----

----

**Form      10-Q**

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

**June      30, 2006**

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

**TOWER      FINANCIAL CORPORATION**

----

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

----

| Large                accelerated filer o | Accelerated                filer o | Non-accelerated                filer x |
|------------------------------------------|------------------------------------|----------------------------------------|

----

----

----

**Forward-Looking      Statements**

|  | · | Our                dependence on key management                personnel; |
|--|--------|---------------------------------------------------------------------------|

|  | · | the                risk of losses due to loan defaults by larger commercial loan customers                or                a significant number of borrowers; |
|--|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------|

|  | · | Our                dependence on a favorable local economy in our primary service                area; |
|--|--------|--------------------------------------------------------------------------------------------------------|

|  | · | the                effect of government regulation on our ability to grow and                compete; |
|--|--------|-------------------------------------------------------------------------------------------------------|

|  | · | the                effect of changes in federal economic and monetary policies and local                competition on our ability to attract deposits,                make loans and achieve satisfactory interest                spreads; |
|--|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|  | · | general                changes in economic conditions, including interest rates, interest                rate                spreads, and real estate values;                and |
|--|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|  | · | restrictions                imposed on the our by regulators or regulations of the financial                services                industry. |
|--|--------|-----------------------------------------------------------------------------------------------------------------------------------------------|

----

**INDEX**

| **PART                    I. FINANCIAL INFORMATION** |                       |
|------------------------------------------------------|----------------------------|
|                                                 |                       |   |   |
|                                                 | Item                    1. | Financial                    Statements | page                    no. |
|                                                 |                       |   |   |
|                                                 |                       | Consolidated                    Condensed Balance Sheets at June 30, 2006                    (unaudited) and December 31, 2005 | 4 |
|                                                 |                       |   |   |
|                                                 |                       | Consolidated                    Condensed Statements of Operations for the                    three and six months ended June 30, 2006 and June 30, 2005                    (unaudited) | 5 |
|                                                 |                       |   |   |
|                                                 |                       | Consolidated                    Condensed Statements of Changes in                    Stockholders’ Equity for the six months ended June 30, 2006 and June 30,                    2005 (unaudited) | 6 |
|                                                 |                       |   |   |
|                                                 |                       | Consolidated                    Condensed Statements of Cash Flows for the six                    months ended June 30, 2006 and June 30, 2005                    (unaudited) | 7 |
|                                                 |                       |   |   |
|                                                 |                       | Notes                    to Consolidated Condensed Financial Statements | 8 |
|                                                 |                       |   |   |
|                                                 | Item                    2. | Management’s                    Discussion and Analysis of Financial Condition                    and Results of Operations | 11 |
|                                                 |                       |   |   |
|                                                 | Item                    3. | Quantitative                    and Qualitative Disclosures About Market                    Risk | 17 |
|                                                 |                       |   |   |
|                                                 | Item                    4. | Controls                    and Procedures | 19 |
|                                                 |                       |   |   |
| **PART                    II. OTHER INFORMATION**    |                       |
|                                                 |                       |   |   |
|                                                 | Item                    1. | Legal                    Proceedings | 20 |
|                                                 |                       |   |   |
|                                                 | Item                    6. | Exhibits | 20 |
|                                                 |                       |   |   |
| **SIGNATURES**                                       | 20                         |

