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United StatesSECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549




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FORM 10-Q

|      |  |                                                                                                       
|----- |  | ------------------------------------------------------------------------------------------------------
|[ X ] |  | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
               OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ending June 30, 2003

OR

|        |  |                                                   
|------- |  | --------------------------------------------------
|[     ] |  | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d)
|        |  | OF THE SECURITIES EXCHANGE ACT OF 1934            

For the transition period from
__________________ to _________



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NORTHERN STATES FINANCIAL CORPORATION

(Exact name of Registrant as specified in its charter)


|                                  |  |                                  |  |                                                
|--------------------------------- |  | -------------------------------- |  | -----------------------------------------------
|Delaware
(State of Incorporation) |  | 0-19300
(Commission
File Number) |  | 36-3449727
(I.R.S. Employer
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)



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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: XXX      NO:

Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act).      
YES: XXX      NO:

4,305,105 shares of common stock were outstanding
as of June 30, 2003





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TABLE OF CONTENTS



|                                        |                                                                                               |                                       |  |  |  |  |  | 
|--------------------------------------- | --------------------------------------------------------------------------------------------- | ------------------------------------- |  |  |  |  |  | 
|PART 1. FINANCIAL INFORMATION          
|                                        | ITEM 1. FINANCIAL STATEMENTS                                                                 
|                                        |                                                                                               | REPORT OF INDEPENDENT ACCOUNTANTS    
|                                        |                                                                                               | CONDENSED CONSOLIDATED BALANCE SHEETS
|                                        | ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
|                                        | ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK                           
|                                        | ITEM 4. DISCLOSURE CONTROLS AND PROCEDURES REPORT                                            
|PART II. OTHER INFORMATION             
|                                        | ITEM 1. LEGAL PROCEEDINGS                                                                    
|                                        | ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS                                            
|                                        | ITEM 3. DEFAULTS UPON SENIOR SECURITIES                                                      
|                                        | ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS                                  
|                                        | ITEM 5. OTHER INFORMATION                                                                    
|                                        | ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K                                                     
|SIGNATURES                             
|Exhibit 31.1 Section 302 Certifications
|Exhibit 32.1 Section 906 Certifications



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NORTHERN STATES FINANCIAL CORPORATION AND SUBSIDIARY
FORM 10-Q
June 30, 2003
INDEX

|                                        |                                                                                               |  |             |    | 
|--------------------------------------- | --------------------------------------------------------------------------------------------- |  | ----------- | -- | 
|                                        |                                                                                               |  | Page Number
|PART I. FINANCIAL INFORMATION           |                                                                                               |  |             |   
|                                        | Item 1. Financial Statements                                                                  |  |             |    | 
|                                        | Report of Independent Accountants                                                             |  |             | 2  | 
|                                        | Condensed Consolidated Financial Statements and Notes                                         |  |             | 3  | 
|                                        | Item 2. Managements Discussion and Analysis of Financial
Condition and Results of Operations |  |             | 8  | 
|                                        | Item 3. Quantitative and Qualitative Disclosures About Market Risk                            |  |             | 17 | 
|                                        | Item 4. Controls and Procedures                                                               |  |             | 19 | 
|PART II. OTHER INFORMATION              |                                                                                               |  |             |   
|                                        | Item 1. Legal Proceedings                                                                     |  |             | 19 | 
|                                        | Item 2. Changes in Securities and Use of Proceeds                                             |  |             | 20 | 
|                                        | Item 3. Defaults upon Senior Securities                                                       |  |             | 20 | 
|                                        | Item 4. Submission of Matters to a Vote of Security Holders                                   |  |             | 20 | 
|                                        | Item 5. Other Information                                                                     |  |             | 20 | 
|                                        | Item 6. Exhibits and Reports on Form 8-K                                                      |  |             | 20 | 
|                                        | Signatures                                                                                    |  |             | 21 | 
|EXHIBIT 31.1 Section 302 Certifications |                                                                                               |  | 22          |   
|EXHIBIT 32.1 Section 906 Certification  |                                                                                               |  | 24          |   

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PART 1. FINANCIAL INFORMATION




ITEM 1. FINANCIAL STATEMENTS




REPORT OF INDEPENDENT ACCOUNTANTS

Board of Directors and Stockholders
Northern States Financial Corporation
Waukegan, Illinois

We have reviewed the condensed consolidated balance sheet of NORTHERN
STATES FINANCIAL CORPORATION as of June 30, 2003 and the related condensed
consolidated statements of income for the three and six month periods ended
June 30, 2003 and 2002 and the condensed consolidated statements of cash flows
for the six month periods ended June 30, 2003 and 2002. These financial
statements are the responsibility of the Companys management.

We conducted our review in accordance with standards established by the
American Institute of Certified Public Accountants. 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 generally accepted auditing standards, 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 reviews, we are not aware of any material modifications that
should be made to the condensed financial statements referred to above for them
to be in conformity with accounting principles generally accepted in the United
States of America.

We have previously audited, in accordance with auditing standards
generally accepted in the United States of America, the consolidated balance
sheet of Northern States Financial Corporation as of December 31, 2002, and the
related consolidated statements of income, stockholders equity and cash flows
for the year then ended (not presented herein); and in our report dated
February 7, 2003, we expressed an unqualified opinion on those financial
statements. In our opinion, the information set forth in the accompanying
condensed consolidated balance sheet as of December 31, 2002, is fairly stated,
in all material respects, in relation to the consolidated balance sheet from
which it has been derived.

/s/ Crowe Chizek and Company LLC

Oak Brook, Illinois
July 24, 2003

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NORTHERN STATES FINANCIAL CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
June 30, 2003 and December 31, 2002
(In thousands of dollars) (Unaudited)

|                                                                                   |                                 |                                            |         |          |         |              |         |         |         | 
|---------------------------------------------------------------------------------- | ------------------------------- | ------------------------------------------ | ------- | -------- | ------- | ------------ | ------- | ------- | ------- | 
|                                                                                   |                                 |                                            |         | June 30, |         | December 31,
|                                                                                   |                                 |                                            |         | 2003     |         | 2002        
|                                                                                   |                                 |                                            |         |          |         |             
|                                                                                   |                                 | Assets                                     |         |          |         |              |         |         |         | 
|Cash and due from banks                                                            |                                 | $                                          | 18,033  |          |         | $            | 16,475  |        
|Interest bearing deposits in financial institutions -
maturities less than 90 days |                                 |                                            | 159     |          |         |              | 163     |        
|Federal funds sold                                                                 |                                 |                                            | 1,787   |          |         |              | 20,940  |        
|                                                                                   |                                 |                                            |         |          |         |              |         |        
|                                                                                   | Total cash and cash equivalents |                                            |         | 19,979   |         |              |         | 37,578  |        
|Securities available for sale                                                      |                                 |                                            | 252,974 |          |         |              | 236,898 |        
|Loans and leases                                                                   |                                 |                                            | 351,658 |          |         |              | 352,124 |        
|Less: Allowance for loan and lease losses                                          |                                 |                                            | (3,788  | )        |         |              | (3,698  | )      
|                                                                                   |                                 |                                            |         |          |         |              |         |        
|                                                                                   | Loans and leases, net           |                                            |         | 347,870  |         |              |         | 348,426 |        
|Federal Home Loan Bank stock                                                       |                                 |                                            | 1,810   |          |         |              | 1,734   |        
|Office buildings and equipment, net                                                |                                 |                                            | 5,534   |          |         |              | 5,478   |        
|Other real estate owned                                                            |                                 |                                            | 2,422   |          |         |              | 2,022   |        
|Accrued interest receivable and other assets                                       |                                 |                                            | 3,148   |          |         |              | 3,540   |        
|                                                                                   |                                 |                                            |         |          |         |              |         |        
|                                                                                   | Total assets                    |                                            | $       | 633,737  |         |              | $       | 635,676 |        
|                                                                                   |                                 |                                            |         |          |         |              |         |        
|                                                                                   |                                 | Liabilities and Stockholders Equity       |         |          |         |              |         |         |         | 
|Liabilities                                                                        |                                 |                                            |         |          |         |              |         |        
|Deposits                                                                           |                                 |                                            |         |          |         |              |         |        
|                                                                                   | Demand - noninterest bearing    |                                            | $       | 49,587   |         |              | $       | 47,658  |        
|                                                                                   | Interest bearing                |                                            |         | 402,130  |         |              |         | 401,936 |        
|                                                                                   |                                 |                                            |         |          |         |              |         |        
|                                                                                   |                                 | Total deposits                             |         |          | 451,717 |              |         |         | 449,594 | 
|Securities sold under repurchase agreements
and other short-term borrowings        |                                 |                                            | 93,590  |          |         |              | 97,181  |        
|Federal Home Loan Bank advances                                                    |                                 |                                            | 6,500   |          |         |              | 6,500   |        
|Advances from borrowers for taxes and insurance                                    |                                 |                                            | 506     |          |         |              | 466     |        
|Accrued interest payable and other liabilities                                     |                                 |                                            | 4,525   |          |         |              | 5,343   |        
|                                                                                   |                                 |                                            |         |          |         |              |         |        
|                                                                                   |                                 | Total liabilities                          |         |          | 556,838 |              |         |         | 559,084 | 
|Stockholders Equity                                                               |                                 |                                            |         |          |         |              |         |        
|Common stock                                                                       |                                 |                                            | 1,789   |          |         |              | 1,789   |        
|Additional paid-in capital                                                         |                                 |                                            | 11,584  |          |         |              | 11,584  |        
|Retained earnings                                                                  |                                 |                                            | 66,516  |          |         |              | 65,957  |        
|Accumulated other comprehensive income, net                                        |                                 |                                            | 1,398   |          |         |              | 1,365   |        
|Treasury stock, at cost                                                            |                                 |                                            | (4,388  | )        |         |              | (4,103  | )      
|                                                                                   |                                 |                                            |         |          |         |              |         |        
|                                                                                   | Total stockholders equity      |                                            |         | 76,899   |         |              |         | 76,592  |        
|                                                                                   |                                 |                                            |         |          |         |              |         |        
|                                                                                   |                                 | Total liabilities and stockholders equity |         | $        | 633,737 |              |         | $       | 635,676 | 
|                                                                                   |                                 |                                            |         |          |         |              |         |        

