UNITED STATES SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

                                  FORM 10-QSB

                [X] QUARTERLY REPORT UNDER SECTION 13 OR 15 (D)
                     OF THE SECURITIES EXCHANGE ACT OF 1934

                  FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2004

                [ ] TRANSITION REPORT UNDER SECTION 13 OR 15(D)
                              OF THE EXCHANGE ACT

                  FOR THE TRANSITION PERIOD FROM ---- TO ----

                         COMMISSION FILE NUMBER 0-18599

                            BLACKHAWK BANCORP, INC.
       (EXACT NAME OF SMALL BUSINESS ISSUER AS SPECIFIED IN ITS CHARTER)

               WISCONSIN                                    39-1659424
     (STATE OR OTHER JURISDICTION OF                    (I. R. S. EMPLOYER
     INCORPORATION OR ORGANIZATION)                     IDENTIFICATION NO.)

                                400 BROAD STREET
                            BELOIT, WISCONSIN  53511
                    (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)

                                      (608) 364-8911
                               (ISSUER'S TELEPHONE NUMBER)

                                      NOT APPLICABLE

(FORMER NAME,  FORMER ADDRESS  AND FORMER  FISCAL YEAR,  IF CHANGED  SINCE  LAST
REPORT)

Check whether the issuer (1) filed all  reports required to be filed by  Section
13 or 15(d) of the Exchange Act during the  past 12 months (or for such  shorter
period that the registrant was required to file such reports), and (2) has  been
subject to such filing requirements for the past 90 days.

                        YES    X                            NO
                             -----                              -----

State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date:

                                                     OUTSTANDING AT
          CLASS OF COMMON STOCK                       JULY 31, 2004
          ---------------------                       -------------
          $.01 PAR VALUE                             2,526,145 SHARES

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

                                     INDEX

                         PART I - FINANCIAL INFORMATION

                                                                       Page
                                                                       ----

ITEM 1.  FINANCIAL STATEMENTS

     Consolidated Balance Sheets as of June 30,
           2004 (unaudited) and December 31, 2003                        4

     Unaudited Consolidated Statements of Income for the
           Three Months Ended June 30, 2004 and 2003                     5

     Unaudited Consolidated Statements of Income for the
           Six Months Ended June 30, 2004 and 2003                       6

     Unaudited Consolidated Statements of Stockholders'
           Equity for the Six Months Ended June 30, 2004 and 2003        7

     Unaudited Consolidated Statements of Cash Flows for the
           Six Months Ended June 30, 2004 and 2003                     8-9

     Notes to Unaudited Consolidated Financial Statements            10-14

ITEM 2.  MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN
             OF OPERATION                                            15-28

ITEM 3.  CONTROLS AND PROCEDURES                                        29

                          PART II - OTHER INFORMATION

ITEM 1.     LEGAL PROCEEDINGS                                           29

ITEM 2.     CHANGES IN SECURITIES AND SMALL BUSINESS
            ISSUER PURCHASES OF EQUITY SECURITIES                       29

ITEM 3.     DEFAULTS UPON SENIOR SECURITIES                             29

ITEM 4.     SUBMISSION OF MATTERS TO A VOTE
              OF SECURITY HOLDERS                                    29-30

ITEM 5.     OTHER INFORMATION                                           30

ITEM 6.     A) EXHIBITS                                                 30

            B) REPORTS ON FORM 8-K                                      30

SIGNATURES                                                              31

INDEX TO EXHIBITS                                                    32-33


                     BLACKHAWK BANCORP, INC. AND SUBSIDIARY
                          CONSOLIDATED BALANCE SHEETS
                JUNE 30, 2004 (UNAUDITED) AND DECEMBER 31, 2003

<TABLE>

                                                                           JUNE 30,     DECEMBER 31,
                                                                             2004           2003
                                                                             ----           ----
<S>                                                                          <C>            <C>
ASSETS                                                                     (Dollars in thousands)
------
Cash and due from banks                                                    $ 14,813       $ 17,250
Federal funds sold and securities purchased under agreements to resell        5,294          6,120
Interest-bearing deposits in banks                                            2,012          2,841
Available-for-sale securities                                               129,584        118,107
Held to maturity securities, at amortized cost                                   -0-        17,606
Loans, less allowance for loan losses of $2,508 and $3,302
  at June 30, 2004 and December 31, 2003, respectively                      231,723        230,142
Office buildings and equipment, net                                           9,657          9,981
Intangible assets                                                             7,048          7,246
Bank-owned life insurance                                                     6,395          6,263
Other assets                                                                  9,385          9,846
                                                                           --------       --------
   Total Assets                                                            $415,911       $425,402
                                                                           --------       --------
                                                                           --------       --------

LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
LIABILITIES:
Deposits:
   Noninterest-bearing                                                     $ 49,190       $ 47,999
   Interest-bearing                                                         257,536        275,640
                                                                           --------       --------
   Total deposits                                                           306,726        323,639
Short-term borrowings                                                        16,887          9,486
Subordinated debentures                                                       7,217          7,217
Long-term borrowings                                                         57,232         55,913
Other liabilities                                                             2,651          3,384
                                                                           --------       --------
   Total Liabilities                                                        390,713        399,639
                                                                           --------       --------

STOCKHOLDERS' EQUITY:
Preferred stock
   1,000,000 shares, $.01 par value per share
   authorized, none issued or outstanding                                        --             --
Common stock
   10,000,000 shares, $.01 par value per share authorized,
   shares issued and outstanding: 2,526,145 at June 30, 2004, 2,522,995
   at December 31, 2003                                                          25             25
Surplus                                                                       8,845          8,818
Retained earnings                                                            16,470         16,092
Accumulated other comprehensive income (loss)                                  (142)           828
                                                                           --------       --------
   Total Stockholders' Equity                                                25,198         25,763
                                                                           --------       --------
   Total Liabilities and Stockholders' Equity                              $415,911       $425,402
                                                                           --------       --------
                                                                           --------       --------
</TABLE>

            See Notes to Unaudited Consolidated Financial Statements

                     BLACKHAWK BANCORP, INC. AND SUBSIDIARY
                  UNAUDITED CONSOLIDATED STATEMENTS OF INCOME

<TABLE>
                                                                   THREE MONTHS ENDED JUNE 30,
                                                                       2004           2003
                                                                       ----           ----
<S>                                                                    <C>            <C>
INTEREST INCOME:                                          (Dollars in thousands, except per share data)
   Interest and fees on loans                                         $3,472         $3,065
   Interest and dividends on securities:
       Taxable                                                           922            929
       Nontaxable                                                        306            282
   Interest on federal funds sold and securities purchased under
     agreements to resell                                                 18              7
   Interest on interest-bearing deposits in banks                         13              8
                                                                      ------         ------
       Total Interest Income                                           4,731          4,291
                                                                      ------         ------
INTEREST EXPENSE:
   Interest on deposits                                                1,076          1,230
   Interest on short-term borrowings                                      23             41
   Interest on subordinated debentures                                   103             84
   Interest on long-term borrowings                                      561            530
                                                                      ------         ------
       Total Interest Expense                                          1,763          1,885
                                                                      ------         ------
   Net Interest Income                                                 2,968          2,406
   Provision for loan losses                                             103            142
                                                                      ------         ------
   Net Interest Income After Provision For Loan Losses                 2,865          2,264
                                                                      ------         ------
NONINTEREST INCOME:
   Service charges on deposit accounts                                   629            365
   Gain on sale of loans                                                 208            141
   Securities gains, net                                                  72             95
   Increase in cash value of bank-owned life insurance                    71             77
   Other                                                                 220            204
                                                                      ------         ------
       Total Noninterest Income                                        1,200            882
                                                                      ------         ------
NONINTEREST EXPENSES:
   Salaries and employee benefits                                      1,837          1,360
   Occupancy                                                             255            179
   Equipment                                                             300            231
   Data processing services                                              272            203
   Advertising and marketing                                             117            143
   Amortization of intangibles                                            95             79
   Professional fees                                                     116            116
   Office supplies                                                        58             55
   Telephone                                                              96             79
   Postage                                                                51             60
   Transportation                                                         64             52
   Other                                                                 307            258
                                                                      ------         ------
       Total Noninterest Expenses                                      3,568          2,815
                                                                      ------         ------
Income Before Income Taxes                                               497            331
Income Taxes                                                              71              1
                                                                      ------         ------
Net Income                                                            $  426         $  330
                                                                      ------         ------
                                                                      ------         ------
Basic Earnings Per Share                                              $ 0.17         $ 0.13
                                                                      ------         ------
                                                                      ------         ------
Diluted Earnings Per Share                                            $ 0.17         $ 0.13
                                                                      ------         ------
                                                                      ------         ------
Dividends Per Share                                                   $ 0.09         $ 0.09
                                                                      ------         ------
                                                                      ------         ------
</TABLE>

            See Notes to Unaudited Consolidated Financial Statements

                     BLACKHAWK BANCORP, INC. AND SUBSIDIARY
                  UNAUDITED CONSOLIDATED STATEMENTS OF INCOME

<TABLE>
                                                                    SIX MONTHS ENDED JUNE 30,
                                                                       2004           2003
                                                                       ----           ----
<S>                                                                    <C>            <C>
INTEREST INCOME:                                          (Dollars in thousands, except per share data)
   Interest and fees on loans                                         $7,013         $6,327
   Interest and dividends on securities:
       Taxable                                                         1,978          1,857
       Nontaxable                                                        619            535
   Interest on federal funds sold and securities purchased under
     agreements to resell                                                 31             49
   Interest on interest-bearing deposits in banks                         30             18
                                                                      ------         ------
       Total Interest Income                                           9,671          8,786
                                                                      ------         ------
INTEREST EXPENSE:
   Interest on deposits                                                2,200          2,496
   Interest on short-term borrowings                                      52             76
   Interest on subordinated debentures                                   206            168
   Interest on long-term borrowings                                    1,121          1,035
                                                                      ------         ------
       Total Interest Expense                                          3,579          3,775
                                                                      ------         ------
   Net Interest Income                                                 6,092          5,011
   Provision for loan losses                                             207            365
                                                                      ------         ------
   Net Interest Income After Provision For Loan Losses                 5,885          4,646
                                                                      ------         ------
NONINTEREST INCOME:
   Service charges on deposit accounts                                 1,115            704
   Gain on sale of loans                                                 355            301
   Securities gains, net                                                 152            424
   Increase in cash value of bank-owned life insurance                   140            153
   Other                                                                 466            340
                                                                      ------         ------
       Total Noninterest Income                                        2,228          1,922
                                                                      ------         ------
NONINTEREST EXPENSES:
   Salaries and employee benefits                                      3,655          2,818
   Occupancy                                                             545            369
   Equipment                                                             608            461
   Data processing services                                              550            399
   Advertising and marketing                                             210            207
   Amortization of intangibles                                           190            159
   Professional fees                                                     244            302
   Office supplies                                                       130            117
   Telephone                                                             192            153
   Postage                                                               102            116
   Transportation                                                        128             96
   Other                                                                 596            583
                                                                      ------         ------
       Total Noninterest Expenses                                      7,150          5,780
                                                                      ------         ------
Income Before Income Taxes                                               963            788
Income Taxes                                                             131             61
                                                                      ------         ------
Net Income                                                            $  832         $  727
                                                                      ------         ------
                                                                      ------         ------
Basic Earnings Per Share                                              $ 0.33         $ 0.29
                                                                      ------         ------
                                                                      ------         ------
Diluted Earnings Per Share                                            $ 0.33         $ 0.29
                                                                      ------         ------
                                                                      ------         ------
Dividends Per Share                                                   $ 0.18         $ 0.18
                                                                      ------         ------
                                                                      ------         ------
</TABLE>

