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United States
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549



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FORM 10-Q

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

For the quarterly period ending March 31, 2002

OR

|                |  |                                                                                          
|--------------- |  | -----------------------------------------------------------------------------------------
|OPEN BALLOT BOX |  | 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: |  | 

4,472,255 shares of common stock were outstanding
as of March 31, 2002



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TABLE OF CONTENTS



|                                                                                              |                                                       |  |  |  |  |  |  | 
|--------------------------------------------------------------------------------------------- | ----------------------------------------------------- |  |  |  |  |  |  | 
|PART I. FINANCIAL INFORMATION                                                                
|ITEM 1. FINANCIAL STATEMENTS                                                                 
|                                                                                              | INDEPENDENT ACCOUNTANTS REPORT                      
|                                                                                              | CONDENSED CONSOLIDATED FINANCIAL STATEMENTS AND NOTES
|ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
|ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK                          
|PART II. OTHER INFORMATION                                                                   
|ITEM 1. LEGAL PROCEEDS                                                                       
|ITEM 2. CHANGES IN SECURITIES AND USE 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                                                                                   



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NORTHERN STATES FINANCIAL CORPORATION AND SUBSIDIARY
FORM 10-Q
MARCH 31, 2002
INDEX

|                                |                                                                                                 |                                                       |  |             |   | 
|------------------------------- | ----------------------------------------------------------------------------------------------- | ----------------------------------------------------- |  | ----------- | - | 
|                                |                                                                                                 |                                                       |  | Page Number
|                                |                                                                                                 |                                                       |  |            
|PART I.   FINANCIAL INFORMATION |                                                                                                 |                                                       |  |            
|                               
|                                | Item 1.   Financial Statements                                                                  |                                                       |  |             |  
|                               
|                                |                                                                                                 | Independent Accountants Report                       |  |             | 2 | 
|                               
|                                |                                                                                                 | Condensed Consolidated Financial Statements and Notes |  |             | 3 | 
|                               
|                                | Item 2.   Managements Discussion and Analysis of Financial
Condition and Results of Operations |                                                       |  | 9           |  
|                               
|                                | Item 7A.   Quantitative and Qualitative Disclosures
About Market Risk                           |                                                       |  | 16          |  
|                               
|PART II.   OTHER INFORMATION    |                                                                                                 |                                                       |  |            
|                               
|                                | Item 1.   Legal Proceeds                                                                        |                                                       |  | 18          |  
|                               
|                                | Item 2.   Changes in Securities and Use Proceeds                                                |                                                       |  | 18          |  
|                               
|                                | Item 3.   Defaults upon Senior Securities                                                       |                                                       |  | 18          |  
|                               
|                                | Item 4.   Submission of Matters to a Vote of Security Holders                                   |                                                       |  | 18          |  
|                               
|                                | Item 5.   Other Information                                                                     |                                                       |  | 18          |  
|                               
|                                | Item 6.   Exhibits and Reports on Form 8-K                                                      |                                                       |  | 18          |  
|                               
|                                | Signatures                                                                                      |                                                       |  | 19          |  

1



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NORTHERN STATES FINANCIAL CORPORATION
FORM 10-Q
MARCH 31, 2002










INDEPENDENT ACCOUNTANTS REPORT

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 March 31, 2002 and the condensed
consolidated statements of income and cash flows for the three month periods
ended March 31, 2002 and 2001. 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 to
financial data and making inquiries of persons responsible for financial and
accounting matters. It is substantially less in scope than an audit conducted
in accordance with auditing standards generally accepted in the United States
of America, the objective of which is the expression of an opinion regarding
the financial statements taken as a whole. Accordingly, we do not express such
an opinion.

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

/s/ Crowe, Chizek and Company LLP

Oak Brook, Illinois
May 1, 2002

2



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NORTHERN STATES FINANCIAL CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
March 31, 2002 and December 31, 2001
(In thousands of dollars) (Unaudited)

|                                                                                   |                                 |                                            |         |           |         |   |              |         |         | 
|---------------------------------------------------------------------------------- | ------------------------------- | ------------------------------------------ | ------- | --------- | ------- | - | ------------ | ------- | ------- | 
|                                                                                   |                                 |                                            |         | March 31, |         |   | December 31, |        
|                                                                                   |                                 |                                            |         | 2002      |         |   | 2001         |        
|                                                                                   |                                 |                                            |         |           |         |   |              |        
|                                                                                   |                                 | Assets                                     |         |           |         |   |              |         |         | 
|Cash and due from banks                                                            |                                 | $                                          | 14,129  |           |         | $ | 18,172       |        
|Interest bearing deposits in financial institutions -
maturities less than 90 days |                                 |                                            | 192     |           |         |   | 143          |        
|Federal funds sold                                                                 |                                 |                                            | 9,000   |           |         |   | 16,000       |        
|                                                                                   |                                 |                                            |         |           |         |  
|                                                                                   | Total cash and cash equivalents |                                            |         | 23,321    |         |   |              | 34,315  |        
|Securities available for sale                                                      |                                 |                                            | 206,601 |           |         |   | 213,982      |        
|Loans and leases                                                                   |                                 |                                            | 327,724 |           |         |   | 326,680      |        
|Less: Allowance for loan losses                                                    |                                 |                                            | (3,650  | )         |         |   | (3,822       | )      
|                                                                                   |                                 |                                            |         |           |         |  
|                                                                                   | Loans, net                      |                                            |         | 324,074   |         |   |              | 322,858 |        
|Federal Home Loan Bank stock                                                       |                                 |                                            | 1,671   |           |         |   | 1,647        |        
|Office buildings and equipment, net                                                |                                 |                                            | 5,516   |           |         |   | 5,576        |        
|Other real estate owned                                                            |                                 |                                            | 2,022   |           |         |   | 2,022        |        
|Accrued interest receivable                                                        |                                 |                                            | 4,964   |           |         |   | 4,592        |        
|Other assets                                                                       |                                 |                                            | 2,805   |           |         |   | 2,246        |        
|                                                                                   |                                 |                                            |         |           |         |  
|                                                                                   | Total assets                    |                                            | $       | 570,974   |         |   | $            | 587,238 |        
|                                                                                   |                                 |                                            |         |           |         |  
|                                                                                  
|                                                                                   |                                 | Liabilities and Stockholders Equity       |         |           |         |   |              |         |         | 
|Liabilities                                                                        |                                 |                                            |         |           |         |   |              |        
|Deposits                                                                           |                                 |                                            |         |           |         |   |              |        
|                                                                                   | Demand  noninterest bearing    |                                            | $       | 47,640    |         |   | $            | 48,092  |        
|                                                                                   | NOW accounts                    |                                            |         | 42,386    |         |   |              | 45,971  |        
|                                                                                   | Money market accounts           |                                            |         | 50,137    |         |   |              | 50,200  |        
|                                                                                   | Savings                         |                                            |         | 47,229    |         |   |              | 44,571  |        
|                                                                                   | Time, $100,000 and over         |                                            |         | 121,330   |         |   |              | 128,305 |        
|                                                                                   | Time, under $100,000            |                                            |         | 85,991    |         |   |              | 89,893  |        
|                                                                                   |                                 |                                            |         |           |         |  
|                                                                                   |                                 | Total deposits                             |         |           | 394,713 |   |              |         | 407,032 | 
|Securities sold under repurchase agreements
and other short-term borrowings        |                                 |                                            | 86,401  |           |         |   | 86,170       |        
|Federal Home Loan Bank advances                                                    |                                 |                                            | 5,000   |           |         |   | 10,000       |        
|Advances from borrowers for taxes and insurance                                    |                                 |                                            | 869     |           |         |   | 743          |        
|Accrued interest payable and other liabilities                                     |                                 |                                            | 6,523   |           |         |   | 6,964        |        
|                                                                                   |                                 |                                            |         |           |         |  
|                                                                                   |                                 | Total liabilities                          |         |           | 493,506 |   |              |         | 510,909 | 
|Stockholders Equity                                                               |                                 |                                            |         |           |         |   |              |        
|Common stock                                                                       |                                 |                                            | 1,789   |           |         |   | 1,788        |        
|Additional paid-in capital                                                         |                                 |                                            | 11,584  |           |         |   | 11,551       |        
|Retained earnings                                                                  |                                 |                                            | 65,110  |           |         |   | 63,110       |        
|Accumulated other comprehensive loss, net                                          |                                 |                                            | (1,015  | )         |         |   | (120         | )      
|                                                                                   |                                 |                                            |         |           |         |  
|                                                                                   | Total stockholders equity      |                                            |         | 77,468    |         |   |              | 76,329  |        
|                                                                                   |                                 |                                            |         |           |         |  
|                                                                                   |                                 | Total liabilities and stockholders equity |         | $         | 570,974 |   |              | $       | 587,238 | 
|                                                                                   |                                 |                                            |         |           |         |  

