United
      States


**SECURITIES
      AND EXCHANGE COMMISSION**


Washington,
      D.C. 20549


_________________________________________________________





**FORM
      10-Q**





**ý** **QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)**


**OF
      THE SECURITIES EXCHANGE ACT OF 1934**


For
      the
      quarterly period ended March 31, 2007


OR


** ̈** **TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)**


**OF
      THE SECURITIES EXCHANGE ACT OF 1934**





For
      the
      transition period from _________ to __________


_________________________________________________________





**NORTHERN
      STATES FINANCIAL CORPORATION**


(Exact
      name of Registrant as specified in its charter)





Delaware
              0-19300
              36-3449727(State
                  of Incorporation)
              (Commission
              (I.R.S.
                  EmployerFile
                  Number)
              Identification
                  No.)


1601
      North Lewis Avenue


Waukegan,
      Illinois 60085


(847)
      244-6000


(Address,
      including zip code, and telephone number, including


area
      code, of principal executive office)


_________________________________________________________





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 for 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: ý NO: ** ̈**





Indicate
      by check mark whether the registrant is a large accelerated filer, an
      accelerated filer, or a non-accelerated filer. See definition of “accelerated
      filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check
      one):


Large
      Accelerated Filer ** ̈** Accelerated Filer ý Non-accelerated Filer ** ̈**





Indicate
      by check mark whether the registrant is a shell company (as defined in Rule
      12b-2 of the Act).  YES: ** ̈**  NO: ý








4,203,105
      shares of common stock were outstanding


as
      of
      April 30, 2007





**NORTHERN
      STATES FINANCIAL CORPORATION AND SUBSIDIARY**


**FORM
      10-Q**


**For
      the Quarter Ended March 31, 2007**


**INDEX**




Page
      Number


PART
                I.
            FINANCIAL
                INFORMATIONItem
                1.
            Financial
                StatementsReport
                of Independent Registered
                Public Accounting Firm
            2Condensed
                Consolidated Financial
                Statements and Notes
            3Item
                2.
            Management’s
                Discussion and Analysis
                of Financial Condition and Results of Operations
            10Item
                3.
            Quantitative
                and Qualitative Disclosures
                About Market Risk
            19Item
                4.
            Controls
                and Procedures
            21PART
                II.
            OTHER
                INFORMATIONItem
                1.
            Legal
                Proceedings
            22Item
                1A.
            Risk
                Factors
            22Item
                2.
            Unregistered
                Sales of Equity Securities and Use
                of Proceeds
            23Item
                3.
            Defaults
                upon Senior
                Securities
            23Item
                4.
            Submission
                of Matters to a Vote of Security
                Holders
            23Item
                5.
            Other
                Information
            23Item
                6.
            Exhibits
            24Signatures
            
            25EXHIBIT
                INDEX
            26




1




**PART
      I. FINANCIAL INFORMATION**





**ITEM
      1. FINANCIAL STATEMENTS**









REPORT
      OF INDEPENDENT REGISTERED PUBLIC
      ACCOUNTING FIRM








Board
      of
      Directors and Stockholders


Northern
      States Financial Corporation


Waukegan,
      Illinois





We
      have
      reviewed the accompanying interim condensed consolidated balance sheet of NORTHERN
      STATES FINANCIAL CORPORATION as of
      March 31, 2007, the condensed consolidated statements of income for the three
      month periods ended March 31, 2007 and 2006 and the condensed statements of
      cash
      flows and stockholders equity for the three month periods ended March 31, 2007
      and 2006. These interim financial statements are the responsibility of the
      company's management.





We
      conducted our review in accordance with standards of the Public Company
      Accounting Oversight Board (United States). A review of interim financial
      information consists principally of applying analytical procedures and making
      inquiries of persons responsible for financial and accounting matters. It is
      substantially less in scope than an audit conducted in accordance with the
      standards of the Public Company Accounting Oversight Board, the objective of
      which is the expression of an opinion regarding the financial statements taken
      as a whole. Accordingly, we do not express such an opinion.





Based
      on
      our review, we are not aware of any material modifications that should be made
      to the accompanying interim condensed financial statements for them to be in
      conformity with accounting principles generally accepted in the United States
      of
      America.





/s/
                Plante & Moran, PLLC
              
              Chicago,
                Illinois
              April
                25, 2007





2
 *Index*




NORTHERN
          STATES FINANCIAL CORPORATION
 CONDENSED
          CONSOLIDATED BALANCE
          SHEETS
 March
          31,
          2007 and December 31, 2006
 (In
          thousands of dollars) (Unaudited)
 March
                      31,
                    2007
                  
                  December
                      31,
                    2006AssetsCash
                      and due from banks
                  
                  $
                  14,232
                  
                  $
                  19,023Interest
                      bearing deposits in financial institutions - maturities less
                      than 90
                      days
                  
                  
                  136
                  
                  
                  885Federal
                      funds sold
                  
                  
                  14,551
                  
                  
                  10,078Total
                      cash and cash equivalents
                  
                  
                  28,919
                  
                  
                  29,986Securities
                      available for sale
                  
                  
                  258,539
                  
                  
                  279,056Loans
                      and leases
                  
                  
                  371,399
                  
                  
                  373,715Less:
                      Allowance for loan and lease losses
                  
                  
                  (3,763
                  )
                  
                  (7,162
                  )Loans
                      and leases, net
                  
                  
                  367,636
                  
                  
                  366,553Federal
                      Home Loan Bank stock
                  
                  
                  1,445
                  
                  
                  1,445Office
                      buildings and equipment, net
                  
                  
                  9,401
                  
                  
                  9,394Other
                      real estate owned
                  
                  
                  2,857
                  
                  
                  2,983Goodwill
                  
                  
                  9,522
                  
                  
                  9,522Core
                      deposit intangible asset
                  
                  
                  1,738
                  
                  
                  1,854Accrued
                      interest receivable and other assets
                  
                  
                  8,246
                  
                  
                  9,216Total
                      assets
                  
                  $
                  688,303
                  
                  $
                  710,009Liabilities
                      and Stockholders' EquityLiabilitiesDepositsDemand
                      - noninterest bearing
                  
                  $
                  55,705
                  
                  $
                  58,530Interest
                      bearing
                  
                  
                  451,920
                  
                  
                  464,066Total
                      deposits
                  
                  
                  507,625
                  
                  
                  522,596Securities
                      sold under repurchase agreements
                  
                  
                  81,112
                  
                  
                  86,775Federal
                      Home Loan Bank advances
                  
                  
                  6,500
                  
                  
                  11,500Subordinated
                      debentures
                  
                  
                  10,000
                  
                  
                  10,000Advances
                      from borrowers for taxes and insurance
                  
                  
                  1,155
                  
                  
                  794Accrued
                      interest payable and other liabilities
                  
                  
                  8,783
                  
                  
                  6,881Total
                      liabilities
                  
                  
                  615,175
                  
                  
                  638,546Stockholders'
                      EquityCommon
                      stock
                  
                  
                  1,789
                  
                  
                  1,789Additional
                      paid-in capital
                  
                  
                  11,584
                  
                  
                  11,584Retained
                      earnings
                  
                  
                  67,132
                  
                  
                  65,603Treasury
                      stock, at cost
                  
                  
                  (6,611
                  )
                  
                  (5,961
                  )Accumulated
                      other comprehensive loss
                  
                  
                  (766
                  )
                  
                  (1,552
                  )Total
                      stockholders' equity
                  
                  
                  73,128
                  
                  
                  71,463Total
                      liabilities and stockholders' equity
                  
                  $
                  688,303
                  
                  $
                  710,009




The
        accompanying notes are an integral part of these condensed consolidated
        financial statements.
  3
 *Index*
 NORTHERN
          STATES FINANCIAL CORPORATION
 CONDENSED
          CONSOLIDATED STATEMENTS OF INCOME
 Three
          months ended March 31, 2007 and 2006
 (In
          thousands of dollars, except per share data) (Unaudited)
  Three
                      months endedMarch
                      31,
                    2007
                  
                  March
                      31,
                    2006Interest
                      incomeLoans
                      (including fee income)
                  
                  $
                  6,583
                  
                  $
                  6,474SecuritiesTaxable
                  
                  
                  2,622
                  
                  
                  2,136Exempt from federal income tax
                  
                  
                  71
                  
                  
                  58Federal
                      funds sold and other
                  
                  
                  90
                  
                  
                  83Total
                      interest income
                  
                  
                  9,366
                  
                  
                  8,751Interest
                      expenseTime
                      deposits
                  
                  
                  3,118
                  
                  
                  2,832Other
                      deposits
                  
                  
                  991
                  
                  
                  978Repurchase
                      agreements and federal funds purchased
                  
                  
                  994
                  
                  
                  703Federal
                      Home Loan Bank advances
                  
                  
                  113
                  
                  
                  63Subordinated
                      debentures
                  
                  
                  166
                  
                  
                  155Total
                      interest expense
                  
                  
                  5,382
                  
                  
                  4,731Net
                      interest income
                  
                  
                  3,984
                  
                  
                  4,020Provision
                      for loan and lease losses
                  
                  
                  (1,425
                  )
                  
                  0Net
                      interest income after provision for loan and lease losses
                  
                  
                  5,409
                  
                  
                  4,020Noninterest
                      incomeService
                      fees on deposits
                  
                  
                  656
                  
                  
                  585Trust
                      income
                  
                  
                  211
                  
                  
                  216Other
                      operating income
                  
                  
                  299
                  
                  
                  289Total
                      noninterest income
                  
                  
                  1,166
                  
                  
                  1,090Noninterest
                      expenseSalaries
                      and employee benefits
                  