            See Notes to Unaudited Consolidated Financial Statements

                     BLACKHAWK BANCORP, INC. AND SUBSIDIARY
           UNAUDITED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

                                                          SIX MONTHS ENDED
                                                              JUNE 30,
                                                        2004           2003
                                                       (Dollars in thousands)
Common stock:
   Balance at beginning of period                      $    25        $    25
   Stock options exercised                                  --             --
                                                       -------        -------
   Balance at end of period                                 25             25
                                                       -------        -------

Surplus:
   Balance at beginning of period                        8,818          8,698
   Stock options exercised                                  27             75
                                                       -------        -------
   Balance at end of period                              8,845          8,773
                                                       -------        -------

Retained earnings:
   Balance at beginning of period                       16,092         15,788
   Net income                                              832            727
   Dividends declared on common stock                     (454)          (453)
                                                       -------        -------
   Balance at end of period                             16,470         16,062
                                                       -------        -------

Accumulated other comprehensive income (loss):
   Balance at beginning of period                          828          1,287
   Other comprehensive income (loss), net of taxes        (970)            (5)
                                                       -------        -------
   Balance at end of period                               (142)         1,282
                                                       -------        -------

Total Stockholders' Equity                             $25,198        $26,142
                                                       -------        -------
                                                       -------        -------

            See Notes to Unaudited Consolidated Financial Statements

                     BLACKHAWK BANCORP, INC. AND SUBSIDIARY
                UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS

<TABLE>
                                                                                SIX MONTHS ENDED
                                                                                    JUNE 30,
                                                                             2004             2003
                                                                             ----             ----
<S>                                                                          <C>               <C>
                                                                             (Dollars in thousands)
CASH FLOWS FROM OPERATING ACTIVITIES:
   Net income                                                              $    832         $    727
   Adjustments to reconcile net income to net cash
     provided by (used in) operating activities:
   Depreciation and amortization                                                706              648
   Provision for loan losses                                                    207              365
   Gain on sale of loans                                                       (355)            (301)
   FHLB stock dividends                                                        (167)            (126)
   Amortization of premiums on securities, net                                  509              397
   Securities gains, net                                                       (152)            (424)
   Decrease in accrued interest receivable                                      241              253
   Decrease in accrued interest payable                                        (119)             (55)
   (Increase) decrease in other assets                                           64             (213)
   Increase (decrease) in other liabilities                                      14           (1,127)
                                                                           --------         --------
       Net cash provided by operations before
         loan originations and sales                                          1,780              144
   Origination of loans for sale                                            (25,349)         (15,050)
   Proceeds from sale of loans                                               24,506           16,708
                                                                           --------         --------
   Net cash provided by operating activities                                    937            1,802
                                                                           --------         --------

CASH FLOWS FROM INVESTING ACTIVITIES:
   Net decrease in interest-bearing deposits in banks                           829            6,550
   Net decrease in federal funds sold and securities
     purchased under agreements to resell                                       826           13,120
   Proceeds from sales of available-for-sale securities                      25,274           23,957
   Proceeds from maturities and calls of available-for-sale securities       17,525           20,824
   Proceeds from maturities and calls of held-to-maturity securities          1,188            3,574
   Purchase of available-for-sale securities                                (39,960)         (62,948)
   Net (increase) decrease in loans                                          (1,711)             951
   Proceeds from the sale of office buildings, equipment, and
     other real estate owned                                                  1,333              317
   Purchase of office buildings and equipment, net                             (222)            (202)
                                                                           --------         --------
   Net cash provided by investing activities                                  5,082            6,143
                                                                           --------         --------

CASH FLOWS FROM FINANCING ACTIVITIES:
   Net decrease in deposits                                                 (16,776)         (14,192)
   Dividends paid                                                              (454)            (453)
   Proceeds from long-term borrowings                                         6,000            8,000
   Payments on long-term borrowings                                          (4,650)            (300)
   Net increase (decrease) in short-term borrowings                           7,401           (1,464)
   Proceeds from exercise of stock options                                       23               58
                                                                           --------         --------
   Net cash used in financing activities                                     (8,456)          (8,351)
                                                                           --------         --------
   Net decrease in cash and due from banks                                   (2,437)            (406)

CASH AND DUE FROM BANKS:
   Beginning                                                                 17,250           12,572
                                                                           --------         --------

   Ending                                                                  $ 14,813         $ 12,166
                                                                           --------         --------
                                                                           --------         --------

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
   Cash paid (refunded) during the period for:
       Interest                                                            $  3,866         $  3,825
       Income taxes                                                        $   (160)        $   (163)

SUPPLEMENTAL SCHEDULES OF NON-CASH INVESTING
   ACTIVITIES:
   Change in accumulated other comprehensive income:
       Unrealized losses on available-for-sale securities, net             $ (1,026)        $    (50)
       Unrealized gain on interest rate swap contract, net                 $     56         $     --
   Other assets acquired in settlement of loans                            $  1,040         $     88
</TABLE>

           See Notes to Unaudited Consolidated Financial Statements.

                     BLACKHAWK BANCORP, INC. AND SUBSIDIARY
              NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
                                 June 30, 2004

Note 1. General:

        The unaudited consolidated financial statements include the accounts  of
        Blackhawk  Bancorp, Inc. and  its subsidiary.   Effective September  30,
        2003, Blackhawk Bancorp, Inc. acquired the assets of DunC Corp. and  its
        subsidiary,  First  Bank, bc.,  in  a  transaction accounted  for  as  a
        purchase.   The  assets and  liabilities and  results of  operations  of
        those  acquired  companies  have  been  included  in  the   consolidated
        financial statements of  Blackhawk Bancorp, Inc. subsequent to the  date
        of acquisition and affect comparability of 2004 results with 2003.

        In  the  opinion of  management,  all adjustments  (consisting  only  of
        normal recurring adjustments)  necessary for a fair presentation of  the
        financial position, results of operation and cash flows for the  interim
        periods  have been made.   The results of operations  for the three  and
        six  months ended June 30,  2004 are not  necessarily indicative of  the
        results to be expected for the entire fiscal year.

        The  unaudited  interim  financial  statements  have  been  prepared  in
        conformity with  accounting principles generally accepted in the  United
        States  of  America  and industry  practice.    Certain  information  in
        footnote disclosure  normally included in financial statements  prepared
        in  accordance  with accounting  principles  generally accepted  in  the
        United  States of America  and industry practice  has been condensed  or
        omitted  pursuant  to  rules  and  regulations  of  the  Securities  and
        Exchange Commission. The  more significant policies used by the  Company
        in preparing and  presenting its financial statements are stated in  the
        Company's  Form 10-KSB.  These financial  statements should  be read  in
        conjunction  with  the  consolidated  financial  statements  and   notes
        thereto  included in the Company's  December 31, 2003 audited  financial
        statements.

        The  preparation of financial statements  in conformity with  accounting
        principles generally accepted  in the United States of America  requires
        management to make  estimates and assumptions which affect the  reported
        amounts  of assets and liabilities  and disclosure of contingent  assets
        and liabilities as  of the date of the financial statements, as well  as
        the  reported  amounts  of  income  and  expenses  during  the  reported
        periods.  Actual results could differ from those estimates.

        Certain reclassifications have been made to the 2003 historical
        financial statements to conform to the 2004 presentation with no effect
        on net income or stockholders' equity.

        Stock-Based Compensation Plan:  The Company's stock-based director,  key
        -----------------------------
        officer  and employee compensation plans  expired on December 31,  2003.
        The  Company  accounts  for  these  plans  under  the  recognition   and
        measurement  principles of  APB  Opinion No.  25, Accounting  for  Stock
        Issued  to  Employees,  and related  interpretations.    No  stock-based
        employee  compensation  cost is  reflected  in income,  as  all  options
        granted  under those plans  had an exercise  price equal  to the  market
        value of  the underlying common stock on the  date of grant.  The  table
        on the following page illustrates the effect on net income and  earnings
        per  share  if  the  Company had  applied  the  fair  value  recognition
        provisions of Financial Accounting Standards Board (FASB) Statement  No.
        123,  Accounting for Stock-Based  Compensation, to stock-based  employee
        compensation.   The pro-forma  compensation expense  is recognized  over
        the three year option vesting period.

<TABLE>
(Dollars in thousands, except per share data)                                    THREE MONTHS ENDED JUNE 30,
                                                                                   2004               2003
                                                                                   ----               ----
<S>                                                                                 <C>                <C>
Net income, as reported                                                           $ 426              $ 330
Deduct total stock-based employee and director compensation
  expense determined under fair value based method for all awards,
  net of related tax effects                                                        (18)               (21)
                                                                                  -----              -----
PRO FORMA NET INCOME                                                              $ 408              $ 309
                                                                                  -----              -----
                                                                                  -----              -----

Earnings per share:
   Basic:
     As reported                                                                  $0.17              $0.13
     Pro forma                                                                     0.16               0.12

   Diluted:
     As reported                                                                   0.17               0.13
     Pro forma                                                                     0.16               0.12
</TABLE>

<TABLE>

(Dollars in thousands, except per share data)                                    SIX MONTHS ENDED JUNE 30,
                                                                                  2004                2003
                                                                                  ----                ----
<S>                                                                                <C>                 <C>
Net income, as reported                                                           $ 832              $ 727
Deduct total stock-based employee and director compensation
  expense determined under fair value based method for all awards,
  net of related tax effects                                                        (35)               (42)
                                                                                  -----              -----
PRO FORMA NET INCOME                                                              $ 797              $ 685
                                                                                  -----              -----
                                                                                  -----              -----

Earnings per share:
   Basic:
     As reported                                                                  $0.33              $0.29
     Pro forma                                                                     0.32               0.27

   Diluted:
     As reported                                                                   0.33               0.29
     Pro forma                                                                     0.31               0.27
</TABLE>

        In determining compensation cost using the fair value method prescribed
        in Statement No. 123, the value of each grant is estimated at the grant
        date with the following weighted-average assumptions used for grants in
        2003 and 2002, respectively: dividend yield of 3 percent and 4 percent;
        expected price volatility of 23 percent and 25 percent; risk-free
        interest rates of 3 percent and 4 percent; and expected lives of 7
        years and 10 years, respectively.

