<PAGE>
                                  UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

                                    FORM 10-Q
(Mark One)

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

         For the quarterly period ended JUNE 30, 2004

[   ]    TRANSITION REPORT PURSUANT TO 13 or 15(d) OF THE SECURITIES EXCHANGE
         ACT OF 1934

         For the transition period from ____________ to ____________


                        Commission file number 000-25287

                           TOWER FINANCIAL CORPORATION
--------------------------------------------------------------------------------
             (Exact name of Registrant as specified in its charter)


            INDIANA                                    35-2051170
            -------                                    ----------
(State or other jurisdiction of                     (I.R.S. Employer
 incorporation or organization)                    Identification No.)


                116 East Berry Street, Fort Wayne, Indiana 46802
                    (Address of principal executive offices)


                                 (260) 427-7000
--------------------------------------------------------------------------------
                         (Registrant's telephone number)

     Indicate by check whether the Registrant (1) filed all reports required to
     be filed by Section 13 or 15(d) of the Exchange Act of 1934 during the
     preceding 12 months (or for such shorter period that the registrant
     was required to file such reports), and (2) has been subject to
     such filing requirements for the past 90 days.
                                Yes [ X ] No [  ]


        Indicate by check whether the Registrant is an accelerated filer
        (as defined in Rule 12b-2 of the Exchange Act). Yes [  ] No [ X ]


  Number of shares of the issuer's common stock, without par value, outstanding
                         as of July 30, 2004: 3,944,394.



                                       1
<PAGE>

                                      INDEX

<TABLE>
<S>                                                                                                    <C>
PART I.   FINANCIAL INFORMATION

             Item 1.  Financial Statements                                                             page no.

                      Consolidated Condensed Balance Sheets at
                      June 30, 2004 (unaudited) and December 31, 2003 ..............................      3

                      Consolidated Condensed Statements of Operations for the three and
                      six months ended June 30, 2004 and June 30, 2003 (unaudited) .................      4

                      Consolidated Condensed Statements of Comprehensive Income for the three
                      and six months ended June 30, 2004 and June 30, 2003 (unaudited) .............      5

                      Consolidated Condensed Statements of Changes in Stockholders' Equity for
                      the six months ended June 30, 2004 and June 30, 2003 (unaudited) .............      6

                      Consolidated Condensed Statements of Cash Flows for the six months ended
                      June 30, 2004 and June 30, 2003 (unaudited) ..................................      7

                      Notes to Consolidated Condensed Financial Statements..........................      8

             Item 2.  Management's Discussion and Analysis of Financial Condition and
                      Results of Operations.........................................................      10

             Item 3.  Quantitative and Qualitative Disclosures About Market Risk....................      19

             Item 4.  Controls and Procedures.......................................................      21


PART II.   OTHER INFORMATION

             Item 1.  Legal Proceedings.............................................................      22

             Item 4.  Submission of Matters to a Vote of Security Holders...........................      22

             Item 6.  Exhibits and Reports on Form 8-K..............................................      22


SIGNATURES..........................................................................................      23
</TABLE>



                                       2
<PAGE>

                          PART I. FINANCIAL INFORMATION

ITEM 1.  FINANCIAL STATEMENTS

TOWER FINANCIAL CORPORATION
CONSOLIDATED CONDENSED BALANCE SHEETS
At June 30, 2004 and December 31, 2003

<TABLE>
<CAPTION>
                                                                        (unaudited)
                                                                          JUNE 30,            DECEMBER 31,
                                                                            2004                  2003
----------------------------------------------------------------------------------------------------------
<S>                                                                    <C>                   <C>
ASSETS
Cash and due from banks                                                $  14,148,278         $  12,708,817
Short-term investments and interest-earning deposits                      10,261,047             4,017,755
Federal funds sold                                                        19,742,266            11,115,643
                                                                       -------------         -------------
       Total cash and cash equivalents                                    44,151,591            27,842,215
Securities available for sale, at fair value                              40,169,535            24,324,935
FHLB and FRB stock                                                         2,361,700             2,332,500
Loans                                                                    381,689,715           376,838,578
Allowance for loan losses                                                 (5,180,796)           (5,259,273)
                                                                       -------------         -------------
       Net loans                                                         376,508,919           371,579,305
Premises and equipment, net                                                3,195,711             2,932,580
Accrued interest receivable                                                1,604,843             1,289,370
Other assets                                                               5,623,444             6,168,085
                                                                       -------------         -------------

       Total assets                                                    $ 473,615,743         $ 436,468,990
                                                                       =============         =============

LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Deposits:
   Noninterest-bearing                                                 $  61,381,105         $  62,638,230
   Interest-bearing                                                      338,830,655           300,238,538
                                                                       -------------         -------------
       Total deposits                                                    400,211,760           362,876,768
Short-term borrowings                                                        200,000             1,060,000
Federal Home Loan Bank (FHLB) advances                                    27,000,000            27,000,000
Junior subordinated debt                                                   3,608,000             3,608,000
Accrued interest payable                                                     446,734               278,964
Other liabilities                                                            883,268               736,609
                                                                       -------------         -------------

       Total liabilities                                                 432,349,762           395,560,341

STOCKHOLDERS' EQUITY
Preferred stock, no par value, 4,000,000 shares authorized;
   no shares issued and outstanding
Common stock and paid-in-capital, no par value, 6,000,000
   shares authorized; 3,944,394 shares issued and outstanding
   at June 30, 2004 and 3,942,519 shares issued and
   outstanding at December 31, 2003                                       37,347,861            37,322,694
Retained earnings                                                          4,495,718             3,560,844
Accumulated other comprehensive income (loss), net of tax of
   $(385,065) at June 30, 2004 and $16,741 at December 31, 2003             (577,598)               25,111
                                                                       -------------         -------------
       Total stockholders' equity                                         41,265,981            40,908,649
                                                                       -------------         -------------

       Total liabilities and stockholders' equity                      $ 473,615,743         $ 436,468,990
                                                                       =============         =============
</TABLE>


      The following notes are an integral part of the financial statements.

                                       3
<PAGE>

TOWER FINANCIAL CORPORATION
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
For the three and six months ended June 30, 2004 and 2003

<TABLE>
<CAPTION>
                                                  (unaudited)                  (unaudited)
                                               THREE MONTHS ENDED            SIX MONTHS ENDED
                                                    JUNE 30,                     JUNE 30,
                                           -------------------------     -------------------------
                                              2004           2003           2004           2003
                                           ----------     ----------     ----------     ----------
<S>                                        <C>            <C>            <C>            <C>
INTEREST INCOME:
      Loans, including fees                $4,494,231     $4,268,756     $8,937,882     $8,401,182
      Securities - taxable                    243,623         88,347        429,984        174,176
      Securities - tax exempt                 124,807         24,794        214,089         41,504
      Other interest income                    41,979         55,663         71,907         97,639
                                           ----------     ----------     ----------     ----------
           Total interest income            4,904,640      4,437,560      9,653,862      8,714,501
INTEREST EXPENSE:
      Deposits                              1,356,259      1,359,442      2,587,479      2,690,188
      Short-term borrowings                       485         26,488          4,131         29,457
      FHLB advances                           176,830        116,985        340,561        261,045
      Junior subordinated debt                 81,180         79,335        162,360        158,670
                                           ----------     ----------     ----------     ----------
           Total interest expense           1,614,754      1,582,250      3,094,531      3,139,360
                                           ----------     ----------     ----------     ----------
Net interest income                         3,289,886      2,855,310      6,559,331      5,575,141
PROVISION FOR LOAN LOSSES                     310,000        690,000        810,000      1,535,000
                                           ----------     ----------     ----------     ----------
Net interest income after provision
   for loan losses                          2,979,886      2,165,310      5,749,331      4,040,141
NONINTEREST INCOME:
      Trust fees                              411,501        337,384        818,333        693,344
      Service charges                         147,520        159,508        305,879        308,795
      Loan broker fees                         82,651        284,291        170,415        484,936
      Net gain on sale of securities              376              -          3,286        190,766
      Other fees                              173,940        151,101        306,509        289,880
                                           ----------     ----------     ----------     ----------
           Total noninterest income           815,988        932,284      1,604,422      1,967,721
NONINTEREST EXPENSE:
      Salaries and benefits                 1,701,328      1,332,750      3,233,025      2,604,465
      Occupancy and equipment                 412,129        302,285        748,794        606,063
      Marketing                               111,891        158,126        300,541        211,056
      Data processing                         102,262         83,524        190,780        172,403
      Loan and professional costs             327,355        157,426        568,102        327,083
      Office supplies and postage              67,086         67,113        159,336        137,939
      Courier services                         78,670         68,451        149,847        136,285
      Business development                     78,955         65,060        154,085        146,493
      Other expense                           235,532        175,668        417,489        694,213
                                           ----------     ----------     ----------     ----------
           Total noninterest expense        3,115,208      2,410,403      5,921,999      5,036,000
                                           ----------     ----------     ----------     ----------
INCOME BEFORE INCOME TAXES                    680,666        687,191      1,431,754        971,862
Income taxes expense                          226,230        257,470        496,880        356,670
                                           ----------     ----------     ----------     ----------
NET INCOME                                 $  454,436     $  429,721     $  934,874     $  615,192
                                           ==========     ==========     ==========     ==========