                  
                  2,301
                  
                  
                  2,256Occupancy
                      and equipment, net
                  
                  
                  598
                  
                  
                  616Data
                      processing
                  
                  
                  379
                  
                  
                  379Legal
                  
                  
                  139
                  
                  
                  102Audit
                      and other professional
                  
                  
                  297
                  
                  
                  327Amortization
                      of core deposit intangible asset
                  
                  
                  116
                  
                  
                  116Printing
                      and supplies
                  
                  
                  95
                  
                  
                  140Other
                      operating expenses
                  
                  
                  395
                  
                  
                  499Total
                      noninterest expense
                  
                  
                  4,320
                  
                  
                  4,435Income
                      before income taxes
                  
                  
                  2,255
                  
                  
                  675Income
                      tax expense
                  
                  
                  726
                  
                  
                  132Net
                      income
                  
                  $
                  1,529
                  
                  $
                  543Earnings
                      per share
                  
                  $
                  0.36
                  
                  $
                  0.13Comprehensive
                      income (loss)
                  
                  $
                  2,315
                  
                  $
                  726




The
        accompanying notes are an integral part of these condensed consolidated
        financial statements.
  4
 *Index*




NORTHERN
        STATES FINANCIAL CORPORATION
 CONDENSED
        CONSOLIDATED STATEMENTS OF CASH FLOWS
 Three
        months ended March 31, 2007 and 2006
 (In
        thousands of dollars) (Unaudited)
  Three
                    months endedMarch
                    31,
                  2007
                
                
                March
                    31,
                  2006Cash
                    flows from operating activitiesNet
                    income
                
                $
                1,529
                
                $
                543Adjustments
                    to reconcile net income to net cash from operating
                    activities:Depreciation
                
                
                145
                
                
                144Amortization
                    of other intangible assets
                
                
                116
                
                
                116Reversal
                    of provision for loan and lease losses
                
                
                (1,425
                )
                
                0Loss
                    on sale of other real estate owned
                
                
                8
                
                
                0Net
                    change in accrued interest receivable and other assets
                
                
                465
                
                
                (648
                )Net
                    change in accrued interest payable and other liabilities
                
                
                (98
                )
                
                1,149Net
                    cash from operating activities
                
                
                740
                
                
                1,304Cash
                    flows from investing activitiesProceeds
                    from maturities and calls of securities available for sale
                
                
                53,753
                
                
                42,033Purchases
                    of securities available for sale
                
                
                (29,954
                )
                
                (28,344
                )Change
                    in loans made to customers
                
                
                351
                
                
                2,934Property
                    and equipment expenditures
                
                
                (152
                )
                
                (225
                )Proceeds
                    from sales of other real estate owned
                
                
                118
                
                
                0Net
                    cash from investing activities
                
                
                24,116
                
                
                16,398Cash
                    flows from financing activitiesNet
                    increase (decrease) in:Deposits
                
                
                (14,971
                )
                
                (9,837
                )Securities
                    sold under repurchase agreements and federal funds
                    purchased
                
                
                (5,663
                )
                
                (6,683
                )Advances
                    from borrowers for taxes and insurance
                
                
                361
                
                
                392Federal
                    Home Loan Bank advances
                
                
                10,000
                
                
                0Repayment
                    of Federal Home Loan Bank advances
                
                
                (15,000
                )
                
                0Purchases
                    of treasury stock
                
                
                (650
                )
                
                0Net
                    cash from financing activities
                
                
                (25,923
                )
                
                (16,128
                )Net
                    change in cash and cash equivalents
                
                
                (1,067
                )
                
                1,574Cash
                    and cash equivalents at beginning of period
                
                
                29,986
                
                
                29,668Cash
                    and cash equivalents at end of period
                
                $
                28,919
                
                $
                31,242




The
        accompanying notes are an integral part of these condensed consolidated
        financial statements.
  5
 *Index*


NORTHERN
      STATES FINANCIAL CORPORATION


CONDENSED
      CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY


Three
      months ended March 31, 2007 and 2006


(In
      thousands of dollars, except for per share data) (Unaudited)




Common
                Stock
              
              Additional
                Paid-In
                Capital
              
              Retained
                Earnings
              
              Accumulated
                Other
                Comprehensive
                Income
                  (Loss)
              
              Treasury
                Stock,
                  at Cost
              
              Total
                Stockholders'
                EquityBalance,
                  December 31, 2005
              
              $
              1,789
              
              $
              11,584
              
              $
              65,526
              
              
              ($3,487
              )
              
              ($4,660
              )
              $
              70,752Correction
                  of errors from previous years,
                January 1, 2006
              
              
              
              
              
              
              
              
              (245
              )
              
              
              
              
              
              
              
              (245
              )Balance,
                  January 1, 2006, restated
              
              
              1,789
              
              
              11,584
              
              
              65,281
              
              
              (3,487
              )
              
              (4,660
              )
              
              70,507Net
                  income
              
              
              
              
              
              
              
              
              543
              
              
              
              
              
              
              
              
              543Unrealized
                  gain on securitiesavailable
                  for
                sale, net of deferred tax
              
              
              
              
              
              
              
              
              
              
              
              183
              
              
              
              
              
              183Balance,
                  March 31, 2006
              
              $
              1,789
              
              $
              11,584
              
              $
              65,824
              
              
              ($3,304
              )
              
              ($4,660
              )
              $
              71,233Balance,
                  December 31, 2006
              
              $
              1,789
              
              $
              11,584
              
              $
              65,603
              
              
              ($1,552
              )
              
              ($5,961
              )
              $
              71,463Net
                  income
              
              
              
              
              
              
              
              
              1,529
              
              
              
              
              
              
              
              
              1,529Purchase
                  of 30,000 shares ofcommon
                  stock
                as treasury stock
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              (650
              )Unrealized
                  gain on securitiesavailable
                  for
                sale, net of deferred tax
              
              
              
              
              
              
              
              
              
              
              
              786
              
              
              
              
              
              786Balance,
                  March 31, 2007
              
              $
              1,789
              
              $
              11,584
              
              $
              67,132
              
              
              ($766
              )
              
              ($6,611
              )
              $
              73,128


The
        accompanying notes are an integral part of these condensed consolidated
        financial statements.
  6
 *Index*




**NORTHERN
          STATES FINANCIAL CORPORATION**
 
 **NOTES
          TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**
 
 March
          31,
          2007
 
 (Unaudited)
 Note
        1 -
        Basis of Presentation
 
 The
        accompanying interim condensed consolidated financial statements are prepared
        without audit and reflect all adjustments which are of a normal and recurring
        nature and, in the opinion of management, are necessary to present interim
        financial statements of Northern States Financial Corporation (the "Company")
        in
        accordance with accounting principles generally accepted in the United States
        of
        America. The interim financial statements do not purport to contain all the
        necessary financial disclosures covered by accounting principles generally
        accepted in the United States of America that might otherwise be necessary
        for
        complete financial statements.
 
 To
        prepare
        financial statements in conformity with accounting principles generally accepted
        in the United States of America, management makes estimates and assumptions
        based on available information. These estimates and assumptions affect the
        amounts reported in the financial statements and the disclosures provided,
        and
        future results could differ. The allowance for loan and lease losses and
        status
        of contingencies are particularly subject to change.
 
 The
        interim condensed financial statements should be read in conjunction with
        the
        audited financial statements and accompanying notes (or "notes thereto")
        of the
        Company for the years ended December 31, 2006 and 2005. The results of
        operations for the three month period ended March 31, 2007, are not necessarily
        indicative of the results to be expected for the full year.
 
 Net
        income was utilized to calculate earnings per share for all periods presented.
        The Company had no common stock equivalents during the first three months
        of
        2007 and the entire year of 2006. The average outstanding common shares used
        for
        earnings per share follows:
  Three
                    months endedMarch
                    31,
                  2007
                
                March
                    31,
                  2006Average
                    outstanding common shares
                
                
                4,211,105
                
                
                4,295,105
  On
        April
        17, 2002, the Company announced that its Board of Directors had approved
        a stock
        repurchase program that allows the Company to purchase up to 200,000 shares
        of
        Northern States Financial Corporation stock either in open market or private
        transactions. On February 19, 2003, the Company announced that its Board
        of
        Directors had approved an additional repurchase program to purchase 200,000
        additional shares of its stock. During the three months ended March 31, 2007,
        30,000 shares of stock were repurchased for a total of $650,000. At March
        31,
        2007, the Company had a total of 269,150 shares of treasury stock that it
        purchased under these programs. Treasury stock is carried at cost. The Company
        may purchase 130,850 shares under the remaining stock repurchase
        program.
  7
 *Index*
  **NORTHERN
          STATES FINANCIAL CORPORATION**
 
 **NOTES
          TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**
 
 March
          31,
          2007
 
 (Unaudited)
 Information
        related to common stock was as follows:
  **March
                    31, 2007**
                
                **December
                    31, 2006**Par
                    value per share
                
                $
                0.40
                
                $
                0.40Authorized
                    shares
                
                
                6,500,000
                
                
                6,500,000Issued
                    shares
                
                
                4,472,255
                
                
                4,472,255Treasury
                    shares
                
                
                269,150
                
                
                239,150Outstanding
                    shares
                
                
                4,203,105
                
                
                4,233,105
  Note
        2 -
        Subordinated Debentures
 
 During
        September 2005, the Company issued $10 million of trust preferred securities
        through Northern States Statutory Trust I, a wholly-owned grantor trust.
        The
        Company issued $10 million of subordinated debentures to Northern States
        Statutory Trust I, which in turn issued $10 million of trust preferred
        securities. The subordinated debentures mature in September 2035. From December
        2005 until September 15, 2010, the subordinated debentures bear interest
        at a
        rate equal to the sum of the product of 50% times the 3-month LIBOR plus
        1.80%,
        plus the product of 50% times 6.186%, and thereafter at a rate equal to the
        3-month LIBOR plus 1.80%. The rate on the subordinated debentures was 6.67044%
        at March 31, 2007 and is the effective rate from March 15, 2007 through June
        14,
        2007. For the three months ended March 31, 2007, interest expense on the
        subordinated debentures was $166,000. For the three months ended March 31,
        2006,
        interest expense on the subordinated debentures was $155,000.
 