Note 2. Allowance for Loan Losses

        A summary of transactions in the allowance for loan losses is as
        follows:

                                                       THREE MONTHS ENDED
                                                            JUNE 30,
                                                     (Dollars in thousands)
                                                       2004         2003
                                                       ----         ----
        Balance at beginning of period                $3,173       $2,197
        Provision charged to expense                     103          142
        Loans charged off                                844           90
        Recoveries                                        76           93
                                                      ------       ------
        Balance at end of period                      $2,508       $2,342
                                                      ------       ------
                                                      ------       ------

                                                         SIX MONTHS ENDED
                                                             JUNE 30,
                                                     (Dollars in thousands)
                                                       2004         2003
                                                       ----         ----
        Balance at beginning of period                $3,302       $2,079
        Provision charged to expense                     207          365
        Loans charged off                              1,101          247
        Recoveries                                       100          145
                                                      ------       ------
        Balance at end of period                      $2,508       $2,342
                                                      ------       ------
                                                      ------       ------

Note 3. Earnings Per Share

        Presented below are the calculations for basic and diluted earnings  per
        share:

<TABLE>
                                                            THREE MONTHS ENDED            SIX MONTHS ENDED
                                                                 JUNE 30,                     JUNE 30,
                                                           2004            2003          2004          2003
                                                           ----            ----          ----          ----
<S>                                                        <C>              <C>           <C>           <C>
     Basic:
     Net income available to common stockholders        $  426,000      $  330,000    $  832,000    $  727,000
                                                        ----------      ----------    ----------    ----------
                                                        ----------      ----------    ----------    ----------
     Weighted average shares outstanding                 2,526,145       2,517,219     2,525,308     2,515,627
                                                        ----------      ----------    ----------    ----------
                                                        ----------      ----------    ----------    ----------
     Basic earnings per share                           $     0.17      $     0.13    $     0.33    $     0.29
                                                        ----------      ----------    ----------    ----------
                                                        ----------      ----------    ----------    ----------

     Diluted:
     Net income available to common stockholders        $  426,000      $  330,000    $  832,000    $  727,000
                                                        ----------      ----------    ----------    ----------
                                                        ----------      ----------    ----------    ----------
     Weighted average shares outstanding                 2,526,145       2,517,219     2,525,308     2,515,627
     Effect of dilutive stock options outstanding           30,540          17,267        30,540        17,267
                                                        ----------      ----------    ----------    ----------
     Diluted weighted average shares outstanding         2,556,685       2,534,486     2,555,848     2,532,894
                                                        ----------      ----------    ----------    ----------
                                                        ----------      ----------    ----------    ----------
     Diluted earnings per share                         $     0.17      $     0.13    $     0.33    $     0.29
                                                        ----------      ----------    ----------    ----------
                                                        ----------      ----------    ----------    ----------
</TABLE>

Note 4. Derivative Instrument

        During June 2003, the Company entered into an interest rate swap
        transaction, which resulted in the Company converting $7,000,000 of its
        $7,217,000 of variable rate subordinated debentures into fixed rate
        debt. This swap transaction requires the payment of interest by the
        Company at a fixed rate equal to 2.47% using an actual/360 day basis.
        In turn the Company receives a variable rate interest payment based on
        the 90 day LIBOR rate adjusted quarterly.

        Summary information about the interest rate swap at June 30 is as
        follows:

                                                     2004              2003
                                                     ----              ----
                                                     (Dollars in thousands)
        Notional amount                            $7,000            $7,000
        Weighted average fixed rate                 2.51%             2.51%
        Weighted average variable rate              1.61%             1.02%
        Weighted average maturity               3.5 years         4.5 years
        Fair value                                   $308               $69

Note 5. Acquisition of DunC Corp.

        As more fully described in Item 2 of this report under the caption
        "Acquisition or Disposition of Assets", Blackhawk Bancorp, Inc.
        acquired DunC Corp. on September 30, 2003 in a transaction accounted
        for as a purchase. The assets and liabilities of DunC Corp., valued at
        fair market value, on the date of acquisition are included in the
        unaudited consolidated balance sheet of Blackhawk Bancorp, Inc. and
        Subsidiary at June 30, 2004 and in the audited consolidated balance
        sheet of Blackhawk Bancorp, Inc. and Subsidiary at December 31, 2003.
        The results of operations have been included in the unaudited
        consolidated statements of income for the three and six months ended
        June 30, 2004 and will affect the comparability to 2003 results.

Note 6. Sale of Branches Located in Rochelle and Oregon, Illinois

        As more fully described in Item 2 of this report under the caption
        "Acquisition or Disposition of Assets", on June 22, 2004 Blackhawk
        State Bank entered into a definitive agreement for the sale of its
        branches located in the Illinois communities of Rochelle and Oregon.
        The sale includes only the branch facilities and deposits, not loans.
        The two branches currently have approximately $35 million in combined
        deposits. The transaction, which is subject to regulatory and other
        customary closing conditions, is expected to close in the fourth
        quarter of 2004.  In accordance with generally accepted accounting
        principals, the assets and liabilities of these two branches and their
        results of operations and cash flows have been included in the
        financial statements of Blackhawk Bancorp, Inc. for all periods
        presented.

Note 7. Recent Accounting Developments

        FIN   No.   46  Consolidation   of   Variable  Interest   Entities,   an
        Interpretation of Accounting Research Bulletin No. 51 (Revised  December
        2003).   FIN  46 establishes  accounting guidance  for consolidation  of
        variable   interest  entities  (VIE)  that   function  to  support   the
        activities  of the primary  beneficiary.  The  primary beneficiary of  a
        VIE is the entity that absorbs a majority of the VIE's expected  losses,
        receives a majority of the VIE's expected residual returns, or both,  as
        a  result of ownership,  controlling interest, contractual  relationship
        or other business relationship with a VIE.  Prior to the  implementation
        of FIN  46, VIEs were generally consolidated  by an enterprise when  the
        enterprise had a  controlling financial interest through ownership of  a
        majority  of voting interest in  the entity.  The  provisions of FIN  46
        were  effective  immediately for  all  arrangements entered  into  after
        January 31, 2003.   However, subsequent revisions to the  interpretation
        deferred  the implementation  date  of FIN  46  until the  first  period
        ending after March 15, 2004.

        The  Company  adopted  FIN  46,  as  revised,  in  connection  with  its
        consolidated financial statements for the quarter ended March 31,  2004.
        The implementation of FIN 46 required the Company to de-consolidate  its
        investment  in Blackhawk  Statutory Trust  I (the  "Trust") because  the
        Company  is  not  the primary  beneficiary.    There was  no  impact  on
        stockholders' equity, or net income upon adoption of the standard.

        The  trust  preferred  securities issued  by  the  Trust  are  currently
        included  in the Tier 1  capital of the  Company for regulatory  capital
        purposes.  However, because  the financial statements of the Trust  will
        no   longer  be  included  in   the  Company's  consolidated   financial
        statements,  the  Federal  Reserve Board  may  in  the  future  disallow
        inclusion  of the  trust  preferred securities  in  Tier 1  capital  for
        regulatory  capital purposes.  In July  2003, the Federal Reserve  Board
        issued  a  supervisory  letter instructing  bank  holding  companies  to
        continue  to include  the trust  preferred securities  in their  Tier  1
        capital  for regulatory capital  purposes until notice  is given to  the
        contrary.  On  May 6, 2004 the Federal  Reserve Board issued a  proposed
        rule  limiting the  amount of  trust preferred  securities eligible  for
        inclusion  in Tier 1  capital to 25%  of core capital  elements, net  of
        goodwill.   This proposed change would be  fully effective on March  31,
        2007 after a  three year phase in period.  The proposed rule will  limit
        the Company's trust preferred securities eligible for inclusion in  Tier
        1 capital  to $6,870,000.  Under the proposed  rule, the balance of  the
        Company's  trust  preferred  securities  will  be  included  in  Tier  2
        capital.  There can be no assurance that the Federal Reserve Board  will
        continue  to permit institutions to  include trust preferred  securities
        in Tier 1 capital for regulatory capital purposes.

Note 8. Recent Regulatory Developments

        The Sarbanes-Oxley Act of 2002 (the "Act") impacts corporate  governance
        of  public  companies, affecting  their  officers and  directors,  their
        audit  committees, their relationships  with their  accountants and  the
        audit  function itself. Certain provisions  of the Act became  effective
        on  July 30, 2002.  The  requirements  of Section 404 of  the Act become
        effective for the Company for the year ended December 31, 2005.  Section
        404  requires  an evaluation  of and  report on  the Company's  internal
        control environment and  an auditors' opinion on managements' evaluation
        of internal control.

        The Act implements a broad range of corporate governance and  accounting
        measures   for  public  companies  designed   to  promote  honesty   and
        transparency  in corporate  America and  better protect  investors  from
        corporate  wrongdoing. The Act includes  the creation of an  independent
        accounting oversight board to oversee the audit of public companies  and
        their auditors,  provisions restricting non-audit services performed  by
        independent  accountants for public  companies and additional  corporate
        governance and responsibility provisions.

                 ITEM 2.  MANAGEMENT'S DISCUSSION AND ANALYSIS OR
                               PLAN OF OPERATION

The purpose of Management's  discussion and analysis  is to provide  relevant
information regarding the Registrant's financial condition and its results of
operations.  The information  included herein should  be read in  conjunction
with the company's  consolidated financial statements  and footnotes  thereto
for the year ended December 31, 2003.

This report contains certain forward-looking statements within the meaning of
the Private Securities  Litigation Reform  Act of  1995 with  respect to  the
financial  condition,  results  of  operations,  plans,  objectives,   future
performance and business of Blackhawk Bancorp,  Inc. Statements that are  not
historical facts, including  statements about beliefs  and expectations,  are
forward-looking statements.  These  statements  are based  upon  beliefs  and
assumptions of Blackhawk's management and on information currently  available
to such management. The use of  the words "believe", "expect",  "anticipate",
"plan", "estimate", "may", "will" or similar expressions are  forward-looking
statements.

Contemplated, projected,  forecasted or  estimated results  in such  forward-
looking statements involve certain inherent risks and uncertainties. A number
of factors - many of which are beyond  the ability of the company to  control
or predict  - could  cause actual  results to  differ materially  from  those
described in the forward-looking statements. Factors which could cause such a
variance to occur include,  but are not  limited to: heightened  competition;
adverse state  and  federal  regulation; failure  to  obtain  new  or  retain
existing  customers;  ability  to  attract  and  retain  key  executives  and
personnel; changes  in  interest  rates; unanticipated  changes  in  industry
trends; unanticipated changes in credit  quality and risk factors,  including
general economic  conditions; success  in gaining  regulatory approvals  when
required; changes in the Federal Reserve Board monetary policies;  unexpected
outcomes  of  new  and  existing  litigation   in  which  Blackhawk  or   its
subsidiaries,  officers,  directors   or  employees   is  named   defendants;
technological changes; changes in accounting principles generally accepted in
the United  States;  changes  in  assumptions  or  conditions  affecting  the
application of critical accounting policies; and the inability of third party
vendors to perform critical services for the company or its customers.