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

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NORTHERN STATES FINANCIAL CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
Three and six months ended June 30, 2003 and 2002
(In thousands of dollars, except per share data) (Unaudited)

|                                                              |                                |                                |       |                    |       |                  |       |          |       |          |       |        |        |   |        |        |        | 
|------------------------------------------------------------- | ------------------------------ | ------------------------------ | ----- | ------------------ | ----- | ---------------- | ----- | -------- | ----- | -------- | ----- | ------ | ------ | - | ------ | ------ | ------ | 
|                                                              |                                |                                |       | Three months ended |       | Six months ended
|                                                              |                                |                                |       | June 30,           |       | June 30,         |       | June 30, |       | June 30,
|                                                              |                                |                                |       | 2003               |       | 2002             |       | 2003     |       | 2002    
|                                                              |                                |                                |       |                    |       |                  |       |          |       |         
|Interest income                                               |                                |                                |       |                    |       |                  |       |          |       |          |       |        |        |   |        |       
|                                                              | Loans (including fee income)   |                                | $     | 5,114              |       |                  | $     | 5,590    |       |          | $     | 10,346 |        |   | $      | 11,020 |       
|                                                              | Securities                     |                                |       |                    |       |                  |       |          |       |          |       |        |        |   |        |        |       
|                                                              |                                | Taxable                        |       |                    | 1,699 |                  |       |          | 2,204 |          |       |        | 3,401  |   |        |        | 4,613  | 
|                                                              |                                | Exempt from federal income tax |       |                    | 85    |                  |       |          | 110   |          |       |        | 167    |   |        |        | 232    | 
|                                                              | Federal funds sold and other   |                                |       | 17                 |       |                  |       | 60       |       |          |       | 36     |        |   |        | 110    |       
|                                                              |                                |                                |       |                    |       |                  |       |          |       |          |       |        |        |   |        |        |       
|                                                              |                                | Total interest income          |       |                    | 6,915 |                  |       |          | 7,964 |          |       |        | 13,950 |   |        |        | 15,975 | 
|                                                              |                                |                                |       |                    |       |                  |       |          |       |          |       |        |        |   |        |        |       
|Interest expense                                              |                                |                                |       |                    |       |                  |       |          |       |          |       |        |        |   |        |       
|                                                              | Time deposits                  |                                |       | 1,626              |       |                  |       | 1,731    |       |          |       | 3,409  |        |   |        | 3,655  |       
|                                                              | Other deposits                 |                                |       | 354                |       |                  |       | 495      |       |          |       | 730    |        |   |        | 999    |       
|                                                              | Other borrowings               |                                |       | 542                |       |                  |       | 581      |       |          |       | 1,088  |        |   |        | 1,250  |       
|                                                              |                                |                                |       |                    |       |                  |       |          |       |          |       |        |        |   |        |        |       
|                                                              |                                | Total interest expense         |       |                    | 2,522 |                  |       |          | 2,807 |          |       |        | 5,227  |   |        |        | 5,904  | 
|                                                              |                                |                                |       |                    |       |                  |       |          |       |          |       |        |        |   |        |        |       
|Net interest income                                           |                                |                                | 4,393 |                    |       |                  | 5,157 |          |       |          | 8,723 |        |        |   | 10,071 |       
|Provision for loan and lease losses                           |                                |                                | 150   |                    |       |                  | 75    |          |       |          | 280   |        |        |   | 150    |       
|                                                              |                                |                                |       |                    |       |                  |       |          |       |          |       |        |        |   |        |        |       
|Net interest income after provision for
loan and lease losses |                                |                                | 4,243 |                    |       |                  | 5,082 |          |       |          | 8,443 |        |        |   | 9,921  |       
|                                                              |                                |                                |       |                    |       |                  |       |          |       |          |       |        |        |   |        |        |       
|Noninterest income                                            |                                |                                |       |                    |       |                  |       |          |       |          |       |        |        |   |        |       
|                                                              | Service fees on deposits       |                                |       | 570                |       |                  |       | 518      |       |          |       | 1,084  |        |   |        | 996    |       
|                                                              | Trust income                   |                                |       | 174                |       |                  |       | 183      |       |          |       | 331    |        |   |        | 363    |       
|                                                              | Mortgage banking income        |                                |       | 117                |       |                  |       | 43       |       |          |       | 237    |        |   |        | 129    |       
|                                                              | Other operating income         |                                |       | 225                |       |                  |       | 183      |       |          |       | 360    |        |   |        | 351    |       
|                                                              |                                |                                |       |                    |       |                  |       |          |       |          |       |        |        |   |        |        |       
|                                                              |                                | Total noninterest income       |       |                    | 1,086 |                  |       |          | 927   |          |       |        | 2,012  |   |        |        | 1,839  | 
|                                                              |                                |                                |       |                    |       |                  |       |          |       |          |       |        |        |   |        |        |       
|Noninterest expense                                           |                                |                                |       |                    |       |                  |       |          |       |          |       |        |        |   |        |       
|                                                              | Salaries and employee benefits |                                |       | 1,705              |       |                  |       | 1,676    |       |          |       | 3,405  |        |   |        | 3,318  |       
|                                                              | Occupancy and equipment, net   |                                |       | 339                |       |                  |       | 331      |       |          |       | 709    |        |   |        | 678    |       
|                                                              | Data processing                |                                |       | 174                |       |                  |       | 147      |       |          |       | 307    |        |   |        | 305    |       
|                                                              | Legal                          |                                |       | 200                |       |                  |       | 93       |       |          |       | 583    |        |   |        | 140    |       
|                                                              | Other operating expenses       |                                |       | 632                |       |                  |       | 570      |       |          |       | 998    |        |   |        | 1,110  |       
|                                                              |                                |                                |       |                    |       |                  |       |          |       |          |       |        |        |   |        |        |       
|                                                              |                                | Total noninterest expense      |       |                    | 3,050 |                  |       |          | 2,817 |          |       |        | 6,002  |   |        |        | 5,551  | 
|                                                              |                                |                                |       |                    |       |                  |       |          |       |          |       |        |        |   |        |        |       
|Income before income taxes                                    |                                |                                | 2,279 |                    |       |                  | 3,192 |          |       |          | 4,453 |        |        |   | 6,209  |       
|Provision for income taxes                                    |                                |                                | 777   |                    |       |                  | 1,098 |          |       |          | 1,569 |        |        |   | 2,115  |       
|                                                              |                                |                                |       |                    |       |                  |       |          |       |          |       |        |        |   |        |        |       
|Net income                                                    |                                | $                              | 1,502 |                    |       | $                | 2,094 |          |       | $        | 2,884 |        |        | $ | 4,094  |       
|                                                              |                                |                                |       |                    |       |                  |       |          |       |          |       |        |        |   |        |        |       
|Basic and diluted earnings per share                          |                                | $                              | 0.35  |                    |       | $                | 0.47  |          |       | $        | 0.67  |        |        | $ | 0.92   |       
|Comprehensive income                                          |                                | $                              | 1,798 |                    |       | $                | 4,094 |          |       | $        | 2,917 |        |        | $ | 5,199  |       

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

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NORTHERN STATES FINANCIAL CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Six months ended June 30, 2003 and 2002
(In thousands of dollars) (Unaudited)