 The
        Company has guaranteed the payment of distributions and payments upon
        liquidation or redemption of the trust preferred securities, in each case
        to the
        extent of funds held by the Trust. The Company and the Trust believe that,
        taken
        together, the obligations of the Company under the guarantee, the subordinated
        debentures, and other related agreements provide, in the aggregate, a full,
        irrevocable and unconditional guarantee, on a subordinated basis, of all
        of the
        obligations of the Trust under the trust preferred securities. Subject to
        certain limitations, the Company has the right to defer the payment of interest
        on the subordinated debentures at any time, or from time to time, for a period
        not to exceed 20 consecutive quarters. The trust preferred securities are
        subject to mandatory redemption, in whole or in part, upon repayment of the
        subordinated debentures at maturity or their earlier redemption. The
        subordinated debentures are callable at par beginning in 2010, and earlier
        at
        the discretion of the Company if certain conditions are met, and, in any
        event,
        only after the Company has obtained Federal Reserve approval, if then required
        under applicable guidelines or regulations.
 
 8
 *Index*
  **NORTHERN
          STATES FINANCIAL CORPORATION**
 
 **NOTES
          TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**
 
 March
          31,
          2007
 
 (Unaudited)
 Note
        3 -
        New Accounting Pronouncements
 
 In
        February
        2007, the Financial Accounting Standards Board (“FASB”) issued Statement of
        Financial Accounting Standards (“SFAS”) No. 159, “The Fair Value Option for
        Financial Assets and Financial Liabilities” which permits an entity to measure
        certain financial assets and financial liabilities at fair value. The objective
        of SFAS No. 159 is to improve financial reporting by allowing entities to
        mitigate volatility in reported earnings caused by the measurement of related
        assets and liabilities using different attributes, without having to apply
        complex hedge accounting provisions. When a company elects to apply the fair
        value option to existing specific items, the company reports the difference
        between the items’ carrying value and their fair value as a cumulative-effect
        adjustment to the opening balance of retained earnings. When a company elects
        to
        apply the fair value option to new items, the company reports the change
        in the
        items value through current period income. SFAS No. 159 is effective for
        fiscal
        years beginning after November 15, 2007, which for the Company is January
        1,
        2008. An entity may elect to early adopt SFAS No. 159 if, among a number
        of
        conditions, it has not issued financial statements for any interim period
        within
        the fiscal year SFAS No. 159 is first adopted. The Company has not elected
        to
        apply the fair value option to existing specific items and as such expects
        no
        impact on the financial statements from the adoption of SFAS No.
        159.
  9
 *Index*
 **NORTHERN
            STATES FINANCIAL CORPORATION**
  **ITEM
        2. MANAGEMENT’S
        DISCUSSION AND ANALYSIS OF
        FINANCIAL CONDITION** **AND
        RESULTS OF OPERATIONS**
 The
            following discussion focuses on the consolidated financial condition
            of Northern
            States Financial Corporation (the “Company”) at March 31, 2007 and the
            consolidated results of operations for the three month period ended March
            31,
            2007, compared with the same period of 2006. The purpose of this discussion
            is
            to provide a better understanding of the condensed consolidated financial
            statements of Northern States Financial Corporation and the operations
            of its
            wholly owned subsidiary, NorStates Bank (the “Bank”) and the Bank’s wholly owned
            subsidiaries, Northern States Community Development Corporation (“NSCDC”) and
            Waukegan Hotels, LLC (“WHLLC”). This discussion should be read in conjunction
            with the interim condensed consolidated unaudited financial statements
            and notes
            thereto included herein.
 
 Statements
            contained in this report that are not historical facts may constitute
            forward-looking statements (within the meaning of Section 21E of the
            Securities
            Exchange Act of 1934, as amended), which involve significant risks and
            uncertainties. The Company intends such forward-looking statements to
            be covered
            by the safe harbor provisions for forward-looking statements contained
            in the
            Private Securities Litigation Reform Act of 1995, and is including this
            statement for purposes of invoking these safe harbor provisions. Forward-looking
            statements, which are based on certain assumptions and describe future
            plans,
            strategies and expectations of the Company, are generally identifiable
            by the
            use of the words "believe," "expect," "intend," "anticipate," "estimate,"
            "project," "plan," or similar expressions. The Company's ability to predict
            results or the actual effect of future plans or strategies is inherently
            uncertain and actual results may differ from those predicted. The Company
            undertakes no obligation to update these forward-looking statements in
            the
            future. The Company cautions readers of this report that a number of
            important
            factors could cause the Company’s actual results subsequent to March 31, 2007 to
            differ materially from those expressed in forward-looking statements.
            Factors
            that could cause actual results to differ from those predicted and could
            have a
            material adverse effect on the operations of the Company and its subsidiaries
            include, but are not limited to, the potential for further deterioration
            in the
            credit quality of the Company’s loan and lease portfolios, uncertainty regarding
            the Company’s ability to ultimately recover on the surety bonds relating to the
            remaining equipment lease pools and other loans currently on nonaccrual
            status,
            unanticipated changes in interest rates, general economic conditions,
            increasing
            regulatory compliance burdens or potential legislative/regulatory changes,
            monetary and fiscal policies of the U.S. Government, including policies
            of the
            U.S. Treasury and the Federal Reserve Board, the quality or composition
            of the
            Company’s loan or investment portfolios, deposit flows, competition, demand for
            loan products and financial services in the Company’s market area, and changes
            in accounting principles, policies and guidelines. These risks and uncertainties
            should be considered in evaluating forward-looking statements.
 
 OVERVIEW
 
 Total
            assets at March 31, 2007 declined from year-end levels. Assets totaled
            $688.3
            million at March 31, 2007, a decrease of $21.7 million or 3.1 percent
            from total
            assets of $710.0 million at December 31, 2006. The decline was primarily
            attributable to the reduction of $20.5 million through maturities to
            the
            Company’s securities portfolio. Loans and leases also declined $2.3 million from
            year-end 2006. Deposits decreased $15.0 million compared to December
            31, 2006 as
            commercial depositors used funds for business purposes or transferred
            funds to
            alternative investments outside of the Bank. Securities sold under repurchase
            agreements declined $5.7 million and Federal Home Loan term advances
            decreased
            $5.0 million from December 31, 2006. The Company reduced its repurchase
            agreements and term advance borrowings as higher rates are usually paid
            on these
            liabilities than on deposits.
 
 Earnings
            for the first quarter of 2007 were $1,529,000, or $.36 per share, compared
            with
            $543,000, or $.13 per share, for the like quarter of 2006, an increase
            of 182
            percent. During the first quarter of 2007, the Company reduced its allowance
            for
            loan and lease loss and the corresponding provision
  10
 *Index*
 **NORTHERN
                STATES FINANCIAL CORPORATION**
  for
            loan
            and lease loss expense by $1.4 million, causing an increase to net income
            of
            $872,000, or $.21 per share. The Company reduced its allowance as nonperforming
            assets decreased 23 percent, additional collateral was received on an
            impaired
            loan and management’s analysis of the allowance at March 31, 2007 showed an
            allowance of $3.8 million was adequate to cover probable incurred loan
            and lease
            losses.
 
 Included
            in the $1.4 million reduction to the allowance for loan and lease losses
            during
            the quarter ended March 31, 2007 was $275,000 that had been specifically
            allocated to a problem loan of $1.4 million at December 31, 2006, as
            this loan
            was paid in full. On another impaired loan, payments significantly lowered
            the
            loan balance, causing the Company to reduce the specific allowance allocated
            to
            this loan by $277,000. The Company was also able to eliminate the allowance
            of
            $500,000 that had been specifically allocated at year-end to another
            impaired
            loan when the Company received additional collateral. The remaining reduction
            to
            the allowance was attributable to general improvement to the credit quality
            of
            the loan portfolio during the three months ended March 31, 2007.
 
 Earnings
            during the first quarter of 2007 were impacted favorably by an increase
            of
            $71,000 in service fees on deposits, and by a reduction to noninterest
            expense
            of $115,000 as compared with the same quarter of 2006. Most of the decrease
            to
            noninterest expense is attributed to a decline in expenses relating to
            the
            selling and maintenance of foreclosed properties as the value of these
            properties, totaling $2.9 million at March 31, 2007, were reduced to
            their
            lowest quarter-end level in over three years.
 
 CRITICAL
            ACCOUNTING POLICIES
 
 Certain
            critical accounting policies involve estimates and assumptions by management.
            To
            prepare financial statements in conformity with accounting principles
            generally
            accepted in the United States of America, management makes estimates
            and
            assumptions based on available information. These estimates and assumptions
            affect the amounts reported in the financial statements and the disclosures
            provided, and future results could differ. The allowance for loan and
            lease
            losses is a critical accounting policy for the Company because management
            must
            make estimates of losses and these estimates are subject to change.
 
 The
            allowance
            for loan and lease losses is a valuation allowance for probable incurred
            credit
            losses, increased by the provision for loan and lease losses and decreased
            by
            charge-offs less recoveries. Management estimates the allowance balance
            required
            using past loan and lease loss experience, the nature and volume of the
            portfolio, information about specific borrower situations, estimated
            collateral
            values, economic conditions and other factors. Allocations of the allowance
            may
            be made for specific loans and leases, but the entire allowance is available
            for
            any loan or lease that, based on management’s judgment, should be charged-off.
 
 Management
            analyzes the adequacy of the allowance for loan and lease losses at least
            quarterly. Loans and leases judged to be impaired, with probable incurred
            loss
            exposure, that are no longer accruing interest, and historical net loss
            percentages are reviewed in the analysis of the allowance for loan and
            lease
            losses. Factors considered in assessing the adequacy of the allowance
            include:
            changes in the type and volume of the loan and lease portfolio; review
            of the
            larger credits within the Bank; historical loss experience; current economic
            trends and conditions; review of the present value of expected cash flows
            or
            fair value of collateral on impaired loans and leases; portfolio growth;
            and
            other factors management deems appropriate. Based on management’s analysis, the
            allowance for loan and lease losses at March 31, 2007 is adequate to
            cover
            probable incurred credit losses.
 