The Company does not undertake, and specifically declines any obligation,  to
publicly release  the results  of any  revisions  which may  be made  to  any
forward-looking statements to reflect events or circumstances after the  date
of  such  statements  or  to  reflect   the  occurrence  of  anticipated   or
unanticipated events.

                     ACQUISITION OR DISPOSITION OF ASSETS

On September 30, 2003 (the "Effective Date"), Blackhawk Bancorp, Inc., (the
"Corporation") consummated its acquisition of DunC Corp. ("DunC"), a bank
holding company registered under the Bank Holding Company Act of 1956, as
amended, and DunC's wholly owned subsidiary, First Bank, bc  ("First Bank"),
an Illinois state bank.

The Corporation acquired DunC and First Bank pursuant to an Agreement and Plan
of Merger dated as of March 17, 2003 (the "Merger Agreement"), between the
Corporation, DunC Merger Corporation ("Merger Corp"), a wholly owned
subsidiary of the Corporation, and DunC through a series of mergers.

Pursuant to the Merger Agreement, Merger Corp was merged with and into DunC at
the close of business on the Effective Date, and DunC became a wholly owned
subsidiary of the Corporation.  The merger consideration was cash in the
aggregate amount of $7,223,000, which was paid to former DunC shareholders.
The price paid by the Corporation for the DunC common stock was arrived at
through arms-length negotiations.

The terms of the merger of Merger Corp with and into DunC are described more
fully in the Merger Agreement filed as Exhibit 2.1 to the Corporation's Form
10-QSB for the quarterly period ended June 30, 2003, which is incorporated
herein by reference.  The description of the transaction set forth above is
qualified in its entirety by the terms set forth in the Merger Agreement.

Immediately following the merger of Merger Corp into DunC, DunC merged with
and into the Corporation, and First Bank merged with and into Blackhawk State
Bank, a wholly owned subsidiary of the Corporation.  As a result of these
mergers the Corporation and Blackhawk State Bank were the surviving entities,
and DunC and First Bank ceased to exist.

The merger consideration paid to the former shareholders of DunC was funded
through a term loan with U.S. Bank National Association, Milwaukee,
Wisconsin. The term loan for $7.5 million was entered into in the ordinary
course of business and on terms commensurate with prevailing market
conditions on September 26, 2003. The term loan matures on September 26,
2008. A copy of the term loan agreement was filed as an exhibit on the
Corporation's Current Report on Form 8-K dated September 30, 2003 and is
incorporated herein by reference.

In accordance with the requirements of  purchase accounting, the operations
of the acquired  companies have  been included with  the operations  of the
Company since date  of acquisition.   Because of the  relative size  of the
Company and DunC, the acquisition has had a significant  effect on both the
operations and  balance sheets  of the  Company, and  significantly affects
comparisons  between  2003  and  2004.    In  addition,  as  part  of  that
acquisition, the Company committed to its regulators to maintain the Bank's
Tier 1 leverage capital at not  less than 7% for three years,  and to raise
capital in the event that the  cash flow required to  service debt incurred
in the acquisition exceeds 80% of Bank net income.

The following  provides  certain  summary financial  information  about  the
financial condition of DunC and the  assets and liabilities acquired in  the
acquisition, and DunC's operations, prior  to the acquisition to  illustrate
their impact upon the corporation:

Balance Sheet
-------------
(Dollars in thousands)        At September 30, 2003
----------------------        ---------------------
Loans                                  $46,781
Allowance for Loan Losses                 (889)
Investments                             11,104
Total Assets                            77,726
Deposits                                64,237
Borrowings                               3,631

Income Statement
----------------                 Nine Months Ended          Year Ended
(Dollars in thousands)          September 30, 2003      December 31, 2002
----------------------          ------------------      -----------------
Total Interest Income                  $ 3,645                $ 4,602
Total Interest Expense                     850                  1,453
                                       -------                -------
Net Interest Income                      2,795                  3,149
Provision for Loan Losses                  200                    628
Non-Interest Income                      1,819                  2,497
Non-Interest Expense                     4,701                  4,208
                                       -------                -------
Net Income (Loss) before Tax              (287)                   810

On the acquisition date,  the First Bank branch  located at 417 Ware  Avenue,
Rockford, Illinois was closed with its  accounts being consolidated into  the
Bank's Rockford office located at 2475 North Perryville Road. On January  31,
2004 the Bank closed  its branch office located  at 1021 North State  Street,
Belvidere, Illinois and consolidated the accounts into the office located  at
2141 North State Street,  Belvidere, Illinois, which is  a former First  Bank
branch obtained in the acquisition.

On June 22, 2004 the Bank entered into an agreement to sell its Rochelle  and
Oregon, Illinois branches  to The First  National Bank and  Trust Company  of
Rochelle, Illinois.  The agreement was filed as exhibit 2.1 to Form 8-K dated
June 22, 2004 and  is incorporated herein by  reference.  The description  of
the transaction set forth below is qualified in its entirety by the terms set
forth in the Agreement.

The purchaser  will assume  the  deposits of  these  two locations  and  will
acquire their premises and equipment.  The Bank will transfer assets equal to
the liabilities  assumed net  of a  premium equal  to 6.77%  of Core  Deposit
Liabilities transferred.    Currently these  two  branches have  deposits  of
approximately $35  million.   The Bank  will retain  the loans  of these  two
branches.

The Bank plans to replace these deposits with brokered deposits, Federal Home
Loan  Bank  borrowings,  liquidation   of  investment  securities,  or   some
combination thereof.   The  transaction is  subject to  regulatory and  other
customary closing conditions and is expected  to close in the fourth  quarter
of 2004.

In accordance with generally accepted accounting principals, the deposits  to
be transferred  and the  results  of operations  of  these two  branches  are
included in the company's June 30, 2004 and December 31, 2003 balance  sheets
and in its results of operations and cash flows for all periods presented.

                            RESULTS OF OPERATIONS

The company reported net income of $426,000 for the three months ended June  30,
2004, an increase of $96,000  or 29.1% from the  $330,000 reported for the  same
three month period in 2003.  Net income for the six month period ended June  30,
2004 was $832,000, an increase of $105,000, or 14.4% from the $727,000  reported
for the same period in 2003.

Diluted earnings per share  were $0.17 and  $0.33 for the  three and six  months
ended June 30,  2004, respectively,  compared to $0.13  and $0.29  for the  same
periods in 2003.  This represents an increase  of 30.8% and 13.8% for the  three
month and six month periods, respectively.

NET INTEREST INCOME

Net interest income, which is the sum of interest and certain fees generated  by
earning assets minus interest paid on deposits and other funding sources, is the
primary source of the  company's earnings.  All  discussions of interest  income
amounts and  rates are  on a  tax-equivalent basis,  which accounts  for  income
earned on loans and securities that are not fully subject to income taxes as  if
they were fully  subject to  income taxes. The  following table  sets forth  the
company's consolidated average balances of assets, liabilities and stockholders'
equity, interest income and expense on related items, and the company's  average
rate for the three and six month periods ended June 30, 2004 and 2003. The  tax-
equivalent yield calculations assume a Federal Tax Rate of 34%:

AVERAGE BALANCE SHEET WITH RESULTANT INTEREST AND RATES

<TABLE>

(yields on a tax-equivalent basis)             Three Months ended June 30, 2004      Three Months ended June 30, 2003
                                               --------------------------------      --------------------------------
                                               Average                  Average      Average                   Average
                                               Balance     Interest      Rate        Balance      Interest      Rate
                                               -------     --------     -------      -------      --------     -------
<S>                                              <C>         <C>          <C>          <C>          <C>          <C>
INTEREST EARNING ASSETS:
  Interest-bearing deposits in banks            $  2,394      $   13      2.18%       $  1,409      $    8        2.28%
  Federal funds sold & securities
    purchased under agreements to resell           5,036          18      1.44%          1,640           7        1.71%
  Investment securities:
     Taxable investment securities               103,092         922      3.60%         99,804         929        3.73%
     Tax-exempt investment securities             32,241         464      5.79%         28,387         427        6.03%
                                                --------      ------      -----       --------      ------        -----
           Total investment securities           135,333       1,386      4.12%        128,191       1,356        4.24%
  Loans                                          238,200       3,473      5.86%        182,962       3,065        6.72%
                                                --------      ------      -----       --------      ------        -----

TOTAL EARNING ASSETS                            $380,963      $4,890      5.16%       $314,202      $4,436        5.66%
                                                              ------      -----                     ------        -----
  Allowance for loan losses                      (3,124)                               (2,278)
  Cash and due from banks                         13,539                                11,263
  Other assets                                    26,838                                19,833
                                                --------                              --------

TOTAL ASSETS                                    $418,216                              $343,020
                                                --------                              --------
                                                --------                              --------

INTEREST BEARING LIABILITIES:
  Interest bearing checking accounts           $  46,277      $   57       .50%       $ 39,047      $   75         .77%
  Savings and money market deposits               82,659         157       .76%         54,466         102         .75%
  Time deposits                                  134,869         862      2.57%        124,229       1,053        3.40%
                                                --------      ------      -----       --------      ------        -----

      Total interest bearing deposits            263,805       1,076      1.64%        217,742       1,230        2.27%

   Short-term borrowings                          11,791          23       .78%         13,463          41        1.22%
   Subordinated debentures                         7,217         103      5.74%          7,217          84        4.67%
   Long-term borrowings                           57,404         561      3.93%         44,029         530        4.83%
                                                --------      ------      -----       --------      ------        -----

TOTAL INTEREST-BEARING LIABILITIES              $340,217      $1,763      2.08%       $282,451      $1,885        2.67%
                                                              ------      -----                     ------        -----

INTEREST RATE SPREAD                                                      3.08%                                   2.99%
                                                                          -----                                   -----
                                                                          -----                                   -----

  Checking accounts                               50,211                                32,535
  Other liabilities                                2,203                                 2,140
                                                --------                              --------

  Total liabilities                              392,631                               317,126
  Stockholders' equity                            25,585                                25,894
                                                --------                              --------

TOTAL LIABILITIES AND
  STOCKHOLDERS' EQUITY                          $418,216                              $343,020
                                                --------                              --------
                                                --------                              --------

NET INTEREST INCOME/MARGIN                                    $3,127      3.30%                     $2,551        3.26%
                                                              ------      -----                     ------        -----
                                                              ------      -----                     ------        -----
</TABLE>

AVERAGE BALANCE SHEET WITH RESULTANT INTEREST AND RATES

<TABLE>
(yields on a tax-equivalent basis)              Six Months ended June 30, 2004        Six Months ended June 30, 2003
                                                ------------------------------        ------------------------------
                                               Average                  Average      Average                   Average
                                               Balance     Interest      Rate        Balance      Interest      Rate
                                               -------     --------     -------      -------      --------     -------
<S>                                              <C>         <C>          <C>          <C>          <C>          <C>