BASIC EARNINGS PER COMMON SHARE            $     0.12     $     0.11     $     0.24     $     0.16
DILUTED EARNINGS PER COMMON SHARE          $     0.11     $     0.11     $     0.23     $     0.15
Average common shares outstanding           3,944,394      3,932,194      3,943,953      3,931,759
Average common shares and dilutive
   potential common shares outstanding      4,017,018      3,969,399      4,031,425      4,007,177
</TABLE>

      The following notes are an integral part of the financial statements


                                       4
<PAGE>

TOWER FINANCIAL CORPORATION
CONSOLIDATED CONDENSED STATEMENTS OF COMPREHENSIVE INCOME
For the three and six months ended June 30, 2004 and 2003

<TABLE>
<CAPTION>
                                                                  (unaudited)                           (unaudited)
                                                               THREE MONTHS ENDED                    SIX MONTHS ENDED
                                                                    JUNE 30,                              JUNE 30,
                                                    -------------------------------------------------------------------------
                                                             2004              2003               2004               2003
---------------------------------------------------------------------------------------    ----------------------------------
<S>                                                 <C>                     <C>            <C>                    <C>
Net income                                                $  454,436         $ 429,721          $ 934,874          $ 615,192

Other comprehensive income (loss):
Change in net unrealized appreciation
   (depreciation) on securities available for
   sale, net of tax of $(541,232) and $6,135 for
   the three months ended June 30, 2004
   and 2003 and $(401,806) and $(93,380) for
   the six months ended June 30, 2004
   and 2003.                                                (811,849)            9,205           (602,709)          (140,071)
                                                        -------------------------------    ----------------------------------

COMPREHENSIVE INCOME                                      $ (357,413)        $ 438,926          $ 332,165          $ 475,121
                                                        ===============================    ==================================
</TABLE>



      The following notes are an integral part of the financial statements.



                                       5
<PAGE>

TOWER FINANCIAL CORPORATION
CONSOLIDATED CONDENSED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
For the six months ended June 30, 2004 and 2003
(unaudited)

<TABLE>
<CAPTION>
                                                              COMMON                                ACCUMULATED
                                                             STOCK AND                                 OTHER
                                                              PAID-IN            RETAINED          COMPREHENSIVE
                                                              CAPITAL            EARNINGS           INCOME (LOSS)       TOTAL
---------------------------------------------------------------------------------------------------------------------------------
<S>                                                      <C>                  <C>                  <C>             <C>
BALANCE, JANUARY 1, 2003                                    $ 37,190,692       $ 1,760,778            $ 223,393     $ 39,174,863

Net income for 2003                                                                615,192                               615,192

Issuance of 1,010 shares of common
    stock for stock options exercised                             11,850                                                  11,850
Change in net unrealized
   appreciation (depreciation)
   on securities available
   for sale, net of tax of $(93,380)                                                                   (140,071)        (140,071)
                                                         ------------------------------------------------------------------------

BALANCE, JUNE 30, 2003                                      $ 37,202,542       $ 2,375,970            $  83,322     $ 39,661,834
                                                         ========================================================================



BALANCE, JANUARY 1, 2004                                    $ 37,322,694       $ 3,560,844            $  25,111     $ 40,908,649

Net income for 2004                                                                934,874                               934,874

Issuance of 1,875 shares of common
    stock for stock options exercised                             22,932                                                  22,932
Tax benefit on non-qualified
    stock options                                                  2,235                                                   2,235
Change in net unrealized
   appreciation (depreciation)
   on securities available
   for sale, net of tax of $(401,806)                                                                  (602,709)        (602,709)
                                                         ------------------------------------------------------------------------

BALANCE, JUNE 30, 2004                                      $ 37,347,861       $ 4,495,718            $(577,598)    $ 41,265,981
                                                         ========================================================================
</TABLE>

      The following notes are an integral part of the financial statements.




                                       6
<PAGE>

TOWER FINANCIAL CORPORATION
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
For the six months ended June 30, 2004 and 2003

<TABLE>
<CAPTION>
                                                                (unaudited)          (unaudited)
                                                             SIX MONTHS ENDED     SIX MONTHS ENDED
                                                               JUNE 30, 2004        JUNE 30, 2003
                                                             ----------------     ----------------
<S>                                                          <C>                  <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
     Net income                                                $    934,874         $    615,192
     Adjustments to reconcile net income
        to net cash from operating activities:
         Depreciation and amortization                              342,100              281,820
         Provision for loan losses                                  810,000            1,535,000
         Earnings on life insurance                                 (31,318)             (66,968)
         Net gain on sale of securities                              (3,286)            (190,766)
         FHLB stock dividend                                        (29,200)                 -
         Change in accrued interest receivable                     (315,473)            (197,788)
         Change in other assets                                     977,765             (676,555)
         Change in accrued interest payable                         167,770               (3,554)
         Change in other liabilities                                146,659             (748,914)
         Origination of loans held for sale                                          (13,897,650)
         Proceeds from sales of loans held for sale                                   18,559,872
                                                               ------------         ------------
            Net cash from operating activities                    2,999,891            5,209,689
CASH FLOWS FROM INVESTING ACTIVITIES:
     Net change in loans                                        (11,595,283)         (34,660,928)
     Purchase of securities available for sale                  (20,361,188)          (6,023,016)
     Proceeds from maturities of securities
        available for sale                                        2,966,212            3,604,718
     Proceeds from sale of securities
        available for sale                                          501,769            3,174,780
     Purchase of FHLB and FRB stock                                                      (14,200)
     Purchase of life insurance                                                       (3,000,000)
     Proceeds from sale of participation loans                    5,855,669
     Purchase of equipment and leasehold
        expenditures                                               (557,853)            (230,146)
                                                               ------------         ------------
         Net cash from investing activities                     (23,190,674)         (37,148,792)
CASH FLOWS FROM FINANCING ACTIVITIES:
     Net change in deposits                                      37,334,992           32,464,563
     Net change in short-term borrowings                           (860,000)
     Gross proceeds from issuance of common stock
        from exercise of stock options and tax benefits              25,167               11,850
     Proceeds from FHLB advances                                 13,000,000            3,500,000
     Repayment of FHLB advances                                 (13,000,000)          (6,000,000)
                                                               ------------         ------------
         Net cash from financing activities                      36,500,159           29,976,413
                                                               ------------         ------------
NET CHANGE IN CASH AND CASH EQUIVALENTS                          16,309,376           (1,962,690)
Cash and cash equivalents, beginning of period                   27,842,215           36,168,679
                                                               ------------         ------------
CASH AND CASH EQUIVALENTS, END OF PERIOD                       $ 44,151,591         $ 34,205,989
                                                               ============         ============

Supplemental disclosures of cash flow information
Cash paid during the year for:
     Interest                                                  $  2,926,761         $  3,142,914
     Income taxes net of refund                                    (603,665)           1,008,076
</TABLE>


      The following notes are an integral part of the financial statements.


                                       7
<PAGE>

TOWER FINANCIAL CORPORATION
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS


NOTE 1 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

     a.   ORGANIZATION: Tower Financial Corporation (the "Company") was
          incorporated on July 8, 1998. The Company's wholly-owned subsidiary,
          Tower Bank & Trust Company (the "Bank") opened on February 19, 1999
          after receiving federal and state bank regulatory approvals to
          commence its banking operations. The Company's wholly-owned special
          purpose trust subsidiary, Tower Capital Trust 1 ("TCT1"), was
          incorporated on November 1, 2001 for the single purpose of issuing
          trust preferred securities.

     b.   BASIS OF PRESENTATION: The accompanying unaudited consolidated
          condensed financial statements were prepared in accordance with
          generally accepted accounting principles for interim periods and with
          instructions for Form 10-Q and, therefore, do not include all
          disclosures required by generally accepted accounting principles for
          complete presentation of the Company's financial statements. In the
          opinion of management, the unaudited consolidated condensed financial
          statements contain all adjustments necessary to present fairly its
          consolidated financial position at June 30, 2004 and its consolidated
          results of operations, comprehensive income, changes in stockholders'
          equity and cash flows for the six-month periods ended June 30, 2004
          and June 30, 2003. The results for the period ended June 30, 2004
          should not be considered as indicative of results for a full year.
          These consolidated condensed financial statements should be read in
          conjunction with the audited financial statements for the years ended
          December 31, 2003, 2002, and 2001 and related notes included in the
          Company's Annual Report on Form 10-K for the year ended December 31,
          2003.

     c.   PRINCIPLES OF CONSOLIDATION: The accompanying consolidated condensed
          financial statements include the accounts of the Company and the Bank.
          All significant intercompany accounts and transactions have been
          eliminated in consolidation. As was discussed in Note 8 of the 2003
          annual report, a trust (TCT1) that had previously been consolidated
          with the Company prior to December 31, 2003 is now reported
          separately, under the caption junior subordinated debt. The effect of
          no longer consolidating the trust does not significantly change the
          amounts reported as the Company's assets, liabilities, equity or
          interest expense.

     d.   STOCK COMPENSATION: Employee compensation expense under stock options
          is reported using the intrinsic value method. No stock-based
          compensation cost is reflected in net income, as all options had an
          exercise price equal to or greater than the market price of the
          underlying common stock at date of grant. The following table
          illustrates the effect on net income and earnings per share if expense
          was measured using the fair value recognition provisions of FASB
          Statement No. 123, Accounting for Stock-Based Compensation.


