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UNITED STATES  SECURITIES AND EXCHANGE COMMISSION
Washington D.C. 20549

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FORM 10-Q

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2005

Commission File Number 0-20050

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PRINCETON NATIONAL BANCORP, INC.
(Exact name of registrant as specified in its charter)

|Delaware(State or other jurisdictionof incorporation or organization) | 36-3210283(I.R.S. Employer Identification No.)
|--------------------------------------------------------------------- | ----------------------------------------------

606 S. Main Street, Princeton, IL 61356
(Address of principal executive offices and Zip Code)

(815) 875-4444
(Registrants telephone number, including area code)

| | Indicate by check
mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or 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
| | --------

| | Indicate by check
mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).
| | ---------------------------------------------------------------------------------------------------------------------

| | Yes X No
| | --------

| | As of July 12, 2005, the registrant had outstanding 3,029,132
shares of its $5 par value common stock.
| | ------------------------------------------------------------------------------------------------------

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Page 1 of 23 pages

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Part I:   FINANCIAL INFORMATION

The unaudited consolidated financial statements of Princeton National
Bancorp, Inc. and Subsidiary and managements discussion and analysis of financial condition and results of operations are
presented in the schedules as follows:

| | Schedule 1:   Consolidated Balance Sheets
Schedule 2:   Consolidated Statements of Income and Comprehensive Income
Schedule 3:   Consolidated Statements of Stockholders Equity
Schedule 4:   Consolidated Statements of Cash Flows
Schedule 5:   Notes to Consolidated Financial Statements
Schedule 6:   Managements Discussion and Analysis of Financial Condition and Results of Operations
Schedule 7:   Controls and Procedures
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Part II:   OTHER INFORMATION

|Item 2. |  | Unregistered Sales of Equity Securities and Use of Proceeds
|------- |  | -----------------------------------------------------------

|(e) |  | The following table provides information about purchases of the
Corporations common stock by the Corporation during the quarter ended June 30, 2005:
|--- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------

|Period           |  | (a) Total number of shares purchased |  | (b) Average price paid per share |  | (c) Total number of shares purchasedas part of a publicly announced plan or program |  | (d) Maximum number (or approximate dollar value) of shares that may yet be purchased under the plans or programs
|---------------- |  | ------------------------------------ |  | -------------------------------- |  | ----------------------------------------------------------------------------------- |  | ----------------------------------------------------------------------------------------------------------------
|                 |  |                                      |  |                                  |  |                                                                                     |  |                                                                                                                 
|4/1/05 - 4/30/05 |  |                                      |  | 0                                |  | $ 0.00                                                                              |  |                                                                                                                 
|5/1/05 - 5/31/05 |  |                                      |  | 32,500                           |  | $30.42                                                                              |  |                                                                                                                 
|6/1/05 - 6/30/05 |  |                                      |  | 0                                |  | $0.00                                                                               |  |                                                                                                                 
|                 |  |                                      |  |                                  |  |                                                                                     |  |                                                                                                                 
|Total            |  |                                      |  | 32,500                           |  | $30.42                                                                              |  |                                                                                                                 
|                 |  |                                      |  |                                  |  |                                                                                     |  |                                                                                                                 

|(1) |  | We purchased an aggregate of 32,500 shares of our common stock
pursuant to the repurchase program that we announced on January 24, 2005 (the Program).
|--- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------

|(2) |  | Our Board of Directors approved the repurchase by us of up to an
aggregate of 100,000 shares of our common stock pursuant to the Program. The expiration date of this Program is January 24, 2006.
Unless terminated earlier by resolution of our Board of Directors, the Program will expire on the earlier of such expiration date
or when we have repurchased all shares authorized for repurchase under the Program.
|--- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|Item 4. |  | Submission of Matters to a Vote of Security Holders
|------- |  | ---------------------------------------------------

The Annual Meeting of
Shareholders of Princeton National Bancorp, Inc. was held on April 26, 2005, for the purpose of electing three directors each to
serve for a term of three years. Proxies for the meeting were solicited by Management pursuant to Regulation 14A under the
Securities Exchange Act of 1934, and there was no solicitation in opposition to Managements solicitation.

All three of
Managements nominees for director listed in the proxy statement were elected. The results of the vote were as follows:

|                 | SharesVotedFor |           | SharesWithheld |        | Abstain
|---------------- | ---------------- | --------- | ---------------- | ------ | -------
|Donald E. Grubb  |                  | 2,776,974 |                  | 4,135  |        
|Ervin I. Pietsch |                  | 2,764,463 |                  | 16,646 |        
|Craig O. Wesner  |                  | 2,776,323 |                  | 4,786  |        

In addition, the following
directors terms of offices continued after the meeting:

|Gary C. Bruce     |  | Daryl Becker     | 
|----------------- |  | ---------------- | 
|John R. Ernat     |  | Sharon L. Covert | 
|Thomas M. Longman |  | Mark Janko       | 
|Tony J. Sorcic    |  | James B. Miller  | 
|                  |  | Stephen W. Samet | 

|Item 6. |  | Exhibits
|------- |  | --------

| | 31.1 |  | Certification of Tony J. Sorcic required by Rule 13a-14(a).
| | ---- |  | -----------------------------------------------------------

| | 31.2 |  | Certification of Todd D. Fanning required by Rule 13a-14(a).
| | ---- |  | ------------------------------------------------------------

| | 32.1 |  | Certificaton of Tony J. Sorcic required by Rule 13a-14(b) and Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350.
| | ---- |  | ------------------------------------------------------------------------------------------------------------------------------------

| | 32.2 |  | Certificaton of Todd D. Fanning required by Rule 13a-14(b) and Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350.
| | ---- |  | -------------------------------------------------------------------------------------------------------------------------------------