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 months ended March 31, 2002 and 2001
(In thousands of dollars, except per share data) (Unaudited)

|                                                    |                                                     |                                |                           |       |                    |       |       |           |       |       | 
|--------------------------------------------------- | --------------------------------------------------- | ------------------------------ | ------------------------- | ----- | ------------------ | ----- | ----- | --------- | ----- | ----- | 
|                                                    |                                                     |                                |                           |       | Three months ended |      
|                                                    |                                                     |                                |                           |       |                    |      
|                                                    |                                                     |                                |                           |       | March 31,          |       |       | March 31, |      
|                                                    |                                                     |                                |                           |       | 2002               |       |       | 2001      |      
|                                                    |                                                     |                                |                           |       |                    |       |       |           |      
|Interest income                                     |                                                     |                                |                           |       |                    |       |       |          
|                                                    | Loans (including fee income)                        |                                | $                         | 5,430 |                    |       | $     | 6,680     |      
|                                                    | Securities                                          |                                |                           |       |                    |       |       |           |      
|                                                    |                                                     | Taxable                        |                           |       | 2,409              |       |       |           | 2,528 |      
|                                                    |                                                     | Exempt from federal income tax |                           |       | 122                |       |       |           | 169   |      
|                                                    | Interest bearing deposits in financial institutions |                                |                           | 1     |                    |       |       | 2         |      
|                                                    | Federal funds sold                                  |                                |                           | 49    |                    |       |       | 304       |      
|                                                    |                                                     |                                |                           |       |                    |      
|                                                    |                                                     |                                | Total interest income     |       |                    | 8,011 |       |           |       | 9,683 | 
|                                                    |                                                     |                                |                           |       |                    |      
|Interest expense                                    |                                                     |                                |                           |       |                    |       |       |          
|                                                    | Time deposits                                       |                                |                           | 1,924 |                    |       |       | 3,160     |      
|                                                    | Other deposits                                      |                                |                           | 504   |                    |       |       | 932       |      
|                                                    | Other borrowings                                    |                                |                           | 669   |                    |       |       | 1,245     |      
|                                                    |                                                     |                                |                           |       |                    |      
|                                                    |                                                     |                                | Total interest expense    |       |                    | 3,097 |       |           |       | 5,337 | 
|                                                    |                                                     |                                |                           |       |                    |      
|Net interest income                                 |                                                     |                                | 4,914                     |       |                    |       | 4,346 |          
|Provision for loan losses                           |                                                     |                                | 75                        |       |                    |       | 0     |          
|                                                    |                                                     |                                |                           |       |                    |      
|Net interest income after provision for
loan losses |                                                     |                                | 4,839                     |       |                    |       | 4,346 |          
|                                                    |                                                     |                                |                           |       |                    |      
|Noninterest income                                  |                                                     |                                |                           |       |                    |       |       |          
|                                                    | Service fees on deposits                            |                                |                           | 478   |                    |       |       | 340       |      
|                                                    | Trust income                                        |                                |                           | 180   |                    |       |       | 169       |      
|                                                    | Net gains on sales of securities                    |                                |                           | 8     |                    |       |       | 0         |      
|                                                    | Mortgage banking income                             |                                |                           | 86    |                    |       |       | 45        |      
|                                                    | Other operating income                              |                                |                           | 160   |                    |       |       | 157       |      
|                                                    |                                                     |                                |                           |       |                    |      
|                                                    |                                                     |                                | Total noninterest income  |       |                    | 912   |       |           |       | 711   | 
|                                                    |                                                     |                                |                           |       |                    |      
|Noninterest expense                                 |                                                     |                                |                           |       |                    |       |       |          
|                                                    | Salaries and employee benefits                      |                                |                           | 1,642 |                    |       |       | 1,515     |      
|                                                    | Occupancy and equipment, net                        |                                |                           | 347   |                    |       |       | 381       |      
|                                                    | Data processing                                     |                                |                           | 158   |                    |       |       | 132       |      
|                                                    | FDIC deposit insurance                              |                                |                           | 18    |                    |       |       | 17        |      
|                                                    | Other real estate owned                             |                                |                           | 9     |                    |       |       | 31        |      
|                                                    | Other operating expenses                            |                                |                           | 560   |                    |       |       | 555       |      
|                                                    |                                                     |                                |                           |       |                    |      
|                                                    |                                                     |                                | Total noninterest expense |       |                    | 2,734 |       |           |       | 2,631 | 
|                                                    |                                                     |                                |                           |       |                    |      
|Income before income taxes                          |                                                     |                                | 3,017                     |       |                    |       | 2,426 |          
|Provision for income taxes                          |                                                     |                                | 1,017                     |       |                    |       | 770   |          
|                                                    |                                                     |                                |                           |       |                    |      
|Net income                                          |                                                     | $                              | 2,000                     |       |                    | $     | 1,656 |          
|                                                    |                                                     |                                |                           |       |                    |      
|                                                   
|Basic earnings per share                            |                                                     | $                              | 0.45                      |       |                    | $     | 0.37  |          
|                                                   
|Diluted earnings per share                          |                                                     | $                              | 0.45                      |       |                    | $     | 0.37  |          
|                                                   
|Comprehensive income                                |                                                     | $                              | 1,105                     |       |                    | $     | 2,659 |          