 One
            of
            the components of the allowance for loan losses is historical loss experience.
            Different loan classifications within the portfolio have different loss
            experience ratios. For example, loans secured by real estate generally
            have a
            better loss experience than loans secured by other assets. Changes in
            the
            classification between periods can impact the allocation for historical
            losses.
            At March 31, 2007 approximately 86 percent of the Bank’s loans were secured by
            real estate.
 
 11
 *Index*
 **NORTHERN
                STATES FINANCIAL CORPORATION**
  Management
            specifically analyzes its nonperforming loans for probable losses. The
            change in
            the volume of nonperforming loans may significantly impact the amount
            of
            estimated losses specifically allocated to these loans depending on the
            adequacy
            of the loan collateral and the borrowers’ ability to repay the loans. As
            specific allocations are done on a loan-by-loan basis, the amount of
            the
            specific allocation is more likely subject to fluctuation than an allocation
            for
            a pool of loans based on historical loss trends. The amount of the allocations
            on nonperforming loans may fluctuate in future periods due to changes
            in
            conditions of underlying collateral and changes in the borrowers’ ability to
            repay.
 
 Goodwill
            results from business acquisitions and represents the excess of the purchase
            price over the fair value of acquired tangible assets and liabilities
            and
            identifiable intangible assets. Goodwill is assessed for impairment annually
            and
            more often if warranted by circumstances. Any such impairment will be
            recognized
            in the period identified.
 
 Other
            intangible assets consist of core deposit and acquired customer relationship
            intangible assets arising from whole bank and branch acquisitions, which
            is
            periodically evaluated for impairment. They are initially measured at fair value
            and then are amortized on the straight-line method over their estimated
            useful
            life of seven years.
 
 FINANCIAL
            CONDITION
 
 The
            Company’s federal funds sold at March 31, 2007 increased $4.5 million to $14.6
            million compared with $10.1 million at December 31, 2006. The Company’s federal
            funds sold position increased as the Company’s securities available for sale
            declined $20.5 million to $258.5 million from $279.0 million at year-end
            2006.
            Federal funds are an overnight investment that the Company uses for liquidity
            for purposes such as funding loan growth, purchasing securities or covering
            cash
            outflows for deposit withdrawals.
 
 Loans
            and
            leases are the largest earning asset of the Company and totaled $371.4
            million
            at March 31, 2007, decreasing $2.3 million from $373.7 million at December
            31,
            2006. The decrease in loans and leases is partially the result of having
            charged
            off $2.0 million of nonperforming loans and leases during the first quarter
            of
            2007. Approximately 86 percent of the Bank’s loan portfolio at March 31, 2007
            was secured by real estate and a majority of the Company’s loans had fixed rates
            where a year ago the majority of loans had variable rates or rates that
            change
            periodically based on an index. This shift to fixed rate loans has occurred
            due
            to market competition and borrowers’ requests for fixed rate loans as protection
            against possible increases to general interest rates. Loan commitments
            have
            increased $26.7 million to $132.2 million at March 31, 2007 compared
            with $105.5
            million at December 31, 2006 as loans are being approved but borrowers
            have
            delayed drawing on the loans. Letters of credit also increased during
            the
            quarter to $8.7 million from $8.0 million at year-end. At March 31, 2007,
            loans to related parties totaled $1.6 million. Loan commitments and letters
            of
            credit issued to related parties were $1.9 million at March 31, 2007.
            Loans,
            commitments and letters of credit to related parties are made at the
            same terms
            and conditions that available to the public. Loans to the lodging industry
            at
            March 31, 2007 totaled $18.1 million.
  Deposits
            decreased $15.0 million, or 2.9 percent, from year-end 2006. A majority
            of the
            decline in deposits was in money market accounts, which decreased $9.9
            million
            from year-end. Demand and NOW accounts also declined $2.8 million and
            $1.4
            million from December 31, 2006, respectively. Commercial deposits at
            March 31,
            2007 declined $11.9 million from year-end as commercial depositors used
            funds
            for business purposes or transferred funds to alternative investments
            outside of
            the Bank. Public deposits at the Bank also decreased $2.6 million due
            to the
            cyclical nature of the collection of local property taxes that are due
            in June
            and September. During the first quarter of each year public deposits
            usually
            will decline as public entities use the funds for expenditures. Brokered
            deposits totaled $44.4 million at March 31, 2007, which approximate year-end
            levels. Brokered deposits are time deposits placed in the Bank by a broker
            from
            depositors outside the Bank’s geographic area. These deposits usually bear an
            interest rate of 10 to 15 basis points greater than the terms and conditions
            offered to local depositors. The Company expects to decrease the amount
            of its
            brokered deposits by year-end 2007 to decrease its interest expense.
 
 12
 *Index*
 **NORTHERN
                STATES FINANCIAL CORPORATION**
  Securities
            sold under repurchase agreements decreased by $5.7 million to $81.1 million
            at
            March 31, 2007 from $86.8 million at December 31, 2006. Federal Home
            Loan Bank
            term advances also decreased $5.0 million from year-end. The Company
            reduced its
            repurchase agreements and term advance borrowings as higher rates are
            usually
            paid on these other borrowings than on deposits. It is expected that
            higher cost
            securities sold under repurchase agreements will decrease further in
            2007.
 
 As
            previously disclosed, included in other liabilities at March 31, 2007
            is
            $304,000 related to estimated
            environmental clean-up expenses of a parcel of other real estate sold
            in
            previous years. The Company intends to seek reimbursement of these expenses
            from
            the State of Illinois that has a fund for this type of cleanup. However,
            there
            can be no assurance that the Company will be successful in obtaining
            any such
            reimbursement.
 
 CAPITAL
  Total
            stockholders’ equity increased $1.7 million to $73.1 million during the three
            months ended March 31, 2007, primarily as a result of net income of $1,529,000
            and from a $786,000 adjustment for the unrealized gain on securities
            available
            for sale, net of deferred tax. The increase in stockholders’ equity during the
            quarter was offset by the purchase of 30,000 shares of treasury stock
            for
            $650,000. The book value of the Company’s stock at March 31, 2007 was $17.40 per
            share.
 
 On
            a
            consolidated basis, the Company’s Tier 1 to total assets ratio and total capital
            to assets ratio, on a risk adjusted basis, were 10.66 percent and 16.38
            percent,
            respectively, as of March 31, 2007 and exceed the regulatory minimum for
            capital adequacy purposes. Management believes that the capital position
            of both
            the Company and the Bank are adequate for current projected needs.
 
 LIQUIDITY
 
 The
            Company’s liquidity is measured by the ability to raise funds through deposits,
            borrowed funds, capital or cash flow from the repayment or maturities
            of loans
            and securities and net profits.   Liquidity is primarily managed through
            the growth
            of
            deposits and by liquid assets such as cash and due from banks less any
            reserve
            requirements, securities available for sale less any pledged securities
            and
            federal funds sold.  Asset and liability management is the process of
            ma naging
            the balance sheet to achieve a mix of earning assets and liabilities
            in such a
            way that achieves an interest rate risk profile acceptable to management
            and
            assists in achieving a desired level of profitability.  An important part
            of the overall asset and liability management process is providing adequate
            liquidity. Liquid assets at the Bank consist of cash and equivalents
            less any
            Federal Reserve Bank deposit requirements plus unpledged securities available
            for sale. The Bank’s liquid assets totaled $124.4 million at March 31, 2007
            compared with $142.8 million at December 31, 2006.
 
 Management
            reviews the liquidity ratio of the Bank monthly. The liquidity ratio
            is the net
            liquid assets divided by net deposits and short-term liabilities. At
            March 31,
            2007, this ratio at the Bank was 27.8% and was within management’s internal
            policy guidelines.
 
 Liquidity
            management involves the Company’s ability to meet the cash flow requirements of
            customers. The Company needs to have sufficient cash flow to meet the
            requirements of depositors wanting to withdraw funds or to fund loans
            to
            borrowers. The statements of cash flows shows that for the three months
            ended
            March 31, 2007 cash and cash equivalents decreased slightly by $1.1 million
            to
            $28.9 million.
 
 Federal
            funds sold, interest bearing deposits in banks and available for sale
            securities, particularly those of shorter maturities, are principal sources
            of
            liquidity. Federal funds sold at March 31, 2007 were $14.6 million. The
            Company
            classifies all of its securities as available for sale, which increases
            the
            Company's flexibility in that the Company can use its unpledged securities
            to
            meet liquidity requirements by
  13
 *Index*
 **NORTHERN
                STATES FINANCIAL CORPORATION**
  increasing
            its repurchase agreement balances. Securities available for sale totaled
            $258.5
            million at March 31, 2007 of which $157.6 million were pledged to secure
            public
            deposits and repurchase agreements.
 
 Although
            the Company can sell unpledged securities for liquidity purposes prior
            to their
            maturity date, the Company, at the present, may have to recognize a loss
            on the
            sale to do so. At March 31, 2007, the Company has $131.4 million in securities
            issued by government-sponsored entities that will mature in the remaining
            nine
            months of 2007. It is expected that liquidity will be made available
            in this way
            during the balance of 2007 without causing recognition of any loss.
 
 During
            the first three months of 2007, the Company had incoming cash flows from
            maturities and calls of securities available for sale of $53.8 million
            while it
            had cash outflows for purchases of securities of $30.0 million. These
            securities
            activities during the first quarter of 2007 provided liquidity of $23.8
            million
            which was used to meet the decreases of $15.0 million in deposits, $5.7
            million
            in repurchase agreements and $5.0 million in term advance borrowings.
 