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.

|                       | PRINCETON NATIONAL BANCORP, INC.
|---------------------- | --------------------------------
|                      
|Date:   August 8, 2005 | By                              
|                       |                                 
|                      
|Date:   August 8, 2005 | By                              
|                       |                                 

2

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Schedule 1

PRINCETON NATIONAL BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(dollars in thousands, except share data)

|                                                                        | June 30,2005(unaudited) |  | December 31,2004
|----------------------------------------------------------------------- | ----------------------- |  | ----------------
|ASSETS                                                                  |                         |  |                 
|Cash and due from banks                                                 |                         |  | $               
|Interest-bearing deposits with financial institutions                   |                         |  |                 
|Federal funds sold                                                      |                         |  |                 
|                                                                        |                         |  |                 
|                                                                       
|Total cash and cash equivalents                                         |                         |  |                 
|                                                                       
|Loans held for sale, at lower of cost or market                         |                         |  |                 
|                                                                       
|Investment securities:                                                 
|Available-for-sale, at fair value                                       |                         |  |                 
|Held-to-maturity, at amortized cost (fair value of $14,718 and $14,111) |                         |  |                 
|                                                                        |                         |  |                 
|                                                                       
|Total investment securities                                             |                         |  |                 
|                                                                       
|Loans:                                                                 
|Loans, net of unearned interest                                         |                         |  |                 
|Allowance for loan losses                                               |                         |  |                 
|                                                                        |                         |  |                 
|                                                                       
|Net loans                                                               |                         |  |                 
|                                                                       
|Premises and equipment, net of accumulated depreciation                 |                         |  |                 
|Bank-owned life insurance                                               |                         |  |                 
|Accrued interest receivable                                             |                         |  |                 
|Goodwill                                                                |                         |  |                 
|Intangible assets, net of accumulated amortization                      |                         |  |                 
|Other real estate owned                                                 |                         |  |                 
|Other assets                                                            |                         |  |                 
|                                                                        |                         |  |                 
|                                                                       
|TOTAL ASSETS                                                            |                         |  | $               
|                                                                        |                         |  |                 
|                                                                       
|LIABILITIES                                                            
|Deposits:                                                               |                         | 
|Demand                                                                  |                         |  | $               
|Interest-bearing demand                                                 |                         |  |                 
|Savings                                                                 |                         |  |                 
|Time                                                                    |                         |  |                 
|                                                                        |                         |  |                 
|                                                                       
|Total deposits                                                          |                         |  |                 
|                                                                       
|Borrowings:                                                             |                         | 
|Customer repurchase agreements                                          |                         |  |                 
|Advances from the Federal Home Loan Bank                                |                         |  |                 
|Interest-bearing demand notes issued to the U.S. Treasury               |                         |  |                 
|Federal funds purchased                                                 |                         |  |                 
|Note payable                                                            |                         |  |                 
|                                                                        |                         |  |                 
|                                                                       
|Total borrowings                                                        |                         |  |                 
|                                                                       
|Other liabilities                                                       |                         |  |                 
|                                                                        |                         |  |                 
|                                                                       
|TOTAL LIABILITIES                                                       |                         |  |                 
|                                                                        |                         |  |                 
|                                                                       
|STOCKHOLDERS EQUITY                                                   
|Common stock: $5 par value, 7,000,000 shares                            |                         | 
|authorized; 4,139,841 issued                                            |                         |  |                 
|Surplus                                                                 |                         |  |                 
|Retained earnings                                                       |                         |  |                 
|Accumulated other comprehensive income, net of tax                      |                         |  |                 
|Less: Cost of 1,110,709 and 1,081,841 treasury shares at                |                         | 
|June 30, 2005 and December 31, 2004, respectively                       |                         |  |                 
|                                                                        |                         |  |                 
|                                                                       
|TOTAL STOCKHOLDERS EQUITY                                              |                         |  |                 
|                                                                        |                         |  |                 
|                                                                       
|TOTAL LIABILITIES AND                                                   |                         | 
|STOCKHOLDERS EQUITY                                                    |                         |  | $               
|                                                                        |                         |  |                 

See accompanying notes to consolidated financial statements

3

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Schedule 2

PRINCETON NATIONAL BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
(dollars in thousands, except share data)