INTEREST EARNING ASSETS:
  Interest-bearing deposits in banks            $  2,621      $   30      2.30%       $  1,774      $   18        2.05%
  Federal funds sold & securities
    purchased under agreements to resell           4,511          31      1.38%          5,072          49        1.95%
  Investment securities:
     Taxable investment securities               102,568       1,978      3.88%         93,158       1,857        4.02%
     Tax-exempt investment securities             32,272         938      5.85%         26,692         810        6.12%
                                                --------      ------      -----       --------      ------        -----
           Total investment securities           134,840       2,916      4.35%        119,850       2,667        4.49%
  Loans                                          237,899       7,015      5.93%        182,960       6,328        6.97%
                                                --------      ------      -----       --------      ------        -----

TOTAL EARNING ASSETS                            $379,871      $9,992      5.29%       $309,656      $9,062        5.90%
                                                              ------      -----                     ------        -----
  Allowance for loan losses                       (3,188)                               (2,212)
  Cash and due from banks                         13,495                                10,860
  Other assets                                    27,280                                19,930
                                                --------                              --------

TOTAL ASSETS                                    $417,458                              $338,234
                                                --------                              --------
                                                --------                              --------

INTEREST BEARING LIABILITIES:
  Interest bearing checking accounts           $  46,802      $  125       .54%       $ 38,513      $  162         .85%

  Savings and money market deposits               79,728         307       .77%         53,527         212         .80%
  Time deposits                                  137,021       1,768      2.59%        123,518       2,122        3.46%
                                                --------      ------      -----       --------      ------        -----

      Total interest bearing deposits            263,551       2,200      1.68%        215,558       2,496        2.34%
   Short-term borrowings                          12,927          52       .81%         12,958          76        1.18%
   Subordinated debentures                         7,217         206      5.74%          7,217         168        4.68%
   Long-term borrowings                           56,932       1,121      3.96%         42,445       1,035        4.92%
                                                --------      ------      -----       --------      ------        -----

TOTAL INTEREST-BEARING LIABILITIES              $340,627      $3,579      2.11%       $278,178      $3,775        2.74%
                                                              ------      -----                     ------        -----

INTEREST RATE SPREAD                                                      3.18%                                   3.16%
                                                                          -----                                   -----
                                                                          -----                                   -----

  Checking accounts                               48,329                                32,164
  Other liabilities                                2,658                                 2,011
                                                --------                              --------

  Total liabilities                              391,614                               312,353
  Stockholders' equity                            25,844                                25,881
                                                --------                              --------

TOTAL LIABILITIES AND
  STOCKHOLDERS' EQUITY                          $417,458                              $338,234
                                                --------                              --------
                                                --------                              --------

NET INTEREST INCOME/MARGIN                                    $6,413      3.39%                     $5,287        3.44%
                                                              ------      -----                     ------        -----
                                                              ------      -----                     ------        -----
</TABLE>

Net interest income increased by $576,000, or 22.6%, to $3,127,000 for the
quarter ended June 30, 2004, compared to $2,551,000 for the comparable period in
2003.  On a year to  date basis net interest income increased by  $1,126,000, or
21.3%, to $6,413,000 compared to $5,287,000 for the first six months of 2003.
The increase in net interest margin is primarily due to  the  DunC  acquisition
which added $69,300,000 of earning  assets and $54,000,000  of interest bearing
liabilities at the acquisition date of September 30, 2003.

The net interest margin, which is the tax equivalent net interest income divided
by average interest earning assets was 3.30% and 3.39% for the three and six
month periods ended June 30, 2004.  The second quarter net interest margin
represents a 4 basis point increase  compared to the  2003 second quarter  net
interest  margin of 3.26%.  The year to  date net interest margin  of 3.39%
represents a  5 basis point decrease compared to the 3.44% net interest margin
realized for  the same period in 2003.  The  increase in  second quarter net
interest margin reflects management's efforts to shift the earning asset mix
from investments to loans and to shift the liability mix from time deposits to
savings and demand deposits. These shifts offset the negative impact of asset
re-pricings at interest rates that remain at 46 year historical lows.

For the three months ended June  30, 2004, total interest income increased by
$454,000, or 10.2%, to $4,890,000 compared to $4,436,000 for the same period in
2003.  The increase in interest income is due to an increase in average earning
assets of 21.2% or $66,761,000 offset by a 50 basis point decrease in average
yield on earning assets. The average balance sheet with resultant interest and
rates reflects the earning assets of DunC for the first two quarters of 2004,
but not the first two quarters of 2003, as the acquisition was completed on
September 30, 2003. At September  30, 2003  DunC had  earning assets  of
$69,300,000.  Earning assets adjusted to reflect the DunC acquisition decreased
$2,539,000  or 0.7% quarter over quarter.

For the  six  months  ended June  30, 2004,  total interest income increased by
$930,000, or 10.3%, to $9,992,000 compared to $9,062,000 for the same period in
2003.  The increase in interest income is due to an increase in average earning
assets of 22.7% or $70,215,000 offset by a 61 basis point decrease in the yield
on average earning assets to 5.29% compared to 5.90% for the same period in
2003.  Earning assets for the six months ended June 30, 2004 adjusted to reflect
the DunC acquisition increased $915,000 or 0.2%.

Managed and long-term interest rates remained at 46 year historical lows during
the second quarter of 2004.  On June 30, 2004 the Federal Reserve Board of
Governors increased managed interest rates by 25 basis points.  While management
believes they have adequate systems and processes in place to manage interest
rate risk, the pace and magnitude of interest rate changes could have an adverse
impact on net interest income in the future.

Interest and fees on loans increased 13.3% to $3,473,000 for the three months
ended June 30, 2004 compared to $3,065,000 for the same period of 2003.  This
increase was the result of a $55,238,000 or 30.2% increase in average loans
outstanding offset by an 86 basis point decrease in yield on the portfolio.
Interest and fees on loans increased 10.9% to $7,015,000 for the six months
ended June  30, 2004 compared to $6,328,000 in same period of 2003.  This
increase was the result of a $54,939,000 or 30.0% increase in average loans
outstanding and a 104 basis point decrease in yield on the portfolio.  The
Company acquired $46,781,000 of gross loans at September 30, 2003 in connection
with the DunC acquisition. Excluding the loans obtained in the DunC acquisition,
average total loans increased $8,457,000 or 3.7% for the three months ended
June 30, 2004 and $8,158,000 or 3.6% for the six months ended June 30. 2004.
The lower yield on average loans continues to reflect the overall lower interest
rate environment previously discussed and continuing competitive pricing
pressure for quality credit customers.

Interest income on taxable securities decreased by $7,000 or 0.8% in the second
quarter of 2004  to $922,000  compared to $929,000 for the same period in 2003.
Average balances of taxable investment securities increased 3.3% to $103,092,000
for the quarter ended June 30, 2004 compared to $99,804,000 for the same period
in the prior year.  The yield on average taxable investment securities decreased
13 basis points to 3.60% for the second quarter of 2004 compared to 3.73% for
the second quarter of 2003.  Tax exempt investment securities increased
$3,854,000, or 13.6% to an average balance of $32,241,000 for the three months
ended June 30, 2004 compared to $28,387,000 for the same period in 2003.
Interest income on tax exempt securities increased $37,000 or 8.7% to $464,000
for the second quarter of 2004 compared to $427,000 for the second quarter of
2003.  The DunC acquisition added $8,800,000 of taxable investment securities
and $2,300,000 of tax-exempt investment securities at the acquisition date.
Excluding the securities acquired in the DunC acquisition taxable investment
securities decreased $5,512,000 or 5.1% and tax exempt investment securities
increased $1,544,000 or 5.1%.

Interest income on taxable securities increased by $121,000, or 6.5%, in the
first six months of 2004 to $1,978,000 from $1,857,000 for the same period in
2003.  Average balances of taxable investment securities increased 10.1% to
$102,568,000 for the six months ended June 30, 2004 compared to $93,158,000 for
the same period in the prior year.  The increase in average balances outstanding
was offset by a decrease of 14 basis points in average yield to 3.88% for the
first six months of 2004 compared to 4.02% for the first six months of 2003.
Average tax exempt securities increased to $32,272,000 for the six months ended
June 30, 2004 compared to $26,692,000 for the same period in 2003 and their
average tax equivalent yield decreased from 6.12% for the six months ended June
30, 2003 to 5.85% for the same period in 2004.  The DunC acquisition added
$8,800,000 of taxable investment securities and $2,300,000 of tax-exempt
investment securities at the acquisition date. Excluding the securities acquired
in the DunC acquisition taxable investment securities increased $610,000 or 0.6%
and tax exempt investment securities increased $3,280,000 or 11.3%.

Interest from federal funds sold and  securities  purchased under  agreements to
resell increased  to $18,000  for  the three  month period ended June  30, 2004,
compared to $7,000 during the same period in 2003. The average balance of
federal funds sold and securities purchased under agreements to resell increased
by $3,396,000 or 207.1% to $5,036,000 for the three months ended June 30, 2004.

Interest from federal funds sold and  securities  purchased under  agreements to
resell decreased to $31,000 for the six month period ended June 30, 2004,
compared to $49,000 during the same period in 2003.  The average balance of
federal funds sold and securities purchased under agreements to resell decreased
by $561,000 or 11.1% to $4,511,000 for the six months ended June 30, 2004.

Total interest expense decreased by $122,000, or 6.5%, to $1,763,000 for the
three months ended June 30, 2004 compared to $1,885,000 for the same period in
2003.  For the six months ended June 30, 2004 total interest expense decreased
by $196,000, or 5.2%, to $3,579,000 compared to $3,775,000 for the same period
in 2003.  The decrease in total interest expense is the result of the
aforementioned lower interest rate environment which reduced the average rate
paid on interest bearing liabilities from 2.67% for the three months ended June
30, 2003 to 2.08% for the three months ended June 30, 2004 and from 2.74% for
the six months ended June 30, 2003 to 2.11% for the six months ended June 30,
2004.  The DunC acquisition increased interest bearing liabilities by
$54,000,000 at the acquisition date.  Excluding the acquisition, interest
bearing liabilities increased by $3,766,000 or 1.1% and by $8,449,000 or 2.5%
for the three and six month periods ended June 30, 2004.

While interest paid on deposits decreased  $154,000, or 12.5% to $1,076,000
during the three months ended June 30, 2004 compared to $1,230,000 for the same
period in 2003, average interest bearing deposits increased $46,063,000, or
21.2% quarter over quarter.  Year to date interest paid on deposits decreased
$296,000, or 11.9% to $2,200,000 compared to $2,496,000 for the same period in
2003 while average total interest bearing deposits increased by $47,993,000, or
22.3%.  The DunC acquisition added $50,300,000 in interest bearing deposits as
of September 30, 2003.  Excluding the acquisition, interest bearing deposits
decreased $4,237,000 or 1.6% and $2,307,000 or 0.9% for the three and six month
periods ended June 30, 2004.  The decrease in interest paid on deposits was
primarily due to the overall lower interest rate environment.