----

*Index*

**PART      I. FINANCIAL INFORMATION **

**Item      1. FINANCIAL STATEMENTS**

**Tower      Financial Corporation**

**Consolidated      Condensed Balance Sheets**

|                                                                                                                                                                                                                                 |   | *(unaudited)*               |        |                            |   |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|-----------------------------|-------------|---------------------------------|--------|
|                                                                                                                                                                                                                                 |   | **June                30,** |        | **December                31,** |   |
|                                                                                                                                                                                                                                 |   | **2006**                    |        | **2005**                        |   |
| **ASSETS**                                                                                                                                                                                                                           |   |                        |        |                            |   |
| Cash                and due from banks                                                                                                                                                                                               |   | $                           | 17,128,235  |                            | $      | 14,326,710 |   |
| Short-term                investments and interest-earning deposits                                                                                                                                                                  |   |                        | 570,783     |                            |   | 16,393,439 |   |
| Federal                funds sold                                                                                                                                                                                                    |   |                        | 7,607,458   |                            |   | 7,188,188 |   |
| Total                cash and cash equivalents                                                                                                                                                                                       |   |                        | 25,306,476  |                            |   | 37,908,337 |   |
| Securities                available for sale, at fair value                                                                                                                                                                          |   |                        | 56,376,624  |                            |   | 50,642,276 |   |
| FHLB                and FRB stock                                                                                                                                                                                                    |   |                        | 3,421,300   |                            |   | 3,421,300 |   |
| Loans                                                                                                                                                                                                                                |   |                        | 506,077,120 |                            |   | 450,390,935 |   |
| Allowance                for loan losses                                                                                                                                                                                             |   |                        | (6,173,559  | )                               |   | (5,645,301 | ) |
| Net                loans                                                                                                                                                                                                             |   |                        | 499,903,561 |                            |   | 444,745,634 |   |
| Premises                and equipment, net                                                                                                                                                                                           |   |                        | 5,805,145   |                            |   | 4,638,436 |   |
| Accrued                interest receivable                                                                                                                                                                                           |   |                        | 3,096,079   |                            |   | 2,802,189 |   |
| Bank                owned life insurance                                                                                                                                                                                             |   |                        | 10,654,906  |                            |   | 10,462,402 |   |
| Other                assets                                                                                                                                                                                                          |   |                        | 5,217,017   |                            |   | 3,200,086 |   |
|                                                                                                                                                                                                                                 |   |                        |        |                            |   |   |   |
| Total                assets                                                                                                                                                                                                          |   | $                           | 609,781,108 |                            | $      | 557,820,660 |   |
|                                                                                                                                                                                                                                 |   |                        |        |                            |   |   |   |
| **LIABILITIES                AND STOCKHOLDERS' EQUITY**                                                                                                                                                                              |   |                        |        |                            |   |   |   |
| LIABILITIES                                                                                                                                                                                                                          |   |                        |        |                            |   |   |   |
| Deposits:                                                                                                                                                                                                                            |   |                        |        |                            |   |   |   |
| Noninterest-bearing                                                                                                                                                                                                                  |   | $                           | 69,668,932  |                            | $      | 66,742,748 |   |
| Interest-bearing                                                                                                                                                                                                                     |   |                        | 440,565,925 |                            |   | 394,208,113 |   |
| Total                deposits                                                                                                                                                                                                        |   |                        | 510,234,857 |                            |   | 460,950,861 |   |
| Short-term                borrowings                                                                                                                                                                                                 |   |                        | -           |                            |   | - |   |
| Federal                Home Loan Bank (FHLB) advances                                                                                                                                                                                |   |                        | 36,200,000  |                            |   | 34,700,000 |   |
| Junior                subordinated debt                                                                                                                                                                                              |   |                        | 11,856,000  |                            |   | 11,856,000 |   |
| Accrued                interest payable                                                                                                                                                                                              |   |                        | 1,251,100   |                            |   | 954,075 |   |
| Other                liabilities                                                                                                                                                                                                     |   |                        | 1,920,190   |                            |   | 2,091,670 |   |
|                                                                                                                                                                                                                                 |   |                        |        |                            |   |   |   |
| Total                liabilities                                                                                                                                                                                                     |   |                        | 561,462,147 |                            |   | 510,552,606 |   |
|                                                                                                                                                                                                                                 |   |                        |        |                            |   |   |   |
| 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;                4,019,310 shares issued and outstanding at June 30, 2006 and 4,007,936                at                December 31, 2005 |   |                        | 38,210,903  |                            |   | 38,006,929 |   |
| Retained                earnings                                                                                                                                                                                                     |   |                        | 11,062,884  |                            |   | 9,478,812 |   |
| Accumulated                other comprehensive income(loss), net of tax of $(537,090) at June                30,                2006 and $(122,448) at December 31, 2005                                                             |   |                        | (954,826    | )                               |   | (217,687 | ) |
| Total                stockholders' equity                                                                                                                                                                                            |   |                        | 48,318,961  |                            |   | 47,268,054 |   |
|                                                                                                                                                                                                                                 |   |                        |        |                            |   |   |   |
| Total                liabilities and stockholders' equity                                                                                                                                                                            |   | $                           | 609,781,108 |                            | $      | 557,820,660 |   |