|                                                          | For the Three MonthsEnded June 30 |  | For the Six MonthsEnded June 30
|--------------------------------------------------------- | --------------------------------- |  | -------------------------------
|
|Interest income:                                          |                                   |  |                                
|Interest and fees on loans                                |                                   |  | $                              
|Interest and dividends on investment securities           |                                   |  |                                
|Interest on federal funds sold                            |                                   |  |                                
|Interest on interest-bearing time deposits in other banks |                                   |  |                                
|                                                          |                                   |  |                                
|                                                         
|Total interest income                                     |                                   |  |                                
|                                                         
|Interest expense:                                        
|Interest on deposits                                      |                                   |  |                                
|Interest on borrowings                                    |                                   |  |                                
|                                                          |                                   |  |                                
|                                                         
|Total interest expense                                    |                                   |  |                                
|                                                          |                                   |  |                                
|                                                         
|Net interest income                                       |                                   |  |                                
|Provision for loan losses                                 |                                   |  |                                
|                                                          |                                   |  |                                
|                                                         
|Net interest income after provision                      
|for loan losses                                           |                                   |  |                                
|                                                         
|Non-interest income:                                      |                                   | 
|Trust & farm management fees                              |                                   |  |                                
|Service charges on deposit accounts                       |                                   |  |                                
|Other service charges                                     |                                   |  |                                
|Gain on sales of securities available-for-sale            |                                   |  |                                
|Gain on sale of loans                                     |                                   |  |                                
|Brokerage fee income                                      |                                   |  |                                
|Mortgage banking income                                   |                                   |  |                                
|Bank-owned life insurance income                          |                                   |  |                                
|Other operating income                                    |                                   |  |                                
|                                                          |                                   |  |                                
|                                                         
|Total non-interest income                                 |                                   |  |                                
|                                                         
|Non-interest expense:                                    
|Salaries and employee benefits                            |                                   |  |                                
|Occupancy                                                 |                                   |  |                                
|Equipment expense                                         |                                   |  |                                
|Federal insurance assessments                             |                                   |  |                                
|Intangible assets amortization                            |                                   |  |                                
|Data processing                                           |                                   |  |                                
|Advertising                                               |                                   |  |                                
|Other operating expense                                   |                                   |  |                                
|                                                          |                                   |  |                                
|                                                         
|Total non-interest expense                                |                                   |  |                                
|                                                          |                                   |  |                                
|                                                         
|Income before income taxes                                |                                   |  |                                
|Income tax expense                                        |                                   |  |                                
|                                                          |                                   |  |                                
|                                                         
|Net income                                                |                                   |  | $                              
|                                                          |                                   |  |                                
|                                                         
|Earnings per share:                                       |                                   | 
|Basic                                                     |                                   |  |                                
|Diluted                                                   |                                   |  |                                
|                                                         
|Basic weighted average shares outstanding                 |                                   |  |                                
|Diluted weighted average shares outstanding               |                                   |  |                                

See accompanying notes to consolidated financial statements

4

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Schedule 2

PRINCETON NATIONAL BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)
(dollars in thousands)

|                                                                        | For the Three MonthsEnded June 30 |  | For the Six MonthsEnded June 30
|----------------------------------------------------------------------- | --------------------------------- |  | -------------------------------
|
|Net income                                                              |                                   |  | $                              
|                                                                       
|Other comprehensive income (loss), net of tax                           |                                   | 
|                                                                       
|Unrealized holding gains (losses) arising during the period, net of tax |                                   |  |                                
|Less:  Reclassification adjustment for realized gains on                |                                   | 
|sales of securities included in net income                              |                                   |  |                                
|                                                                        |                                   |  |                                
|                                                                       
|Other comprehensive income (loss)                                       |                                   |  |                                
|                                                                        |                                   |  |                                
|                                                                       
|Comprehensive income                                                    |                                   |  | $                              
|                                                                        |                                   |  |                                

See accompanying notes to consolidated financial statements

5

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Schedule 3

PRINCETON NATIONAL BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS EQUITY
(Unaudited)
(dollars in thousands except per share data)

|                                     
|-------------------------------------
|For the Six Months EndedJune 30, 2005
|Balance, January 1, 2005             
|                                     
|Net income                           
|Sale of 3,407 shares                 
|of treasury stock                    
|Purchase of 67,600 shares            
|of treasury stock                    
|Exercise of stock options and        
|re-issuance of treasury              
|stock (35,325 shares)                
|Cash dividends                       
|($.43 per share)                     
|Other comprehensive income,          
|net of $94 tax effect                
|                                     
|                                     
|Balance, June 30, 2005               
|                                     
|                                     
|For the Six Months EndedJune 30, 2004
|                                     
|Balance, January 1, 2004             
|                                     
|Net income                           
|Sale of 2,564 shares                 
|of treasury stock                    
|Purchase of 72,000 shares            
|of treasury stock                    
|Exercise of stock options and        
|re-issuance of treasury              
|stock (29,068 shares)                
|Cash dividends                       
|($.37 per share)                     
|Other comprehensive loss,            
|net of $935 tax effect               
|                                     
|                                     
|Balance, June 30, 2004               
|                                     

See accompanying notes to consolidated financial statements

6

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Schedule 4

PRINCETON NATIONAL BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(dollars in thousands)

|                                                                                  | For the Six Months EndedJune 30
|--------------------------------------------------------------------------------- | -------------------------------
|
|Operating activities:                                                             |                                
|Net income                                                                        |                                
|Adjustments to reconcile net income to net cash provided by operating activities:
|Depreciation                                                                      |                                
|Provision for loan losses                                                         |                                
|Amortization of other intangible assets                                           |                                
|Amortization of premiums on investment securities, net of accretion               |                                
|Gain on securities transactions, net                                              |                                
|Gain on sale of loans                                                             |                                
|FHLB stock dividends                                                              |                                
|Loans originated for sale                                                         |                                
|Proceeds from sales of loans originated for sale                                  |                                
|Increase (decrease) in accrued interest payable                                   |                                
|Decrease in accrued interest receivable                                           |                                
|Increase in other assets                                                          |                                
|Increase (decrease) in other liabilities                                          |                                
|                                                                                  |                                
|                                                                                 
|Net cash provided by operating activities                                         |                                
|                                                                                  |                                
|                                                                                 
|Investing activities:                                                             |                                
|Proceeds from sales of investment securities available-for-sale                   |                                
|Proceeds from maturities of investment securities available-for-sale              |                                
|Purchase of investment securities available-for-sale                              |                                
|Proceeds from maturities of investment securities held-to-maturity                |                                
|Purchase of investment securities held-to-maturity                                |                                
|Proceeds from sale of credit card loans                                           |                                
|Net increase in loans                                                             |                                
|Purchases of premises and equipment                                               |                                
|                                                                                  |                                
|                                                                                 
|Net cash used in investing activities                                             |                                
|                                                                                  |                                
|                                                                                 
|Financing activities:                                                             |                                
|Net increase (decrease) in deposits                                               |                                
|Net increase in borrowings                                                        |                                
|Dividends paid                                                                    |                                
|Purchases of treasury stock                                                       |                                
|Exercise of stock options and issuance of treasury stock                          |                                
|Sales of treasury stock                                                           |                                
|                                                                                  |                                
|                                                                                 
|Net cash provided by financing activities                                         |                                
|                                                                                  |                                
|                                                                                 
|Increase (decrease) in cash and cash equivalents                                  |                                
|Cash and cash equivalents at beginning of period                                  |                                
|                                                                                  |                                
|                                                                                 
|Cash and cash equivalents at June 30                                              |                                
|                                                                                  |                                
|                                                                                 
|                                                                                 
|                                                                                 
|Supplemental disclosures of cash flow information:                               
|Cash paid during the period for:                                                  |                                
|Interest                                                                          |                                
|Income taxes                                                                      |                                
|                                                                                 
|Supplemental disclosures of non-cash flow activities:                            
|Loans transferred to other real estate owned                                      |                                