<TABLE>
<CAPTION>
                                                                       THREE MONTHS ENDED             SIX MONTHS ENDED
                                                                            JUNE 30,                       JUNE 30,
                                                                 ---------------------------    ---------------------------
                                                                        2004         2003             2004          2003
                 ---------------------------------------------------------------------------    ---------------------------
<S>                                                              <C>             <C>            <C>             <C>
                 Net income as reported                              $ 454,436    $ 429,721        $ 934,874     $ 615,192
                 Deduct: Stock-based compensation expense
                     determined under fair value-based method          (28,422)     (38,480)         (56,199)      (76,961)
                                                                 ---------------------------    ---------------------------
                 Pro forma net income                                $ 426,014    $ 391,241        $ 878,675     $ 538,231
                                                                 ===========================    ===========================

                 Basic earnings per share as reported                $    0.12    $    0.11        $    0.24     $    0.16
                 Pro forma basic earnings per share                       0.11         0.10             0.22          0.14
                 Diluted earnings per share as reported                   0.11         0.11             0.23          0.15
                 Pro forma diluted earnings per share                     0.11         0.10             0.22          0.13
</TABLE>


               The pro forma effects are computed using option-pricing models,
               with the following weighted average assumptions as of the date of
               grant:


                                       8
<PAGE>

<TABLE>
<CAPTION>
                                                                       THREE MONTHS ENDED               SIX MONTHS ENDED
                                                                             JUNE 30,                       JUNE 30,
                                                               -------------------------------    -------------------------
                                                                       2004           2003              2004        2003
              --------------------------------------------------------------------------------    -------------------------
<S>                                                            <C>                <C>             <C>           <C>
              Risk-free interest rate                                    4.47%          3.18%            4.47%       3.16%
              Expected option life                                   8.0 years      6.0 years        8.0 years   5.6 years
              Expected stock price volatility                           36.88%         24.37%           36.88%      25.56%
              Dividend yield                                              None           None             None        None
</TABLE>


     e.   EFFECT OF NEWLY ISSUED BUT NOT YET EFFECTIVE ACCOUNTING STANDARDS:
          There are no newly issued but not yet effective accounting standards
          issued by the Financial Accounting Standard Board that would
          materially affect the Company's financial position or results of
          operations.

     f.   RECLASSIFICATIONS: Certain items from the prior period financial
          statements were reclassified to conform to the current presentation.



NOTE 2 - EARNINGS PER SHARE

     The following table reflects the calculation of basic and diluted earnings
     per common share for the three-month and six-month periods ended June 30,
     2004 and 2003. Options not considered in the calculation of diluted
     earnings per common share because they were antidilutive, totaled 7,500 and
     8,000 and 0 and 8,000 for the three-month and six-month periods ended June
     30, 2004 and 2003 respectively.

<TABLE>
<CAPTION>
                                                                         THREE MONTHS ENDED             SIX MONTHS ENDED
                                                                               JUNE 30,                      JUNE 30,
                                                                      -------------------------     -------------------------
                                                                         2004           2003           2004           2003
          -------------------------------------------------------------------------------------     -------------------------
<S>                                                                   <C>            <C>            <C>            <C>
          BASIC
          Net income                                                  $  454,436     $  429,721     $  934,874     $  615,192
                                                                      -------------------------     -------------------------
          Weighted average common shares outstanding                   3,944,394      3,932,194      3,943,953      3,931,759
                                                                      -------------------------     -------------------------
          Basic earnings per common share                             $     0.12     $     0.11     $     0.24     $     0.16

          DILUTED
          Net income                                                  $  454,436     $  429,721     $  934,874     $  615,192
                                                                      -------------------------     -------------------------
          Weighted average common shares outstanding                   3,944,394      3,932,194      3,943,953      3,931,759
          Add:  dilutive effect of assumed stock option exercises         72,624         37,205         87,472         75,418
                                                                      -------------------------     -------------------------
          Weighted average common shares and dilutive
             potential common shares outstanding                       4,017,018      3,969,399      4,031,425      4,007,177
                                                                      -------------------------     -------------------------
          Diluted earnings per common share                           $     0.11     $     0.11     $     0.23     $     0.15
</TABLE>


NOTE 3 - STOCK OPTION PLANS

     Options to buy stock are granted to directors, officers and employees under
     the 1998 and 2001 Stock Option and Incentive Plans (the "Plans"), which
     together provide for issuance of up to 435,000 shares of common stock of
     the Company. The exercise price of stock options granted under the Plans
     may not be less than the market price at the date of grant. The maximum
     option term is ten years. Option vesting occurs over various periods of
     time ranging from immediate to four years.

     At June 30, 2004, options for 396,353 shares were outstanding to certain
     officers, employees and directors. The options were granted at the market
     price on the dates of the grant in a range from $7.625 to $14.00 per share.
     Of the total options outstanding, options for 323,338 shares were vested
     and exercisable at June 30, 2004. During the second quarter of 2004, 7,500
     options were granted at a price of $14.00 per share and 750 non-vested
     options were forfeited. During the second quarter of 2003, there were 8,000
     options granted at a price of $13.38 per share and 7,000 options were
     forfeited.


                                       9
<PAGE>

NOTE 4 - CONTINGENCY LOSS

In the fourth quarter of 2002, the Company's audit results showed stale-dated
receivables existed in a mortgage operating account. Further investigation by
the Company during 2003 uncovered unauthorized mortgage loans and improper
mortgage activity in the operating account. An employee of the Company was
terminated as a result of this investigation, and management made appropriate
changes to internal controls in 2003. During 2002 and 2003, a total of
$1,393,000 in pretax special charges was recorded to address these identified
issues (excluding any professional expenses incurred to investigate, document
and support the Company's related insurance claim). The Company believes that it
has substantially completed its investigation into this matter and that it has
identified the majority of the resulting losses. The Company has filed and is
attempting to recover such losses through fidelity bond insurance and collection
efforts.

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS

The following presents management's discussion and analysis of the consolidated
financial condition of the Company as of June 30, 2004 and December 31, 2003 and
results of operations for the three-month and six-month periods ended June 30,
2004 and June 30, 2003. This discussion should be read in conjunction with the
Company's unaudited consolidated condensed financial statements and the related
notes appearing elsewhere in this report and the Company's Annual Report on Form
10-K for the year ended December 31, 2003.

FORWARD-LOOKING STATEMENTS

This report includes "forward-looking statements." All statements regarding the
Company's expected financial position, business and strategies are
forward-looking statements and the Company intends for them to be covered by the
safe harbor provisions for forward-looking statements contained in the Private
Securities Litigation Reform Act of 1995. The words "anticipates," "believes,"
"estimates," "seeks," "expects," "plans," "intends," and similar expressions, as
they relate to the Company, the Bank or its management, are intended to identify
forward-looking statements. Although the Company believes that the expectations
reflected in these forward-looking statements are reasonable and has based these
expectations on its beliefs as well as assumptions it has made, these
expectations may prove to be incorrect. Important factors that could cause
actual results to differ materially from the Company's expectations include,
without limitation, the following:

     -    the effect of extensive banking regulation on the Bank's ability to
            grow and compete;
     -    the effect of changes in federal economic and monetary policies on the
            Bank's ability to attract deposits, make loans and achieve
            satisfactory interest spreads;
     -    the competitive disadvantage resulting from the Company's status as a
            highly regulated, start-up company;
     -    the Company's dependence on key management personnel;
     -    the increased risk of losses due to loan defaults caused by the Bank's
            commercial loan concentration;
     -    the Company's dependence on a favorable local economy in the Bank's
            primary service area;
     -    the Bank's dependence on net interest spread for profitability;
     -    the Bank's ability to implement developments in technology to be
            competitive;
     -    failure of a significant number of borrowers to repay their loans;
     -    general changes in economic conditions, including interest rates and
            real estate values; and
     -    restrictions imposed on the Company by regulators or regulations of
            the banking industry.

Readers are also directed to other risks and uncertainties discussed in other
documents filed by the Company with the Securities and Exchange Commission. The
Company undertakes no obligation to update or revise any forward-looking
information, whether as a result of new information, future developments or
otherwise.


                                       10
<PAGE>

CRITICAL ACCOUNTING POLICIES

A comprehensive discussion of the Company's critical accounting policies is
disclosed in our Annual Report on Form 10-K for the year ended December 31,
2003. There have been no material changes in the information regarding our
critical accounting policies since December 31, 2003.