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

----

*Index*

**Tower      Financial Corporation**

**Consolidated      Condensed Statements of Operations**

|                                                                                                 |   |  *(unaudited)*                         |      |                                |   |      |   |
|------------------------------------------------------------------------------------------------------|--------|---------------------------------------------|-----------|-------------------------------------|--------|-----------|--------|
|                                                                                                 |   |  **Three                Months ended** |      | **Six                Months Ended** |   |
|                                                                                                 |   |  **June                30**            |      | **June                30**          |   |
|                                                                                                 |   |  **2006**                              |      | **2005**                            |   | **2006**  |   | **2005** |   |
| **Interest                income:**                                                                  |   |                                   |      |                                |   |      |   |   |   |
| Loans,                including fees                                                                 |   | $                                           | 9,076,121 |                                | $      | 6,372,476 |   | $ | 17,221,565 |   | $ | 12,133,057 |   |
| Securities                - taxable                                                                  |   |                                        | 524,597   |                                |   | 231,258   |   |   | 1,015,161 |   |   | 478,548 |   |
| Securities                - tax exempt                                                               |   |                                        | 169,863   |                                |   | 134,632   |   |   | 317,255 |   |   | 269,361 |   |
| Other                interest income                                                                 |   |                                        | 162,912   |                                |   | 122,003   |   |   | 307,915 |   |   | 203,787 |   |
|  Total                interest income                                                           |   |                                        | 9,933,493 |                                |   | 6,860,369 |   |   | 18,861,896 |   |   | 13,084,753 |   |
| **Interest                expense:**                                                                 |   |                                        |      |                                |   |      |   |   |   |   |   |   |   |
| Deposits                                                                                             |   |                                        | 4,389,514 |                                |   | 2,293,840 |   |   | 7,983,268 |   |   | 4,157,443 |   |
| Short-term                borrowings                                                                 |   |                                        |      |                                |   |      |   |   |   |   |   | 289 |   |
| FHLB                advances                                                                         |   |                                        | 369,069   |                                |   | 181,405   |   |   | 721,249 |   |   | 428,105 |   |
| Junior                subordinated debt                                                              |   |                                        | 209,230   |                                |   | 81,180    |   |   | 418,461 |   |   | 162,360 |   |
|  Total                interest expense                                                          |   |                                        | 4,967,813 |                                |   | 2,556,425 |   |   | 9,122,978 |   |   | 4,748,197 |   |
| Net                interest income                                                                   |   |                                        | 4,965,680 |                                |   | 4,303,944 |   |   | 9,738,918 |   |   | 8,336,556 |   |
| **Provision                for loan losses**                                                         |   |                                        | 475,000   |                                |   | 536,000   |   |   | 1,050,000 |   |   | 1,117,000 |   |
| Net                interest income after provision for loan losses                                   |   |                                        | 4,490,680 |                                |   | 3,767,944 |   |   | 8,688,918 |   |   | 7,219,556 |   |
| **Noninterest                income:**                                                               |   |                                        |      |                                |   |      |   |   |   |   |   |   |   |
| Trust                and brokerage fees                                                              |   |                                        | 603,542   |                                |   | 538,442   |   |   | 1,394,498 |   |   | 1,038,583 |   |
| Service                charges                                                                       |   |                                        | 141,182   |                                |   | 169,285   |   |   | 319,864 |   |   | 317,437 |   |