See accompanying notes to consolidated financial statements

7

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Schedule 5

PRINCETON NATIONAL BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
(Unaudited)

The accompanying unaudited consolidated financial statements have been
prepared in accordance with the instructions to Form 10-Q and do not include all of the information required by accounting
principles generally accepted in the United States of America for complete financial statements and related footnote disclosures.
In the opinion of management, all adjustments (consisting only of normal recurring accruals) considered for a fair presentation of
the results for the interim period have been included. For further information, refer to the consolidated financial statements and
notes included in the Registrants 2004 Annual Report on Form 10-K. Results of operations for interim periods are not
necessarily indicative of the results that may be expected for the year. Certain amounts in the 2004 consolidated financial
statements have been reclassified to conform to the 2005 presentation.

# (1)   EARNINGS PER SHARE CALCULATION

The following table sets
forth the computation of basic and diluted earnings per share for the periods indicated (in thousands, except share data):

|                                 | Three Months EndedJune 30, |  | Six Months EndedJune 30,
|-------------------------------- | -------------------------- |  | ------------------------
|
|Numerator:                       |                            |  |                         
|Net income                       |                            |  | $                       
|                                
|Denominator:                    
|Basic earnings per share-        |                            | 
|weighted average shares          |                            |  |                         
|                                
|Effect of dilutive securities-  
|stock options                    |                            |  |                         
|                                 |                            |  |                         
|Diluted earnings per share-      |                            | 
|adjusted weighted average shares |                            |  |                         
|                                
|Net income per share:           
|                                
|Basic                            |                            |  | $                       
|Diluted                          |                            |  | $                       

8

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# (2)   GOODWILL AND INTANGIBLE ASSETS

The balance of goodwill, net
of accumulated amortization, totaled $1,355,000 at June 30, 2005 and December 31, 2004. The balance of intangible assets, net of
accumulated amortization, totaled $1,415,000 and $1,317,000 at June 30, 2005 and December 31, 2004, respectively.

The following table
summarizes the Corporations intangible assets, which are subject to amortization, as of June 30, 2005 and December 31, 2004.

|(in thousands)          | 2005 |  | 2004
|----------------------- | ---- |  | ----
|
|Core deposit intangible |      |  | $   
|Other intangible assets |      |  |     
|                        |      |  |     
|Total                   |      |  | $   
|                        |      |  |     

Amortization expense totaled
$104,000 for the six months ended June 30, 2005 and June 30, 2004, respectively. The amortization expense will be approximately
$104,000 for the remainder of 2005.

The Corporation has
originated mortgage servicing rights which are included in other assets on the consolidated balance sheets. Mortgage servicing
rights are amortized in proportion to, and over the period of, estimated net servicing income similar to the interest method using
an accelerated amortization method and are subject to periodic impairment testing. As of June 30, 2005 no impairment had been
recorded during the year. Changes in the carrying value of capitalized mortgage servicing rights are summarized as follows:

|(in thousands)                   | 
|-------------------------------- | 
|Balance, January 1, 2005         | 
|Servicing rights capitalized     | 
|Amortization of servicing rights | 
|Impairment of servicing rights   | 
|                                 | 
|Balance, June 30, 2005           | 
|                                 | 

The Corporation services
loans for others with unpaid principal balances at June 30, 2005 and December 31, 2004 of approximately $142,757,000, and
$147,958,000, respectively.

9

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The following table shows the
future estimated amortization expense for mortgage servicing rights based on existing balances as of June 30, 2005. The
Corporations actual amortization expense in any given period may be significantly different from the estimated amounts
displayed depending on the amount of additional servicing rights, changes in mortgage interest rates, actual prepayment speeds,
and market conditions.

Estimated Amortization Expense:

|                                           | Amount (in thousands)
|------------------------------------------ | ---------------------
|For the six months ended December 31, 2005 |                      
|For the year ended December 31, 2006       |                      
|For the year ended December 31, 2007       |                      
|For the year ended December 31, 2008       |                      
|For the year ended December 31, 2009       |                      
|For the year ended December 31, 2010       |                      
|Thereafter                                 |                      