 Other
            sources
            of liquidity available to the Company are deposits and borrowings. The
            Company
            may use brokered deposits as a source of liquidity. To help ensure the
            ability
            to meet its funding needs, including any unexpected strain on liquidity,
            the
            Company at
 March
            31,
            2007 had $25.0 million available through arrangements that allow the
            Company to
            purchase federal funds from an independent bank.
 
 RESULTS
            OF OPERATIONS
 
 NET
            INCOME
 
 Consolidated
            net income for the quarter ended March 31, 2007 was $1,529,000, increasing
            $986,000 compared with net income of $543,000 for the same quarter of
            2006. The
            annualized return on average assets was .89% for the quarter, increasing
            from
            .30% for the same quarter the previous year. The increase to net income
            for the
            quarter is primarily the result of the Company’s reduction of the allowance for
            loan and lease loss and the corresponding negative provision for loan
            and lease
            loss expense by $1,425,000.
 
 NET
            INTEREST INCOME
 
 Net
            interest
            income, the difference between interest income on earning assets and
            interest
            expense on interest bearing liabilities, remained stable for the three
            months
            ended March 31, 2007 compared with the same period of 2006, decreasing
            only
            $36,000.
 
 The
            reason that net interest income remained stable was that the yields earned
            on
            interest earning assets increased to approximately the same extent as
            rates paid
            on interest bearing liabilities. Table 1 shows that yields earned on
            interest
            earning assets increased 54 basis points during the first quarter of
            2007 as
            compared with the like quarter of 2006. Rates paid on interest bearing
            liabilities also increased during the three months ended March 31, 2007
            compared
            with the same period of 2006 by 59 basis points. The net interest spread
            decreased 5 basis points to 1.90 percent for the first quarter of 2007
            compared
            to 1.95 percent for the same quarter of 2006. However the net yield on
            earning
            assets ratio increased 5 basis points to 2.47 percent for the first quarter
            2007
            as compared with 2.42 percent for the same quarter 2006 as the amount
            of
            interest bearing liabilities to earning assets decreased to 85.46 percent
            from
            86.53 percent.
 
 The
            Company constantly reviews its net interest income and implements strategies
            to
            increase its net yield on interest earning assets. During the first quarter
            of
            2007, the Company was able to increase the average yield earned on the
            its
            taxable securities by 69 basis points to 3.96 percent as compared with
            3.27
            percent during the same period of 2006. At March 31, 2007, the Company
            has
            $131.4 million in securities issued by government-sponsored entities
            having an
            average yield of 3.15 percent that will mature during the remaining months
            of
            2007. The Company has the opportunity to reinvest these funds from the
            maturities by purchasing new securities that are currently yielding in
            excess of
            5.00 percent. The Company could instead choose to use the liquidity generated
            by
            the maturing securities to lower the balances of higher cost
  14
 *Index*
 **NORTHERN
                STATES FINANCIAL CORPORATION**
 
 $100,000
            certificates of deposits including brokered CDs, repurchase agreements
            and
            Federal Home Loan term advances as they mature. It is estimated that
            either of
            these options will cause net interest income to increase.
 TABLE
              1
 NORTHERN
                STATES FINANCIAL CORPORATION
 ANALYSIS
                OF AVERAGE BALANCE AND TAX EQUIVALENT RATES
 For
                the
                Three Months Ended March 31, 2007 and 2006 - Rates are Annualized
 ($
                000s)
 2007
                      
                      
                      2006AverageBalance
                      
                      Interest
                      
                      Rate
                      
                      AverageBalance
                      
                      Interest
                      
                      RateAssetsLoans
                          (1)(2)(3)
                      
                      
                      
                      
                      $
                      373,673
                      
                      $
                      6,600
                      
                      
                      7.07
                      %
                      $
                      397,277
                      
                      $
                      6,490
                      
                      
                      6.53
                      %Taxable
                          securities (4)
                      
                      
                      
                      
                      
                      262,386
                      
                      
                      2,622
                      
                      
                      3.96
                      %
                      
                      256,195
                      
                      
                      2,136
                      
                      
                      3.27
                      %Tax
                          advantaged securities (2) (4)
                      
                      7,768
                      
                      
                      108
                      
                      
                      5.56
                      %
                      
                      6,505
                      
                      
                      87
                      
                      
                      5.34
                      %Federal
                          funds sold
                      
                      
                      
                      
                      
                      6,569
                      
                      
                      90
                      
                      
                      5.48
                      %
                      
                      6,853
                      
                      
                      83
                      
                      
                      4.84
                      %Interest
                          earning assets
                      
                      650,396
                      
                      
                      9,420
                      
                      
                      5.77
                      %
                      
                      666,830
                      
                      
                      8,796
                      
                      
                      5.23
                      %Noninterest
                          earning assets
                      
                      39,452
                      
                      
                      
                      
                      
                      
                      
                      
                      47,159Average
                          assets
                      
                      
                      
                      
                      $
                      689,848
                      
                      
                      
                      
                      
                      
                      
                      $
                      713,989Liabilities
                          and stockholders' equityNOW
                          deposits
                      
                      
                      
                      
                      $
                      49,565
                      
                      $
                      97
                      
                      
                      0.78
                      %
                      $
                      53,716
                      
                      $
                      146
                      
                      
                      1.09
                      %Money
                          market deposits
                      
                      77,555
                      
                      
                      769
                      
                      
                      3.97
                      %
                      
                      71,473
                      
                      
                      609
                      
                      
                      3.41
                      %Savings
                          deposits
                      
                      
                      
                      
                      
                      67,642
                      
                      
                      126
                      
                      
                      0.75
                      %
                      
                      77,384
                      
                      
                      223
                      
                      
                      1.15
                      %Time
                          deposits
                      
                      
                      
                      
                      
                      260,562
                      
                      
                      3,118
                      
                      
                      4.79
                      %
                      
                      286,582
                      
                      
                      2,832
                      
                      
                      3.95
                      %Other
                          borrowings
                      
                      
                      
                      
                      
                      100,530
                      
                      
                      1,272
                      
                      
                      5.06
                      %
                      
                      87,827
                      
                      
                      921
                      
                      
                      4.19
                      %Interest
                          bearing liabilities
                      
                      555,854
                      
                      
                      5,382
                      
                      
                      3.87
                      %
                      
                      576,982
                      
                      
                      4,731
                      
                      
                      3.28
                      %Demand
                          deposits
                      
                      
                      
                      
                      
                      55,364
                      
                      
                      
                      
                      
                      
                      
                      
                      58,413Other
                          noninterest bearing liabilities
                      
                      7,436
                      
                      
                      
                      
                      
                      
                      
                      
                      7,576Stockholders'
                          equity
                      
                      
                      
                      
                      
                      71,194
                      
                      
                      
                      
                      
                      
                      
                      
                      71,018Average
                              liabilities and stockholders' equity
                      
                      
                      
                      
                      $
                      689,848
                      
                      
                      
                      
                      
                      
                      
                      $
                      713,989Net
                          interest income
                      
                      
                      
                      
                      
                      
                      
                      $
                      4,038
                      
                      
                      
                      
                      
                      
                      
                      $
                      4,065Net
                          interest spread
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      1.90
                      %
                      
                      
                      
                      
                      
                      
                      
                      1.95
                      %Net
                          yield on interest earning assets (4)
                      
                      
                      
                      
                      
                      
                      
                      2.47
                      %
                      
                      
                      
                      
                      
                      
                      
                      2.42
                      %Interest-bearing
                          liabilities to earning assets ratio
                      
                      
                      
                      
                      
                      
                      
                      85.46
                      %
                      
                      
                      
                      
                      
                      
                      
                      86.53
                      %
   (1)
                        Interest
                            income on loans includes loan origination and other fees
                            of $60 and $61
                            for the three months ended March 31, 2007 and
                            2006.
  (2)
                        Tax-exempt
                            income is reflected on a fully tax equivalent basis utilizing
                            a 34% tax
                            rate.
  (3)
                        Non-accrual
                            loans are included in average
                            loans.
  (4)
                        Rate
                            information was calculated on the average amortized cost
                            for securities.
                            The three months ended March 31, 2007 and 2006 average
                            balance information
                            includes an average unrealized gain (loss) for taxable
                            securities of
                            ($2,998) and ($5,441) and for tax-advantaged securities
                            of $2 and
                            ($10).
 15
 *Index*
 **NORTHERN
                  STATES FINANCIAL CORPORATION**
  ASSET
            QUALITY AND THE PROVISION FOR LOAN AND LEASE LOSSES
 
 At
            March
            31, 2007, management, with the concurrence of the Board of Directors,
            after
            carefully reviewing the adequacy of the allowance for loan and lease
            losses and
            the levels of nonperforming and impaired loans and leases, determined
            that the
            current allowance of $3.8 million was adequate to cover probable incurred
            loan
            and lease losses. The allowance decreased by $3.4 million at March 31,
            2007,
            from the year-end 2006 allowance of $7.2 million. During the first three
            months
            of 2007, $2.0 million in loans and leases were charged off against the
            allowance
            compared with charge offs of $6,000 during the same period last year.
            There was
            $35,000 in recoveries of loans previously charged off during the three
            months
            ended March 31, 2007 compared with $6,000 in recoveries during the same
            period
            in 2006. During the first quarter of 2007, the provision for loan and
            lease
            losses was reduced by $1.4 million as compared with no provision during
            the same
            quarter of 2006.
 
 Nonperforming
            loans and leases, which includes loans and leases on nonaccrual status
            in
            addition to loans and leases 90 days or more past due and still accruing
            interest, were $6.3 million at March 31, 2007, or 1.70 percent of total
            loans
            and leases, as compared with $8.2 million at December 31, 2006, or 2.19
            percent
            of loans and leases. The reduction to nonperforming loans at March 31,
            2007
            compared to year-end was $1.9 million or 23 percent.
 