|                                                 |                                                                            |                                                                     |                                                                             |                                    |          |                  |         |          |          |        |       | 
|------------------------------------------------ | -------------------------------------------------------------------------- | ------------------------------------------------------------------- | --------------------------------------------------------------------------- | ---------------------------------- | -------- | ---------------- | ------- | -------- | -------- | ------ | ----- | 
|                                                 |                                                                            |                                                                     |                                                                             |                                    |          | Six months ended
|                                                 |                                                                            |                                                                     |                                                                             |                                    |          | June 30,         |         | June 30,
|                                                 |                                                                            |                                                                     |                                                                             |                                    |          | 2003             |         | 2002    
|Cash flows from operating activities             |                                                                            |                                                                     |                                                                             |                                    |          |                  |         |         
|                                                 | Net income                                                                 |                                                                     | $                                                                           | 2,884                              |          |                  | $       | 4,094    |         
|                                                 | Adjustments to reconcile net income to net cash from
operating activities: |                                                                     |                                                                             |                                    |          |                  |         |          |         
|                                                 |                                                                            | Depreciation                                                        |                                                                             |                                    | 189      |                  |         |          | 188      |       
|                                                 |                                                                            | Net gains on sales of securities                                    |                                                                             |                                    | 0        |                  |         |          | (8       | )     
|                                                 |                                                                            | Net gains on sales of other real estate owned                       |                                                                             |                                    | (29      | )                |         |          | 0        |       
|                                                 |                                                                            | Federal Home Loan Bank stock dividends                              |                                                                             |                                    | (76      | )                |         |          | (44      | )     
|                                                 |                                                                            | Provision for loan and lease losses                                 |                                                                             |                                    | 280      |                  |         |          | 150      |       
|                                                 |                                                                            | Net change in accrued interest receivable and other assets          |                                                                             |                                    | 445      |                  |         |          | 782      |       
|                                                 |                                                                            | Net change in accrued interest payable and other liabilities        |                                                                             |                                    | (818     | )                |         |          | (2,107   | )     
|                                                 |                                                                            |                                                                     |                                                                             |                                    |          |                  |         |          |         
|                                                 |                                                                            |                                                                     |                                                                             | Net cash from operating activities |          |                  | 2,875   |          |          |        | 3,055 | 
|                                                 |                                                                            |                                                                     |                                                                             |                                    |          |                  |         |          |         
|Cash flows from investing activities             |                                                                            |                                                                     |                                                                             |                                    |          |                  |         |         
|                                                 |                                                                            | Proceeds from maturities and calls of securities available for sale |                                                                             |                                    | 670,839  |                  |         |          | 173,135  |       
|                                                 |                                                                            | Proceeds from sales of securities available for sale                |                                                                             |                                    | 0        |                  |         |          | 4,436    |       
|                                                 |                                                                            | Proceeds from sales of other real estate owned                      |                                                                             |                                    | 535      |                  |         |          | 0        |       
|                                                 |                                                                            | Purchases of securities available for sale                          |                                                                             |                                    | (686,861 | )                |         |          | (162,819 | )     
|                                                 |                                                                            | Change in loans made to customers                                   |                                                                             |                                    | (704     | )                |         |          | (8,037   | )     
|                                                 |                                                                            | Property and equipment expenditures                                 |                                                                             |                                    | (245     | )                |         |          | (108     | )     
|                                                 |                                                                            |                                                                     |                                                                             |                                    |          |                  |         |          |         
|                                                 |                                                                            |                                                                     |                                                                             | Net cash from investing activities |          |                  | (16,436 | )        |          |        | 6,607 | 
|                                                 |                                                                            |                                                                     |                                                                             |                                    |          |                  |         |          |         
|Cash flows from financing activities             |                                                                            |                                                                     |                                                                             |                                    |          |                  |         |         
|                                                 |                                                                            | Net increase (decrease) in:                                         |                                                                             |                                    |          |                  |         |          |          |       
|                                                 |                                                                            |                                                                     | Deposits                                                                    |                                    |          | 2,123            |         |          |          | 18,919 |      
|                                                 |                                                                            |                                                                     | Securities sold under repurchase agreements
and other short-term borrowings |                                    |          | (3,591           | )       |          |          | (7,364 | )    
|                                                 |                                                                            |                                                                     | Advances from borrowers for taxes and insurance                             |                                    |          | 40               |         |          |          | (154   | )    
|                                                 |                                                                            | Repayment of Federal Home Loan Bank advances                        |                                                                             |                                    | 0        |                  |         |          | (5,000   | )     
|                                                 |                                                                            | Net proceeds from exercise of stock options                         |                                                                             |                                    | 0        |                  |         |          | 21       |       
|                                                 |                                                                            | Purchases of treasury stock                                         |                                                                             |                                    | (285     | )                |         |          | (2,725   | )     
|                                                 |                                                                            | Dividends paid                                                      |                                                                             |                                    | (2,325   | )                |         |          | (2,370   | )     
|                                                 |                                                                            |                                                                     |                                                                             |                                    |          |                  |         |          |         
|                                                 |                                                                            |                                                                     |                                                                             | Net cash from financing activities |          |                  | (4,038  | )        |          |        | 1,327 | 
|                                                 |                                                                            |                                                                     |                                                                             |                                    |          |                  |         |          |         
|Net change in cash and cash equivalents          |                                                                            |                                                                     | (17,599                                                                     | )                                  |          |                  | 10,989  |         
|Cash and cash equivalents at beginning of period |                                                                            |                                                                     | 37,578                                                                      |                                    |          |                  | 34,315  |         
|                                                 |                                                                            |                                                                     |                                                                             |                                    |          |                  |         |          |         
|Cash and cash equivalents at end of period       |                                                                            | $                                                                   | 19,979                                                                      |                                    |          | $                | 45,304  |         
|                                                 |                                                                            |                                                                     |                                                                             |                                    |          |                  |         |          |         

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

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NORTHERN STATES FINANCIAL CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2003

(Dollar amounts in thousands, except per share data)

(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 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,
2002, 2001 and 2000. The results of operations for the three and six month periods ended June 30, 2003, are not
necessarily indicative of the results to be expected for the full year.

Net income was utilized to calculate both basic and diluted earnings per share for all periods presented.
Information regarding weighted average shares utilized in computing basic and diluted earnings per share follows.
It should be noted that all stock options were exercised in early 2002 and there have since been none outstanding.

|                                                          |  |                    |           |                  |  |          |           |          |  |  |           |  |  |  |           | 
|--------------------------------------------------------- |  | ------------------ | --------- | ---------------- |  | -------- | --------- | -------- |  |  | --------- |  |  |  | --------- | 
|                                                          |  | Three months ended |           | Six months ended
|                                                          |  | June 30,           |           | June 30,         |  | June 30, |           | June 30,
|                                                          |  | 2003               |           | 2002             |  | 2003     |           | 2002    
|                                                          |  |                    |           |                  |  |          |           |         
|Average outstanding common shares                         |  |                    | 4,305,105 |                  |  |          | 4,430,728 |          |  |  | 4,306,652 |  |  |  | 4,451,363 | 
|Effect of stock options                                   |  |                    | 0         |                  |  |          | 0         |          |  |  | 0         |  |  |  | 9         | 
|                                                          |  |                    |           |                  |  |          |           |          |  |  |           |  |  |  |           | 
|Average outstanding shares for
diluted earnings per share |  |                    | 4,305,105 |                  |  |          | 4,430,728 |          |  |  | 4,306,652 |  |  |  | 4,451,372 | 
|                                                          |  |                    |           |                  |  |          |           |          |  |  |           |  |  |  |           | 

On April 17, 2002 it was announced that the Northern States Financial Corporations 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. At February 19, 2003, the Company
announced that it had approved an additional repurchase program to purchase an additional 200,000 shares of its
stock. At June 30, 2003, 167,150 shares of treasury stock had been purchased that the Company carries at cost.

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##### Table of Contents



NORTHERN STATES FINANCIAL CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2003

(Dollar amounts in thousands, except per share data)

(Unaudited)

Information related to stockholders equity was as follows:

|                    |  |          |           |              |  |   |           | 
|------------------- |  | -------- | --------- | ------------ |  | - | --------- | 
|                    |  | June 30, |           | December 31,
|                    |  | 2003     |           | 2002        
|                    |  |          |           |             
|Par value per share |  | $        | 0.40      |              |  | $ | 0.40      | 
|Authorized shares   |  |          | 6,500,000 |              |  |   | 6,500,000 | 
|Issued shares       |  |          | 4,472,255 |              |  |   | 4,472,255 | 
|Treasury shares     |  |          | 167,150   |              |  |   | 157,150   | 
|Outstanding shares  |  |          | 4,305,105 |              |  |   | 4,315,105 | 

Note 2 - Commitments, Off-Balance Sheet Risk and Contingencies

At June 30, 2003 and December 31, 2002, the contract amount of the Companys off-balance
sheet commitments were as follows:

|                                                      |               |       |       |          |        |              |       |        |         | 
|----------------------------------------------------- | ------------- | ----- | ----- | -------- | ------ | ------------ | ----- | ------ | ------- | 
|                                                      |               |       |       | June 30, |        | December 31,
|                                                      |               |       |       | 2003     |        | 2002        
|                                                      |               |       |       |          |        |             
|Unused lines of credit and commitments to make loans: |               |       |       |          |        |              |       |       
|                                                      | Fixed rate    |       | $     | 13,145   |        |              | $     | 11,533 |        
|                                                      | Variable rate |       |       | 86,582   |        |              |       | 99,896 |        
|                                                      |               |       |       |          |        |              |       |        |        
|                                                      |               | Total |       | $        | 99,727 |              |       | $      | 111,429 | 
|                                                      |               |       |       |          |        |              |       |        |        
|Standby letters of credit                             |               | $     | 6,151 |          |        | $            | 5,435 |       

Since many commitments to make loans expire without being used, the amounts above do not
necessarily represent future cash commitments. Collateral obtained upon exercise of the commitments is
determined using managements credit evaluation of the borrower, and may include commercial and
residential real estate and other business and consumer assets.

Commitments to make loans to related parties totaled $577 and $1,006 at June 30, 2003 and December 31, 2002.
These commitments were made at the same terms and conditions available to nonrelated parties.

The Company also has Community Reinvestment Act (CRA) investment commitments outstanding of
$871 as of June 30, 2003. The commitment is to be funded over the next six years.

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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 the Northern States Financial Corporation (the Company) at June 30, 2003
and the consolidated results of operations for the three and six month periods
ended June 30, 2003, compared to the same period of 2002. 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, the Bank of Waukegan (the Bank)
and the Banks wholly owned subsidiary, Northern States Community Development
Corporation (NSCDC). This discussion should be read in conjunction with the
interim condensed consolidated financial statements and notes thereto included
herein.