Interest on  short-term  borrowings decreased  $18,000 to $23,000 for  the three
months ended June 30, 2004 compared to $41,000 for the same period in 2003. This
decrease is the  result of a $1,672,000 decrease in average balances outstanding
for the three  months ended  June 30,  2004 compared  to the same period in 2003
combined with the effect of the sustained low interest rate environment. For the
six months ended June 30, 2004 interest on short-term borrowings decreased
$24,000 to $52,000 compared to $76,000 for the same period in 2003.  This
decrease is the result of the sustained low interest rate environment and a
$31,000 or 0.2% decrease in average short-term borrowings to $12,927,000 for the
six months ended June 30, 2004 compared to $12,958,000 for the same period in
2003.

Interest expense on subordinated debentures increased by $19,000 to $103,000 for
the second quarter of 2004 compared to $84,000 in the second quarter of 2003 and
by $38,000  to $206,000  for the  six  months ended  June  30, 2004  compared to
$168,000 for  the same  period in  2003.   The increase  reflects the  use of an
interest rate swap, which was entered into by the company on June 26, 2003 to
fix the cost of this borrowing. During the first six months of 2003 the interest
rate adjusted quarterly and was set  at 325 basis points  over the 3 month LIBOR
rate.  The interest  rate swap was  part of the  Company's overall interest rate
risk management strategy and was utilized to minimize significant fluctuations
in earnings caused by interest rate volatility.

Interest expense  on  long-term  borrowings  increased  $31,000  and  $86,000 to
$561,000 and $1,121,000 for the three and  six month periods ended June 30, 2004
compared to $530,000  for the  second quarter and  $1,035,000 for  the first six
months of 2003.  The average  balance outstanding increased $13,375,000 or 30.4%
for the three months  ended June 30, 2004  and $14,487,000 or  34.1% for the six
months ended June 30,  2004.  The  increase in the  average balance of long-term
borrowings outstanding reflects the $7,500,000 in bank debt issued to finance
the DunC acquisition and additional FHLB borrowings in 2004.

PROVISION FOR LOAN LOSSES

The provision for loan  losses (provision) is an  amount added to  the allowance
for loan losses  (allowance) to provide  for the known  and estimated  amount of
loans that will  not be collected.  Actual loan losses  are charged  against the
allowance when management  believes that  the collection of  principal will  not
occur. Subsequent recoveries of amounts previously charged to  the allowance, if
any, are  credited  to  (increase)  the  allowance.  Management  determines  the
appropriate provision  based upon  a number  of criteria,  including a  detailed
evaluation of certain credits,  historical performance, economic  conditions and
overall quality of the loan portfolio.

The provision was $103,000 in the second quarter of 2004, a  decrease of $39,000
or 27.5% from  the $142,000 in  the second quarter  of 2003.  For the  first six
months of 2004, the provision was $207,000 compared to $365,000  during the same
time period a year ago.

Activity in the allowance for loan losses is detailed in Note 2 to the unaudited
consolidated financial statements. Charge-offs, net of recoveries for the second
quarter of 2004  totaled $768,000 compared  to net recoveries  of $3,000 for the
second quarter of 2003. Year to date net charge-offs increased $899,000 or
881.4% to $1,001,000 compared to $102,000 for the first six months of 2003.
During the second quarter of 2004 the bank recognized charge-offs totaling
$668,000 on two commercial real estate loans. These loans were in non-performing
status at December 31, 2003.  The collateral on one of the loans has been
liquidated and the other is held in other real estate at its estimated net
realizable value at June 30, 2004. The charge-offs related to these two loans
resulted in a decrease in the allowance to total loans to 1.07% at June 30,
2004 compared to 1.26% at June 30, 2003 and 1.41% at December 31, 2003.  These
loans had specific reserve allocations of $470,000 at December 31, 2003.

NONINTEREST INCOME

Total noninterest  income increased  $318,000, or  36.1%, to  $1,200,000 for the
three months ended  June 30, 2004  compared to $882,000  for the  same period in
2003. Year to  date total  noninterest income  increased $306,000,  or 15.9%, to
$2,228,000 compared to $1,922,000 for the same period in 2003.

Service charges  on  deposit accounts  increased  $264,000 to  $629,000  for the
quarter ended June 30, 2004 compared to $365,000 for the second quarter of 2003,
and increased  $411,000 to  $1,115,000 for  the six  months ended  June 30, 2004
compared to the same  period in 2003.   These increases are  due to the accounts
obtained in the DunC acquisition and the introduction  of an overdraft privilege
program in the second quarter of 2004.

Gains on the sales of mortgage loans increased $67,000 or 47.5% to  $208,000 for
the second quarter of 2004 compared to the $141,000 of gains recognized during
the second quarter of 2003.  In the second quarter of 2004, $14,650,000 of loans
were sold to the secondary market compared to $7,719,000 for the  same period in
2003.  Year to date gain on sale of mortgage loans increased $54,000 or 17.9% to
$355,000 compared to $301,000 for the same period in 2003.  The average  gain in
2004  was 1.45% on $24,506,000 in loans sold to the secondary market compared to
an average gain of 1.80% on the $16,708,000 of loans sold in the same period in
2003.  At June 30, 2004 the pipeline of held for sale loans has decreased
substantially from the level that existed at March 31, 2004. The decrease is due
to a rise in market interest rates which has reduced the demand for mortgage
refinancings and turnover in the mortgage origination staff.  The decrease in
the held for sale loan pipeline may negatively impact the gains on sales of
mortgage loans realized  in the  next quarter.

The Company recognized $72,000 in securities gains in the second quarter of 2004
compared to $95,000 in the second quarter of 2003.  Year to date the company has
realized $152,000 in securities gains, a $272,000 or 64.2% decrease compared  to
the $424,000 in gains realized for the six months ended June 30, 2003.
Securities are sold from time to time to reposition the portfolio into
investments that offer better risk reward characteristics under a number of
potential future  interest rate scenarios.

Other noninterest income increased $16,000 or 7.8% to $220,000 for the quarter
ended June 30, 2004 compared to $204,000 for the second quarter of 2003.

Year to date other noninterest income increased by $126,000 or 37.1% to $466,000
for the six months ended June 30, 2004 from $340,000 for the six months ended
June 30, 2003.

NONINTEREST EXPENSES

Total noninterest expense  increased $753,000,  or 26.7%, to  $3,568,000 for the
three months ended June  30, 2004 compared to  $2,815,000 for the same period in
2003.  Year  to date  noninterest expense increased  by $1,370,000, or 23.7%  to
$7,150,000 for the six months ended June 30, 2004 compared to $5,780,000 for the
six months ended June 30, 2003. The increases reflect increased costs in 2004 as
a result  of the  DunC acquisition  offset  by the  accretive benefits from  the
elimination of duplicative expenses.

Salaries and employee benefits increased $477,000 or 35.1% to $1,837,000 for the
quarter ended June  30, 2004  compared to $1,360,000  for the  second quarter of
2003.   For  the first six months  of 2003 total  salaries and employee benefits
increased $837,000 or  29.7% to $3,655,000  compared to  $2,818,000 for the same
period in  2003.   The increases  reflect  additional staffing  due to  the DunC
acquisition, additional costs of employee benefits and normal salary increases.

Equipment expenses increased $69,000 or 29.9%  to $300,000 for the quarter ended
June 30, 2004 compared to  $231,000 for the same  quarter in 2003. For the first
six months of 2003  equipment expense increased $147,000,  or 31.9%, to $608,000
compared to $461,000 for the same period in 2003. The increases relate primarily
to increased  depreciation  and  maintenance  on assets  acquired  in  the  DunC
acquisition and additional depreciation and maintenance on a new items
processing system installed during the third quarter of 2003.

Data processing costs increased  $69,000, or 34.0%, to  $272,000 for the quarter
ended June 30, 2004 and $151,000, or 37.8%, to $550,000 for the six months ended
June 30, 2004. These  increases reflect higher volumes  of service utilized from
our core processor due to additional  accounts added in the DunC acquisition and
the outsourcing of network support services in 2004.

Professional fees decreased  $58,000 or  19.2%, to  $244,000 for  the six months
ended June 30, 2004 compared to $302,000 for the same period in 2003 primarily
as a result of lower legal fees in 2004 related to the Fiserv, Inc.  litigation.
There is  an  appeal  in this  case  still  pending and  the  Company  may incur
additional legal fees in future periods as more fully discussed under the
heading "OFF BALANCE SHEET ITEMS AND CONTINGENCIES" in Part I Item 2 of this
report.

Other noninterest expenses increased $49,000 or  19.0% to $307,000 for the three
months ended June 30, 2004 compared to  $258,000 for the same period a year ago.
For the first six months of 2004 other noninterest expenses increased $13,000 or
2.2% to  $596,000 compared  to $583,000  for  the same  period  in 2003.   Other
expenses for the quarter ended March 31, 2003 included a non-recurring expense
of $56,000 related to a sales and use tax audit.

                             BALANCE SHEET ANALYSIS

OVERVIEW

Total assets decreased to $415,911,000 at June 30, 2004 compared to $425,402,000
at December 31, 2003,  a decrease of 2.2%.  The December 31,  2003 balance sheet
included short-term  year-end deposits  of $11,750,000,  which were  invested in
federal funds sold and interest bearing deposits in  banks at December 31, 2003.
Excluding these  deposits,  total  assets  increased  $2,259,000, or  0.5%  from
December 31, 2003 to June 30, 2004.

LOANS

Net loans  increased  $1,581,000, or  0.7%,  to $231,723,000  on  June 30,  2004
compared to $230,142,000 on December 31, 2003. The composition of loans is shown
in the following table:

<TABLE>

                                                                 As a % of Total Loans
                          June 30,   December 31,   Change in   June 30,   December 31,
                            2004         2003        Balance      2004         2003
                          --------   ------------   ---------   --------   ------------
                           (Dollars in millions)
<S>                          <C>         <C>           <C>         <C>          <C>
Residential Real Estate     $99.9       $97.5          $2.4       42.7%        41.8%
Commercial Real Estate      $69.2       $67.0          $2.2       29.5%        28.7%
Construction and Land
  Development               $16.8       $11.3          $5.5        7.2%         4.8%
Commercial                  $27.3       $35.6         ($8.3)      11.7%        15.3%
Consumer                    $18.6       $19.2         ($0.6)       7.9%         8.2%
Other                        $2.4        $2.8         ($0.4)       1.0%         1.2%
</TABLE>

During the second quarter of 2004 loans decreased by $7,312,000 due to principal
amortization on  outstanding  loans,  the pay-off  of  a  $2,493,000  commercial
relationship due to a sale of the customer's business and the partial charge off
of two  commercial relationships.   Management  intends to  aggressively  pursue
quality credits in future periods and plans a consumer loan promotion.