# (3)   STOCK OPTION PLAN

The Corporation accounts for
the stock-based compensation plan under APB Opinion No. 25. For the stock option program, no compensation cost is recognized in
connection with the granting of stock options with an exercise price equal to the fair market value of the stock on the date of
the grant. In accordance with the disclosure requirements of FAS 123, as amended by FAS 148, the following table provides the pro
forma effect on net income and earnings per share if the fair value method of accounting for stock-based compensation had been
used for all awards:

|                                         | For the Three Months Ended June 30, |  | For the Six Months Ended June 30,
|---------------------------------------- | ----------------------------------- |  | ---------------------------------
|
|Net Income as reported                   |                                     |  | $                                
|Deduct: Stock-based compensation, net of |                                     | 
|tax, that would have been reported       |                                     | 
|if the fair value based method had       |                                     | 
|been applied to all awards               |                                     |  |                                  
|                                         |                                     |  |                                  
|Pro forma net income                     |                                     |  | $                                
|                                         |                                     |  |                                  
|                                        
|Basic Earnings Per Share                 |                                     | 
|As Reported                              |                                     |  | $                                
|Pro Forma                                |                                     |  |                                  
|Diluted Earnings Per Share               |                                     | 
|As Reported                              |                                     |  | $                                
|Pro Forma                                |                                     |  |                                  

10

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Schedule 6

PRINCETON NATIONAL BANCORP, INC. AND SUBSIDIARY
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
For the three and six months ended June 30, 2005 and 2004

The following discussion
provides information about Princeton National Bancorp, Inc.s (PNBC or the Corporation) financial
condition and results of operations for the three and six month periods ended June 30, 2005 and 2004. This discussion should be
read in conjunction with the attached consolidated financial statements and notes thereto. Certain statements in this report
constitute forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E
of the Securities Exchange Act of 1934, including, but not limited to those statements that include the words
believes, expects, anticipates, estimates, or similar expressions. PNBC cautions
that such forward-looking statements involve risks and uncertainties that may cause actual results to differ materially from those
expressed or implied. Such risks and uncertainties include potential change in interest rates, competitive factors in the
financial services industry, general economic conditions, the effect of new legislation, and other risks detailed in documents
filed by the Corporation with the Securities and Exchange Commission from time to time.

# RESULTS OF OPERATIONS

Net income for the second
quarter of 2005 was $1,693,000, or basic earnings per share of $0.56 (diluted earnings per share of $0.55), as compared to net
income of $1,909,000 in the second quarter of 2004, or basic earnings per share of $0.62 (diluted earnings per share of $0.61).
This represents a decrease of $216,000 (11.3%) or $.06 per basic and diluted share and is attributable to the sale of the
subsidiary banks credit card portfolio during the second quarter of 2004 which resulted in an after-tax gain of
approximately $285,000. Additionally, the second quarter 2005 results were negatively impacted by $99,000 (pre-tax) in conjunction
with non-recurring costs incurred in farm management. Net income for the first six months of 2005 was $3,401,000, or basic
earnings per share of $1.12 (diluted earnings per share of $1.11), as compared to net income of $3,550,000, or basic earnings per
share of $1.14 (diluted earnings per share of $1.12) for the first six months of 2004. This represents a decrease of $149,000
(4.2%) or $.02 per basic share and $.01 per diluted share and is due to the aforementioned sale of the subsidiary banks
credit card portfolio and farm management related expenses. The annualized return on average assets and return on average equity
were 1.01% and 13.02%, respectively, for the second quarter of 2005, compared with 1.25% and 15.48% for the second quarter of
2004. For the six-month periods, the annualized return on average assets and return on average equity were 1.04% and 13.13%,
respectively for 2005, compared with 1.17% and 14.07%, respectively for 2004.

11

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Net interest income before
any provision for loan losses was $5,495,000 for the second quarter of 2005, compared to $5,165,000 for the second quarter of 2004
(an increase of $330,000 or 6.4%). This improvement is the result of an increase in average interest-earning assets of $48.5
million over the past twelve months. The loan growth and nine increases in the prime rate over the last twelve months positively
impacted the net interest margin. However, this improvement was negatively impacted by interest rates increasing more rapidly on
interest-bearing liabilities, as well as more deposits being invested into certificates of deposit. The Company recognized an
opportunity to increase deposits, so it sacrificed the short-term margin to meet its long-term goals. The Companys net
interest margin declined to 3.88%, a decrease from 3.94% in the first quarter of 2005 and 3.98% in the second quarter of 2004. Net
interest income before any provision for loan losses was $10,870,000 for the first six months of 2005, compared to $10,174,000 for
the first six months of 2004 (an increase of $696,000 or 6.8%). For the six months ended June 30, 2005, average interest-earning
assets were $604.6 million compared to $556.1 million for the six months ended June 30, 2004. The resulting net yield on
interest-earning assets (on a fully taxable equivalent basis) decreased from 3.94% in the first half of 2004 to 3.90% in the first
half of 2005.

PNBC did not record a loan
loss provision in the first six months of 2005, due to the low amount of net charge-offs during the period, compared to a
provision of $200,000 in the second quarter of 2004 and $300,000 for the first six months of 2004. Although the ratio of
non-performing loans to total loans at June 30, 2005 of 0.47% is up from 0.18% at June 30, 2004, the increase is attributable to a
commercial line of credit being transferred to non-accrual in January 2005. The loan is in a payout status and paydowns are being
received on the line on a regular basis. The provision expense recorded is determined monthly by managements evaluation of
the risk characteristics of the loan portfolio. For the second quarter of 2005, PNBC had net charge-offs of $11,000, compared to
net charge-offs of $33,000 for the second quarter of 2004. For the six-month comparable periods, PNBC had net charge-offs of
$22,000 in 2005 and net charge-offs of $104,000 in 2004.