FINANCIAL CONDITION

The Company continued to experience growth in the second quarter of 2004. Total
assets of the Company were $473.6 million at June 30, 2004 compared to total
assets at December 31, 2003 of $436.5 million. The 8.5% increase in assets was
mainly due to an increase in investments, cash and cash equivalents and loans
and was supported by a $37.3 million inflow of funds from deposit growth at the
Bank during the first six months of 2004. While assets increased during the
first six months of 2004, the rate of growth was less in the first six months of
2004 than the substantial growth experienced during most of the quarters since
the Bank began operations. The growth during previous quarters was also a result
of deposit growth at the Bank. Management believes that the smaller growth
levels reflected during the last few quarters have been a result of a lagging
local economy. As the Bank enters its sixth year of operation, the Company
anticipates that, in the near-term, assets will increase at a volume similar to
our more recent historical trends as we continue to market our institution,
products and banking expertise, deliver a high level of customer service and
develop our branch network.

Cash and Investments. Cash and cash equivalents, which include federal funds
sold, were $44.2 million at June 30, 2004, a $16.3 million, or 58.6%, increase
from $27.8 million at December 31, 2003. Securities available for sale were
$40.2 million at the end of the first six months of 2004, an increase of $15.9
million from December 31, 2003. The net increase in cash and cash equivalents
during the first six months of 2004 was reflective of the cash needs of the Bank
relative to anticipated loan growth, the purchase of investments and normal
daily liquidity activity offset by the increase in deposits during the second
quarter ended June 30, 2004. The increase in securities available for sale was a
result of planned purchases of investments to continue to diversify the earning
assets as part of our liquidity and asset and liability management strategies.

Loans. Total loans were $381.7 million at June 30, 2004 reflecting a 1.3%
increase from total loans of $376.8 million at December 31, 2003. Loan growth in
the first six months of 2004 occurred in the mortgage and commercial real estate
portfolios. The mix of the loan portfolio has not materially changed since
year-end as the total of commercial and commercial real estate loans of the
portfolio was 78.6% at June 30, 2004 and 79.2% of the portfolio at December 31,
2003. Management believes that the aggregate loan growth during the first six
months of 2004 was the result of slow local market economic conditions.

The following table summarizes the composition of the loan portfolio at the
dates indicated:

<TABLE>
<CAPTION>
                                                             JUNE 30, 2004               DECEMBER 31, 2003
                                                     ----------------------------------------------------------
                                                           BALANCE         %             BALANCE         %
           ----------------------------------------------------------------------------------------------------
<S>                                                  <C>                <C>       <C>                 <C>
           Commercial                                   $ 192,450,672    50.4%        $ 198,063,494    52.6%
           Commercial real estate                         107,506,912    28.2%          100,309,154    26.6%
           Residential real estate                         42,937,696    11.3%           40,648,402    10.8%
           Home equity                                     26,513,604     7.0%           25,943,402     6.9%
           Consumer                                        11,954,393     3.1%           11,593,808     3.1%
                                                     ----------------------------------------------------------
                Total loans                               381,363,277   100.0%          376,558,260   100.0%
           Net deferred loan costs                            326,438                       280,318
           Allowance for loan losses                       (5,180,796)                   (5,259,273)
                                                     -----------------            ------------------

                Net loans                               $ 376,508,919                 $ 371,579,305
                                                     =================            ==================
</TABLE>


Nonperforming Assets. Nonperforming assets include nonperforming loans and other
real estate owned (OREO). Nonperforming loans include loans past due over 90
days and still accruing and all nonaccrual loans. Nonperforming assets have
decreased from $2.0 million, or 0.45% of total assets, at December 31, 2003 to
$1.6 million, or 0.35% of total assets, at June 30, 2004. The decrease in
nonperforming assets was mainly attributable to $923,068 of nonperforming assets
that were restructured, worked out or charged off, offset by the carrying value
of several loans, totaling $555,384, which were recorded as nonaccrual loans
during the first six months of 2004. Additionally, the commercial OREO property
of $80,000 held at December 31, 2003 was sold during the first quarter of 2004.
Total impaired loans at June 30, 2004 were $5.2 million and included all
nonaccrual loans in addition to one commercial credit of $537,519 recorded as a
troubled debt restructuring and one commercial real estate credit of $3.4
million where the borrower has sought bankruptcy protection. At June 30, 2004,
management believes it has allocated adequate specific

                                       11
<PAGE>

allowances for these risks of $1.2 million. Impaired loans at December 31, 2003
were $2.2 million with specific allowances for these risks of $807,000.

The following table summarizes the Company's nonperforming assets at the dates
indicated:

<TABLE>
<CAPTION>
                                                                               JUNE 30,        DECEMBER 31,
                                                                                 2004              2003
          -------------------------------------------------------------------------------------------------
<S>                                                                     <C>                   <C>
          Loans past due over 90 days and still accruing                      $   363,741      $   290,375
          Nonaccrual loans                                                      1,273,332        1,614,447
                                                                        -----------------------------------
               Total nonperforming loans                                      $ 1,637,073      $ 1,904,822
          Other real estate owned                                                                   80,000
                                                                        -----------------------------------
               Total nonperforming assets                                     $ 1,637,073      $ 1,984,822
                                                                        ===================================

          Nonperforming assets to total assets                                       0.35%            0.45%

          Nonperforming loans to total loans                                         0.43%            0.51%
</TABLE>


Allowance for Loan Losses. In each quarter the allowance for loan losses is
adjusted by management to the amount management believes is necessary to
maintain the allowance at adequate levels. The allowance consists of three
allocations: identified specific allocation, a percentage allocation based on
loss history for different loan groups, and an unallocated allowance. Management
will allocate specific portions of the allowance for loan losses based on
specifically identifiable problem loans. Problem loans are identified through a
loan risk rating system and monitored through watchlist reporting. Specific
reserves are determined for each identified problem loan based on delinquency
rates, collateral and other risk factors specific to that problem loan.
Management's evaluation of the allowance for different loan groups is based on
consideration of actual loss experience, the present and prospective financial
condition of borrowers, industry concentrations within the loan portfolio and
general economic conditions, and absent some of those factors, based upon peer
industry data of comparable banks. The unallocated allowance is maintained to
recognize the imprecision of estimation and measuring loss when evaluating loss
allocations for individual loans or pools of loans.

The allowance for loan losses at June 30, 2004 was $5.2 million or 1.36% of
total loans outstanding, a slight decrease from $5.3 million, or 1.40%, at
December 31, 2003. The provision for loan losses during the first six months of
2004 was $810,000 compared to $1,535,000 in the first six months of 2003. A
significant portion of the decrease in the provision for the first six months of
2004 is attributable to the improper mortgage activity issue in 2003.

The table below summarizes the allowance allocations by type as of the indicated
dates:

<TABLE>
<CAPTION>
                                                               June 30, 2004        December 31, 2003
          -------------------------------------------------------------------------------------------
<S>                                                            <C>                  <C>
          Specific allocations                                  $ 3,246,000            $ 3,287,000
          Loan pool percentage allocations                        1,861,000              1,862,000
          Unallocated                                                73,796                110,273
                                                              ---------------------------------------

             Total allowance for loan losses                    $ 5,180,796            $ 5,259,273
                                                              =======================================
</TABLE>


In general, the addition to the allowance during the first six months of 2004
was directly attributable to the amount of loan growth and net charge-off
activity during the period and also attributable to risk factors, such as
watchlist directed specific allocations as well as peer bank loss experience.
Net charge-offs for the first six months of 2004 were $888,476 compared to
$766,715 for the first six months of 2003. The charge-offs during the first six
months ended June 30,2004 were primarily attributable to several commercial
loans. Substantially all of the charge-offs on these loans had previously been
specifically reserved in our allowance for loan losses. Nonperforming loans
decreased during the first six months of 2004 by $267,749 and were $1.6 million
at June 30, 2004. During the first six months of 2003, charge-offs included
$560,000 for the unauthorized mortgage loans problem. As a result of the
decreased level of nonperforming loans at June 30, 2004, specific allocations of
the loss allowance decreased $41,000 from December 31, 2003. The amount of the
allowance allocated for loan pools stayed essentially flat during the first six
months as a net result of increased loans outstanding, which was offset by a
decrease in loss experience percentages mainly for commercial loans.

Management considers the allowance for loan losses at June 30, 2004 to be
adequate; however, there can be no assurance that charge-offs in future periods
will not exceed the allowance. Additional provisions for the allowance are
expected during 2004 as a result of anticipated increases in the total loan
portfolio.


                                       12
<PAGE>

The following table summarizes changes in the Company's allowance for loan
losses for the periods indicated:

<TABLE>
<CAPTION>
                                                                                2004             2003
         ------------------------------------------------------------------------------------------------
<S>                                                                   <C>                   <C>
         Beginning balance, January 1                                       $ 5,259,273      $ 4,745,672
         Provision charged to operating expense                                 810,000        1,545,000
         Charge-offs                                                           (904,782)        (783,143)
         Recoveries                                                              16,305           16,428
                                                                      -----------------------------------

               Ending balance, June 30                                      $ 5,180,796      $ 5,523,957
                                                                      ===================================

         Net charge-offs to average loans (annualized)                             0.35%            0.45%
</TABLE>


Other Assets. The $544,641 decrease in other assets was mainly attributable to
the $595,958 reduction of the tax assets in the first six months of 2004 net of
other asset increases.