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
Three months ended March 31, 2002 and 2001
(In thousands of dollars)(Unaudited)

|                                                 |                                                                            |                                                                     |                                                                             |                                    |         |                    |         |       |           |        |        |  
|------------------------------------------------ | -------------------------------------------------------------------------- | ------------------------------------------------------------------- | --------------------------------------------------------------------------- | ---------------------------------- | ------- | ------------------ | ------- | ----- | --------- | ------ | ------ | -
|                                                 |                                                                            |                                                                     |                                                                             |                                    |         | Three months ended |        
|                                                 |                                                                            |                                                                     |                                                                             |                                    |         |                    |        
|                                                 |                                                                            |                                                                     |                                                                             |                                    |         | March 31,          |         |       | March 31, |       
|                                                 |                                                                            |                                                                     |                                                                             |                                    |         | 2002               |         |       | 2001      |       
|                                                 |                                                                            |                                                                     |                                                                             |                                    |         |                    |         |       |           |       
|Cash flows from operating activities             |                                                                            |                                                                     |                                                                             |                                    |         |                    |         |      
|                                                 | Net income                                                                 |                                                                     | $                                                                           | 2,000                              |         |                    | $       | 1,656 |          
|                                                 | Adjustments to reconcile net income to net cash from
operating activities: |                                                                     |                                                                             |                                    |         |                    |         |       |          
|                                                 |                                                                            | Depreciation                                                        |                                                                             |                                    | 94      |                    |         |       | 115       |       
|                                                 |                                                                            | Net gains on sales of securities                                    |                                                                             |                                    | (8      | )                  |         |       | 0         |       
|                                                 |                                                                            | Federal Home Loan Bank dividends                                    |                                                                             |                                    | (24     | )                  |         |       | (31       | )     
|                                                 |                                                                            | Provision for loan losses                                           |                                                                             |                                    | 75      |                    |         |       | 0         |       
|                                                 |                                                                            | Deferred loan fees                                                  |                                                                             |                                    | 2       |                    |         |       | 12        |       
|                                                 |                                                                            | Amortization of mortgage servicing rights                           |                                                                             |                                    | 7       |                    |         |       | 11        |       
|                                                 |                                                                            | Net change in interest receivable                                   |                                                                             |                                    | (372    | )                  |         |       | 326       |       
|                                                 |                                                                            | Net change in interest payable                                      |                                                                             |                                    | (1,181  | )                  |         |       | 231       |       
|                                                 |                                                                            | Net change in other assets                                          |                                                                             |                                    | (1      | )                  |         |       | 11        |       
|                                                 |                                                                            | Net change in other liabilities                                     |                                                                             |                                    | 753     |                    |         |       | 483       |       
|                                                 |                                                                            |                                                                     |                                                                             |                                    |         |                   
|                                                 |                                                                            |                                                                     |                                                                             | Net cash from operating activities |         |                    | 1,345   |       |           |        | 2,814  |  
|                                                 |                                                                            |                                                                     |                                                                             |                                    |         |                   
|Cash flows from investing activities             |                                                                            |                                                                     |                                                                             |                                    |         |                    |         |      
|                                                 |                                                                            | Proceeds from maturities and calls of securities available for sale |                                                                             |                                    | 63,436  |                    |         |       | 103,518   |       
|                                                 |                                                                            | Proceeds from sales of securities available for sale                |                                                                             |                                    | 4,436   |                    |         |       | 0         |       
|                                                 |                                                                            | Purchases of securities available for sale                          |                                                                             |                                    | (61,943 | )                  |         |       | (87,359   | )     
|                                                 |                                                                            | Change in loans made to customers                                   |                                                                             |                                    | (1,263  | )                  |         |       | 1,425     |       
|                                                 |                                                                            | Property and equipment expenditures                                 |                                                                             |                                    | (34     | )                  |         |       | (27       | )     
|                                                 |                                                                            | Net change in direct lease financing                                |                                                                             |                                    | (30     | )                  |         |       | (2,371    | )     
|                                                 |                                                                            |                                                                     |                                                                             |                                    |         |                   
|                                                 |                                                                            |                                                                     |                                                                             | Net cash from investing activities |         |                    | 4,602   |       |           |        | 15,186 |  
|                                                 |                                                                            |                                                                     |                                                                             |                                    |         |                   
|Cash flows from financing activities             |                                                                            |                                                                     |                                                                             |                                    |         |                    |         |      
|                                                 |                                                                            | Net increase (decrease) in:                                         |                                                                             |                                    |         |                    |         |       |           |       
|                                                 |                                                                            |                                                                     | Deposits                                                                    |                                    |         | (12,319            | )       |       |           | (4,961 | )     
|                                                 |                                                                            |                                                                     | Securities sold under repurchase agreements
and other short-term borrowings |                                    |         | 231                |         |       |           | (211   | )     
|                                                 |                                                                            |                                                                     | Advances from borrowers for taxes and insurance                             |                                    |         | 126                |         |       |           | 188    |       
|                                                 |                                                                            | Federal Home Loan Bank advances                                     |                                                                             |                                    | 0       |                    |         |       | 10,000    |       
|                                                 |                                                                            | Repayment of Federal Home Loan Bank advances                        |                                                                             |                                    | (5,000  | )                  |         |       | (10,000   | )     
|                                                 |                                                                            | Net proceeds from exercise of stock options                         |                                                                             |                                    | 21      |                    |         |       | 8         |       
|                                                 |                                                                            |                                                                     |                                                                             |                                    |         |                   
|                                                 |                                                                            |                                                                     |                                                                             | Net cash from financing activities |         |                    | (16,941 | )     |           |        | (4,976 | )
|                                                 |                                                                            |                                                                     |                                                                             |                                    |         |                   
|Net change in cash and cash equivalents          |                                                                            |                                                                     | (10,994                                                                     | )                                  |         |                    | 13,024  |      
|Cash and cash equivalents at beginning of period |                                                                            |                                                                     | 34,315                                                                      |                                    |         |                    | 31,187  |      
|                                                 |                                                                            |                                                                     |                                                                             |                                    |         |                   
|Cash and cash equivalents at end of period       |                                                                            | $                                                                   | 23,321                                                                      |                                    |         | $                  | 44,211  |      
|                                                 |                                                                            |                                                                     |                                                                             |                                    |         |                   

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

March 31, 2002

(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 condensed consolidated balance sheets are as of March 31, 2002 and
December 31, 2001. The condensed consolidated statements of income and cash
flows are for the three months ended March 31, 2002 and 2001.