The statements contained in this managements discussion and analysis that
are not historical facts are forward-looking statements subject to the safe
harbor created by the Private Securities Litigation Reform Act of 1995. The
Company cautions readers of this report that a number of important factors
could cause the Companys actual results subsequent to June 30, 2003 to differ
materially from those expressed in any such forward-looking statements.

FINANCIAL CONDITION

The consolidated total assets for the Company were $633.7 million at June
30, 2003, decreasing $1.9 million from December 31, 2002. The decrease was
attributable to declines to the Companys cash and cash equivalents that were
partially offset by increases to the Companys securities portfolio.

The Companys federal funds sold at June 30, 2003 declined $19.2 million
to $1.8 million from $20.9 million at December 31, 2002. The Companys federal
funds sold position decreased in order to fund increases to securities
available for sale that were $16.1 million greater than at December 31, 2002.
The fair value of securities at June 30, 2003 was $253.0 million of which
$222.9 million were pledged to secure repurchase agreements and public
deposits. The statement of cash flows shows that $670.8 million in securities
were called or matured during the first six months of 2003 compared to only
$173.1 million for the same period last year. With interest rates falling the
issuers of securities had incentive to call the securities. At June 30, 2003,
the Company has $127.9 million in U.S. Government agency securities with call
options and an additional $81.0 million that will mature within 90 days.

The Companys gross loans and leases declined slightly at June 30, 2003
from December 31, 2002 by $466,000. Loan demand during the first half of 2003
has receded compared to previous years as the economy has slowed and there is
uncertainty as to the future. The Companys commercial loan and real estate
construction loans decreased $6.1 million and $5.5 million from year-end as
commercial loans were secured by real estate and construction projects were
completed. These loans were transferred to the real estate mortgage portfolio
to more consistently reflect the underlying collateral of these loans causing
real estate mortgages to increase $9.1 million. The Companys home equity loans
increased by $1.0 million indicating the continued popularity of this type of
loan because of its tax advantages to the borrower. Installment consumer loans
also increased from year-end by $1.2 million. At June 30, 2003, loans to
related parties totaled $4.9 million increasing $2.4 million from December 31,
2002.

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NORTHERN STATES FINANCIAL CORPORATION

MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS

During the first six months of 2003, deposits at the Company increased
slightly by $2.1 million from December 31, 2002. Deposits from municipal and
other public entity depositors decreased $8.7 million from year-end. This
decline resulted from the normal cyclical nature of public entities drawing
down their balances for operational purposes during the early part of the year
until real estate tax payments are received during the second half of the year.
This decrease was offset by increases to retail and commercial deposits that
grew by $7.3 million and $3.1 million during the first half of 2003. Retail
customers have increased their deposits due to disenchantment with the stock
market and the Company offers competitive interest rates that have helped to
increase retail savings and NOW accounts. Deposit balances from related
parties totaled $12.7 million at June 30, 2003.

Securities sold under repurchase agreements and other short-term
borrowings at the Company decreased by $3.6 million from December 31, 2002 with
balances of $93.6 million at June 30, 2003. Securities sold under repurchase
agreements are offered through an overnight repurchase agreement product and a
term product with maturities from 7 days to one year. The decrease in
repurchase agreements was mainly from the overnight repurchase agreement
product that was $5.8 million less at June 30, 2003 compared to the prior
year-end. At June 30, 2003 the Company had $2.5 million in federal funds
purchased compared to none at December 31, 2002. At June 30, 2003, securities
sold under repurchase agreements to related parties totaled $51.7 million.
Borrowings from the Federal Home Loan Bank through term advances remained at
$6.5 million at June 30, 2003.

Total stockholders equity increased $307,000 to $76.9 million during the
six months ended June 30, 2003. The increase is the result of net income of
$2,884,000, plus the adjustment in the valuation allowance for the market value
of securities available for sale, net of tax, of $33,000, less $285,000 due to
the purchase of 10,000 shares of the Companys common stock as treasury stock
and less $2,325,000 paid out as a cash dividend at $.54 per share.

The tier 1 capital to average asset ratio at June 30, 2003 was 11.90% and
the total tier 2 capital to asset ratio, on a risk adjusted basis, amounted to
18.11%, exceeding the minimum required to be well capitalized under prompt
corrective action regulations, which minimums are 5.00% and 10.00%. Book value
per share was $17.86 at June 30, 2003 as compared to $17.75 at December 31,
2002. On June 30, 2003, the Company and the Bank were in compliance with all
applicable regulatory capital requirements.

RESULTS OF OPERATIONS

NET INCOME

The consolidated net income for the quarter ended June 30, 2003 was
$1,502,000, decreasing $592,000 or 28.27% compared to net income of $2,094,000
for the same period the previous year. The annualized return on average assets
was .95% for the quarter, a decrease from a return on average assets for the
same quarter the previous year of 1.47%. The consolidated net income for the
six months ended June 30, 2003 was $2,884,000, a decrease of $1,210,000 over
the first half of 2002. The annualized return on average assets for the first
six months of 2002 was .91%, decreasing from the return on average assets for
the same period the previous year of 1.43%.

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NORTHERN STATES FINANCIAL CORPORATION

MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS

NET INTEREST INCOME

Net interest income, the difference between interest income earned on
average interest earning assets and interest expense on average interest
bearing liabilities, decreased $764,000 to $4,393,000 during the three months
ended June 30, 2003, compared to the same three months in 2002.

One of the major factors affecting net interest income during the second
quarter of 2003 was the level of nonaccrual loans and leases. Although
nonaccrual loans and leases at June 30, 2003 and June 30, 2002 were the same at
$15.3 million, lease pools totaling $11.3 million were placed on non-accrual
status at June 30, 2002. The Company had been recognizing income of $290,000
per quarter on these leases pools prior to placing the lease pools on
non-accrual status.

In addition, interest rates during the second quarter of 2003 were lower
compared to the second quarter of 2002 contributing to lower net interest
income as loans and securities yields dropped to a greater extent than yields
on deposits and borrowings. At June 30, 2003 over half of the Companys loan
portfolio are variable rate that are affected by changes to the prime rate.
The lower rates are evidenced by the prime lending rate that for much of the
second quarter of 2003 was 4.25% with it dropping to 4.00% at the end of the
quarter as compared to 4.75% during the same period last year. Table 1,
Analysis of Average Balance and Tax Equivalent Rates for the Three Months
ended June 30, 2003 and 2002 shows that the net yield on interest earning
assets decreased 93 basis points to 2.91% during the second quarter of 2003
from 3.84% last year.

Yields on interest earning assets declined during the second quarter of
2003 by 133 basis points compared to the second quarter of 2002. Average loan
rates during the second quarter of 2003 were 5.78% and declined 102 basis from
the same quarter last year. Yields earned on taxable securities also decreased
182 basis points to 2.81% during the second quarter of 2003 compared to the
same period last year. Interest income on taxable securities consequently
declined by $505,000 during the second quarter of 2003 compared to last year.
The effect of the calls and maturities during the first half of 2003, combined
with the calls and maturities that took place during the last six months of
2002, is that the yields on taxable securities have fallen to a much greater
extent than loans as new securities were purchased yielding lower interest
rates.

Yields on interest bearing liabilities decreased by 55 basis points during
the second quarter of 2003 to 2.00% compared to the second quarter of 2002
yields of 2.55%. The lower rates paid on interest bearing liabilities had the
effect of lowering interest expense during the second quarter of 2003 by
$285,000 compared to the same quarter of 2002.

For similar reasons net interest income for the six months ended June 30,
2003 decreased $1,348,000 compared to the same period of 2002. Interest rates
during the first 6 months of 2003 declined with the prime rate dropping from
4.25% to 4.00% at June 30, 2003 while, during the same period of 2002, rates
remained stable with the prime rate at 4.75% throughout the period. Table 2,
Analysis of Average Balance and Tax Equivalent Rates for the Six Months ended
June 30, 2003 and 2002 shows that yields on interest earning assets declined
128 basis points during the first half of 2003 compared to last year. Table 2
shows that rates paid on interest bearing liabilities decreased to a lesser
extent, declining only 59 basis points during the first six months of 2003
compared to the same six months of 2002. These developments caused net
interest income to decrease.