Non-interest income totaled
$2,037,000 for the second quarter of 2005, as compared to $2,470,000 in the second quarter of 2004, a decrease of $433,000 (or
17.5%). This is a result of the sale of the subsidiary banks credit card portfolio during the second quarter of 2004 which
resulted in a pre-tax gain of $465,000 and a decrease in brokerage fee income of $68,000 (or 51.5%). Offsetting this decrease,
trust and farm management fee income increased by $75,000 (or 21.1%), as assets under management have increased, and mortgage
banking income increased by $63,000 (or 46.7%), due to an increase in the serviced loan portfolio, during the three months ended
June 30, 2005 as compared to the same period ended June 30, 2004. Annualized non-interest income as a percentage of total average
assets decreased to 1.22% for the first six months of 2005, compared to 1.62% for the same period in 2004. Year-to-date in 2005,
non-interest income totals $3,912,000 compared to $4,509,000 for the first half of 2004, a decrease of $597,000 (or 13.2%). Again,
the primary reason for the decrease is the sale of the subsidiary banks credit card portfolio ($465,000). Additionally,
gains on sales of securities have decreased from $182,000 to $28,000 over the comparable time frames. Partially offsetting the
decrease was an increase in trust and farm management fees of $126,000, an increase of 17.9%. Annualized non-interest income as a
percentage of total average assets decreased to 1.19% for the first six months of 2005, compared to 1.48% for the same period in
2004.

Total non-interest expense
for the second quarter of 2005 was $5,299,000, an increase of $460,000 (or 9.5%) from $4,839,000 in the second quarter of 2004.
This increase is attributable to salaries/employee benefits, which increased $267,000 (or 9.7%) and the previously mentioned farm
management expenses of $99,000 included in other operating expense. Annualized non-interest expense

12

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as a percentage of total average assets increased to 3.18% for the second
quarter of 2005, compared to 3.17% for the second quarter of 2004. Year-to-date non-interest expenses for 2005 were $10,296,000,
an increase of $673,000 (or 7.0%) from the $9,623,000 for the first half of 2004. This increase is also due to increases in
salaries/employee benefits ($529,000 or 9.7%) and an increase in equipment expenses of $134,000 (or 17.0%), primarily technology
related. Annualized non-interest expense as a percentage of total average assets have decreased to 3.14% for the first six months
of 2005, compared to 3.16% for the same period in 2004.

# INCOME TAXES

Income tax expense totaled
$540,000 for the second quarter of 2005, as compared to $687,000 for the second quarter of 2004. The effective tax rate was 24.2%
for the three month period ended June 30, 2005 compared to 26.5% for the three month period ended June 30, 2004, due to a lower
pre-tax income. Income tax expense totaled $1,085,000 for the first six months of 2005, compared to $1,210,000 for the first six
months of 2004. The effective tax rate was 24.2% for the six months ended June 30, 2005 compared to 25.4% for the six months ended
June 30, 2004.

# ANALYSIS OF FINANCIAL CONDITION

Total assets at June 30, 2005
increased to $680,693,000 from $655,738,000 at December 31, 2004 (an increase of $25.0 million or 3.8%). Total deposits at June
30, 2005 increased to $593,337,000 from $573,561,000 at December 31, 2004 (an increase of $19.8 million or 3.5%). Comparing
categories of deposits at June 30, 2005 to the December 31, 2004 totals, time deposits increased by $19.1 million (or 7.7%) and
savings deposits increased $13.5 million (or 23.0%), primarily due to increased passbook IRA growth. Conversely, interest-bearing
demand deposits decreased $11.1 million (or 5.8%) and demand deposits decreased $1.8 million (or 2.3%). Borrowings, consisting of
customer repurchase agreements, notes payable, treasury, tax, and loan (TT&L) deposits, federal funds purchased,
and Federal Home Loan Bank advances, increased from $25,535,000 at December 31, 2004 to $29,269,000 at June 30, 2005 (an increase
of $3.7 million or 14.6%). Investment balances totaled $183,322,000 at June 30, 2005, compared to $188,809,000 at December 31,
2004 (a decrease of $5.5 million or 2.9%).

Loan balances, net of
unearned interest, increased to $428,993,000 at June 30, 2005, compared to $410,044,000 at December 31, 2004 (an increase of $18.9
million or 4.6%). This increase was primarily in the commercial and residential real estate areas. Non-performing loans increased
to $2,024,000 or 0.47% of net loans at June 30, 2005, as compared to $328,000 or 0.08% of net loans at December 31, 2004. Although
non-performing loans increased from the low level at December 31, 2004, this increase was attributable to one commercial credit,
which continues to pay down and for which management expects no future losses.

# ASSET QUALITY

For the six months ended June
30, 2005, the subsidiary bank charged off $124,000 of loans and had recoveries of $102,000, compared to charge-offs of $233,000
and recoveries of $129,000 during the six months ended June 30, 2004. The allowance for loan losses is based on factors that
include the overall composition of the loan portfolio, types of loans, underlying collateral, past loss experience, loan
delinquencies, substandard and doubtful credits, and such other factors that, in managements reasonable judgment, warrant
consideration. The adequacy of the allowance is monitored monthly. At June 30, 2005,

13

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the allowance was $2,502,000 which is 123.6% of non-performing loans and
0.58% of total loans, compared with $2,524,000 which was 769.5% of non-performing loans and 0.62% of total loans at December 31,
2004.

At June 30, 2005, impaired
loans totaled $1,797,000 compared to $175,000 at December 31, 2004. This increase is also attributable to the aforementioned
commercial credit in non-performing loans. The total amount of loans ninety days or more past due and still accruing interest at
June 30, 2005 was $25,000 and at December 31, 2004 was $0. There was no specific loan loss reserve established for impaired loans
as of June 30, 2005 compared to a specific loan loss reserve of $3,000 at December 31, 2004. PNBCs management analyzes the
allowance for loan losses monthly and believes the current level of allowance is adequate to meet probable losses as of June 30,
2005.