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, 2001, 2000 and 1999.

The results of operations for the three month period ended March 31, 2002,
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 is as follows:

|                                                          |  |                    |           |  |           |  |           | 
|--------------------------------------------------------- |  | ------------------ | --------- |  | --------- |  | --------- | 
|                                                          |  | Three months ended |          
|                                                          |  |                    |          
|                                                          |  | March 31,          |           |  | March 31, | 
|                                                          |  | 2002               |           |  | 2001      | 
|                                                          |  |                    |           |  |           | 
|Average outstanding common shares                         |  |                    | 4,472,255 |  |           |  | 4,461,755 | 
|Effect of stock options                                   |  |                    | 0         |  |           |  | 5,773     | 
|                                                          |  |                    |           |  |           | 
|Average outstanding shares for
diluted earnings per share |  |                    | 4,472,255 |  |           |  | 4,467,528 | 
|                                                          |  |                    |           |  |           | 

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NORTHERN STATES FINANCIAL CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2002

(Dollar amounts in thousands, except per share data)

(Unaudited)

Information related to stockholders equity was as follows:

|                              |  |           |           |  |              |   |           | 
|----------------------------- |  | --------- | --------- |  | ------------ | - | --------- | 
|                              |  | March 31, |           |  | December 31, |  
|                              |  | 2002      |           |  | 2001         |  
|                              |  |           |           |  |              |  
|Par value per share           |  | $         | 0.40      |  |              | $ | 0.40      | 
|Authorized shares             |  |           | 6,500,000 |  |              |   | 6,500,000 | 
|Issued and outstanding shares |  |           | 4,472,255 |  |              |   | 4,469,755 | 

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

At March 31, 2002 and December 31, 2001, the contract amount of the
Companys off-balance sheet commitments were as follows:

|                                                      |               |       |       |           |        |   |              |        |         | 
|----------------------------------------------------- | ------------- | ----- | ----- | --------- | ------ | - | ------------ | ------ | ------- | 
|                                                      |               |       |       | March 31, |        |   | December 31, |       
|                                                      |               |       |       | 2002      |        |   | 2001         |       
|                                                      |               |       |       |           |        |   |              |       
|Unused lines of credit and commitments to make loans: |               |       |       |           |        |   |              |       
|                                                      | Fixed rate    |       | $     | 9,847     |        |   | $            | 10,446 |        
|                                                      | Variable rate |       |       | 87,026    |        |   |              | 89,831 |        
|                                                      |               |       |       |           |        |  
|                                                      |               | Total |       | $         | 96,873 |   |              | $      | 100,277 | 
|                                                      |               |       |       |           |        |  
|Standby letters of credit                             |               | $     | 3,748 |           |        | $ | 4,730        |       

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.

The Company also has Community Reinvestment Act (CRA) investment
commitments outstanding of $1,000. The commitment is to be funded over seven
years.

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##### Table of Contents



NORTHERN STATES FINANCIAL CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2002

(Dollar amounts in thousands, except per share data)

(Unaudited)

Note 3  Other Comprehensive Income (Loss)

Other comprehensive income (loss) components and related taxes for the
three months ended March 31, 2002 and 2001 follows:

|                                                                   |                                   |  |                    |       |   |           |       |       | 
|------------------------------------------------------------------ | --------------------------------- |  | ------------------ | ----- | - | --------- | ----- | ----- | 
|                                                                   |                                   |  | Three months ended |      
|                                                                   |                                   |  |                    |      
|                                                                   |                                   |  | March 31,          |       |   | March 31, |      
|                                                                   |                                   |  | 2002               |       |   | 2001      |      
|                                                                   |                                   |  |                    |       |   |           |      
|Unrealized holding gains (losses)
on securities available for sale |                                   |  | ($1,452            | )     |   | $         | 1,639 |      
|Less reclassification adjustments
for gains recognized in income   |                                   |  | 8                  |       |   |           | 0     |      
|                                                                   |                                   |  |                    |       |   |          
|Net unrealized gains (losses)                                      |                                   |  | (1,460             | )     |   |           | 1,639 |      
|Tax effect                                                         |                                   |  | (565               | )     |   |           | 636   |      
|                                                                   |                                   |  |                    |       |   |          
|                                                                   | Other comprehensive income (loss) |  |                    | ($895 | ) |           | $     | 1,003 | 
|                                                                   |                                   |  |                    |       |   |          

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NORTHERN STATES FINANCIAL CORPORATION




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 March 31, 2002
and the consolidated results of operations for the three month period ended
March 31, 2002, compared to the same period of 2001. The purpose of this
discussion is to provide a better understanding of the condensed consolidated
financial statements and the operations of its subsidiary, the Bank of Waukegan
(the Bank). 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 March 31, 2002 to differ
materially from those expressed in any such forward-looking statements.

FINANCIAL CONDITION

The consolidated total assets for the Company were $571.0 million at March
31, 2002, decreasing $16.3 million from December 31, 2001. The decrease was
attributable to decreased deposit levels reflecting stiff local competition for
deposits, which reduced funding for asset growth.

The Company had federal funds sold amounting to $9 million at March 31,
2002 compared to $16 million at December 31, 2001 a decline of $7 million. The
Companys federal funds sold position has decreased during the past three
months as deposit levels declined.

The carrying value of the Companys securities available for sale was
$206.6 million at March 31, 2002 decreasing by $7.4 million from the previous
year-end. Securities during the three months ended March 31, 2002 declined as
fewer securities were purchased as securities matured or were called. The
statement of cash flows shows that $63.4 million in securities were called or
matured while only $61.9 million in securities were purchased. Sales of
securities also contributed to the decrease in the securities portfolio.
During the quarter the Company sold $4.4 million of securities available for
sale realizing net gains of $8,000. Most of the Companys mortgage-backed
securities, consisting of many small issues that were no longer cost effective
to administer, were sold. U.S. Government agency security with an amortized
cost of $1.0 million was also sold at a small gain. The funds derived from the
sale were used to purchase another agency security without call provisions that
earned a better yield. The market value of the securities also declined $1.5
million during the first quarter of 2002 due to fluctuations in interest rates.

The Companys loans and leases grew by $1.0 million to $313.8 million at
March 31, 2002 from December 31, 2001. The commercial loan portfolio decreased
$3.3 million from year-end. Real estate construction loans, however, increased
$4.5 million indicating seasonal growth in the local building industry. Real
estate mortgages decreased slightly by $1.4 million. The Companys home
equity loans increased by $1.9 million indicating the continued popularity of
this type of loan because of its tax advantages to the borrower. Installment
consumer loans decreased slightly from year-end by $.7 million and leases
remained unchanged.