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NORTHERN STATES FINANCIAL CORPORATION

MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS

TABLE 1
NORTHERN STATES FINANCIAL CORPORATION
ANALYSIS OF AVERAGE BALANCE AND TAX EQUIVALENT RATES
For the Three Months Ended June 30, 2003 and 2002  Rates are Annualized
($ 000s)

|                                     |                                                      |                                              |   |         |         |          |   |       |       |         |  |          |      |         |   |         |         |  |   |       |       |  |  |       |      |   |  |  |  | 
|------------------------------------ | ---------------------------------------------------- | -------------------------------------------- | - | ------- | ------- | -------- | - | ----- | ----- | ------- |  | -------- | ---- | ------- | - | ------- | ------- |  | - | ----- | ----- |  |  | ----- | ---- | - |  |  |  | 
|                                     |                                                      |                                              |   | 2003    |         | 2002     |   |       |       |        
|                                     |                                                      |                                              |   |         |         |          |   |       |       |        
|                                     |                                                      |                                              |   | Average |         |          |   |       |       |         |  |          |      | Average |   |         |         |  |   |       |       |  |  |       |      |  
|                                     |                                                      |                                              |   | Balance |         | Interest |   | Rate  |       | Balance |  | Interest |      | Rate    |   |         |         | 
|                                     |                                                      |                                              |   |         |         |          |   |       |       |         |  |          |      |         |   |         |         | 
|Assets                               |                                                      |                                              |   |         |         |          |   |       |       |         |  |          |      |         |   |         |         |  |   |       |       |  |  |      
|                                     | Loans (1)(2)(3)                                      |                                              | $ | 354,382 |         |          | $ | 5,124 |       |         |  | 5.78     | %    |         | $ | 329,824 |         |  | $ | 5,603 |       |  |  | 6.80  | %   
|                                     | Taxable securities (4)                               |                                              |   | 243,757 |         |          |   | 1,699 |       |         |  | 2.81     | %    |         |   | 190,090 |         |  |   | 2,204 |       |  |  | 4.63  | %   
|                                     | Tax-advantaged securities (2) (4)                    |                                              |   | 8,494   |         |          |   | 128   |       |         |  | 6.24     | %    |         |   | 9,635   |         |  |   | 167   |       |  |  | 7.07  | %   
|                                     | Federal funds sold and other                         |                                              |   | 5,610   |         |          |   | 17    |       |         |  | 1.21     | %    |         |   | 14,819  |         |  |   | 60    |       |  |  | 1.62  | %   
|                                     |                                                      |                                              |   |         |         |          |   |       |       |         |  |          |      |         |   |         |         |  |   |       |       |  |  |      
|                                     |                                                      | Interest earning assets (4)                  |   |         | 612,243 |          |   |       | 6,968 |         |  |          | 4.57 | %       |   |         | 544,368 |  |   |       | 8,034 |  |  |       | 5.90 | %
|                                     | Noninterest earning assets                           |                                              |   | 23,097  |         |          |   |       |       |         |  |          |      |         |   | 26,261  |         |  |   |       |       |  |  |       |     
|                                     |                                                      |                                              |   |         |         |          |   |       |       |         |  |          |      |         |   |         |         |  |   |       |       |  |  |      
|                                     |                                                      | Average assets                               |   | $       | 635,340 |          |   |       |       |         |  |          |      |         |   | $       | 570,629 |  |   |       |       |  |  |       |      |  
|                                     |                                                      |                                              |   |         |         |          |   |       |       |         |  |          |      |         |   |         |         |  |   |       |       |  |  |      
|Liabilities and stockholders equity |                                                      |                                              |   |         |         |          |   |       |       |         |  |          |      |         |   |         |         |  |   |       |       |  |  |      
|                                     | NOW deposits                                         |                                              | $ | 50,873  |         |          | $ | 83    |       |         |  | .65      | %    |         | $ | 46,529  |         |  | $ | 109   |       |  |  | .94   | %   
|                                     | Money market deposits                                |                                              |   | 50,158  |         |          |   | 144   |       |         |  | 1.15     | %    |         |   | 47,776  |         |  |   | 208   |       |  |  | 1.74  | %   
|                                     | Savings deposits                                     |                                              |   | 51,650  |         |          |   | 127   |       |         |  | .98      | %    |         |   | 47,940  |         |  |   | 178   |       |  |  | 1.49  | %   
|                                     | Time deposits                                        |                                              |   | 246,027 |         |          |   | 1,626 |       |         |  | 2.64     | %    |         |   | 210,630 |         |  |   | 1,731 |       |  |  | 3.29  | %   
|                                     | Other borrowings                                     |                                              |   | 105,047 |         |          |   | 542   |       |         |  | 2.06     | %    |         |   | 87,370  |         |  |   | 581   |       |  |  | 2.66  | %   
|                                     |                                                      |                                              |   |         |         |          |   |       |       |         |  |          |      |         |   |         |         |  |   |       |       |  |  |      
|                                     |                                                      | Total interest bearing liabilities           |   |         | 503,755 |          |   |       | 2,522 |         |  |          | 2.00 | %       |   |         | 440,245 |  |   |       | 2,807 |  |  |       | 2.55 | %
|                                     |                                                      |                                              |   |         |         |          |   |       |       |         |  |          |      |         |   |         |         |  |   |       |       |  |  |      
|                                     | Demand deposits                                      |                                              |   | 48,368  |         |          |   |       |       |         |  |          |      |         |   | 46,348  |         |  |   |       |       |  |  |       |     
|                                     | Other noninterest earning liabilities                |                                              |   | 6,570   |         |          |   |       |       |         |  |          |      |         |   | 7,492   |         |  |   |       |       |  |  |       |     
|                                     | Stockholders equity                                 |                                              |   | 76,647  |         |          |   |       |       |         |  |          |      |         |   | 76,544  |         |  |   |       |       |  |  |       |     
|                                     |                                                      |                                              |   |         |         |          |   |       |       |         |  |          |      |         |   |         |         |  |   |       |       |  |  |      
|                                     |                                                      | Average liabilities and
Stockholders equity |   | $       | 635,340 |          |   |       |       |         |  |          |      |         |   | $       | 570,629 |  |   |       |       |  |  |       |      |  
|                                     |                                                      |                                              |   |         |         |          |   |       |       |         |  |          |      |         |   |         |         |  |   |       |       |  |  |      
|                                     | Net interest income                                  |                                              |   |         |         |          | $ | 4,446 |       |         |  |          |      |         |   |         |         |  | $ | 5,227 |       |  |  |       |     
|                                     |                                                      |                                              |   |         |         |          |   |       |       |         |  |          |      |         |   |         |         |  |   |       |       |  |  |      
|                                     | Net yield on interest earning assets (4)             |                                              |   |         |         |          |   |       |       |         |  | 2.91     | %    |         |   |         |         |  |   |       |       |  |  | 3.84  | %   
|                                     |                                                      |                                              |   |         |         |          |   |       |       |         |  |          |      |         |   |         |         |  |   |       |       |  |  |      
|                                     | Interest bearing liabilities
To earning assets ratio |                                              |   |         |         |          |   |       |       |         |  | 82.56    | %    |         |   |         |         |  |   |       |       |  |  | 80.84 | %   
|                                     |                                                      |                                              |   |         |         |          |   |       |       |         |  |          |      |         |   |         |         |  |   |       |       |  |  |      



|(1) |  | Interest income on loans includes loan origination and other fees of $129 and $106 for the three months ended
June 30, 2003 and 2002.                                                                                                                                                             
|--- | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|(2) |  | Tax-exempt income is reflected on a fully tax equivalent basis utilizing a 34% 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 June 30, 2003
and 2002 average balance information includes an average unrealized gain (loss) for taxable securities of $1,779 and
($435) and for tax-advantaged securities of $295 and $192.

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NORTHERN STATES FINANCIAL CORPORATION

MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS

TABLE 2
NORTHERN STATES FINANCIAL CORPORATION
ANALYSIS OF AVERAGE BALANCE AND TAX EQUIVALENT RATES
For the Six Months Ended June 30, 2003 and 2002  Rates are Annualized
($ 000s)