| Loan                broker fees                                                                      |   |                                        | 4,409     |                                |   | 48,602    |   |   | 35,028 |   |   | 110,795 |   |
| Other                fees                                                                            |   |                                        | 346,630   |                                |   | 244,513   |   |   | 737,674 |   |   | 440,950 |   |
|  Total                noninterest income                                                        |   |                                        | 1,095,763 |                                |   | 1,000,842 |   |   | 2,487,064 |   |   | 1,907,765 |   |
| **Noninterest                expense:**                                                              |   |                                        |      |                                |   |      |   |   |   |   |   |   |   |
| Salaries                and benefits                                                                 |   |                                        | 2,564,673 |                                |   | 2,063,704 |   |   | 5,067,656 |   |   | 3,988,543 |   |
| Occupancy                and equipment                                                               |   |                                        | 511,668   |                                |   | 461,541   |   |   | 991,845 |   |   | 897,257 |   |
| Marketing                                                                                            |   |                                        | 124,290   |                                |   | 153,211   |   |   | 296,636 |   |   | 309,743 |   |
| Data                processing                                                                       |   |                                        | 177,644   |                                |   | 101,602   |   |   | 323,611 |   |   | 223,920 |   |
| Loan                and professional costs                                                           |   |                                        | 328,998   |                                |   | 217,743   |   |   | 549,784 |   |   | 394,149 |   |
| Office                supplies and postage                                                           |   |                                        | 122,457   |                                |   | 70,843    |   |   | 229,096 |   |   | 141,043 |   |
| Courier                services                                                                      |   |                                        | 86,939    |                                |   | 83,464    |   |   | 179,645 |   |   | 162,696 |   |
| Business                development                                                                  |   |                                        | 138,511   |                                |   | 101,060   |   |   | 243,455 |   |   | 196,741 |   |
| Other                expense                                                                         |   |                                        | 288,294   |                                |   | 206,885   |   |   | 561,483 |   |   | 391,755 |   |
|  Total                noninterest expense                                                       |   |                                        | 4,343,474 |                                |   | 3,460,053 |   |   | 8,443,211 |   |   | 6,705,847 |   |
| **Income                before income taxes**                                                        |   |                                        | 1,242,969 |                                |   | 1,308,733 |   |   | 2,732,771 |   |   | 2,421,474 |   |
| Income                taxes expense                                                                  |   |                                        | 330,990   |                                |   | 467,160   |   |   | 827,690 |   |   | 853,050 |   |
|                                                                                                 |   |                                        |      |                                |   |      |   |   |   |   |   |   |   |
| **Net                income**                                                                        |   | $                                           | 911,979   |                                | $      | 841,573   |   | $ | 1,905,081 |   | $ | 1,568,424 |   |
|                                                                                                 |   |                                        |      |                                |   |      |   |   |   |   |   |   |   |
| **Basic                earnings per common share**                                                   |   | $                                           | 0.23      |                                | $      | 0.21      |   | $ | 0.47 |   | $ | 0.39 |   |
| **Diluted                earnings per common share**                                                 |   | $                                           | 0.22      |                                | $      | 0.21      |   | $ | 0.46 |   | $ | 0.39 |   |
| Average                common shares outstanding                                                     |   |                                        | 4,017,254 |                                |   | 4,005,824 |   |   | 4,012,652 |   |   | 4,004,497 |   |
| Average                common shares and dilutive potential common shares                outstanding |   |                                        | 4,119,906 |                                |   | 4,070,626 |   |   | 4,128,173 |   |   | 4,069,757 |   |