Deposits. Total deposits were $400.2 million at June 30, 2004 compared to total
deposits at December 31, 2003 of $362.9 million. Deposit growth has been
significant since the Bank commenced operations, resulting from new and existing
deposit accounts established from the business, consumer and the municipal
sectors. Deposit growth during the first six months of 2004 was reflected mainly
in time deposits under $100,000 and time deposits $100,000 and over. Growth was
approximately $12.3 million in time deposits under $100,000 and $34.9 million in
time deposits $100,000 and over. Money market accounts decreased by $6.0 million
during the first six months mostly attributable to a decrease in public funds
accounts while noninterest bearing demand deposits also reflected a decrease of
$1.3 million. The majority of the growth during the first six months of 2004 was
from brokered CD accounts. While the vast majority of overall deposit funding
had previously come from the local market, growth in the first six months of
2004 was generated from brokered CDs over $100,000 which grew during the first
six months by $38.6 million and reached $63.8 million at June 30, 2004 or 15.9%
of the total deposit portfolio. The amount of brokered CDs at December 31, 2003
was $25.2 million. This increase in brokered deposits was a result of a
significant amount of public funds withdrawn during the first quarter of 2004
and a need for funding to cover anticipated asset growth, over what could be
generated quickly in the local market.

The following table summarizes the Company's deposit balances at the dates
indicated:

<TABLE>
<CAPTION>
                                                                       JUNE 30,                DECEMBER 31, 2003
                                                           ----------------------------------------------------------
                                                                  BALANCE         %            BALANCE         %
          -----------------------------------------------------------------------------------------------------------
<S>                                                        <C>                 <C>         <C>              <C>
          Noninterest-bearing demand                           $  61,381,105    15.3%       $  62,638,230    17.3%
          Interest-bearing checking                               20,497,837     5.1%          23,543,523     6.5%
          Money market                                            92,286,463    23.1%          98,250,351    27.1%
          Savings                                                 11,001,781     2.7%          10,575,908     2.9%
          Time, under $100,000                                    75,326,623    18.8%          63,028,461    17.4%
          Time, $100,000 and over                                139,717,951    35.0%         104,840,295    28.8%
                                                           ----------------------------------------------------------

               Total deposits                                  $ 400,211,760   100.0%       $ 362,876,768   100.0%
                                                           ==========================================================
</TABLE>


Borrowings. Short-term borrowings, which were entirely comprised of overnight
federal funds purchased from one correspondent bank decreased to $200,000 at
June 30, 2004 from $1.1 million at December 31, 2003. In addition to federal
funds purchased, the Company also had borrowings in the amount of $27.0 million
in Federal Home Loan Bank ("FHLB") advances at both June 30, 2004 and December
31, 2003. Two of the FHLB advances mature in 2011, and each of these have
quarterly call features. One of the remaining advances is a short-term daily
variable rate advance and the other six are bullet advances and mature in a
range from December 2004 through March 2006.

Other Liabilities. Other liabilities increased $147,000 from year-end 2003. The
increase in other liabilities was primarily related to the increase in payables
at June 30, 2004.


                                       13
<PAGE>

RESULTS OF OPERATIONS

For The Three-Month Periods Ended June 30

Results of operations for the three-month period ended June 30, 2004 reflected
net income of $454,436, or $0.11 per diluted share. This was a $24,715, or
5.75%, increase over 2003's second quarter net income of $429,721 or $0.11
diluted share. The operating results for the three-month period ended June 30,
2004 were favorable compared to the same period in 2003 primarily because
earning assets grew providing higher net interest income and the provision for
loan losses was lower in part due to a higher provision for loan losses in 2003
relating to previously disclosed unauthorized mortgage loan activity. This was
offset partially by lower noninterest income and higher noninterest expense,
which will be discussed below in more detail.

The increase in total revenue for the second quarter of 2004 as compared to the
prior year was positive, as total revenue, defined as net interest income plus
total noninterest income, increased 8.4%. For the three-month period ended June
30, 2004, net interest income increased 15.2%, while total noninterest income
decreased 12.5% from the same period one year ago primarily due to lower loan
broker fee income.

     PERFORMANCE RATIOS                                 JUNE 30,
                                         -------------------------------
                                                  2004            2003
     -------------------------------------------------------------------

     Return on average assets *                   0.40%           0.44%
     Return on average equity *                   4.38%           4.36%
     Net interest margin *                        3.06%           3.04%
     Efficiency ratio                            75.87%          63.62%

     * annualized


Net Interest Income. Interest income for the three-month periods ended June 30,
2004 and 2003 was $4.9 million and $4.4 million, respectively, while interest
expense for each of those periods was $1.6 million in both 2004 and 2003,
resulting in net interest income of $3.3 million for the second quarter of 2004
and $2.9 million for the second quarter of 2003. The increase during each
quarter of 2004 and 2003 in net interest income was reflective of the general
growth in loans and other earning assets during those periods. The net interest
margin for the second quarter of 2004 was 3.06%, while the net interest margin
for the second quarter of 2003 was 3.04%. The increase in net interest margin
was mainly due to significant growth in earning assets over interest bearing
liabilities during this flat interest rate environment. The yield on earning
assets fell only 15 basis points during the period while cost of funds decreased
24 basis points improving our rate spread on earning assets.

The following table reflects the average balance; interest earned or paid, and
yields or costs of the Company's assets, liabilities and stockholders' equity at
and for the dates indicated:



                                       14

<PAGE>

<TABLE>
<CAPTION>
                                                               AT AND FOR THE THREE MONTH PERIOD ENDED
                                              ---------------------------------------------------------------------------
                                                           JUNE 30, 2004                        JUNE 30, 2003
                                              ---------------------------------------------------------------------------
                                                              INTEREST    ANNUALIZED               INTEREST    ANNUALIZED
                                                  AVERAGE      EARNED        YIELD     AVERAGE      EARNED        YIELD
($ in thousands)                                  BALANCE      OR PAID      OR COST    BALANCE      OR PAID      OR COST
-------------------------------------------------------------------------------------------------------------------------
<S>                                           <C>             <C>         <C>        <C>           <C>         <C>
ASSETS
Short-term investments and
   interest-earning deposits                     $   6,920     $    16       0.93%    $   4,921     $    22       1.79%
Federal funds sold                                  12,015          26       0.87%       13,693          34       0.99%
Securities - taxable                                24,386         244       4.01%        9,656          88       3.65%
Securities - tax exempt (1)                         11,687         168       5.77%        2,545          37       5.82%
Loans held for sale                                    -           -         0.00%        1,022          11       4.31%
Loans                                              381,613       4,494       4.72%      346,946       4,258       4.91%
                                              -------------------------            -------------------------
    Total interest-earning assets                  436,621       4,948       4.55%      378,783       4,450       4.70%
Allowance for loan losses                           (5,201)                              (5,332)
Cash and due from banks                             12,333                                9,342
Other assets                                        10,347                                9,037
                                              -------------                        -------------
    Total assets                                 $ 454,100                            $ 391,830
                                              =============                        =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Interest-bearing checking                        $  22,770     $    20       0.35%    $  16,317     $    22       0.54%
Savings                                             10,891           7       0.26%        9,989          15       0.60%
Money market                                        86,392         193       0.90%      103,804         321       1.24%
Certificates of deposit                            210,102       1,136       2.17%      156,969       1,002       2.55%
Short-term borrowings                                  200           1       2.01%        1,189          26       8.75%
FHLB advances                                       27,000         177       2.63%       19,000         117       2.46%
Junior subordinated debt                             3,608          81       9.00%        3,500          79       9.03%
                                              -------------------------            -------------------------
    Total interest-bearing liabilities             360,963       1,615       1.79%      310,768       1,582       2.03%
Noninterest-bearing checking                        50,422                               40,597
Other liabilities                                    1,100                                  884
Stockholders' equity                                41,615                               39,581
                                              -------------                        -------------
    Total liabilities and stockholders' equity   $ 454,100                            $ 391,830
                                              =============                        =============
NET INTEREST INCOME                                            $ 3,333                              $ 2,868
                                                           ============                         ============
RATE SPREAD                                                                  2.76%                                2.67%
NET INTEREST INCOME AS A PERCENT
   OF AVERAGE EARNING ASSETS                                                 3.06%                                3.04%
                                                                       ============                         ============
</TABLE>

(1)  Computed on a tax equivalent basis for tax exempt securities using a 34%
     statutory tax rate.


Provision for Loan Losses. A provision for loan losses was recorded in the
amount of $310,000 during the second quarter of 2004 as compared to $690,000 for
the second quarter of 2003. The provision recorded for the second quarter of
2004 was directly related to the growth in the loan portfolio, risk factors
inherent in the loan portfolio and recorded charge-offs mainly attributable to
commercial loans. The allowance for loan losses at June 30, 2004 totaled $5.2
million and was 1.36% of total loans outstanding on that date. Total net
charge-offs for the three-month period ended June 30, 2004 were $497,117 and
were $254,576 during the same period a year ago.