|                                     |                                                      |                                              |   |         |         |          |   |        |        |         |  |          |      |         |   |         |         |  |   |        |        |  |  |       |      |   |  |  |  | 
|------------------------------------ | ---------------------------------------------------- | -------------------------------------------- | - | ------- | ------- | -------- | - | ------ | ------ | ------- |  | -------- | ---- | ------- | - | ------- | ------- |  | - | ------ | ------ |  |  | ----- | ---- | - |  |  |  | 
|                                     |                                                      |                                              |   | 2003    |         | 2002     |   |        |        |        
|                                     |                                                      |                                              |   |         |         |          |   |        |        |        
|                                     |                                                      |                                              |   | Average |         |          |   |        |        |         |  |          |      | Average |   |         |         |  |   |        |        |  |  |       |      |  
|                                     |                                                      |                                              |   | Balance |         | Interest |   | Rate   |        | Balance |  | Interest |      | Rate    |   |         |         | 
|                                     |                                                      |                                              |   |         |         |          |   |        |        |         |  |          |      |         |   |         |         | 
|Assets                               |                                                      |                                              |   |         |         |          |   |        |        |         |  |          |      |         |   |         |         |  |   |        |        |  |  |      
|                                     | Loans (1)(2)(3)                                      |                                              | $ | 356,265 |         |          | $ | 10,367 |        |         |  | 5.82     | %    |         | $ | 328,239 |         |  | $ | 11,046 |        |  |  | 6.73  | %   
|                                     | Taxable securities (4)                               |                                              |   | 239,058 |         |          |   | 3,401  |        |         |  | 2.87     | %    |         |   | 193,832 |         |  |   | 4,613  |        |  |  | 4.76  | %   
|                                     | Tax-advantaged securities (2) (4)                    |                                              |   | 8,226   |         |          |   | 253    |        |         |  | 6.37     | %    |         |   | 10,133  |         |  |   | 352    |        |  |  | 7.10  | %   
|                                     | Federal funds sold and other                         |                                              |   | 6,089   |         |          |   | 36     |        |         |  | 1.18     | %    |         |   | 13,618  |         |  |   | 110    |        |  |  | 1.62  | %   
|                                     |                                                      |                                              |   |         |         |          |   |        |        |         |  |          |      |         |   |         |         |  |   |        |        |  |  |      
|                                     |                                                      | Interest earning assets (4)                  |   |         | 609,638 |          |   |        | 14,057 |         |  |          | 4.63 | %       |   |         | 545,822 |  |   |        | 16,121 |  |  |       | 5.91 | %
|                                     | Noninterest earning assets                           |                                              |   | 22,114  |         |          |   |        |        |         |  |          |      |         |   | 26,359  |         |  |   |        |        |  |  |       |     
|                                     |                                                      |                                              |   |         |         |          |   |        |        |         |  |          |      |         |   |         |         |  |   |        |        |  |  |      
|                                     |                                                      | Average assets                               |   | $       | 631,752 |          |   |        |        |         |  |          |      |         |   | $       | 572,181 |  |   |        |        |  |  |       |      |  
|                                     |                                                      |                                              |   |         |         |          |   |        |        |         |  |          |      |         |   |         |         |  |   |        |        |  |  |      
|Liabilities and stockholders equity |                                                      |                                              |   |         |         |          |   |        |        |         |  |          |      |         |   |         |         |  |   |        |        |  |  |      
|                                     | NOW deposits                                         |                                              | $ | 50,182  |         |          | $ | 165    |        |         |  | .66      | %    |         | $ | 45,712  |         |  | $ | 215    |        |  |  | .94   | %   
|                                     | Money market deposits                                |                                              |   | 49,438  |         |          |   | 318    |        |         |  | 1.29     | %    |         |   | 49,271  |         |  |   | 438    |        |  |  | 1.78  | %   
|                                     | Savings deposits                                     |                                              |   | 50,280  |         |          |   | 247    |        |         |  | .98      | %    |         |   | 46,853  |         |  |   | 346    |        |  |  | 1.48  | %   
|                                     | Time deposits                                        |                                              |   | 249,387 |         |          |   | 3,409  |        |         |  | 2.73     | %    |         |   | 211,114 |         |  |   | 3,655  |        |  |  | 3.46  | %   
|                                     | Other borrowings                                     |                                              |   | 102,625 |         |          |   | 1,088  |        |         |  | 2.12     | %    |         |   | 88,537  |         |  |   | 1,250  |        |  |  | 2.82  | %   
|                                     |                                                      |                                              |   |         |         |          |   |        |        |         |  |          |      |         |   |         |         |  |   |        |        |  |  |      
|                                     |                                                      | Total interest bearing liabilities           |   |         | 501,912 |          |   |        | 5,227  |         |  |          | 2.08 | %       |   |         | 441,487 |  |   |        | 5,904  |  |  |       | 2.67 | %
|                                     |                                                      |                                              |   |         |         |          |   |        |        |         |  |          |      |         |   |         |         |  |   |        |        |  |  |      
|                                     | Demand deposits                                      |                                              |   | 47,002  |         |          |   |        |        |         |  |          |      |         |   | 46,357  |         |  |   |        |        |  |  |       |     
|                                     | Other noninterest earning liabilities                |                                              |   | 5,987   |         |          |   |        |        |         |  |          |      |         |   | 7,277   |         |  |   |        |        |  |  |       |     
|                                     | Stockholders equity                                 |                                              |   | 76,851  |         |          |   |        |        |         |  |          |      |         |   | 77,060  |         |  |   |        |        |  |  |       |     
|                                     |                                                      |                                              |   |         |         |          |   |        |        |         |  |          |      |         |   |         |         |  |   |        |        |  |  |      
|                                     |                                                      | Average liabilities and
Stockholders equity |   | $       | 631,752 |          |   |        |        |         |  |          |      |         |   | $       | 572,181 |  |   |        |        |  |  |       |      |  
|                                     |                                                      |                                              |   |         |         |          |   |        |        |         |  |          |      |         |   |         |         |  |   |        |        |  |  |      
|                                     | Net interest income                                  |                                              |   |         |         |          | $ | 8,830  |        |         |  |          |      |         |   |         |         |  | $ | 10,217 |        |  |  |       |     
|                                     |                                                      |                                              |   |         |         |          |   |        |        |         |  |          |      |         |   |         |         |  |   |        |        |  |  |      
|                                     | Net yield on interest earning assets (4)             |                                              |   |         |         |          |   |        |        |         |  | 2.91     | %    |         |   |         |         |  |   |        |        |  |  | 3.74  | %   
|                                     |                                                      |                                              |   |         |         |          |   |        |        |         |  |          |      |         |   |         |         |  |   |        |        |  |  |      
|                                     | Interest bearing liabilities
To earning assets ratio |                                              |   |         |         |          |   |        |        |         |  | 82.62    | %    |         |   |         |         |  |   |        |        |  |  | 80.90 | %   
|                                     |                                                      |                                              |   |         |         |          |   |        |        |         |  |          |      |         |   |         |         |  |   |        |        |  |  |      



|(1) |  | Interest income on loans includes loan origination and other fees of $215 and $210 for the six months ended
June 30, 2003 and 2002.                                                                                                                                                             
|--- | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|(2) |  | Tax-exempt income is reflected on a fully tax equivalent basis utilizing a 34% rate.                                                                                                                                                                                                            
|   
|(3) |  | Non-accrual loans are included in average loans.                                                                                                                                                                                                                                                
|   
|(4) |  | Rate information was calculated on the average amortized cost for securities. The six months ended June 30, 2003
and 2002 average balance information includes an average unrealized gain (loss) for taxable securities of $1,828 and
($100) and for tax-advantaged securities of $285 and $217.

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NORTHERN STATES FINANCIAL CORPORATION

MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS

ASSET QUALITY AND THE PROVISION FOR LOAN AND LEASE LOSSES

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, found that a
$150,000 provision for loan and lease losses was necessary for the three months
ended June 30, 2003 compared to $75,000 for the same period of 2002. The
provision for loan and lease losses for the first half of 2003 was $280,000
compared to $150,000 last year.

At June 30, 2003, the allowance for loan and lease losses was $3,788,000
or 1.08% of loans and leases as compared $3,698,000 or 1.05% of loans and
leases at December 31, 2002. During the second quarter of 2003, $83,000 in
loans were charged off through the allowance compared to $63,000 during the
same period last year. There were $162,000 in recoveries of loans previously
charged off during the second quarter of 2003 compared to $2,000 in recoveries
during the same period in 2002. For the six months ended June 30, 2003,
$352,000 in loans were charged off compared to $313,000 for the same period
last year. Recoveries of loans previously charged off totaled $162,000 during
the first half of 2003 compared to $5,000 during the first six months of 2002.

Nonperforming loans and leases, which includes loans and leases on
nonaccrual status and loans and leases 90 days or more past due and in the
process of collection, were $16.8 million at June 30, 2003 or 4.78% of loans
and leases. Nonperforming loan and lease totals increased $2.7 million from
December 31, 2002 when nonperforming loan levels were $14.1 million or 4.00% of
loans and leases. The largest group of nonperforming loans and leases consists
of lease pools totaling $11.3 million that were placed on nonaccrual status at
June 30, 2002. The lease pools had been purchased from an investment-banking
house and are secured by equipment and carry surety bonds. The Company is in
the process of collecting, through legal proceedings, on these leases from the
insurance companies that issued the surety bonds. The Company also has
nonperforming loans totaling $3.0 million that are secured by motels. The
lodging industry has been especially hurt by the aftermath of 9/11 due to the
decline in travel. At June 30, 2003, the Company had loans for motels totaling
$42.9 million in its loan portfolio that are performing as agreed with the
exception of the $3.0 million discussed above. Nonaccrual loans and leases at
June 30, 2003 were $15.3 million increasing from $13.2 million at December 31,
2002.

Impaired loans and leases at June 30, 2003 were $15.3 million increasing
from $13.2 million at December 31, 2002. The Company considers a loan or lease
impaired if it is expected that full principal and interest will not be
collected under the contractual terms of the note. 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 and lease is collateral dependent. The amount of the allowance for loan
losses allocated for impaired loans and leases was $1,145,000 at June 30, 2003,
decreasing slightly from $1,307,000 at year-end because of impaired loans that
were charged-off during the first half of 2003. The portion of the allowance
allocated to the $11.3 million in impaired lease pools was $604,000 at June 30,
2003.

Management and the Board of Directors analyze 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

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NORTHERN STATES FINANCIAL CORPORATION

MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS

experience; current economic trends and conditions; review of the present value
of expected cash flows and fair value of collateral on impaired loans and
leases; growth; and other factors management deems appropriate. Based on
management and the Board of Directors analysis, the allowance for loan and
lease losses at June 30, 2003 is adequate to cover probable incurred credit
losses.

Another component of non-performing assets is other real estate owned that
consists of assets acquired through loan foreclosure and repossession. The
fair value of other real estate owned is reviewed by management at least
quarterly to assure the reasonableness of its carrying value, which is lower of
cost or the fair value less estimated selling costs. At June 30, 2003, other
real estate owned was $2.4 million increasing from $2.0 million at December 31,
2002. During the first half of 2003, the Company acquired, through
foreclosure, three properties that had been used to secure loans increasing
other real estate owned by $906,000. Two properties held as other real estate
owned were sold for $535,000 during the second quarter of 2003 and $29,000 in
gains were recognized from the sales.

One major piece of property reported as other real estate owned is carried
at the amount of $1,783,000 and was acquired by the Bank of Waukegan through
the receipt of a deed in lieu of foreclosure in 1987. The parcel consists of
approximately 525,000 square feet of land situated on Lake Michigan in
Waukegan, Illinois. During the fourth quarter of 2002, the Bank formed
Northern States Community Development Corporation (NSCDC), as a subsidiary of
the Bank. NSCDC assets consist of cash and this parcel of other real estate
owned. For financial accounting purposes the other real estate is consolidated
into the Bank and is reported as other real estate owned at the Company level.
This subsidiary was formed for the purpose of developing and selling this
parcel as part of the City of Waukegans lakefront development plans.
Proposals under discussion for use of this property include the building of a
minor league baseball park and condominiums.