 The
            Company
            previously disclosed its involvement in certain lease pools purchased
            in 2000
            and 2001 from Commercial Money Center (“CMC”). At March 31, 2007, the nonaccrual
            lease pools had a carrying value of $2.0 million and are secured by surety
            bonds
            issued by RLI Insurance Company. The lease pools balances of $4.0 million
            at
            December 31, 2006 were reduced during the first quarter of 2007 as $2.0
            million
            of the lease pools were charged off against the allowance for loan and
            lease
            losses. The Company continues its litigation against RLI Insurance Company
            seeking performance under the terms of the surety bonds.
 
 Also
            on
            nonaccrual status at March 31, 2007 is a $1.6 million loan for a 90-unit
            condominium construction project which has been classified as a nonaccrual
            loan
            since December 31, 2003. The Company participated in this 90-unit condominium
            construction project with other financial institutions and only has a
            portion of
            the total loan. The construction project experienced substantial cost
            overruns
            and the principal borrowers declared bankruptcy. The construction project
            has
            been completed and all of the units have been sold, with the bankruptcy
            trustee
            holding the sale proceeds in escrow. There are disputed mechanic liens
            of which
            the majority are insured by a title company. The bankruptcy trustee during
            2006
            released $2.7 million of funds held in the escrow to the Company reducing
            the
            loan balance. The bankruptcy trustee is still holding funds in escrow
            until the
            disputed mechanic liens are resolved. The mechanic lien issue is expected
            to be
            concluded during 2007. Management expects to collect all of the remaining
            $1.6
            million loan balance from the bankruptcy trustee.
 
 The
            Company has nonaccrual loans totaling $1.4 million to a heavy equipment
            contractor that are partially secured by real estate and equipment. The
            contractor has experienced cash flow difficulties. The Company has $200,000
            of
            the allowance for loan and lease losses specifically allocated to this
            loan
            relationship.
 
 Payments
            significantly lowered the loan balance of a nonaccrual loan for an entertainment
            center to $223,000 at March 31, 2007 from $736,000 at December 31, 2006.
            As the
            result of these payments, the Company was able to reduce its specific
            allowance
            and its provision for loan and lease losses by $277,000.
  Impaired
            loans and leases at March 31, 2007 totaled $6.9 million as compared with
            $9.5
            million at December 31, 2006. The Company considers a loan or lease impaired
            if
            full principal and interest will not be collected under the contractual
            terms of
            the note. Nonaccrual loans and leases are classified as impaired. Impaired
            loans
            and leases are carried at the present value of expected cash flows discounted
            at
            the loan's effective interest rate or at the fair value of the collateral,
            if
            the loan or lease is collateral dependent.
  16
 *Index*
 **NORTHERN
                STATES FINANCIAL CORPORATION**
  Included
            as impaired loans are restructured loans that the terms and conditions
            of the
            loans have been adjusted due to deterioration in the financial condition
            of the
            borrowers.
 
 The
            Company has one restructured loan included as impaired at March 31, 2007
            in the
            amount of $1.5 million. The loan’s terms and conditions have been adjusted due
            to deterioration in the financial condition of the borrowers. Payments
            have been
            received on this restructured loan based on the modified terms of the
            loan and,
            although classified as impaired, this loan is not included as a nonperforming
            loan. Prior to March 31, 2007, there had been $500,000 specifically allocated
            to
            this restructured loan. During the first quarter of 2007 the Company
            received
            additional collateral in excess of the restructured loan balance and
            the
            allowance no longer includes a specific allocation for this restructured
            loan.
            As a result, during the first quarter of 2007, the allowance for loan
            and lease
            losses and the related provision for loan and lease losses were reduced
            by
            $500,000.
 
 Included
            in the $1.4 million reduction to the allowance for loan and lease losses
            and
            corresponding provision for loan and lease losses during the quarter
            ended March
            31, 2007 was the amount of $275,000 that had been specifically allocated
            to a
            problem loan of $1.4 million at December 31, 2006. The Company received
            payment
            in full on this loan during the first quarter of 2007. Although this
            loan was
            not reported as nonperforming at December 31, 2006, the borrowers had
            shown
            significant cash flow problems and the Company had prudently specifically
            allocated $275,000 of the allowance to this loan. The remaining reduction
            to the
            allowance and provision was attributable to general improvement to the
            credit
            quality of the loan portfolio during the three months ended March 31,
            2007.
 
 Another
            component of nonperforming assets is other real estate owned, consisting
            of
            assets acquired through loan foreclosure and repossession. At March 31,
            2007,
            other real estate owned totaled $2.9 million decreasing from $3.0 million
            at
            December 31, 2006, the lowest quarter-end level of other real estate
            owned
            reduced to their lowest quarter-end level in over three years. The fair
            value of
            other real estate owned is reviewed by management at least quarterly
            to help
            ensure the reasonableness of its carrying value, which is lower of cost
            or the
            fair value less estimated selling costs.
 
 During
            the quarter ended March 31, 2007, the Company sold a parcel carried as
            other
            real estate owned for $126,000 at December 31, 2006 for $118,000 and
            recognized
            a $8,000 loss on the sale. The property consisted of empty lots.
  Other
            real estate owned includes a property acquired in 1987 through the receipt
            of
            deed in lieu of foreclosure. This property is a former commercial/industrial
            site located overlooking Lake Michigan in Waukegan, Illinois, with a
            carrying
            value of $1,710,000 at March 31, 2007. Environmental remediation costs
            may be
            incurred in disposing of this property, and the amount of any such costs
            may
            depend on the future use of the property, such as commercial, residential,
            or
            recreational purposes. There is no requirement to undertake any remediation
            activities at this time. Further, there is no pending or threatened litigation
            regarding the property’s environmental issues, nor are there any threatened or
            pending governmental orders, assessments or actions regarding the same.
            The
            property is currently undergoing a brownfield assessment funded by a
            government
            grant. The grant money is to be used for the brownfield assessment but
            not for
            any remediation that may be needed. The objective of the brownfield assessment
            is to obtain the environmental data needed to determine the appropriate
            remedial
            actions, if any, for the property to achieve a “No Further Remediation Letter”
from the Illinois EPA Site Remediation Program. The end use of the property
            is
            mixed use residential development consistent with the City of Waukegan’s
            Lakefront Downtown Master Plan. The results of the brownfield assessment
            are
            expected later in 2007. Until the results of the assessment are known,
            it is not
            practical to estimate any remediation costs. Thus, no liability has been
            recorded for environmental remediation costs.
 
 17
 *Index*
 **NORTHERN
                STATES FINANCIAL CORPORATION**
  NONINTEREST
            INCOME
 
 Noninterest
            income for the three months ended March 31, 2007 was $1,160,000, increasing
            $76,000 as compared with $1,090,000 for the three months ended March
            31, 2006.
            The increase was primarily from growth in service fees on deposits that
            were
            $71,000 greater during the first quarter of 2007 as compared with the
            same
            quarter of 2006. During the fourth quarter of 2006, the Company had increased
            the fee structure for its deposit accounts.
 
 NONINTEREST
            EXPENSE
 
 Noninterest
            expense for the quarter ended March 31, 2007 was $4,320,000, decreasing
            $115,000
            from $4,435,000 for same quarter last year. The Company’s efficiency ratio,
            noninterest expense divided by the sum of net interest income and noninterest
            income, was 83.9 percent for the first quarter of 2007 as compared with
            86.8
            percent for the same quarter of 2006 and was positively affected by the
            increased noninterest income and lower noninterest expense.
 
 In
            comparing noninterest expenses for the first quarter of 2007 to the same
            quarter
            of 2006, the increased salaries and employee benefits and legal expenses
            were
            largely offset by decreases to occupancy and equipment expenses, audit
            and
            professional, and printing and supplies expenses. It is expected that
            legal
            expenses during 2007 will continue to be greater than 2006 levels as
            litigation
            against the sureties of the remaining lease pools continues. Most of
            the
            $115,000 decrease for the quarter to noninterest expense is attributable
            to the
            decline of $103,000 to expenses relating to the selling and maintenance
            of
            foreclosed properties and are included as part of the other operating
            expense.
            The value of these properties, totaling $2.9 million at March 31, 2007,
            were
            reduced to their lowest quarter-end level in over three years and expenses
            relating to these properties decreased as a result.
 
 FEDERAL
            AND STATE INCOME TAXES
 
 For
            the three
            months ended March 31, 2007, the Company had a tax expense of $726,000
            as
            compared with $132,000 for the same three months last year. As a percentage
            of
            pre-tax income, tax expense was 32.2 percent for the three months ended
            March
            31, 2007 and 19.6 percent for the same period of 2006. The increased
            taxable
            income during the first quarter of 2007 accounts for much of the increase
            in tax
            rate for the first quarter of 2007 compared with the same quarter of
            2006.
 
 The
            Company earned interest income from U.S. Treasury and U.S. government-sponsored
            entity securities not subject to state income tax of $2.3 million during
            the
            first quarter of 2007 as compared with $2.1 million during the first
            quarter of
            2006. During the first quarter of 2007, income not subject to state income
            tax
            caused a tax credit of $27,000 to be recognized. The credit recognized
            during
            the first quarter of 2006 was $103,000 due to the lower taxable income
            last
            year. The Company needs to generate taxable income for state tax return
            purposes
            within 12 years that will use up these tax credits or the Company will
            need to
            reverse these credits.
 
 CONTRACTUAL
            OBLIGATIONS AND OFF-BALANCE SHEET ARRANGEMENTS
  The
            Company
            has contractual obligations that may not appear on the balance sheet.
            Table 2
            presents the Company’s significant fixed and determinable contractual
            obligations as of March 31, 2007, by payment date. The payment amounts
            in Table
            2 represent those amounts contractually due to the recipient and do not
            include
            any unamortized premiums or discounts or similar carrying amount adjustments.
 