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NORTHERN STATES FINANCIAL CORPORATION

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

During the first three months of 2002, deposits at the Company decreased
$12.3 million from December 31, 2001. Deposits from municipal and other public
entity depositors decreased $8.0 million from year-end. In part this decline
resulted from 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. The rest of the decrease in
deposits was from retail and commercial depositors and is attributable to stiff
competition, especially in rates offered on time deposits. Time deposits
decreased $10.9 million from year-end while combined demand-noninterest bearing
and NOW account balances declined $4.0 million. Despite declines in rates paid
on money market accounts, balances remained stable at March 31, 2002. Savings
deposits increased $2.6 million from year-end.

Securities sold under repurchase agreements and other short-term
borrowings at the Company remained stable from December 31, 2001 with balances
of $86.4 million at March 31, 2002. These funds mainly consist of securities
sold under repurchase agreement that are offered through an overnight
repurchase agreement product and a term product with maturities from 7 days to
one year. Repurchase agreements provide a source of funds to the Company that
do not increase reserve requirements with the Federal Reserve Bank or create an
expense relating to FDIC insurance and, therefore, are less costly to the
Company. At March 31, 2002 securities sold under repurchase agreements to
related parties totaled $50.9 million.

During the first quarter of 2002, the Company paid down $5.0 million on
Federal Home Loan Bank term advances lowering the balance at March 31, 2002 to
$5.0 million from $10.0 million at December 31, 2001.

Total stockholders equity increased $1,139,000 to $77,468,000 during the
three months ended March 31, 2002. The increase is the result of net income of
$2,000,000, less the adjustment in the valuation allowance for the market value
of securities available for sale, net of tax, of $895,000, plus $21,000 due to
the exercise of 2,500 stock options pursuant to the Omnibus Incentive Plan,
plus $13,000 derived from the tax benefit from the exercise of the 2,500 stock
options. As of March 31, 2002 no stock options remained outstanding.

On April 17, 2002, the Company announced that the Board of Directors had
approved a stock repurchase program that allows the Company to repurchase up to
200,000 shares in open market transactions. The repurchased stock will be held
as treasury stock and the Company expects that the repurchase program will
increase future earnings per share and return on average equity.

The tier 1 capital to average asset ratio at March 31, 2002 was 13.65% and
the total tier 2 capital to asset ratio, on a risk adjusted basis, amounted to
20.36%, exceeding the minimum required to be capitalized under prompt
corrective action regulations, which minimums are 5.00% and 10.00%. Book value
per share was $17.32 at March 31, 2002 as compared to $17.08 at December 31,
2001. On March 31, 2002, the Company and its subsidiary were in compliance
with all applicable regulatory capital requirements.

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##### Table of Contents



NORTHERN STATES FINANCIAL CORPORATION

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

RESULTS OF OPERATIONS

NET INCOME

The consolidated net income for the quarter ended March 31, 2002 was
$2,000,000, an increase of $344,000 or 20.8%, as compared to net income of
$1,656,000 for the same period the previous year. Basic and diluted earnings
per share for the first quarter of 2002 were $.45 compared to $.37 for the same
quarter last year. The annualized return on average assets was 1.39% for the
quarter, increasing from 1.24% for the quarter the previous year.

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, increased $568,000 to $4,914,000 during the three months
ended March 31, 2002, compared to the same three months in 2001. One of the
major factors affecting net interest income is interest rates. Interest rates
during the first quarter of 2002 were stable compared to the first quarter of
2001 when rates were declining. This is evidenced by the prime lending rate
that during the first quarter of 2002 remained unchanged at 4.75%. During the
first quarter of 2001, the prime rate began the period at 9.50% and declined
three times finally ending the quarter at 8.00%. The stabilization of interest
rates during the first quarter of 2002 allowed the Company to lower yields paid
on deposits and borrowings as time deposits matured and repriced at lower rates
while the rates earned on variable rate loans remained constant. The positive
effects of these developments on net interest income can be seen in Table 1,
Analysis of Average Balance and Tax Equivalent Rates for the Three Months
ended March 31, 2002 and 2001. Table 1 shows that the net yield on interest
earning assets increased to 3.65% during the first quarter of 2002 from 3.49%
for the same quarter last year.

Table 1 shows that during the first quarter of 2002 the rates on interest
earning assets were 5.92% compared to 7.68% during the first quarter of 2001, a
decrease of 176 basis points. Table 1 shows that yields paid on interest
bearing liabilities declined to a greater extent than rates earned on interest
earning assets. The yield on interest bearing liabilities was 243 basis points
lower in the first quarter of 2002 than 2001, dropping to 2.80% from 5.23%.
The average time deposit rate during the first quarter of 2002 was 3.64%
compared to 6.25% last year, a decrease of 261 basis points. Interest rates on
other borrowings during the first quarter of 2002 were 2.98% compared to 6.20%
last year, declining 322 basis points. Rates paid on NOW, Money Market and
Savings deposits were also less during the first quarter of 2002 as compared to
the same quarter last year.

Another factor affecting net interest income is the average balance of
interest earning assets and interest bearing liabilities. As shown in Table 1,
interest earning assets were $37.3 million greater during the first quarter of
2002 while interest bearing liabilities were only $34.4 million greater.
Generally, growth such as this has a positive impact on net interest income
since interest earning assets grew at a faster pace than interest bearing
liabilities.

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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 March 31, 2002 and 2001
($ 000s)