Noninterest Income. Noninterest income was $815,988 during the second quarter of
2004. This was a $113,866, or 12.2%, decrease compared to the second quarter of
2003. The decrease in noninterest income from the comparable period was
reflected primarily in loan brokered service fees, which decreased $201,640 to
$82,651. This category decreased due to lower loan origination volume in 2004
compared to 2003. Trust services fee income increased $74,117 to $411,501 for
the three-month period ended June 30, 2004, reflective of more assets under
management.

Noninterest Expense. Noninterest expense was $3.1 million for the second quarter
of 2004 while noninterest expense for the three-month period ended June 30, 2003
was $2.4 million. The main components of noninterest expense for the second
quarter of 2004 were salaries and benefits of $1.7 million, occupancy and
equipment costs of $412,129, and loan and professional costs in the amount of
$327,355 and represent mainly infrastructure costs for human resource needs to
operate the Bank, rent expense and equipment depreciation. The 27.7% increase in
salaries and benefits reflects 13.0% growth in FTE's, year over year, as part of
our expansion activities throughout the last twelve months, an incentive
compensation program that was not in place at June 30, 2003

                                       15
<PAGE>

due to the unauthorized mortgage issue, and significant benefit cost increases.
Excluding personnel expenses, noninterest expenses increased 31.2%, largely
reflecting a $109,844 or 36.3% increase in occupancy and equipment due to the
Waynedale branch that opened in January 2004 and the new Wealth Management area
that opened downtown early in the second quarter 2004. The other large increase
in noninterest expenses was for loan and professional costs, which reflect
significant costs incurred in the proof of mortgage losses related to our
current insurance claim resulting from the unauthorized mortgage loans issue.

Income Taxes. During the quarters ended June 30, 2004 and 2003, the Company
recorded $226,230 and $257,470, respectively, in income taxes expense. The
effective tax rate recorded was 33.2% for 2004 as compared to 37.5% for 2003.
The decreased effective tax rate in 2004 was mainly from the tax effect of
additional tax-exempt investments held during 2004 compared to 2003.

For The Six-Month Periods Ended June 30

Results of operations for the six-month period ended June 30, 2004 reflected net
income of $934,874 or $0.23 per diluted share. This was a $319,682 or 52.0%
increase from 2003's six-month period net income of $615,192. Net income per
diluted share for the six-month period ended June 30, 2003 was $0.15. The
operating results for the six-month period ended June 30, 2003 were adversely
affected by total pretax special charges of $835,000 for losses discovered in
the Company's residential mortgage operation. During the first six months of
2003, special charges were recorded as a $560,000 addition to the provision for
loan losses for unauthorized mortgage loans and a $275,000 addition to other
expense for improper mortgage transactions and other unreconciled activity in a
mortgage operating account. See Note 4 of the Notes to Consolidated Condensed
Financial Statements in Part I of this Form 10-Q.

The increase in total revenue for the first six months of 2004 as compared to
the prior year period was 5.4%. For the six-month period ended June 30, 2004,
net interest income increased 17.7% and total noninterest income decreased 18.5%
from the same period one year ago, primarily due to a decrease in loan brokerage
fees of $314,521or 64.9%, and a decrease in net gain on sale of investments of
$187,480, or 98.3%. The first six months of 2003 benefited from the gains on
sale of investments and the higher volume of mortgage loan refinancing that
hasn't effected the first six months of 2004.

     PERFORMANCE RATIOS                               JUNE 30,
                                        ------------------------------
                                                2004            2003
     -----------------------------------------------------------------

     Return on average assets *                 0.42%           0.32%
     Return on average equity *                 4.51%           3.14%
     Net interest margin *                      3.11%           3.04%
     Efficiency ratio                          72.54%          66.77%
     * annualized


Net Interest Income. Interest income for the six-month periods ended June 30,
2004 and 2003 was $9.7 million and $8.7 million, respectively, while interest
expense for those periods was $3.1 million in each period, resulting in net
interest income of $6.6 million for the six-month period of 2004 and $5.6
million for the six-month period of 2003. The increase during the first six
months of 2004 over 2003 in net interest income was reflective of the general
growth in loans and other earning assets during those periods. The net interest
margin for the first six months of 2004 was 3.11%, while the net interest margin
for the first six months of 2003 was 3.04%. This increase in net interest margin
was partially due to a four basis point net increase in rate spread. The
remainder of the increase in net interest margin was the result of earning asset
growth outpacing growth in the net interest margin.

The following table reflects the average balance, interest earned or paid and
yield or cost of the Company's assets, liabilities and stockholders' equity at
and for the dates indicated:


                                       16
<PAGE>

<TABLE>
<CAPTION>
                                                                 AT AND FOR THE SIX MONTH PERIODS ENDED
                                                 ------------------------------------------------------------------------
                                                           JUNE 30,2004                         JUNE 30, 2003
                                                 ------------------------------------------------------------------------
                                                              INTEREST    ANNUALIZED               INTEREST    ANNUALIZED
                                                  AVERAGE      EARNED        YIELD     AVERAGE      EARNED        YIELD
($ in thousands)                                  BALANCE      OR PAID      OR COST    BALANCE      OR PAID      OR COST
-------------------------------------------------------------------------------------------------------------------------
<S>                                              <C>          <C>         <C>         <C>          <C>         <C>
ASSETS
Short-term investments and
   interest-earning deposits                     $   5,071     $    25       0.99%    $   4,521     $    30       1.33%
Federal funds sold                                  11,872          47       0.80%       13,609          68       1.00%
Securities - taxable                                21,624         430       4.00%        9,723         175       3.60%
Securities - tax exempt (1)                         10,229         287       5.64%        2,272          59       5.19%
Loans held for sale                                    -           -         0.00%        1,179          33       5.60%
Loans                                              379,775       8,938       4.73%      340,108       8,368       4.92%
                                                 ----------------------               ----------------------
    Total interest-earning assets                  428,571       9,727       4.56%      371,412       8,733       4.70%
Allowance for loan losses                           (5,261)                              (5,091)
Cash and due from banks                             12,259                                9,272
Other assets                                        10,182                                8,222
                                                 ----------                           ----------
    Total assets                                 $ 445,751                            $ 383,815
                                                 ==========                           ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Interest-bearing checking                        $  22,073     $    37       0.34%    $  16,425     $    46       0.56%
Savings                                             10,882          15       0.28%        9,453          32       0.68%
Money market                                        89,912         397       0.89%       99,682         611       1.23%
Certificates of deposit                            197,048       2,139       2.18%      153,271       2,002       2.61%
Short-term borrowings                                  782           4       1.03%        1,126          29       5.15%
FHLB advances                                       27,000         341       2.54%       20,036         261       2.61%
Junior subordinated debt                             3,608         162       9.03%        3,500         159       9.09%
                                                 ----------------------               ----------------------
    Total interest-bearing liabilities             351,305       3,095       1.77%      303,493       3,140       2.07%
Noninterest-bearing checking                        50,929                               39,708
Other liabilities                                    2,015                                1,119
Stockholders' equity                                41,502                               39,495
                                                 ----------                           ----------
    Total liabilities and stockholders' equity   $ 445,751                            $ 383,815
                                                 ==========                           ==========
NET INTEREST INCOME                                            $ 6,632                              $ 5,593
                                                           ============                         ============
RATE SPREAD                                                                  2.79%                                2.75%
NET INTEREST INCOME AS A PERCENT
   OF AVERAGE EARNING ASSETS                                                 3.11%                                3.04%
                                                                       ============                         ============
</TABLE>

(1)  Computed on a tax equivalent basis for tax exempt securities using a 34%
     tax rate.


Provision for Loan Losses. A provision for loan losses was recorded in the
amount of $810,000 during the first six months of 2004 as compared to $1.5
million for the first six months of 2003. Total net charge-offs for the
six-month period ended June 30, 2004 were $888,476, and were $766,715 during the
same period a year ago. At June 30, 2004, nonperforming loans amounted to $1.6
million of which $363,741 was still accruing but past due 90 days or more.
Nonperforming loans at June 30, 2003 were $1.9 million of which $76,990 was
still accruing but past due 90 days or more.

Noninterest Income. Noninterest income was $1.6 million during the first six
months of 2004. This was a $363,299, or 18.5%, decrease from the first six
months of 2003. The decrease in noninterest income from the comparable period
was mainly attributable to a 64.9% decrease in loan broker fees from mortgage
originations, and a 98.3% decrease in net gain on sale of securities. These
decreases were partially offset by an 18.0% growth in fees from trust services
resulting from more assets under management.