NONINTEREST INCOME

Noninterest income for the three months ended June 30, 2003 was $1,086,000
as compared to $927,000 for the three months ended June 30, 2002, an increase
of $159,000. Service fees on deposits and mortgage banking income contributed
to the increase in noninterest income. Service fees on deposits increased by
$52,000 as compared to the same quarter last year because of increased
overdraft fee income due to the Companys overdraft program that honors
overdraft items on qualified retail customers up to $500. Mortgage banking
income increased in the second quarter of 2003 by $74,000 as lower home
mortgage rates caused the level of mortgage banking activity to increase and
has also caused fee percentages to increase. The Company originates mortgage
loans that are closed on behalf of other institutions that fund and own the
loans, with the Company receiving a fee. During the three months ended June
30, 2003, $7.0 million in these types of loan applications were processed and
closed by the mortgage banking area compared to $2.8 million during the same
period last year. Other operating income for the second quarter of 2003 was
$42,000 greater than the same quarter of 2002. There were gains of from the
sale of other real estate owned totaling $29,000 during the second quarter of
2003 compared to none last year while ATM fee income increased $21,000.

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NORTHERN STATES FINANCIAL CORPORATION

MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATION

For the six months ended June 30, 2003, noninterest income was $2,012,000,
an increase of $173,000 compared to the first six months of 2002. Service fees
on deposits and mortgage banking income were $88,000 and $108,000 greater
during the first half of 2003 compared to the same period last year. Service
fees on deposits increased due to greater overdraft fee income generated by the
Companys overdraft program that honors overdraft items on qualified customers.
Increased volumes of mortgage banking activity brought about by the low
mortgage rates contributed to the increased mortgage banking income during the
first half of 2003. Trust fee income during the first half of 2003 declined
$32,000 compared the first half of 2002. Much of trust fee income is tied to
the performance of stocks held in trusts and despite the rebounding of stock
prices in the second quarter of 2003, the lackluster performance of stocks
during the first quarter of 2003 caused year-to-date trust fee income to
decline.

NONINTEREST EXPENSES

Noninterest expenses for the quarter ended June 30, 2003 were $3,050,000,
increasing $233,000 from the same quarter last year. The Companys efficiency
ratio, noninterest expenses divided by the sum of net interest income and
noninterest income, was 55.67% for the second quarter of 2003 as compared to
46.30%
for the same quarter of 2002. Increases to legal fees, as discussed below,
primarily impacted noninterest expense and this ratio.

Increases in salary and employee benefit expenses of $29,000 occurred
during the second quarter of 2003 compared to the same period last year.
Regular salary expense was 2.7% or $34,000 greater during the second quarter of
2003 as the result of annual merit increases. Group insurance expense
increased $21,000 during the second quarter of 2003 compared to last year due
to increases to insurance premiums. Partially offsetting these increases,
compensation expense relating to stock appreciation rights were $33,000 less
during the three months ended June 30, 2003 than for the same three months last
year as all outstanding stock appreciation rights were exercised in 2002 and
they are presently not being awarded.

Data processing expense increased $27,000 during the three months ended
June 30, 2003 to $174,000 compared to $147,000 last year. ATM processing costs
were up for the quarter as the Company implemented its debit card.

Legal expenses increased $107,000 during the second quarter of 2003
compared to the same time period last year. The levels of nonperforming loans
and leases caused legal expenses to increase especially pertaining to the
nonperforming lease pools that totaled $11.3 million at June 30, 2003. It is
expected that litigation against the insurance companies that issued the surety
bonds on the lease pools will continue into 2004.

The Companys other operating expenses during the three months ended June
30, 2003 were $62,000 greater than during the same period of 2002. During the
second quarter of 2003 printing and supplies expense increased $27,000 from the
previous year as the Company printed brochures for its promotional checking
account product and disclosure forms were updated to comply with various
regulations. Other real estate owned expenses increased $13,000 during the
quarter as three properties were transferred into other real estate owned since
the beginning of 2003 and two properties were sold during the second quarter of
2003.

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NORTHERN STATES FINANCIAL CORPORATION

MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATION

For the first half of 2003 noninterest expenses were $6,002,000,
increasing $451,000 or 8.12% from the same period last year. The Companys
efficiency ratio, noninterest expenses divided by the sum of net interest
income and noninterest income, was 55.91% for the first six months of 2003 as
compared to 46.61% for the first six months of 2002. Legal fees, as discussed
below, primarily affected this ratio.

Increases in salary and employee benefit expenses of $87,000 occurred
during the first six months of 2003 compared to the same period last year.
Annual merit increases caused regular salary expense to increase 3.3% or
$83,000 during the first half of 2003 as compared to the first half of 2002.
Group insurance expense was $38,000 greater during the first half of 2003
compared to last year due to insurance premium increases. Compensation expense
relating to stock appreciation rights were $55,000 less during the six months
ended June 30, 2003 than for the same six months last year as all outstanding
stock appreciation rights were exercised in 2002 and are not presently being
awarded.

Occupancy expenses for the first six months of 2003 were $31,000 greater
than during the first six months of 2002. Real estate taxes on the Companys
properties have increased $15,000 during the first half of 2003 as tax bond
referendums were approved. Maintenance expenses increased $20,000 as the
Companys equipment has aged and requires more repairs.

Legal expenses increased $443,000 during the first half of 2003 compared
to the same time period last year. Much of the increase in legal expenses
pertains to the nonperforming lease pools that totaled $11.3 million at June
30, 2003 where the Company is in litigation against the insurance companies
that issued the surety bonds on the lease pools.

The Companys other operating expenses during the six months ended June
30, 2003 were $112,000 less than during the same period of 2002. At the end of
2002 the Company had made a contribution totaling $183,000. The Company
subsequently received information late in the first quarter of 2003 that
disallowed the contribution. The Company consequently reversed the
contribution expense in the first quarter of 2003 and the tax benefit related
to the contribution. Product development expense for the first half of 2003
increased $39,000 from the same period of 2002 as the Companys promotional
checking account product and overdraft program grew. During the first half of
2003 printing and supplies expense increased $20,000 from the previous year due
to the printing of brochures and disclosure forms. Other real estate owned
expenses increased $11,000 during the six months ended June 30, 2003 due to the
increases to the Companys other real estate owned portfolio.

FEDERAL AND STATE INCOME TAXES

For the three months ended June 30, 2003 and 2002, the Companys
provisions for federal and state income taxes were $777,000 and $1,098,000,
which as a percentage of pretax earnings was 34.1% and 34.4%. For the first
half of 2003 and 2002, the Companys provisions for federal and state income
taxes were $1,569,000 and $2,115,000, which as a percentage of pretax earnings
was 35.2% and 34.1%. The tax rate as a percentage of pretax earnings has
increased during the first half of 2003 as the result of the reversal during
the first quarter of 2003 of a tax benefit of $72,000. The $72,000 tax
benefit had been booked late in 2002 based on a contribution made at that time
but was disallowed during the first quarter of 2003. Income taxes as a
percentage of pretax earnings would have been 33.6% if the tax benefit reversal
had not taken place.

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NORTHERN STATES FINANCIAL CORPORATION

MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATION

RECENT ACCOUNTING PRONOUNCEMENTS

The Financial Accounting Standards Board (FASB) recently issued two new
accounting standards, Statement 149, Amendment of Statement 133 on Derivative
Instruments and Hedging Activities, and Statement 150, Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and Equities,
both of which generally become effective in the quarter beginning July 1, 2003.
Because the Company does not have these instruments or is only nominally
involved in these instruments, the new accounting standards will not materially
affect the Companys operating results or financial condition.




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 (IRR) is the exposure of a
banking organizations financial condition to adverse movements in interest
rates. Accepting this risk can be an important source of profitability and
stockholder value, however excessive levels of IRR can pose a significant
threat to the Companys earnings and capital base. Accordingly, effective risk
management that maintains IRR at prudent levels is essential to the Companys
safety and soundness.

Evaluating a financial institutions exposure to changes in interest rates
includes assessing both the adequacy of the management process used to control
IRR and the organizations quantitative level of exposure. When assessing the
IRR management process, the Company seeks to ensure that appropriate policies,
procedures, management information systems and internal controls are in place
to maintain IRR
at prudent levels with consistency and continuity. Evaluating the quantitative
level of IRR 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.

It is important that the board of directors and management oversee a
comprehensive risk-management process that effectively identifies, measures,
and controls IRR. One approach used by management is to minimize IRR is to
periodically shock the balance sheet by decreasing rates 2% and increasing
rates 2% using computer simulation to show the effect of rate changes on the
fair value of the Companys financial instruments. 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 an institution can manage IRR include: selling existing
assets or repaying certain liabilities; matching repricing periods for new
assets and liabilities for example, by shortening terms of new loans or
investments. Financial institutions are also subject to prepayment risk in
falling rate environments. For example, a debtor may prepay other financial
assets so that the debtor may refinance their 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 demand, while most of its assets may be
invested in long-term loans or investments. Accordingly, the Company seeks to
have in place sources of cash to meet short-term demands. Increasing deposits,
borrowing, or selling assets can obtain these funds.