|                                     |                                                      |                                              |   |         |         |  |          |       |       |      |  |       |         |   |         |          |         |  |      |       |       |  |  |       |      |  
|------------------------------------ | ---------------------------------------------------- | -------------------------------------------- | - | ------- | ------- |  | -------- | ----- | ----- | ---- |  | ----- | ------- | - | ------- | -------- | ------- |  | ---- | ----- | ----- |  |  | ----- | ---- | -
|                                     |                                                      |                                              |   | 2002    |         |  | 2001     |      
|                                     |                                                      |                                              |   |         |         |  |          |      
|                                     |                                                      |                                              |   | Average |         |  |          |       |       |      |  |       |         |   | Average |          |         |  |      |       |       |  |  |      
|                                     |                                                      |                                              |   | Balance |         |  | Interest |       |       | Rate |  |       | Balance |   |         | Interest |         |  | Rate |      
|                                     |                                                      |                                              |   |         |         |  |          |       |       |      |  |       |         |   |         |          |         |  |      |      
|Assets                               |                                                      |                                              |   |         |         |  |          |       |       |      |  |       |         |   |         |          |         |  |      |       |       |  |  |      
|                                     | Loans (1)(2)(3)                                      |                                              | $ | 326,654 |         |  | $        | 5,443 |       |      |  | 6.67  | %       |   | $       | 305,802  |         |  | $    | 6,698 |       |  |  | 8.76  | %   
|                                     | Taxable securities (4)                               |                                              |   | 197,574 |         |  |          | 2,409 |       |      |  | 4.88  | %       |   |         | 167,508  |         |  |      | 2,528 |       |  |  | 6.04  | %   
|                                     | Tax-advantaged securities (2) (4)                    |                                              |   | 10,631  |         |  |          | 185   |       |      |  | 7.12  | %       |   |         | 14,157   |         |  |      | 257   |       |  |  | 7.33  | %   
|                                     | Interest bearing deposits in banks                   |                                              |   | 192     |         |  |          | 1     |       |      |  | 2.08  | %       |   |         | 155      |         |  |      | 2     |       |  |  | 5.16  | %   
|                                     | Federal funds sold                                   |                                              |   | 12,225  |         |  |          | 49    |       |      |  | 1.60  | %       |   |         | 22,390   |         |  |      | 304   |       |  |  | 5.43  | %   
|                                     |                                                      |                                              |   |         |         |  |          |       |       |      |  |       |         |   |         |          |         | 
|                                     |                                                      | Interest earning assets (4)                  |   |         | 547,276 |  |          |       | 8,087 |      |  |       | 5.92    | % |         |          | 510,012 |  |      |       | 9,789 |  |  |       | 7.68 | %
|                                     | Noninterest earning assets                           |                                              |   | 26,457  |         |  |          |       |       |      |  |       |         |   |         | 23,566   |         |  |      |       |       |  |  |       |     
|                                     |                                                      |                                              |   |         |         |  |          |       |       |      |  |       |         |   |         |          |         |  |      |       |       | 
|                                     |                                                      | Average assets                               |   | $       | 573,733 |  |          |       |       |      |  |       |         |   |         | $        | 533,578 |  |      |       |       |  |  |       |      |  
|                                     |                                                      |                                              |   |         |         |  |          |       |       |      |  |       |         |   |         |          |         |  |      |       |       | 
|Liabilities and stockholders equity |                                                      |                                              |   |         |         |  |          |       |       |      |  |       |         |   |         |          |         |  |      |       |       |  |  |      
|                                     | NOW deposits                                         |                                              | $ | 44,895  |         |  | $        | 106   |       |      |  | .94   | %       |   | $       | 44,784   |         |  | $    | 283   |       |  |  | 2.53  | %   
|                                     | Money market deposits                                |                                              |   | 50,766  |         |  |          | 230   |       |      |  | 1.81  | %       |   |         | 37,650   |         |  |      | 378   |       |  |  | 4.02  | %   
|                                     | Savings deposits                                     |                                              |   | 45,766  |         |  |          | 168   |       |      |  | 1.47  | %       |   |         | 43,297   |         |  |      | 271   |       |  |  | 2.50  | %   
|                                     | Time deposits                                        |                                              |   | 211,598 |         |  |          | 1,924 |       |      |  | 3.64  | %       |   |         | 202,246  |         |  |      | 3,160 |       |  |  | 6.25  | %   
|                                     | Other borrowings                                     |                                              |   | 89,704  |         |  |          | 669   |       |      |  | 2.98  | %       |   |         | 80,361   |         |  |      | 1,245 |       |  |  | 6.20  | %   
|                                     |                                                      |                                              |   |         |         |  |          |       |       |      |  |       |         |   |         |          |         | 
|                                     |                                                      | Total interest bearing liabilities           |   |         | 442,729 |  |          |       | 3,097 |      |  |       | 2.80    | % |         |          | 408,338 |  |      |       | 5,337 |  |  |       | 5.23 | %
|                                     |                                                      |                                              |   |         |         |  |          |       |       |      |  |       |         |   |         |          |         |  |      |      
|                                     | Demand deposits                                      |                                              |   | 46,366  |         |  |          |       |       |      |  |       |         |   |         | 42,179   |         |  |      |       |       |  |  |       |     
|                                     | Other noninterest earning liabilities                |                                              |   | 7,062   |         |  |          |       |       |      |  |       |         |   |         | 9,408    |         |  |      |       |       |  |  |       |     
|                                     | Stockholders equity                                 |                                              |   | 77,576  |         |  |          |       |       |      |  |       |         |   |         | 73,653   |         |  |      |       |       |  |  |       |     
|                                     |                                                      |                                              |   |         |         |  |          |       |       |      |  |       |         |   |         |          |         |  |      |       |       | 
|                                     |                                                      | Average liabilities and
Stockholders equity |   | $       | 573,733 |  |          |       |       |      |  |       |         |   |         | $        | 533,578 |  |      |       |       |  |  |       |      |  
|                                     |                                                      |                                              |   |         |         |  |          |       |       |      |  |       |         |   |         |          |         |  |      |       |       | 
|                                     | Net interest income                                  |                                              |   |         |         |  | $        | 4,990 |       |      |  |       |         |   |         |          |         |  | $    | 4,452 |       |  |  |       |     
|                                     |                                                      |                                              |   |         |         |  |          |       |       |      |  |       |         |   |         |          |         |  |      |       |       | 
|                                     | Net yield on interest earning assets (4)             |                                              |   |         |         |  |          |       |       |      |  | 3.65  | %       |   |         |          |         |  |      |       |       |  |  | 3.49  | %   
|                                     |                                                      |                                              |   |         |         |  |          |       |       |      |  |       |         |   |         |          |         |  |      |       |       | 
|                                     | Interest bearing liabilities
To earning assets ratio |                                              |   |         |         |  |          |       |       |      |  | 80.97 | %       |   |         |          |         |  |      |       |       |  |  | 80.08 | %   
|                                     |                                                      |                                              |   |         |         |  |          |       |       |      |  |       |         |   |         |          |         |  |      |       |       | 



|(1) - |  | Interest income on loans includes loan origination and other fees of $104 and $85 for the three months ended
March 31, 2002 and 2001.                                                                                                                                                        
|----- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|     
|(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 March 31, 2002
and 2001 average balance information includes an average unrealized gain (loss) for taxable securities of $235 and
($40) and for tax-advantaged securities $242 and $142.

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NORTHERN STATES FINANCIAL CORPORATION

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

Net interest income for the first quarter of 2002 was also greater than in
2001 due to the management decision during the first quarter last year to
consider loans to one creditor totaling $1.1 million as being impaired and
placing the loans on a nonaccrual status. This decision made it necessary to
reverse $70,000 of accrued interest income on the loans lowering net interest
income during the first quarter 2001 by that amount.

ASSET QUALITY AND THE PROVISION FOR LOAN LOSSES

Management, with the concurrence of the Board of Directors, after
carefully reviewing the adequacy of the allowance for loan losses and the
levels of nonperforming and impaired loans and leases, found that a $75,000
provision for loan losses was necessary for the three months ended March 31,
2002. During the three months ended March 31, 2001, the review of the adequacy
of the allowance for loan losses showed the allowance was adequate and no
provision for loan losses was made during the first quarter of 2001.

At March 31, 2002, the allowance for loan losses was $3,650,000 or 1.16%
of loans as compared to 1.22% of loans at December 31, 2001. During the first
quarter of 2002, $250,000 in loans were charged off through the allowance
compared to $604,000 during the same period last year. Recoveries of loans
previously charged off were $3,000 during the first quarter of 2002 compared to
$27,000 during the same period in 2001.