Noninterest Expense. Noninterest expense was $5.9 million for the first six
months of 2004 while noninterest expense for the six-month period ended June 30,
2003 was $5.0 million. Noninterest expense totals for the first six months of
2004 were higher than those for the first six months of 2003 due primarily to
the general growth of the Bank in the form of personnel, rent and equipment at
the existing locations, as well as the opening of a fourth new branch office in
January 2004 and the new Wealth Management area that opened downtown early in
the second quarter 2004. Noninterest expense for the first six months of 2004
also included higher benefit costs and lower contra deferred costs from slower
loan production. The main components of noninterest expense for the first six
months of 2004 were salaries and benefits of $3.2 million, occupancy and
equipment costs of $748,794, and loan and professional costs in the amount of
$568,102. The 24.1% increase in salaries and benefits reflects 13.0% growth in
FTE's as

                                       17
<PAGE>

part of our expansion activities throughout the last twelve months, an incentive
compensation program that was not in place at June 30, 2003 due to the
unauthorized mortgage issue, and significant benefit cost increases. The large
increase in loan and professional costs reflects significant costs incurred in
the proof of mortgage losses related to our current insurance claim resulting
form the unauthorized mortgage issue.

Income Taxes. During the six-month periods ended June 30, 2004 and 2003, the
Company recorded $496,880 and $356,670, respectively, in income taxes expense.
The effective tax rate was 34.7% for 2004 as compared to 36.7% for 2003. The
reduced effective tax rate in 2004 compared to 2003 was attributable to a higher
level of tax-exempt security income.

LIQUIDITY AND CAPITAL RESOURCES

Liquidity. The Company's general liquidity strategy is to fund growth with
deposits and to maintain an adequate level of short- and medium-term investments
to meet typical daily loan and deposit activity needs. Strong deposit growth was
realized during the first two quarters of 2004, as it has been each quarter
since 1999. Deposits have been generated mainly from in-market sources; however,
since 2001 the Company has expanded its funding base to include national,
non-brokered certificates of deposit, borrowings from the FHLB and trust
preferred securities and, beginning with the second quarter of 2003, brokered
CDs. In the aggregate these out-of-market deposits and borrowings represented
$125.0 million, or 29.0% of the Company's total funding, at June 30, 2004. Total
deposits at June 30, 2004 were $400.2 million and the loan to deposit ratio was
95.4%. Total borrowings at June 30, 2004 were $30.8 million. The Company expects
to continue to experience loan growth and that funding for the loan growth will
continue to come from in-market sources, as funds are available through the
marketing of products and the development of branch locations. Additionally, the
Company and the Bank will continue to develop wholesale, out-of-market deposits
and borrowing capacities and use them to augment our interest rate sensitivity
strategy and liquidity capabilities and to diversify the funding base of the
Bank.

Capital Resources. Stockholders' equity is a noninterest-bearing source of
funds, which provides support for asset growth. Stockholders' equity was $41.3
million and $40.9 million at June 30, 2004 and December 31, 2003, respectively.
Affecting the increase in stockholders' equity during the first six months of
2004 was $934,874 in net income, $25,167 from the exercise of 1,875 stock
options including tax benefit offset by a $602,709 decrease in the unrealized
appreciation of securities available for sale, net of tax.

The ability of the Company to pay cash and stock dividends is subject to
limitations under various laws and regulations and to prudent and sound banking
practices. The Company has paid no cash or stock dividends in any year thus far.
The Company expects that its future earnings and those of the Bank, if any,
would be retained to finance future growth and operations. The Company does not
anticipate paying any cash dividends on the common stock in the foreseeable
future.

The following table summarizes the capital ratios of the Company and the Bank at
the dates indicated:

<TABLE>
<CAPTION>
                                         JUNE 30, 2004                       JUNE 30, 2003
                             -----------------------------------------------------------------------
                                             Well-      Minimum                  Well-      Minimum
                                  Actual  Capitalized   Required     Actual   Capitalized   Required
     -----------------------------------------------------------------------------------------------
<S>                              <C>      <C>           <C>         <C>       <C>           <C>
     THE COMPANY
     Leverage capital              9.99%      5.00%       4.00%      10.99%       5.00%       4.00%
     Tier 1 risk-based            11.18%      6.00%       4.00%      11.75%       6.00%       4.00%
     Total risk-based             12.39%     10.00%       8.00%      13.01%      10.00%       8.00%

     THE BANK
     Leverage capital              8.53%      5.00%       4.00%       9.24%       5.00%       4.00%
     Tier 1 risk-based             9.54%      6.00%       4.00%       9.81%       6.00%       4.00%
     Total risk-based             10.79%     10.00%       8.00%      11.06%      10.00%       8.00%
</TABLE>


COMMITMENTS AND OFF-BALANCE SHEET RISK

The Bank maintains off-balance-sheet investments in the normal course of
business to meet the financing needs of its customers. These financial
instruments include commitments to extend credit and standby letters of credit.
These instruments involve, to varying degrees, elements of credit risk in excess
of the amount recognized, if any, in the balance sheet. The Bank's maximum
exposure to loan loss in the event of nonperformance by the other party to the
financial instruments for commitments to extend credit and standby letters of
credit is represented by the contractual notional amount of these instruments.
Such financial

                                       18
<PAGE>

instruments are recorded when they are funded. Fair value of the Bank's
off-balance-sheet instruments (commitments to extend credit and standby letters
of credit) is based on rates currently charged to enter into similar agreements,
taking into account the remaining terms of the agreements and the
counterparties' credit standing. At June 30, 2004, the rates on existing
off-balance-sheet instruments were equivalent to current market rates,
considering the underlying credit standing of the counterparties.

Tabular disclosure of the Company's contractual obligations as of the end of our
latest fiscal year was provided in our Annual Report on Form 10-K for the year
ended December 31, 2003. On March 24, 2004, the Company signed an addendum to
its original operating lease with Tippmann Properties, Inc, for additional space
at its headquarters location with a remaining term through December 31, 2013 and
total aggregate rental payments through the remainder of the term of $5.7
million.

ITEM 3.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

         The Company's primary market risk exposure is interest rate risk and,
to a lesser extent, liquidity risk. All of the Company's transactions are
denominated in U.S. dollars with no specific foreign exchange exposure. The
Company has no agricultural-related loan assets and therefore has no significant
exposure to changes in commodity prices. Any impact that changes in foreign
exchange rates and commodity prices would have on interest rates is assumed to
be insignificant.

Interest rate risk is the exposure of the Company's financial condition to
adverse movements in interest rates. The Company derives its income primarily
from the excess of interest collected on its interest-earning assets over the
interest paid on its interest-bearing liabilities. The rates of interest the
Company earns on its assets and owes on its liabilities generally are
established contractually for a period of time. Since market interest rates
change over time, the Company is exposed to lower profitability if it cannot
adapt to interest rate changes. Accepting interest rate risk can be an important
source of profitability and stockholder value; however, excessive levels of
interest rate risk could pose a significant threat to the Company's earnings and
capital base. Accordingly, effective risk management that maintains interest
rate risk at prudent levels is essential to the Company's safety and soundness.

Evaluating the exposure to changes in interest rates includes assessing both the
adequacy of the process used to control interest rate risk and the quantitative
level of exposure. The Company's interest rate risk management process seeks to
ensure that appropriate policies, procedures, management information and
internal controls are in place to maintain interest rate risk at prudent levels
with consistency and continuity. In evaluating the quantitative level of
interest rate risk, the Company assesses the existing and potential future
effects of changes in interest rates on its financial condition, including
capital adequacy, earnings, liquidity and overall asset quality.

There are two interest rate risk measurement techniques that may be used by the
Company. The first, which is commonly referred to as GAP analysis, measures the
difference between the dollar amount of interest-sensitive assets and
liabilities that will be refinanced or repriced during a given time period. A
significant repricing gap could result in a negative impact to the Company's net
interest margin during periods of changing market interest rates.

The following table depicts the Company's GAP position as of June 30, 2004:


                                       19
<PAGE>

RATE SENSITIVITY ANALYSIS

<TABLE>
<CAPTION>
                                               WITHIN        THREE TO       ONE TO         AFTER
                                               THREE          TWELVE         FIVE          FIVE
($ in thousands)                               MONTHS         MONTHS         YEARS         YEARS         TOTAL
----------------------------------------------------------------------------------------------------------------
<S>                                           <C>            <C>           <C>           <C>          <C>
ASSETS
      Federal funds sold, short-term
         investments and interest-
         earning deposits                     $  30,003      $             $             $            $  30,003
      Securities available for sale               1,230         2,492         6,971        29,476        40,169
      FHLBI and FRB stock                                                                   2,362         2,362
      Fixed rate loans                            8,958        24,250        71,293        25,749       130,250
      Variable rate loans                       251,130                                                 251,130
      Allowance for loan losses                                                                          (5,181)
      Other assets                                                                                       24,883
                                          ----------------------------------------------------------------------
Total assets                                  $ 291,321      $ 26,742      $ 78,264      $ 57,587     $ 473,616
                                          ----------------------------------------------------------------------
LIABILITIES
      Interest-bearing checking               $  20,498      $             $             $            $  20,498
      Savings accounts                           11,002                                                  11,002
      Money market accounts                      92,286                                                  92,286
      Time deposits < $100,000                   17,095        33,588        24,644                      75,327
      Time deposits $100,000 and over            55,454        41,785        42,478                     139,717
      Short-term borrowings                         200                                                     200
      FHLB advances                                             7,500        13,000         6,500        27,000
      Junior subordinated debt                                                              3,608         3,608
      Noninterest-bearing checking                                                                       61,381
      Other liabilities                                                                                   1,331
                                          ----------------------------------------------------------------------
Total liabilities                               196,535        82,873        80,122        10,108       432,350
STOCKHOLDERS' EQUITY                                                                                     41,266
                                          ----------------------------------------------------------------------
Total sources of funds                        $ 196,535      $ 82,873      $ 80,122      $ 10,108     $ 473,616
                                          ----------------------------------------------------------------------
Net asset (liability) GAP                     $  94,786      $(56,131)     $ (1,858)     $ 47,479     $
                                          ----------------------------------------------------------------------
CUMULATIVE GAP                                $  94,786      $ 38,655      $ 36,797      $ 84,276     $
                                          ----------------------------------------------------------------------
PERCENT OF CUMULATIVE GAP TO
   TOTAL ASSETS                                    20.0%          8.2%          7.8%         17.8%
</TABLE>