The following Table 2, Effect of Interest Shocks on Financial Instruments
as of March 31, 2003 and December 31, 2002, shows how interest rate shocks of
decreasing rates 2% and increasing rates 2% effect

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NORTHERN STATES FINANCIAL CORPORATION

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

the fair value of the Companys financial instruments. The data shown in Table
2 is as of March 31, 2003 as it is the most current period available from the
computer simulation model. The computer simulation model used to do the
interest rate shocks and calculate the effect on the fair value of the
Companys financial instruments takes into consideration maturity and repricing
schedules of the various assets and liabilities. At March 31, 2003 the fair
value of securities available for sale increases $2.1 million when rates are
shocked downward 2% while the fair value decreases $7.5 million for a 2%

upwards rate shock. The change in fair value of securities is smaller when
rates are shocked down because there were call provisions on $115.9 million of
the U.S. Government agency securities at March 31, 2003. At March 31, 2003 the
fair value of the Companys financial asset instruments was $654.1 million
compared to the book or carrying value on the Companys financial asset
instruments at March 31, 2003 of $642.0 million.

TABLE 2
NORTHERN STATES FINANCIAL CORPORATION
EFFECT OF INTEREST SHOCKS ON FINANCIAL INSTRUMENTS
as of March 31, 2003 and December 31, 2002
($000s)

|                       |                                                                             |  |                              |         |         |  |       |         |  |  |   |         | 
|---------------------- | --------------------------------------------------------------------------- |  | ---------------------------- | ------- | ------- |  | ----- | ------- |  |  | - | ------- | 
|                       |                                                                             |  | Fair Value at March 31, 2003
|                       |                                                                             |  |                             
|                       |                                                                             |  | Down 2%                      |         | Current |  | Up 2%
|                       |                                                                             |  |                              |         |         |  |      
|Assets                 |                                                                             |  |                              |         |         |  |       |         |  |  |   |        
|                       | Cash and cash equivalents                                                   |  | $                            | 14,301  |         |  | $     | 14,300  |  |  | $ | 14,299  | 
|                       | Securities available for sale                                               |  |                              | 267,420 |         |  |       | 265,360 |  |  |   | 257,885 | 
|                       | Loans and leases                                                            |  |                              | 387,201 |         |  |       | 369,655 |  |  |   | 353,398 | 
|                       | Federal Home Loan Bank stock                                                |  |                              | 1,782   |         |  |       | 1,782   |  |  |   | 1,782   | 
|                       | Accrued interest receivable                                                 |  |                              | 3,002   |         |  |       | 3,002   |  |  |   | 3,002   | 
|Financial liabilities: |                                                                             |  |                              |         |         |  |       |         |  |  |   |        
|                       | Deposits                                                                    |  | $                            | 453,261 |         |  | $     | 450,137 |  |  | $ | 447,169 | 
|                       | Securities sold under repurchase agreements
and other short-term borrowings |  |                              | 112,891 |         |  |       | 112,212 |  |  |   | 111,542 | 
|                       | Federal Home Loan Bank term advances                                        |  |                              | 7,137   |         |  |       | 6,583   |  |  |   | 6,074   | 
|                       | Advances from borrowers for taxes and insurance                             |  |                              | 907     |         |  |       | 907     |  |  |   | 907     | 
|                       | Accrued interest payable                                                    |  |                              | 3,138   |         |  |       | 3,138   |  |  |   | 3,138   | 

|                       |                                                                             |  |                                 |         |         |  |       |         |  |  |   |         | 
|---------------------- | --------------------------------------------------------------------------- |  | ------------------------------- | ------- | ------- |  | ----- | ------- |  |  | - | ------- | 
|                       |                                                                             |  | Fair Value at December 31, 2002
|                       |                                                                             |  |                                
|                       |                                                                             |  | Down 2%                         |         | Current |  | Up 2%
|                       |                                                                             |  |                                 |         |         |  |      
|Assets                 |                                                                             |  |                                 |         |         |  |       |         |  |  |   |        
|                       | Cash and cash equivalents                                                   |  | $                               | 37,580  |         |  | $     | 37,578  |  |  | $ | 37,576  | 
|                       | Securities available for sale                                               |  |                                 | 238,968 |         |  |       | 236,898 |  |  |   | 230,683 | 
|                       | Loans and leases                                                            |  |                                 | 379,290 |         |  |       | 361,709 |  |  |   | 345,796 | 
|                       | Federal Home Loan Bank stock                                                |  |                                 | 1,734   |         |  |       | 1,734   |  |  |   | 1,734   | 
|                       | Accrued interest receivable                                                 |  |                                 | 2,951   |         |  |       | 2,951   |  |  |   | 2,951   | 
|Financial liabilities: |                                                                             |  |                                 |         |         |  |       |         |  |  |   |        
|                       | Deposits                                                                    |  | $                               | 454,566 |         |  | $     | 451,460 |  |  | $ | 448,508 | 
|                       | Securities sold under repurchase agreements
and other short-term borrowings |  |                                 | 97,437  |         |  |       | 97,192  |  |  |   | 96,948  | 
|                       | Federal Home Loan Bank term advances                                        |  |                                 | 7,102   |         |  |       | 6,523   |  |  |   | 5,995   | 
|                       | Advances from borrowers for taxes and insurance                             |  |                                 | 466     |         |  |       | 466     |  |  |   | 466     | 
|                       | Accrued interest payable                                                    |  |                                 | 3,407   |         |  |       | 3,407   |  |  |   | 3,407   | 

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NORTHERN STATES FINANCIAL CORPORATION




ITEM 4. DISCLOSURE CONTROLS AND PROCEDURES REPORT

Within the 90-day period prior to the filing of this report, an evaluation
was carried out under the supervision and with the participation of Northern
States Financial Corporations management, including our Chairman of the Board
and President and Vice President and Treasurer, of the effectiveness of our
disclosure controls and procedures (as defined in Rule 13a-14(c) and 15d-14(c)
under the Securities Exchange Act of 1934). Based on their evaluation, our
Chairman of the Board and President and Vice President and Treasurer have
concluded that the Companys disclosure controls and procedures are, to the
best of their knowledge, effective to ensure that information required to be
disclosed by Northern States Financial Corporation in reports that it files or
submits under the Exchange Act is recorded, processed, summarized and reported
within the time periods specified in Securities and Exchange Commission rules
and forms. Subsequent to the date of their evaluation, there were no
significant changes in Northern States Financial Corporations internal
controls or in other factors that could significantly affect these controls,
including any corrective actions with regard to significant deficiencies and
material weaknesses.




PART II. OTHER INFORMATION




ITEM 1. LEGAL PROCEEDINGS

Due to the nature of their business, the Company and its subsidiary are
often subject to various legal actions. These legal actions, whether pending
or threatened, arise through the normal course of business and are not
considered unusual or material, other than as discussed below.

Between November 2000 and August 2001, the Company purchased commercial
lease pools from Commercial Money Center, a now bankrupt equipment leasing
company. These lease pools, with outstanding balances of $11.3 million, are
secured by assignments of payment streams, underlying equipment and surety
bonds. These lease pools are included as impaired loans and leases at June 30,
2003. Upon default of these lease pools, the Company made demand for payment
from Illinois Union Insurance Company (IU) a wholly owned subsidiary of Ace
Limited Insurance Company (ACE) and RLI Insurance Company (RLI) under the
relevant surety bonds. IU, ACE and RLI (the Sureties) have failed to make
the payments required under the surety bonds. As a result, in April 2002, the
Company filed suit against each of the Sureties. The Companys complaints
allege that the Sureties are liable for payment due to the Company under the
terms of the bonds. ACE, IU and RLI are 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 Sureties 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.

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NORTHERN STATES FINANCIAL CORPORATION




ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS

None




ITEM 3. DEFAULTS UPON SENIOR SECURITIES

None




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

The annual meeting of stockholders of Northern States Financial
Corporation was held on April 24, 2003 with the stockholders of record at March
20, 2003 voting in person or by proxy, with one vote for each share owned, to
elect directors for a one year term each and to ratify Crowe Chizek and Company
LLC as independent auditors of the Company for the year ending December 31,
2003. There were 4,305,105 shares of stock as of March 20, 2003 that could be
voted. The following directors, Fred Abdula, Kenneth W. Balza, Jack H.
Blumberg, Frank Furlan, Harry S. Gaples, James A. Hollensteiner, Raymond M.
Mota, Helen Rumsa, Frank Ryskiewicz, Henry G. Tewes and Arthur J. Wagner, were
duly elected. Crowe Chizek and Company was ratified as the Companys
independent auditors for the year ending December 31, 2003 by a vote of
3,503,411 for ratification, 37 against, and 35,150 abstaining.




ITEM 5. OTHER INFORMATION

None




ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

Exhibit 31.1 Section 302 Certifications.

Exhibit 32.1 Section 906 Certification.

Form 8-K (Item 9) filed with the SEC on April 16, 2003.

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to sign on its behalf by the undersigned
hereunto duly authorized, on this 8th day of August 2003.

|                                      | 
|------------------------------------- | 
|NORTHERN STATES FINANCIAL CORPORATION | 
|(Registrant)                          | 

|                      |  |     |  |                             
|--------------------- |  | --- |  | ----------------------------
|Date:  August 8, 2003 |  | By: |  | /s/ Fred Abdula             
|                      |  |     | 
|                      |  |     |  | Fred Abdula                 
|                      |  |     |  | Chairman of the Board of    
|                      |  |     |  | Directors and President     
|                      |  |     |  |                             
|Date: August 8, 2003  |  | By: |  | /s/ Thomas M. Nemeth        
|                      |  |     | 
|                      |  |     |  | Thomas M. Nemeth            
|                      |  |     |  | Vice President and Treasurer

21