NON-PERFORMING LOANS

Non-performing loans  include loans  that are  determined  by management  to  be
impaired because full  collection of interest  and principal  is doubtful,  have
been placed in non-accrual status, and accruing loans which are past-due  ninety
days or more as to interest and/or principal payments.

The following summarizes information concerning non-performing loans:

                                                       JUNE 30,    DECEMBER 31,
    (Dollars in thousands)                               2004          2003
                                                       --------    ------------
    Impaired loans-still accruing                      $  875         $  923
    Impaired loans-non-accrual                            994          2,058
    Other non-accrual                                   1,285          1,030
    Past due 90 days or more and still accruing           515             42
                                                       ------         ------
    Total non-performing loans                         $3,669         $4,053
                                                       ------         ------
                                                       ------         ------
ASSET QUALITY

The allowance for loan losses was $2,508,000 or 1.07% of total loans at June 30,
2004 compared to $3,302,000  or 1.41% of total loans at December 31, 2003. As of
June 30, 2004, non-performing loans totaled $3,669,000 compared to $4,053,000 at
December 31, 2003. The decrease during the second quarter of 2004 is  due to the
resolution  of  two   commercial  loan  relationships  totaling $1,285,000.  The
collateral on one of the loan relationships has been liquidated and the
collateral on the other loan relationship is  held in other real estate  at its
estimated net realizable value at June 30, 2004.  Management believes the
allowance for loan losses is adequate at June 30, 2004.

The allowance for loan losses is established through a provision for loan losses
charged to expense. Loans are charged against the allowance for loan losses when
management believes  that the collectibility of the  principal is  unlikely. The
allowance for loan losses is adequate to cover probable credit losses relating
to specifically identified loans, as well as probable credit losses inherent in
the balance of the loan portfolio.  In accordance with FASB Statements 5 and
114, the allowance is provided for losses that have been incurred as of the
balance sheet date.  The allowance is based on past events and current economic
conditions, and does not include the effects of expected losses on specific
loans or groups of loans that are related to future events or expected changes
in economic conditions. Management reviews a calculation of the allowance for
loan losses on a quarterly basis.  While management uses the best information
available to make its evaluation, future adjustments to the allowance may be
necessary if  there are significant changes in economic conditions.

In addition, various regulatory agencies periodically  review the  allowance for
loan losses.    These agencies  may  require the  bank to make  additions to the
allowance for  loan losses  based on their judgments of collectibility  based on
information available to them at the time of their examination. The policy of
the Company is to place a loan on non-accrual status if: (a) payment in  full of
interest and principal is not expected, or (b) principal or interest has been in
default for a  period of 90  days or more, unless the obligation is  both in the
process of collection and well secured. Well secured is defined as collateral
with sufficient market value to repay principal and all accrued interest. A debt
is in the process of collection if collection of the debt is proceeding in due
course either through legal action, including judgement enforcement procedures,
or in appropriate circumstances, through collection efforts not involving legal
action which are reasonably expected to result in repayment of the debt or in
its restoration to current status.

At June  30, 2004 the allowance  for  loan losses  to  total  non-performing and
restructured loans equaled 68.4% compared to 81.5% at December 31, 2003.

SHORT-TERM INVESTMENTS

Federal funds sold and securities purchased under agreements to resell decreased
$826,000 to $5,294,000 at June 30, 2004 compared  to $6,120,000  at December 31,
2003.

Interest-bearing deposits in  banks decreased $829,000 to $2,012,000 at June 30,
2004 compared to $2,841,000 at December 31, 2003.

INVESTMENT SECURITIES

During  the  second  quarter  of  2004  the  Bank  and it's  Nevahawk subsidiary
transferred $16,345,000 of  securities in  the held to maturity portfolio to the
available for sale  portfolio.  The transfer allows for more  flexibility in the
management of  the  investment portfolio to increase total  return.   Investment
securities decreased  $6,129,000, or  4.5%, to  $129,584,000  at  June  30, 2004
compared to $135,713,000 at December 31, 2003. The decrease was used to fund the
deposit decrease discussed below.

DEPOSITS

Total deposits decreased $16,913,000 to $306,726,000 at June 30, 2004 compared
to $323,639,000 at December 31, 2003. As noted above, the Company's December 31,
2003 financial statements reflect short-term year-end deposits of $11,750,000.
Excluding the  short-term year-end  deposits, total deposits decreased 1.7% from
December 31,  2003.  Excluding  the  short-term year-end  deposits, non-interest
bearing deposits increased by $1,191,000 and interest bearing deposits decreased
by $6,354,000 at June 30, 2004 compared to December 31, 2003.

BORROWINGS

Short-term borrowings increased $7,401,000 to $16,887,000 at June 30, 2004
from $9,486,000 at year-end. The increase is due to higher outstanding balances
of repurchase agreements with commercial customers.

Long-term borrowings consist of Blackhawk Bancorp's bank term loan of
$7,500,000 and term advances from the Federal Home Loan Bank ("FHLB") that were
$49,732,000 at June 30, 2004 compared to $48,413,000 at December 31, 2003. The
increase reflects a net additional $1,350,000 in FHLB advances outstanding at
June  30, 2004.

SHAREHOLDERS' EQUITY

Total shareholders' equity decreased  $565,000 to $25,198,000 at  June 30,  2004
compared to $25,763,000 at December 31, 2003.  The decrease is due to the impact
of changes in market  interest rates on the  value of the investment  portfolio.
Accumulated other comprehensive income decreased $970,000 to ($142,000) at  June
30, 2004 from $828,000  at December 31, 2003.   Accumulated other  comprehensive
income consists of two parts.   The unrealized gains (losses) on  available-for-
sale securities net of tax decreased by $1,026,000 to a net loss of $345,000  at
June 30, 2004  compared to a  net gain of  $681,000 at December  31, 2003.   The
unrealized gains  on  the Company's  interest  rate  swap contract  net  of  tax
increased by  $56,000 to  $203,000 at  June  30, 2004  compared to  $147,000  at
December 31, 2003.   During the first  six months of  2004 surplus increased  by
$27,000 from the sale  of stock for  stock options exercised.   In addition  the
company declared two  quarterly dividends of  $0.09 per share  on common  stock,
which totaled $454,000.

The Company is subject to certain regulatory capital requirements and  continues
to remain in  compliance with the  requirements. The following  table shows  the
company's capital ratios and regulatory requirements.

                                          JUNE 30,    DECEMBER 31,   REGULATORY
                                            2004          2003      REQUIREMENTS
                                            ----          ----      ------------

Total Capital (To Risk-Weighted Assets)     10.9%        10.9%          8.0%

Tier I Capital (To Risk-Weighted Assets)     9.9%         9.6%          4.0%

Tier I Capital (To Average Assets)           6.2%         6.0%          4.0%

The Company's subsidiary  bank also  meets regulatory capital requirements to be
considered well capitalized.

ASSET/LIABILITY MANAGEMENT

Asset/liability management  is  the  process  of identifying,  measuring  and
managing the risk to  the Company's earnings  and capital resulting  from the
movements in  interest  rates.   It  is the  Company's  objective to  protect
earnings and capital while  achieving liquidity, profitability  and strategic
goals.

The Company focuses its measure of  interest rate risk on the  effect a shift
in interest  rates  would  have  on  earnings.    Since  not  all  assets  or
liabilities move at the same rate and at the same  time, a determination must
be made  as to  how each  interest earning  asset and  each interest  bearing
liability adjusts with each change in  the base rate.   The Company develops,
evaluates and amends  its assumptions  on an ongoing  basis and  analyzes its
earnings exposure quarterly.

In addition to  the effect  on earnings,  a quarterly  evaluation is  made to
determine the change in the economic value of equity  with various changes in
interest rates.    This  determination indicates  how much  the value  of the
assets and the  value of the  liabilities change with  a specified  change in
interest rates.  The net difference between the economic values of the assets
and liabilities results in an economic value of equity.

During June 2003, the  Company entered into  an interest rate  SWAP agreement
related to  the subordinated  debentures.   This SWAP  is utilized  to manage
variable interest rate exposure and is designated as  a highly effective cash
flow hedge. The differential to be paid or received on  the SWAP agreement is
accrued as  interest rates  change and  is recognized  over the  life of  the
agreement in interest expense.   The SWAP agreement expires  in December 2007
and essentially fixes the rate to  be paid at 5.72%.  The  notional amount is
$7,000,000.  Included in  other comprehensive income  is a gain  of $308,000,
less $105,000 of deferred  income tax, relating to  the fair market  value of
the SWAP agreement  as of  June 30, 2004.   Risk  management results  for the
period ended  June 30,  2004 related  to  the balance  sheet  hedging of  the
subordinated debentures indicate that  the hedge was 100%  effective and that
there was no component of the derivative instrument's gain  or loss which was
excluded from the assessment of hedge effectiveness.

LIQUIDITY

Liquidity, as it relates to the subsidiary bank, is a  measure of its ability
to fund loans and  withdrawals of deposits in  a cost-effective manner.   The
Bank's principal sources  of funds are  deposits, scheduled  amortization and
prepayment of  loan  principal,  amortization,  prepayment  and  maturity  of
investment securities,  short-term  borrowings  and income  from  operations.
Additional sources include purchasing fed funds, sale  of securities, sale of
loans, borrowing from  both the  Federal Reserve Bank  and Federal  Home Loan
Bank, and dividends paid by Nevahawk, a wholly owned subsidiary of the Bank.

The liquidity needs of the Company generally consist  of payment of dividends
to its shareholders, payments of principal and interest on borrowed funds and
subordinated debentures, and  a limited  amount of  expenses. The  sources of
funds to provide this liquidity  are issuance of capital  stock and dividends
from its subsidiary bank.   Certain restrictions  are imposed upon  the Bank,
which could  limit its  ability  to pay  dividends  if it  did  not have  net
earnings or adequate  capital in the  future. The Company  maintains adequate
liquidity to pay its expenses.

The  following  table   summarizes  The  Company's   significant  contractual
obligations   and  other  potential  funding  needs  at  June  30,  2004  (in
thousands):

                                                       Data
               Time       Long-term     Operating    Processing
             Deposits    debt(1)<F1>     Leases      Commitment       Total
             --------    -----------    ---------    ----------       -----
2005         $ 83,561      $17,129       $  164        $  534       $101,388
2006           21,053        5,087          164           534         26,838
2007           13,329        7,141          164           534         21,168
2008           11,156        7,875          135           534         19,700
2009            1,907       10,000          114           134         12,155
Thereafter        104       17,217          934             0         18,255
             --------      -------       ------        ------       --------
Total        $131,110      $64,449       $1,675        $2,270       $199,504
             --------      -------       ------        ------       --------
             --------      -------       ------        ------       --------

Commitments to extend credit                               $36,227

(1)<F1>  Long-term debt includes subordinated debentures.