# CAPITAL RESOURCES

Federal regulations require
all financial institutions to evaluate capital adequacy by the risk-based capital method, which makes capital requirements more
sensitive to the differences in the level of risk assets. At June 30, 2005, total risk-based capital of PNBC was 11.10%, compared
to 11.49% at December 31, 2004. The Tier 1 capital ratio decreased from 7.62% at December 31, 2004, to 7.41% at June 30, 2005.
Total stockholders equity to total assets at June 30, 2005 decreased to 7.84% from 7.99% at December 31, 2004. The
Corporation continues to be well-capitalized according to regulatory requirements.

# LIQUIDITY

Liquidity is measured by a
financial institutions ability to raise funds through deposits, borrowed funds, capital, or the sale of assets. Additional
sources of liquidity include cash flow from the repayment of loans and the maturity of investment securities. Major uses of cash
include the origination of loans and purchase of investment securities. Cash flows provided by operating and financing activities,
offset by those used in investing activities, resulted in a net increase in cash and cash equivalents of $10,630,000 from December
31, 2004 to June 30, 2005. This increase was primarily due to a net increase in deposits, and a net decrease in the investment
portfolio, offset by a net increase in loans. For more detailed information, see PNBCs Consolidated Statements of Cash
Flows.

# FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK

The subsidiary bank is party
to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its
customers. These financial instruments include commitments to extend credit and standby letters of credit. Those instruments
involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the consolidated
balance sheets. The contract amounts of those instruments reflect the extent of involvement the subsidiary bank has in particular
classes of financial instruments.

The subsidiary banks
exposure to credit loss in the event of non-performance by the other party to the financial instrument for commitments to extend
credit and standby letters of credit is represented by the contractual notional amount of those instruments. The subsidiary bank
uses the same credit policies in making commitments and conditional obligations as it does for on-balance-sheet instruments. At
June 30, 2005, commitments to extend credit and standby letters of credit were approximately $116,458,000 and $6,428,000,
respectively.

14

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Commitments to extend credit
are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments
generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments
are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash
requirements. The subsidiary bank evaluates each customers creditworthiness on a case-by-case basis. The amount of
collateral obtained, if deemed necessary, by the subsidiary bank upon extension of credit is based on managements credit
evaluation of the counter party. Collateral held varies, but may include real estate, accounts receivable, inventory, property,
plant and equipment, and income-producing properties.

Standby letters of credit are
conditional commitments issued by the subsidiary bank to guarantee the performance of a customer to a third party. The credit risk
involved in issuing standby letters of credit is essentially the same as that involved in extending loan facilities to customers.
The subsidiary bank secures the standby letters of credit with the same collateral used to secure the loan.

# EXPANSION PLANS

The Corporation has begun
construction of a new branch facility in Aurora, Illinois. Construction will continue throughout the remainder of 2005, with an
expected opening in the early months of 2006. Once the Aurora facility is completed, a new bank facility will be built on the
Elburn, Illinois property which was purchased in July of 2003.

# ACQUISITION

On August 2, 2005, the
Corporation announced the completion of the acquisition of Somonauk FSB Bancorp, Inc. (Somonauk), which was purchased
for a total consideration of $49.6 million; 80% payable in cash and the other 20% in common stock resulting in the issuance of
338,600 shares. As of June 30, 2004, the Corporation had incurred acquisition-related costs of $202,000 in conjunction with the
acquisition of Somonauk which are included in other assets at June 30 and was part of the purchase price calculation at closing.
Somonauk has full-service locations in Somonauk, Sandwich, Newark, Millbrook and Plano, Illinois. These locations will compliment
the existing PNBC locations and expand the Corporations presence in high-growth markets. Total assets of Somonauk FSB
Bancorp, Inc. were $210.2 million at December 31, 2004. The Corporations total assets will now be approximately $915
million and total stockholders equity will now be approximately $63 million.

# LEGAL PROCEEDINGS

There are various claims
pending against PNBCs subsidiary bank, arising in the normal course of business. Management believes, based upon
consultation with legal counsel, that liabilities arising from these proceedings, if any, will not be material to PNBCs
financial condition.

# QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

There has been no material
change in market risk since December 31, 2004, as reported in PNBCs 2004 Annual Report on Form 10-K.

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# IMPACT OF NEW ACCOUNTING STANDARDS

On December 16, 2003, the
American Institute of Certified Public Accountants (AICPA) issued Statement of Position 03-3, Accounting for
Certain Loans or Debt Securities Acquired in a Transfer (SOP 03-3). SOP 03-3 provides guidance on the accounting for
differences between contractual and expected cash flows from the purchasers initial investment in loans or debt securities
acquired in a transfer, if those differences are attributable, at least in part, to credit quality. Among other things, SOP 03-3:
(1) prohibits the recognition of the excess of contractual cash flows over expected cash flows as an adjustment of yield, loss
accrual, or valuation allowance at the time of purchase; (2) requires that subsequent increases in expected cash flows be
recognized prospectively through an adjustment of yield; and (3) requires the subsequent decreases in cash flows be recognized as
an impairment. In addition, SOP 03-3 prohibits the creation or carrying over of a valuation allowance in the initial accounting of
all loans within it scope that are acquired in a transfer. SOP 03-3 becomes effective for loans or debt securities acquired in
fiscal years beginning after December 15, 2004. The Corporation is currently completing its evaluation of the impact of SOP 03-3
with respect to the Corporations acquisition of Somonauk.