Nonperforming loans which includes nonaccrual loans and leases and loans
and leases 90 days or more past due and still accruing were $17.4 million at
March 31, 2002 or 5.31% of loans and leases. Nonperforming loan totals
remained unchanged from December 31, 2001 when nonperforming loan levels were
$17.4 million or 5.33% of loans and leases. During the first quarter of 2002,
payments were made bringing one loan totaling $10.6 million for real estate
development current that had previously been past due greater than 90 days at
year-end. However, lease pools totaling $11.3 million became greater than 90
days past due during the quarter ended March 31, 2002 and at quarter-end were
accounted for on the accrual basis. The leases had been purchased from an
investment-banking house and are secured by equipment and a surety bond. The
Company is in the process of collecting on these leases from the surety. Of
the total of $17.4 million in nonperforming loans, $4.6 million or 26.4% of the
nonperforming loans are secured by real estate. Impaired loans at March 31,
2002 were $2.6 million decreasing from $3.4 million at December 31, 2001. The
amount of the allowance for loan losses allocated for impaired loans was
$384,000 at March 31, 2002 decreasing from $585,000 from year-end because of
the charge-off related to impaired loans during the quarter.

Management and the Board of Directors analyze the adequacy of the
allowance for loan losses at least quarterly. Loans judged to be impaired,
loans with probable incurred loss exposure, loans that are no longer accruing
interest, and historical net loan loss percentages are reviewed in the analysis
of the allowance for loan losses. Based on management and the Board of
Directors analysis, the allowance for loan losses at March 31, 2002 is
adequate to cover probable incurred credit losses.

Other real estate owned, a non-performing asset, at March 31, 2002 was
$2,022,000 and remained unchanged from December 31, 2001. One piece of
property accounts for approximately 88 percent of the total of other real
estate owned. The property was acquired by the Bank through the receipt of a
deed

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NORTHERN STATES FINANCIAL CORPORATION

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

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
2001, a purchase agreement for the property that had been in effect since 1994
was allowed to expire by the buyer. The City of Waukegan has engaged the Urban
Land Institute (ULI) in developing a plan for the revitalization of the citys
lakefront that includes this property. The ULI is expected to release its plan
during 2002. In the meantime the Company is actively marketing the property.

NONINTEREST INCOME

Noninterest income for the three months ended March 31, 2002 was $912,000
as compared to $711,000 for the three months ended March 31, 2001, an increase
of $201,000. Service fees on deposits increased by $138,000 as compared to the
same quarter last year because of increased overdraft fee income and monthly
service charges on demand and NOW accounts. During 2002, the Company increased
the fee assessed for overdraft items by 25% that contributed to overdraft fee
income increasing $81,000 from last year. In February 2002, the Company began
an overdraft program that honors overdraft items on qualified retail customers
up to $500. The Company expects that this program will contribute to increased
overdraft fee income in the coming months. Monthly service fees on retail
demand and NOW accounts increased during April 2001 and contributed to a
$31,000 increase in these fees during the first quarter 2002 compared to the
same quarter last year. Commercial checking account service charges increased
$30,000 during the first quarter of 2002 as the earning credits used to offset
the expense of the commercial account transactions was lower due to decreased
U.S. Treasury bill rates.

Mortgage banking income increased by $41,000 as lower home mortgage rates
caused the level of mortgage banking activity to increase. During the first
three months of 2002, $5.8 million in table funded loan applications were
processed and disbursed by the mortgage banking area compared to $2.3 million
during the same period last year. Net gains of $8,000 were realized during the
first quarter of 2002 from the sales of securities.

NONINTEREST EXPENSES

Noninterest expenses for the quarter ended March 31, 2002 were $2,734,000
increasing $103,000 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 46.93% for the first quarter of 2002 as compared to
52.03% for the same quarter of 2001. The efficiency ratio is frequently used
as an indicator as to how well a financial institution manages its noninterest
expenses with a decreasing ratio showing increased performance.

Increases in salary and employee benefit expenses of $127,000 occurred
during the first quarter of 2002 compared to the same period last year.
Regular salary expense was 5.4% or $64,000 greater during the first quarter of
2002 as the result of annual merit increases. Compensation expense relating to
stock appreciation rights were $43,000 more during the three months ended March
31, 2002 than for the same three months last year due to increases in the price
of the Companys stock. Group insurance expense increased $11,000 during the
first quarter of 2002 compared to last year due to changes to the insurance
carrier and coverage.

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NORTHERN STATES FINANCIAL CORPORATION

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

Occupancy expenses for the first quarter of 2002 were $347,000, which were
$34,000 less than during the first quarter of 2001. Depreciation expense
declined $20,000 during the three months ended March 31, 2002 compared to the
same period last year as older equipment became fully depreciated. Utility
expenses were $12,000 less than last year as the 2002 winter had been mild and
utility rates were lower than in 2001.

Data processing expense increased $26,000 during the three months ended
March 31, 2002 to $158,000 compared to $132,000 last year. The increased data
processing expense is attributable to implementation processing costs of the
Companys overdraft program.

Other real estate owned expenses decreased during the first quarter of
2002 by $22,000 to $9,000. This decrease was due to decreased utility rates on
the properties as well as decreased real estate taxes.

FEDERAL AND STATE INCOME TAXES

For the three months ended March 31, 2002 and 2001, the Companys
provisions for federal and state income taxes were $1,017,000 and $770,000,
which as a percentage of pretax earnings was 33.7% and 31.7%. The tax rate as a
percentage of pretax earnings has increased as the result of the decline in
interest earned on qualified state and local subdivision securities as the
balances on these securities have decreased. It is expected that this trend
will continue as the Company is finding it more difficult to purchase enough
bank qualified tax-exempt issues to replace issues of this kind that are
called or mature.

RECENT ACCOUNTING PRONOUNCEMENTS

The Financial Accounting Standards Board (FASB), in July 2001, issued SFAS
142, Goodwill and Other Intangible Assets, that requires goodwill to no
longer be amortized to earnings, but instead be reviewed for impairment. The
amortization of goodwill by the Company ceased upon adoption of the Statement,
which became effective at January 1, 2002. This pronouncement has not had a
material effect on the Companys financial statements.

Effective January 1, 2003, SFAS 143, Accounting for Asset Retirement
Obligations, will apply. The statement requires that the fair value of a
liability for an asset retirement obligation be recognized in the period
incurred. The effect of this statement on the financial position and
operations of the Company will not have a material effect.

The Company adopted SFAS 144, Accounting for the Impairment or Disposal
of Long-Lived Assets on January 1, 2002. The statement requires that the
Company recognize an impairment loss on long-lived assets when the carrying
amount is not recoverable and the measurement of the impairment loss is the
difference between the carrying amount and the fair value of the asset. This
pronouncement did not have a material effect on the Companys financial
statements.