 18
 *Index*
 **NORTHERN
                STATES FINANCIAL CORPORATION**
  TABLE
              2
 NORTHERN
              STATE FINANCIAL CORPORATION
 CONTRACTUAL
              OBLIGATIONS
 As
              of
              March 31, 2007
 ($
              000s)
 One
                          year
                        or
                          less
                      
                      Greater
                          than
                        1
                          yr. and less
                        than
                          or equal
                        to
                          3 yrs.
                      
                      Greater
                          than
                        3
                          yrs. and less
                        than
                          or equal
                        to
                          5 yrs.
                      
                      Greater
                          than
                        5
                          yrs.
                      
                      TotalContractual
                          obligationsLong-term
                          debtFederal
                          Home Loan Bank advance
                      
                      $
                      6,500
                      
                      $
                      0
                      
                      $
                      0
                      
                      $
                      0
                      
                      $
                      6,500Subordinated
                          debentures
                      
                      
                      0
                      
                      
                      0
                      
                      
                      0
                      
                      
                      10,000
                      
                      
                      10,000Time
                          deposits
                      
                      
                      176,543
                      
                      
                      71,808
                      
                      
                      10,157
                      
                      
                      0
                      
                      
                      258,508Other
                          contractual obligationsStandby
                          letters of credit
                      
                      
                      8,733
                      
                      
                      0
                      
                      
                      0
                      
                      
                      0
                      
                      
                      8,733Community
                          Reinvestment Act investment commitment
                      
                      
                      220
                      
                      
                      51
                      
                      
                      0
                      
                      
                      0
                      
                      
                      271
  **ITEM
            3. QUANTITATIVE
            AND QUALITATIVE DISCLOSURES
            ABOUT MARKET RISK**
 
 The
            Company’s
            primary market risk exposure is interest rate risk and, to a lesser extent,
            liquidity risk. Interest rate risk is the exposure of a banking organization’s
            financial condition to adverse movements in interest rates. The Company
            seeks to
            achieve consistent growth in net interest income and net income while
            managing
            volatility that arises from shifts in interest rates. The Company’s Asset and
            Liability Management Committee (“ALCO”) oversees interest rate risk programs
            instituted by management and measurements of interest rate risk to determine
            that they are within authorized limits set by the Company’s Board of Directors.
  Evaluating
            a
            financial institution’s exposure to changes in interest rates includes assessing
            both the adequacy of the management process used to control interest
            rate risk
            and the organization’s quantitative level of exposure. When assessing the
            interest rate risk management process, the Company seeks to ensure that
            appropriate policies, procedures, management information systems and
            internal
            controls are in place to maintain interest rate risk at prudent levels
            with
            consistency and continuity. Evaluating the quantitative level of interest
            rate
            risk exposure requires the Company to assess the existing and potential
            future
            effects of changes in interest rates on its consolidated financial condition,
            including capital adequacy, earnings, liquidity, and, where appropriate,
            asset
            quality.
  One
            approach
            used by management to analyze interest rate risk is to periodically evaluate
            the
“shock” to net interest income of an assumed instantaneous decrease and increase
            in rates of 1% and 2% using computer simulation to show the effect of
            rate
            changes on the base 12 month projected net interest income. This approach
            falls
            under the broad definition of asset/liability management. The Company's
            primary
            asset/liability management technique is the interest rate shock.
 
 Several
            ways the Company can manage interest rate risk include: selling existing
            assets
            or repaying certain liabilities and matching repricing periods for new
            assets
            and liabilities, for example, by shortening terms of new loans or securities.
            Financial institutions are also subject to prepayment risk in a falling
            rate
            environment. For example, a debtor may prepay financial assets so that
            the
            debtor may refinance obligations at new, lower rates. Prepayments of
            assets
            carrying higher rates reduce the Company’s interest income and overall asset
            yields. A large portion of an institution’s liabilities may be short term or due
            on
  19
 *Index*
 **NORTHERN
                STATES FINANCIAL CORPORATION**
  demand,
            while most of its assets may be invested in longer-term loans or securities.
            Accordingly, the Company seeks to have in place sources of cash to meet
            short-term demands. These funds can be obtained by increasing deposits,
            borrowing, or selling assets.
 
 Financial
            institutions are also subject to interest rate risk in a rising rate
            environment. Call features on securities may not be exercised and the
            lower
            yielding securities may remain in the Company’s securities portfolio until
            maturity.
  Table
            3 shows
            how interest rate shocks of decreasing rates 1% and 2% and increasing
            rates 1%
            and 2% affect projected 12 month projected net interest income at March
            31, 2007
            and December 31, 2006. The computer simulation model used to do the interest
            rate shocks and calculate the effect on projected net interest income
            takes into
            consideration maturity and repricing schedules of the various assets
            and
            liabilities as well as call provisions on the Company’s securities.
 
 At
            March
            31, 2007 the projected net interest income increases $659,000 when rates
            are
            shocked upward 2% while projected net interest income decreases $1,186,000
            for a
            2% downward rate shock. At December 31, 2006 projected net interest income
            decreased $800,000 when rates were shocked upward 2% while projected
            net
            interest income decreased only slightly, by $10,000, for a 2% downward
            rate
            shock. The reason for this change is that the Company refined the assumptions
            used in the model regarding its money market accounts and the extent
            that
            interest rates on money market would change during a rate shock.
 
 A
            review
            of the extent that interest rate changes affected money market interest
            rates at
            the Company during the past 10 years showed that when rates went up 100
            basis
            points that the money market rates would increase only 45 basis points.
            Historically, when rates went down 100 basis points, the Company only
            dropped
            money market rates by 45 basis points as well. These assumptions were
            used for
            the March 31, 2007 computer simulation. At December 31, 2006 the assumption
            used
            for money market interest rates was that for each 100 basis point rate
            change
            either up or down that the money market rate would correspondingly go
            up and
            down 100 basis points. The effect of using the refined assumptions based
            on
            historical correlations at March 31, 2007 shows net interest income increasing
            with upward rate shocks and net interest income declining with downward
            rate
            shocks.
  At
            both
            March 31, 2007 and December 31, 2006, the percentage changes from the
            base
            forecasted 12 month net interest income are within policy
            guidelines.
  TABLE
              3
 NORTHERN
              STATES FINANCIAL CORPORATION
 EFFECT
              OF
              INTEREST SHOCKS ON NET INTEREST INCOME
 as
              of
              March 31, 2007 and December 31, 2006
 ($000s)
 Immediate
                          Change in Rates-2.00%
                      
                      -1.00%
                      
                      +1.00%
                      
                      +2.00%March
                          31, 2007:Dollar
                          Change from Base Forecast
                      
                      
                      ($1,186
                      )
                      
                      ($601
                      )
                      $
                      571
                      
                      $
                      765Percent
                          Change from Base Forecast
                      
                      
                      -6.60
                      %
                      
                      -3.35
                      %
                      
                      3.18
                      %
                      
                      4.26
                      %December
                          31, 2006:Dollar
                          Change from Base Forecast
                      
                      
                      ($10
                      )
                      
                      ($2
                      )
                      
                      ($326
                      )
                      
                      ($800
                      )Percent
                          Change from Base Forecast
                      
                      
                      -0.06
                      %
                      
                      -0.01
                      %
                      
                      -1.94
                      %
                      
                      -4.77
                      %
  20
 *Index*
 **NORTHERN
                  STATES FINANCIAL CORPORATION**
  **ITEM
            4. CONTROLS
            AND
            PROCEDURES**
 
 The
            Company maintains disclosure controls and procedures that are designed
            to ensure
            that information required to be disclosed in the reports that the Company
            files
            or submits under the Securities and Exchange Act of 1934 is recorded,
            processed,
            summarized, and reported within the time periods specified in the SEC's
            rules
            and regulations, and that such information is accumulated and Communicated
            to
            the Company's management, including its Chairman of the Board and President
            and
            Vice President and Treasurer, as appropriate, to allow timely decisions
            regarding required financial disclosures.
 
 As
            of the
            end of the period covered by this Quarterly Report on Form 10-Q, the
            Company
            carried out an evaluation, under the supervision and with the participation
            of the Company's management, including the Chairman of the Board and
            President
            and Vice President and Treasurer, of the effectiveness of the design
            and
            operation of the Company’s disclosure controls and procedures pursuant to
            Securities Exchange Act Rule 13a-15(e) and 15d-15(e). Based upon this
            evaluation
            as of March 31, 2007,
            the Chairman of the Board and President and Vice President and Treasurer
            concluded that our disclosure controls and procedures were not effective
            for the
            reasons more fully described below related to the weakness in our internal
            control over financial reporting identified during the audit of the 2006
            internal control over financial reporting evaluation in connection with
            Section
            404 of the Sarbanes-Oxley Act of 2002. Progress is being made to remediate
            this
            material weakness that was identified at December 31, 2006. To address
            the
            control weakness, the Company performed updatedprocedures to ensure the unaudited quarterly consolidated financial
            statements are prepared in accordance with generally accepted accounting
            principles. Accordingly, management believes that the consolidated financial
            statements included in this Quarterly Report on Form 10-Q, fairly presents,
            in
            all material respects our consolidated financial condition, consolidated
            results
            of operations and cash flows for the periods presented.
 
 Management’s
            assessment continued to identify the following material weakness in the
            Company’s internal control over financial reporting as of
            March
            31, 2007(this section of Item 4. "Controls and Procedures" should be
            read in conjunction with Item 9A. "Controls and Procedures," included
            in the
            Company's Form 10-K for the year ended December 31, 2006, for additional
            information on Management's Assessment of Internal Control Over Financial
            Reporting):
  1.
            Deficiencies in the general controls over the reconciliation of the ATM
            clearing
            account resulted in improper recognition of ATM fee income due to a procedural
            bookkeeping error. The system of monitoring the ATM procedures was not
            effective
            in preventing the improper recognition of noninterest income. Accordingly,
            management concluded that this matter represents a material weakness
ofcontrol over financial reporting.
  The
            Company identified this deficiency in its internal control over financial
            reporting during the audit of the year ended December 31, 2006 and accordingly,
            this control deficiency is in the process of being remediated. The finding
            discussed above was characterized as a material weakness in accordance
            with the
            rules and regulations of the Securities and Exchange Commission, as a
            more than
            remote possibility that a material misstatement to the Company's interim
            or
            annual financial statements could occur. However, the internal control
            weakness
            identified by management did not cause a material misstatement or have
            an
            adverse impact to the Company's financial position, results of operations
            or
            control environment as of and for the three months ended March 31,
            2007.
 