A second interest rate risk measurement used is commonly referred to as net
interest income simulation analysis. A simulation model assesses the direction
and magnitude of variations in net interest income resulting from potential
changes in market interest rates. Key assumptions in the model include
prepayment speeds on various loan and investment assets; cash flows and
maturities of interest-sensitive assets and liabilities; and changes in market
conditions impacting loan and deposit volume and pricing. These assumptions are
inherently uncertain, subject to fluctuation and revision in a dynamic
environment; therefore, a model cannot precisely estimate net interest income or
exactly predict the impact of higher or lower interest rates on net interest
income. Actual results will differ from simulated results due to timing,
magnitude, and frequency of interest rate changes and changes in market
conditions and the Company's strategies, among other factors.

As growth has dictated, the Company began utilizing simulation analysis as a
tool for measuring the effects of interest rate risk on the income statement
beginning with year-end 2003.

In addition to changes in interest rates, the level of future net interest
income is also dependent on a number of other variables, including the growth,
composition and absolute levels of loans, deposits, and other earning assets and
interest-bearing liabilities; economic and competitive conditions; potential
changes in lending, investing, and deposit gathering strategies; client
preferences; and other factors.

The following table provides information about the Company's financial
instruments used for purposes other than trading that are rate sensitive to
changes in interest rates as of June 30, 2004. It does not provide when these
items may actually reprice. For loans receivable, securities, and liabilities
with contractual maturities, the table presents principal cash flows and related
weighted-average interest rates by contractual maturities as well as the
Company's historical experience of the impact of interest rate fluctuations on
the prepayment of loans and mortgage backed securities. For core deposits
(demand deposits, interest-bearing checking, savings, and money market deposits)
that have no contractual maturity, the table presents principal cash flows and,
as applicable, related weighted-average interest rates based upon the Company's
historical experience and management's judgment,

                                       20
<PAGE>

as applicable, concerning their most likely withdrawal behaviors. The most
recent historical interest rates for core deposits have been assumed to apply
for future periods in this table as the actual interest rates that will need to
be paid to maintain these deposits are not currently known. Weighted average
variable rates are based upon contractual rates existing at the report date.

<TABLE>
<CAPTION>
                                                                  PRINCIPAL AMOUNT MATURING IN:
                                 ------------------------------------------------------------------------------------------------
     ($ in thousands)                                                                                                  FAIR VALUE
                                   06/30/05    06/30/06    06/30/07     06/30/08    06/30/09   THEREAFTER    TOTAL      06/30/04
                                 ------------------------------------------------------------------------------------------------
<S>                                <C>         <C>         <C>          <C>         <C>        <C>         <C>         <C>
Rate sensitive assets:
  Fixed interest rate loans        $ 33,207    $ 16,076    $ 15,346     $ 14,950    $ 24,921    $ 25,750   $ 130,250   $ 129,089
     Average interest rate            5.42%       6.28%       6.19%        6.19%       4.89%       5.40%       5.60%
  Variable interest rate loans       74,359      43,443      48,488       25,903      27,779      31,158     251,130     251,130
     Average interest rate            4.25%       4.21%       4.20%        4.27%       4.18%       4.34%       4.24%
  Fixed interest rate securities      3,722       4,662         394        1,744         171      29,476      40,169      40,169
     Average interest rate            4.38%       3.71%       3.97%        3.82%       4.40%       4.92%       4.67%
  Other interest bearing assets      30,003                                                                   30,003      30,003
     Average interest rate            0.98%                                                                    0.98%

Rate sensitive liabilities:
  Interest bearing checking          20,498                                                                   20,498      20,498
     Average interest rate            0.37%                                                                    0.34%
  Savings accounts                   11,002                                                                   11,002      11,002
     Average interest rate            0.28%                                                                    0.28%
  Money market accounts              92,286                                                                   92,286      92,286
     Average interest rate            0.93%                                                                    0.96%
  Time deposits                     147,924      52,897       8,205        5,683         110         226     215,045     215,429
     Average interest rate            1.81%       2.30%       3.16%        4.22%       3.26%       4.07%       2.05%
  Fixed interest rate
   borrowings                         5,500      13,000                                           10,108      28,608      28,620
     Average interest rate            2.70%       2.58%                                            5.41%       3.32%
  Variable interest rate
   borrowings                         2,200                                                                    2,200       2,200
     Average interest rate            1.53%                                                                    1.53%
</TABLE>


ITEM 4. CONTROLS AND PROCEDURES

We maintain a set of disclosure controls and procedures, which are designed to
ensure that information required to be disclosed by us in the reports filed by
us under the Securities Exchange Act of 1934, as amended (the "Exchange Act"),
is recorded, processed, summarized and reported within the time periods
specified in the SEC's rules and forms. As of June 30, 2004, we carried out an
evaluation, under the supervision and with the participation of our management,
including our Chairman, President and Chief Executive Officer and our Chief
Financial Officer, of the effectiveness of the design and operation of our
disclosure controls and procedures. Based on that evaluation, our Chairman,
President and Chief Executive Officer and our Chief Financial Officer concluded
that our disclosure controls and procedures are effective.

There was no change in our internal control over financial reporting during the
second quarter of the 2004 fiscal year that has materially affected, or is
reasonably likely to materially affect, our internal control over financial
reporting.



                                       21
<PAGE>

                           PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

     The Company and the Bank may be involved from time to time in various
     routine legal proceedings incidental to its business. Neither the Company
     nor the Bank is engaged in any legal proceeding that is expected to have a
     material adverse effect on the results of operations or financial position
     of the Company or the Bank.

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

(a) The annual meeting of the shareholders of the Company was held on April 20,
    2004.

(b) The following directors were elected at the meeting to serve until the
    annual meeting of shareholders in the year 2007:

                                            Votes For       Votes Withheld
                                      ------------------------------------
      R.V. Prasad Mantravadi, M.D.          3,556,689           16,575
      Michael J. Mirro, M.D.                3,391,888          181,376
      William G. Niezer                     3,472,718          100,546
      Larry L. Smith                        3,558,689           14,575
      John V. Tippmann                      3,391,888          181,376


     In addition, the following directors continue in office until the annual
     meeting of shareholders in the year indicated:

      Keith E. Busse            2005       Debra A. Niezer        2006
      Peter T. Eshelman         2005       Donald F. Schenkel     2005
      Michael S. Gouloff        2005       Joseph D. Ruffolo      2006
      Kathryn D. Callen         2006       Irene A. Walters       2005
      Jerome F. Henry, Jr.      2006


(c) Other matters voted upon and the results of the voting were as follows:

     The shareholders voted 3,438,333 in the affirmative and 123,146 in the
     negative, with 11,785 abstentions, to appoint Crowe Chizek and Company LLC
     as auditors of the Company for 2004.


ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

    (a)  Exhibits.

           31.1  Rule 13a-14(a) /15-14(a) Certification of Chief Executive
                 Officer.
           31.2  Rule 13a-14(a) /15-14(a) Certification of Chief Financial
                 Officer.

           32.1  Certification of Chief Executive Officer pursuant to 18 U.S.C.
                 Section 1350.
           32.2  Certification of Chief Financial Officer pursuant to 18 U.S.C.
                 Section 1350.


    (b)  Reports on Form 8-K

           On April 30, 2004, we furnished a current report on Form 8-K dated
           March 31, 2004 to report, under Item 12 of Form 8-K, our results of
           operations for the quarter ended March 31, 2004.




                                       22
<PAGE>


                                   SIGNATURES

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

                                        TOWER FINANCIAL CORPORATION


Dated:  August 13, 2004                 /s/ Donald F. Schenkel
                                        -------------------------------------
                                        Donald F. Schenkel, Chairman of the
                                        Board, President and Chief Executive
                                        Officer


Dated:  August 13, 2004                 /s/ Michael D. Cahill
                                        -------------------------------------
                                        Michael D. Cahill
                                        Chief Financial Officer and Secretary





                                       23