In September 2004, the FASB
issued Staff Position No. EITF 03-1-1 which delayed the effective date for the measurement recognition guidance contained in the
Emerging Issues Task Force (EITF) Issue No. 03-1, The Meaning of Other-Than-Temporary Impairment and Its Application to
Certain Investments, which was effective for fiscal years ending after December 15, 2003. Until new guidance is issued,
companies must continue to comply with the disclosure requirements of EITF 03-1 and all relevant measurement and recognition
requirements of other accounting literature. EITF 03-1 requires certain quantitative disclosures for debt and marketable equity
securities classified as available-for-sale or held-to-maturity under SFAS No. 115, Accounting for Certain Investments in
Debt and Equity Securities, that are impaired at the balance sheet date, but for which an other-than-temporary impairment
has not been recognized. The Corporation will complete its evaluation of the impact upon issuance of final guidance from the FASB.

In December 2004, the FASB
issued SFAS No. 123 (Revised 2004) (123R), Share-Based Payment, an amendment of FASB Statements No. 123 and 95. SFAS
No. 123R will require compensation cost relating to share-based payment transactions be recognized in the consolidated financial
statements, effective for the Corporations fiscal year beginning January 1, 2006 based on recent SEC guidance. The
Corporation has not yet completed its evaluation of the standard, but anticipates that it will result in a reduction in earnings
and earnings per share, beginning with the first quarter of 2006.

In June 2005, the FASB issued
SFAS No. 154, Accounting Changes and Error Corrections  a replacement of APB Opinion No. 20 and FASB Statement No.
3 (FAS 154). FAS 154 changes the requirements for the accounting for and reporting of a change in accounting principle and
also applies to all voluntary changes in accounting principle. FAS 154 is effective for accounting changes and corrections of
errors made in fiscal years beginning after December 15, 2005.

# EFFECTS OF INFLATION

The consolidated financial
statements and related consolidated financial data presented herein have been prepared in accordance with accounting principles
generally accepted in the United States of America and practices within the banking industry which require the measurement of
financial condition and operating results in terms of historical dollars, without considering the changes in the relative
purchasing power of money over time due to inflation. Unlike most industrial companies, virtually all the assets and liabilities
of a financial institution are monetary in nature. As a result, interest rates have a more significant impact on a financial
institutions performance than the effects of general levels of inflation.

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# PRINCETON NATIONAL BANCORP, INC. AND SUBSIDIARY

The following table sets
forth (in thousands) details of average balances, interest income and expense, and resulting annualized yields/costs for the
Corporation for the periods indicated, reported on a fully taxable equivalent basis, using a tax rate of 34%.

|                                                               | 
|-------------------------------------------------------------- | 
|
|
|Average Interest-Earning Assets                                | 
|Interest-bearing deposits                                      | 
|Taxable investment securities                                  | 
|Tax-exempt investment securities                               | 
|Federal funds sold                                             | 
|Net loans                                                      | 
|                                                               | 
|                                                              
|Total interest-earning assets                                  | 
|                                                               | 
|                                                              
|Average non-interest earning assets                            | 
|                                                               | 
|                                                              
|Total average assets                                           | 
|                                                               | 
|                                                              
|Average Interest-Bearing Liabilities                           | 
|                                                              
|Interest-bearing demand deposits                               | 
|Savings deposits                                               | 
|Time deposits                                                  | 
|Interest-bearing demand notes                                  | 
|issued to the U.S. Treasury                                    | 
|Federal funds purchased and   securities repurchase agreements | 
|Advances from Federal Home Loan Bank                           | 
|Borrowings                                                     | 
|                                                               | 
|                                                              
|Total interest-bearing liabilities                             | 
|                                                               | 
|                                                              
|Net yield on average interest-earning assets                   | 
|                                                               | 
|                                                              
|Average non-interest-bearing liabilities                       | 
|                                                              
|Average stockholders equity                                   | 
|                                                               | 
|                                                              
|Total average liabilities and                                  | 
|stockholders equity                                           | 
|                                                               | 

The following table
reconciles tax-equivalent net interest income (as shown above) to net interest income as reported on the Consolidated Statements
of Income.

|                                      | For the Six Months EndedJune 30,
|------------------------------------- | --------------------------------
|
|Net interest income as stated         |                                 
|Tax equivalent adjustment-investments |                                 
|Tax equivalent adjustment-loans       |                                 
|                                      |                                 
|Tax equivalent net interest income    |                                 
|                                      |                                 

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# Schedule 7.    Controls and Procedures

|(a) |  | Disclosure
controls and procedures. We evaluated the effectiveness of the design and operation of our disclosure controls and procedures as
of June 30, 2005. Our disclosure controls and procedures are the controls and other procedures that we designed to ensure that we
record, process, summarize and report in a timely manner the information we must disclose in reports that we file with or submit
to the SEC. Tony J. Sorcic, President and Chief Executive Officer, and Todd D. Fanning, Senior Vice-President and Chief Financial
Officer, reviewed and participated in this evaluation. Based on this evaluation, Messrs. Sorcic and Fanning concluded that, as of
the date of their evaluation, our disclosure controls were effective.
|--- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(b) |  | Internal controls.
There have not been any significant changes in our internal accounting controls or in other factors during the quarter ended June
30, 2005 that could significantly affect those controls.
|--- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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INDEX TO EXHIBITS

|ExhibitNumber |  | Exhibit                                                                                                                               
|------------- |  | --------------------------------------------------------------------------------------------------------------------------------------
|             
|31.1          |  | Certification of Tony J. Sorcic required by Rule 13a-14(a).                                                                           
|             
|31.2          |  | Certification of Todd D. Fanning required by Rule 13a-14(a).                                                                          
|             
|32.1          |  | Certification of Tony J. Sorcic required by Rule 13a-14(b) and
Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350. 
|             
|32.2          |  | Certification of Todd D. Fanning required by Rule 13a-14(b) and
Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350.

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