 **Changes
            in Internal Control over Financial Reporting**
 
 To
            address
            and remediate the material weaknesses in the Company's internal control
            over
            financial reporting at December 31, 2006, the Company made changes to
            its
            internal controls during the most recently completed fiscal quarter ended
            March
            31, 2007 that has materially affected, or is reasonable likely to materially
            affect, the Company's internal controls over financial reporting. Management,
            with the
  21
 *Index*
 **NORTHERN
                STATES FINANCIAL CORPORATION**
  oversight
            of the Audit Committee, has addressed the issue and has taken steps to
            remediate
            the weakness. These remediation measures include changes to accounting
            procedures for the booking of ATM fee income as well as training of those
            persons monitoring and balancing the ATM procedures to insure that these
            errors
            do not reoccur.
 
 The
            Company believes that the measures above have addressed the matter identified
            as
            a material weakness by management, however, the formal assessment and
            testing
            procedures have not been completed by management or the Company’s independentauditors as of March 31, 2007,
            and as such,
            the material weakness continues to exist. The Company will continue to
            monitor
            the effectiveness of its disclosure controls and procedures,
            including its internal controls and procedures, on an ongoing basis
            and will take further actions, as appropriate.
 
 
 **PART
            II. OTHER INFORMATION**
 
 
 **ITEM
            1. LEGAL PROCEEDINGS**
 
 From
            time
            to time, due to the nature of its business, the Company and its subsidiaries
            are
            often subject to various legal actions. Other than as described below,
            these
            legal actions, whether pending or threatened, arise through the normal
            course of
            business and neither the Company nor any of its subsidiaries are currently
            involved in any proceedings that would, in management’s judgement, have a
            material adverse effect on the Company’s business, results of operation,
            financial condition or cash flows.
  Between
            November 2000 and August 2001, the Company purchased commercial lease
            pools from Commercial Money Center, a now bankrupt equipment leasing
            company.
            The lease pools have outstanding balances of $4.0 million at March 31,
            2007, but
            have been written down to a carrying value of $2.0 million. These lease
            pools
            are secured by assignments of rental payment streams and surety bonds.
            A large
            part of our underwriting decision on these leases was based on the guarantees
            of
            the sureties. These lease pools were included as impaired loans and leases
            at
            March 31, 2007 as they were at December 31, 2004, 2005 and 2006. Upon
            default of
            these lease pools, the Company made demand for payment from RLI Insurance
            Company (“RLI”) under the relevant surety bonds. RLI (the “Surety”) has failed
            to make the payments required under the surety bonds. As a result, in
            April 2002, the Company filed suit against the Surety. The Company’s
            complaints alleged that the Surety is liable for payment due to the Company
            under the terms of the bonds. RLI is seeking to rescind on the surety
            bonds
            alleging that the originator of the leases fraudulently induced the insurers
            to
            issue the surety bonds, and that the bonds are therefore void. The Company
            has
            reviewed these matters with its legal counsel and believes that it has
            valid
            claims as the Surety undertook the responsibility for all credit and
            fraud
            underwriting, and waived all defenses associated with the bonds, including
            defenses of fraud. The Company will continue to assert all the rights
            and
            remedies available to it to obtain payment under the bonds. However,
            there can
            be no assurance as to the exact amounts that the Company will ultimately
            succeed
            in collecting, if any.
 
 
 **ITEM
            1A. RISK FACTORS**
 
 There
            have been no material changes to the risk factors relating to the Company
            from
            those risk factors previously disclosed in the Company’s Annual Report on Form
            10-K for its fiscal year ended December 31, 2006, in response to Item
            1A. to
            Part I of Form 10-K.
  22
 *Index*
 **NORTHERN
                STATES FINANCIAL CORPORATION**
 **ITEM
            2. UNREGISTERED SALES
            OF EQUITY SECURITIES AND USE OF
            PROCEEDS**
 
 **Issuer
            Purchases of Equity Securities**
  The
            following table sets forth information in connection with purchases made
            by, or
            on behalf of, the Company of shares of the Company’s common stock during the
            quarterly period ended March 31, 2007.
  **Period**
                      
                      **Total
                          Number**
                        **of
                          Shares**
                        **Purchased
                          (1)**
                      
                      **Average**
                        **Price
                          Paid**
                        **per
                          Share**
                      
                      **Total
                          Number**
                        **of
                          Shares Purchased**
                        **as
                          Part of Publicly**
                        **Announced
                          Plans**
                      
                      **Maximum
                          Number**
                        **of
                          Shares that May**
                        **Yet
                          be Purchased**
                        **under
                          the Plans**January
                          1, 2007ThroughJanuary
                          31, 2007
                      
                      
                      30,000
                      
                      $
                      21.65
                      
                      
                      0
                      
                      
                      130,850February
                          1, 2007ThroughFebruary
                          28, 2007
                      
                      
                      0
                      
                      $
                      -
                      
                      
                      0
                      
                      
                      130,850March
                          1, 2007ThroughMarch
                          31, 2007
                      
                      
                      0
                      
                      $
                      -
                      
                      
                      0
                      
                      
                      130,850**Total**
                      
                      
                      30,000
                      
                      $
                      21.00
                      
                      
                      
                      
                      
                      130,850
 (1)
                On
                    April 17, 2002, the Company’s Board of Directors authorized the repurchase
                    of up to 200,000 shares of the Company’s common stock either in open
                    market or private transactions. On February 19, 2003, the Company’s Board
                    of Directors authorized the repurchase of an additional 200,000
                    shares.
                    (No time limit has been set for the completion of the repurchase
                    programs.) 
 
 **ITEM
            3. DEFAULTS UPON SENIOR
            SECURITIES**
  None ****
 
 
 **ITEM
            4. SUBMISSION OF
            MATTERS TO A VOTE OF SECURITY
            HOLDERS**
  None
 
 
 **ITEM
            5. OTHER INFORMATION**
  None
 
 23
 *Index*
 NORTHERN
            STATES FINANCIAL
            CORPORATION
  **ITEM
            6. EXHIBITS**
 
 (a)
                Exhibits. 
 Exhibit
            3.1 Articles of Incorporation of the Company, as amended to date. (Filed
            with
            Company’s annual report on Form 10-K for the year ended December 31, 1994
            (Commission File 0-19300) and incorporated herein by reference.)
 
 Exhibit
            3.2 By-Laws of the Company, as amended and restated to date. (Filed with
            Company’s quarterly report on Form 10-Q for the quarter ended March 31, 2004
            (Commission File 0-19300) and incorporated herein by reference.)
 
 Exhibit
            4.1 Certain instruments defining the rights of holders of long-term debt
            of the
            Company and certain of its subsidiaries, none of which authorize a total
            amount
            of indebtedness in excess of 10% of the total assets of the Company and
            its
            subsidiaries on a consolidated basis, have not been filed as exhibits.
            The
            Company hereby agrees to furnish a copy of any of these agreements to
            the SEC
            upon request.
 
 Exhibit
            31.1 Section 302 Certification of Chairman of the Board and
            President.
 
 Exhibit
            31.2 Section 302 Certification of Vice President and Treasurer.
 
 Exhibit
            32.1 Section 906 Certification.
 
 24
 *Index*
  **NORTHERN
            STATES FINANCIAL CORPORATION**
 **FORM
            10-Q**
 **March
            31, 2007**
 
 
 
 
 
 **SIGNATURES**
 
 
 
 
 Pursuant
            to the requirements of the Securities Exchange Act of 1934, the registrant
            has
            duly caused this report on Form 10-Q to be signed on its behalf by the
            undersigned hereunto duly authorized, on this 10th day of May 2007.
   
 **NORTHERN
              STATES FINANCIAL CORPORATION**
 (Registrant)
 Date: 
                            May 10, 2007
                          By:
                          /s/
                            Fred Abdula
 Fred Abdula
                            Chairman of the Board of
                              Directors and President
 Date: 
                              May 10, 2007
                            By:
                            /s/
                              Thomas M. Nemeth
 Thomas M. Nemeth
                              Vice President and Treasurer   25
 *Index*
 
 **NORTHERN
            STATES FINANCIAL CORPORATION**
 **FORM
            10-Q**
 **March
            31, 2007**
 
 
 
 
 **EXHIBIT
            INDEX**
 
 
 Exhibits
 
 
 Exhibit
            3.1 Articles of Incorporation of the Company, as amended to date. (Filed
            with
            Company’s annual report on Form 10-K for the year ended December 31, 1994
            (Commission File 0-19300) and incorporated herein by reference.)
 
 Exhibit
            3.2 By-Laws of the Company, as amended and restated to date. (Filed with
            Company’s quarterly report on Form 10-Q for the quarter ended March 31, 2004
            (Commission File 0-19300) and incorporated herein by reference.)
 
 Exhibit
            4.1 Certain instruments defining the rights of holders of long-term debt
            of the
            Company and certain of its subsidiaries, none of which authorize a total
            amount
            of indebtedness in excess of 10% of the total assets of the Company and
            its
            subsidiaries on a consolidated basis, have not been filed as exhibits.
            The
            Company hereby agrees to furnish a copy of any of these agreements to
            the SEC
            upon request.
 
 Exhibit
            31.1 Section 302 Certification of Chairman of the Board and
            President.
 
 Exhibit
            31.2 Section 302 Certification of Vice President and Treasurer.
 
 Exhibit
            32.1 Section 906 Certification.
 
 26