OFF BALANCE SHEET ITEMS AND CONTINGENCIES

Off-balance sheet items consist of commitments to originate mortgage loans,
unused lines of credit and standby letters of credit totaling approximately
$36,227,000 as of June 30, 2004.  This compares to $34,356,000 at December
31, 2003. The Company's commitments to originate mortgage loans are offset by
commitments of third party investors to purchase the loans. The Company's
obligation to deliver the loans is on a best effort basis; therefore there
are no contingent liabilities associated with them. The Bank has historically
funded off-balance sheet commitments with its primary sources of funds and
management anticipates that this will continue.

In 2000 the Bank filed a lawsuit in Waukesha County, Wisconsin, against
Fiserv, Inc., a former data processing services provider, for breach of
contract.  The bank was seeking to recover damages sustained due to a
processing error in which approximately $500,000 was improperly charged to the
Bank's check clearing account at the Federal Home Loan Bank of Chicago.  On
February 14, 2003 a jury delivered a verdict that Fiserv, Inc. did not breach
its contract with the Bank.  Fiserv, Inc. then filed a counterclaim seeking
approximately $380,000 in reimbursement of legal fees.  On May 12, 2003 a
judge in the case denied Fiserv's motion for reimbursement of legal fees.  In
July, Fiserv appealed the trial court's denial of its request to have its
legal fees reimbursed.  The Bank thereafter cross-appealed on several grounds,
including the trial court's denial of its motion for a new trial.  Fiserv
filed a motion to dismiss the Bank's cross-appeal on procedural grounds.  This
motion was denied and the appeal and cross-appeal are currently pending. The
Company plans to aggressively contest Fiserv's appeal of the decision on legal
fees and has not accrued the legal fee reimbursement claimed by Fiserv. The
Bank also intends to aggressively pursue its appeal for a new trial. Although
the ultimate disposition of any appeal can not be predicted with any
certainty, the Company believes that the outcome of the case will not have a
material adverse effect on the Company's consolidated financial position,
though an adverse result could have a material adverse effect on the Company's
consolidated results of operations in a given year.

Like out-of-state subsidiaries of many Wisconsin financial institutions,
Nevahawk (an out-of-state subsidiary of the Bank) which holds and manages
investment assets, has not been subject to Wisconsin tax.  The Wisconsin
Department of Revenue has instituted an audit program, including an audit of
Blackhawk, specifically aimed at out-of-state bank subsidiaries and has
indicated that it may withdraw favorable rulings previously issued in
connection with such subsidiaries.

In July 2004, the Wisconsin Department of Revenue sent letters to banks in
Wisconsin (whether or not they were undergoing an audit) reporting on
settlements involving 17 banks and their out-of-state investment subsidiaries.
The letter provided a summary of currently available settlement parameters.  For
periods before 2004, they include: restrictions on the types of subsidiary
income which may be excluded from Wisconsin taxation; possible assessment of
certain back taxes for a limited period of time; limitations on net operating
loss carry forwards and interest deductions related to subsidiary loans; and
interest (but not penalties) on any past-due taxes.  For 2004 and going forward,
the letter states similar provisions, including limits on subsidiaries' assets.
Settlement on those terms would result in the rescission of prior letter
rulings, and the Department states that a settlement would be binding going
forward except for future legislation or change by mutual agreement.  The letter
appears to accept by implication the general proposition that some out-of-state
investment subsidiary income is not subject to Wisconsin taxes.

The Department has not yet made any assessment against the Company's subsidiary
nor has the Company determined how it intends to respond.  The Department's
letter did not provide sufficient detail to permit the Company to assess what
effects the acceptance of such a settlement offer might have upon it, nor does
it provide sufficient information for the Company to determine what the
Department's position would be if an assessment were made and the Company were
to challenge it.  The Company expects to seek further detail from the Department
and will evaluate the impact of such a settlement after receiving more specific
details.

ITEM 3. CONTROLS AND PROCEDURES

DISCLOSURE CONTROLS  AND PROCEDURES:     The Company's  management, with  the
participation of the  Company's Chief Executive  Officer and  Chief Financial
Officer, has evaluated the effectiveness of the Company's disclosure controls
and procedures  (as such  term is  defined in  Rules 13a-15(e) and  15d-15(e)
under the Securities Exchange Act  of 1934, as amended  (the "Exchange Act"))
as of  the  end  of  the period  covered  by  this  report.   Based  on  such
evaluation, the Company's Chief Executive Officer and Chief Financial Officer
have concluded that, as of the  end of such period,  the Company's disclosure
controls and procedures are  effective in recording,  processing, summarizing
and reporting, on a timely basis, information required to be disclosed by the
Company in the reports that it files or submits under the Exchange Act.

INTERNAL CONTROL OVER FINANCIAL REPORTING:   There have  not been any changes
in the Company's internal control  over financial reporting (as  such term is
defined in Rules 13a-15(f) and  15d-15(f) under the Exchange  Act) during the
fiscal quarter to which this report relates that have materially affected, or
are reasonably likely  to materially affect,  the Company's  internal control
over financial reporting.

                                    PART II

                               OTHER INFORMATION

ITEM 1.   LEGAL PROCEEDINGS

          None.

ITEM 2.   CHANGES IN SECURITIES AND SMALL BUSINESS ISSUER PURCHASES
          OF EQUITY SECURITIES

          None.

ITEM 3.   DEFAULTS UPON SENIOR SECURITIES

          None.

ITEM 4.   SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

          On May 19, 2004, at the annual meeting of stockholders of the Company,
          the stockholders re-elected Prudence A. Harker, Charles J. Howard  and
          Merritt J.  Mott  and  elected Marco  T.  Lenis  to  three-year  terms
          expiring in 2007.   The  vote, with respect  to the  election of  each
          director was as follows:

               Prudence A. Harker
                    2,526,145 total votes eligible to be cast
                    2,126,100 votes were represented at the Annual Meeting
                    2,033,911 votes were cast "For" re-election
                    No votes were cast "Against" re-election
                    92,189 votes were withheld

              Charles J. Howard
                    2,526,145 total votes eligible to be cast
                    2,126,100 votes were represented at the Annual Meeting
                    2,100,515 votes were cast "For" re-election
                    No votes were cast "Against" re-election
                    25,585 votes were withheld

               Merritt J. Mott
                    2,526,145 total votes eligible to be cast
                    2,126,100 votes were represented at the Annual Meeting
                    2,097,585 votes were cast "For" re-election
                    No votes were cast "Against" re-election
                    28,515 votes were withheld

               Marco T. Lenis
                    2,526,145 total votes eligible to be cast
                    2,126,100 votes were represented at the Annual Meeting
                    2,095,985 votes were cast "For" election
                    No votes were cast "Against" election
                    30,115 votes were withheld

          The following  directors  continue to  serve  until 2005:  R.  Richard
          Bastian, III,  Roger  G.  Bryden, John  B.  Clark  and  Charles  Hart.
          Stephen P.  Carter,  Kenneth  A. Hendricks,  George  D.  Merchant  and
          Stephen R. Thomas serve as directors with terms expiring in 2006.

          In addition, as detailed in the Company's Proxy Statement dated  April
          9, 2004,  the stockholders  ratified the  appointment of  McGladrey  &
          Pullen, LLP as the Company's independent accountants for fiscal  2004.
          The result of the vote is as follows:

                    2,526,145 total votes eligible to be cast
                    2,126,100 votes were represented at the Annual Meeting
                    2,107,335 votes were cast "For" the proposal
                    1,000 votes were cast "Against" the proposal
                    17,765 votes abstained

ITEM 5.   OTHER INFORMATION

          None.

ITEM 6.   A) EXHIBITS

          See Exhibit Index following the signature  page in this report,  which
          is incorporated herein by this reference.

          B) REPORTS ON FORM 8-K

          The Company furnished a Report on Form 8-K dated April 29, 2004  under
          Item 12 which reported  1st quarter 2004 results;  that report is  not
          deemed "filed".

          The Company filed a Report on Form 8-K dated June 22, 2004 under  Item
          5 which  reported  that the  Company  had entered  into  a  definitive
          agreement for the sale of its Rochelle and Oregon branches.

                                   SIGNATURES

Pursuant to  the  requirements of  the  Securities  Exchange Act  of  1934,  the
registrant has  duly caused  this report  to  be signed  on  its behalf  by  the
undersigned, thereunto duly authorized.

                                        Blackhawk Bancorp, Inc.
                                        ----------------------------------------
                                        (Registrant)

Date:  August 9, 2004                   /s/ R. Richard Bastian, III
                                        ----------------------------------------
                                        R. Richard Bastian, III
                                        President and Chief Executive Officer

                                        /s/ Todd J. James
                                        ----------------------------------------
                                        Todd J. James
                                        Executive Vice President and
                                        Chief Financial Officer

                                        /s/ Thomas L. Lepinski
                                        ----------------------------------------
                                        Thomas L. Lepinski, CPA
                                        Principal Accounting Officer

                            BLACKHAWK BANCORP, INC.

                               INDEX TO EXHIBITS

<TABLE>
                                                            Incorporated                         Filed
Exhibit                                                     Herein By                            Here-
Number    Description                                       Reference To:                        with
-------   -----------                                       -----------------                    -----
<S>       <C>                                               <C>                                  <C>

2.1       Agreement and Plan of Merger                      Exhibit 2.1 to Form 8-K dated
          By and Among Blackhawk                            March 17, 2003
          Bancorp, Inc. DunC Merger
          Corporation and DunC Corp

2.1       Office Purchase and Assumption                    Exhibit 2.1 to Form 8-K dated
          Agreement By and Between                          June 22, 2004
          Blackhawk State Bank and The
          First National Bank and Trust
          Company of Rochelle dated as of
          June 22, 2004

3.1       Amended and                                       Exhibit 3.1 to
          restated Articles                                 Amendment No. 1 to
          of Incorporation                                  Registrant's
          of the Registrant                                 Registration
                                                            Statement on Form
                                                            S-1 (Reg. No. 33-32351)

3.2       By-laws of Regis-                                 Exhibit 3.2 to
          trant as amended                                  Amendment No. 1 to
                                                            Registrant's
                                                            Registration
                                                            Statement on Form
                                                            S-1 (Reg. No. 33-32351)

4         Credit Agreement with US Bank                     Form 8-K dated September
          National Association dated                        30, 2003
          September 26, 2003

31.1      Certification of Chief Executive
          Officer Pursuant to Rule 13a-14(a)/
          15d-14(a)                                                                                X

31.2      Certification of Chief Financial
          Officer Pursuant to Rule 13a-14(a)/
          15d-14(a)                                                                                X

32.1      Certification Pursuant to 18
          U. S. C. Section 1350, as
          Adopted Pursuant to Section
          906 of the Sarbanes-Oxley
          Act of 2002                                                                              X

32.2      Certification Pursuant to 18
          U. S. C. Section 1350, as
          Adopted Pursuant to Section
          906 of the Sarbanes-Oxley
          Act of 2002                                                                              X
</TABLE>