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NORTHERN STATES FINANCIAL CORPORATION




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 December 31, 2001 and December 31, 2000, shows how interest rate shocks
of decreasing rates 2% and increasing rates 2% effect the fair value of the
Companys financial instruments. The data shown in Table 2 is as of December
31, 2001 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 December 31, 2001 the fair value of
securities available for sale increases $4.8 million when rates are shocked
downward 2% while the fair value decreases $12.1 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 $182.2 million of the U.S.
Government agency securities at December 31, 2001. At December 31, 2001 the
fair value of the Companys financial asset instruments was $588.0 million
compared to the book or carrying value on the Companys financial asset
instruments at December 31, 2001 of $587.2 million.

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NORTHERN STATES FINANCIAL CORPORATION

QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK

TABLE 2

NORTHERN STATES FINANCIAL CORPORATION
EFFECT OF INTEREST RATE SHOCKS ON FINANCIAL INSTRUMENTS
($ 000s)

|                      |                                                                             |  |                                 |         |  |         |   |         |       |  |   |         | 
|--------------------- | --------------------------------------------------------------------------- |  | ------------------------------- | ------- |  | ------- | - | ------- | ----- |  | - | ------- | 
|                      |                                                                             |  | Fair Value at December 31, 2001 |        
|                      |                                                                             |  |                                 |        
|                      |                                                                             |  | Down 2%                         |         |  | Current |   |         | Up 2% | 
|                      |                                                                             |  |                                 |         |  |         |   |         |       | 
|Assets                |                                                                             |  |                                 |         |  |         |   |         |       |  |   |        
|                      | Cash and cash equivalents                                                   |  | $                               | 34,317  |  |         | $ | 34,315  |       |  | $ | 34,313  | 
|                      | Securities available for sale                                               |  |                                 | 218,779 |  |         |   | 213,982 |       |  |   | 201,848 | 
|                      | Federal Home Loan Bank stock                                                |  |                                 | 1,647   |  |         |   | 1,647   |       |  |   | 1,647   | 
|                      | Loans                                                                       |  |                                 | 320,054 |  |         |   | 318,046 |       |  |   | 296,882 | 
|                      | Direct lease financing                                                      |  |                                 | 16,387  |  |         |   | 15,419  |       |  |   | 14,549  | 
|                      | Accrued interest receivable                                                 |  |                                 | 4,592   |  |         |   | 4,592   |       |  |   | 4,592   | 
|                     
|Financial Liabilities |                                                                             |  |                                 |         |  |         |   |         |       |  |   |        
|                      | Deposits                                                                    |  | $                               | 428,176 |  |         | $ | 409,012 |       |  | $ | 402,148 | 
|                      | Securities sold under repurchase agreements
and other short-term borrowings |  |                                 | 87,008  |  |         |   | 86,246  |       |  |   | 85,502  | 
|                      | Federal Home Loan Bank term advances                                        |  |                                 | 10,088  |  |         |   | 10,000  |       |  |   | 9,914   | 
|                      | Advances from borrowers for taxes and insurance                             |  |                                 | 743     |  |         |   | 743     |       |  |   | 743     | 
|                      | Accrued interest payable                                                    |  |                                 | 4,916   |  |         |   | 4,916   |       |  |   | 4,916   | 

|                      |                                                                             |  |                                 |         |  |         |   |         |       |  |   |         | 
|--------------------- | --------------------------------------------------------------------------- |  | ------------------------------- | ------- |  | ------- | - | ------- | ----- |  | - | ------- | 
|                      |                                                                             |  | Fair Value at December 31, 2000 |        
|                      |                                                                             |  |                                 |        
|                      |                                                                             |  | Down 2%                         |         |  | Current |   |         | Up 2% | 
|                      |                                                                             |  |                                 |         |  |         |   |         |       | 
|Assets                |                                                                             |  |                                 |         |  |         |   |         |       |  |   |        
|                      | Cash and cash equivalents                                                   |  | $                               | 31,189  |  |         | $ | 31,187  |       |  | $ | 31,185  | 
|                      | Securities available for sale                                               |  |                                 | 191,712 |  |         |   | 188,512 |       |  |   | 180,456 | 
|                      | Federal Home Loan Bank stock                                                |  |                                 | 1,538   |  |         |   | 1,538   |       |  |   | 1,538   | 
|                      | Loans                                                                       |  |                                 | 313,509 |  |         |   | 303,309 |       |  |   | 293,677 | 
|                      | Direct lease financing                                                      |  |                                 | 8,284   |  |         |   | 7,871   |       |  |   | 7,499   | 
|                      | Accrued interest receivable                                                 |  |                                 | 4,816   |  |         |   | 4,816   |       |  |   | 4,816   | 
|                     
|Financial Liabilities |                                                                             |  |                                 |         |  |         |   |         |       |  |   |        
|                      | Deposits                                                                    |  | $                               | 383,023 |  |         | $ | 374,677 |       |  | $ | 367,758 | 
|                      | Securities sold under repurchase agreements
and other short-term borrowings |  |                                 | 74,467  |  |         |   | 73,618  |       |  |   | 72,787  | 
|                      | Federal Home Loan Bank term advances                                        |  |                                 | 10,001  |  |         |   | 10,000  |       |  |   | 9,999   | 
|                      | Advances from borrowers for taxes and insurance                             |  |                                 | 816     |  |         |   | 816     |       |  |   | 816     | 
|                      | Accrued interest payable                                                    |  |                                 | 6,208   |  |         |   | 6,208   |       |  |   | 6,208   | 

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NORTHERN STATES FINANCIAL CORPORATION







ITEM 1. LEGAL PROCEEDINGS

The Company and its subsidiary are involved as plaintiff or defendant in
various legal actions arising in the formal course of their business. While
the ultimate outcome of the various legal proceedings involving the Company and
its subsidiary cannot be predicted with certainty, it is the opinion of
management, after consultation with counsel, that the resolution of these legal
actions should not have a material effect on the Companys consolidated
financial position or results of operations.




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

None




ITEM 5. OTHER INFORMATION

None




ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

On April 17, 2002 a Form 8-K was filed with the SEC under Item 5 regarding
the announcement that the Northern States Financial Corporations Board of
Directors 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.

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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 14th day of May 2002.



|                                                                                          |              |  |     |                                                              | 
|----------------------------------------------------------------------------------------- | ------------ |  | --- | ------------------------------------------------------------ | 
|NORTHERN STATES FINANCIAL CORPORATION
             
             
           (Registrant)
|                                                                                         
|                                                                                         
|Date:                                                                                     | May 14, 2002 |  | By: | /s/ Fred Abdula                                             
|                                                                                          |              |  |     | Fred Abdula
Chairman of the Board of
Directors and President
|                                                                                         
|Date:                                                                                     | May 14, 2002 |  | By: | /s/ Thomas M. Nemeth                                        
|                                                                                          |              |  |     | Thomas M. Nemeth
Vice President and Treasurer               

19