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

----

*Index*

**Tower      Financial Corporation**

**Consolidated      Condensed Statements of Changes in Stockholders’ Equity **

*(unaudited)*

|                                                                                                                                                       |   | **Common**                   |       |         |         | **Accumulated**                  |   |         |     |
|------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|------------------------------|------------|--------------|--------------|----------------------------------|--------|--------------|----------|
|                                                                                                                                                       |   | **Stock                and** |       |         |         | **Other**                        |   |         |     |
|                                                                                                                                                       |   | **Paid-in**                  |       | **Retained** |         | **Comprehensive**                |   |         |     |
|                                                                                                                                                       |   | **Capital**                  |       | **Earnings** |         | **Income                (Loss)** |   | **Total**    |     |
|                                                                                                                                                       |   |                         |       |         |         |                             |   |         |     |
| **Balance,                January 1, 2005**                                                                                                                |   | $                            | 37,952,860 |         | $            | 6,040,155                        |   | $            | 20,455   |   | $ | 44,013,470 |   |
|                                                                                                                                                       |   |                         |       |         |         |                             |   |         |     |   |   |   |   |
| Net                income for 2005                                                                                                                         |   |                         |       |         |         | 1,568,424                        |   |         |     |   |   | 1,568,424 |   |
|                                                                                                                                                       |   |                         |       |         |         |                             |   |         |     |   |   |   |   |
| Change                in net unrealized appreciation (depreciation) on securities available                for                sale, net of tax of $42,294  |   |                         |       |         |         |                             |   |         | 78,978   |   |   | 78,978 |   |
|                                                                                                                                                       |   |                         |       |         |         |                             |   |         |     |   |   |   |   |
| Total                Comprehensive Income                                                                                                                  |   |                         |       |         |         |                             |   |         |     |   |   | 1,647,402 |   |
|                                                                                                                                                       |   |                         |       |         |         |                             |   |         |     |   |   |   |   |
| Issuance                of 4,530 shares of common stock for stock options exercised including                tax                benefit                    |   |                         | 51,034     |         |    |                             |   |    |     |   |   | 51,034 |   |
|                                                                                                                                                       |   |                         |       |         |         |                             |   |         |     |   |   |   |   |
| **Balance,                June 30, 2005**                                                                                                                  |   | $                            | 38,003,894 |         | $            | 7,608,579                        |   | $            | 99,433   |   | $ | 45,711,906 |   |
|                                                                                                                                                       |   |                         |       |         |         |                             |   |         |     |   |   |   |   |
|                                                                                                                                                       |   |                         |       |         |         |                             |   |         |     |   |   |   |   |
|                                                                                                                                                       |   |                         |       |         |         |                             |   |         |     |   |   |   |   |
| **Balance,                January 1, 2006**                                                                                                                |   | $                            | 38,006,929 |         | $            | 9,478,812                        |   | $            | (217,687 | ) | $ | 47,268,054 |   |
|                                                                                                                                                       |   |                         |       |         |         |                             |   |         |     |   |   |   |   |
| Net                income for 2006                                                                                                                         |   |                         |       |         |         | 1,905,081                        |   |         |     |   |   | 1,905,081 |   |
|                                                                                                                                                       |   |                         |       |         |         |                             |   |         |     |   |   |   |   |
| Change                in net unrealized appreciation (depreciation) on securities available                for                sale, net of tax of $414,641 |   |                         |       |         |         |                             |   |         | (737,139 | ) |   | (737,139 | ) |
|                                                                                                                                                       |   |                         |       |         |         |                             |   |         |     |   |   |   |   |
| Total                Comprehensive Income                                                                                                                  |   |                         |       |         |         |                             |   |         |     |   |   | 1,167,942 |   |
|                                                                                                                                                       |   |                         |       |         |         |                             |   |         |     |   |   |   |   |
| Cash                dividends paid ($0.04 per share)                                                                                                       |   |                         |       |         |         | (321,009                         | )      |         |     |   |   | (321,009 | ) |
|                                                                                                                                                       |   |                         |       |         |         |                             |   |         |     |   |   |   |   |
| Issuance                of 11,374 shares of common stock for stock options exercised, including                tax benefit                                 |   |                         | 146,308    |         |         |                             |   |         |     |   |   | 146,308 |   |
|                                                                                                                                                       |   |                         |       |         |         |                             |   |         |     |   |   |   |   |
| Stock                option compensation expense                                                                                                           |   |                         | 57,666     |         |         |                             |   |         |     |   |   | 57,666 |   |
|                                                                                                                                                       |   |                         |       |         |         |                             |   |         |     |   |   |   |   |
| **Balance,                June 30, 2006**                                                                                                                  |   | $                            | 38,210,903 |         | $            | 11,062,884                       |   | $            | (954,826 | ) | $ | 48,318,961 |   |
|                                                                                                                                                       |   |                         |       |         |         |                             |   |         |     |   |   |   |   |
| *The                following notes are an integral part of the financial                statements.*                                                      |

----

*Index*

**Tower      Financial Corporation**

**Consolidated      Condensed Statements of Cash Flows**

|                                                                                                     |   | *(unaudited)*                       |        | *(unaudited)*                       |   |
|----------------------------------------------------------------------------------------------------------|--------|-------------------------------------|-------------|-------------------------------------|--------|
|                                                                                                     |   | **Six                Months ended** |        | **Six                Months ended** |   |
|                                                                                                     |   | **June                30, 2006**    |        | **June                30, 2005**    |   |
| **Cash                flows from operating activities:**                                                 |   |                                |        |                                |   |
| Net                income                                                                                |   | $                                   | 1,905,081   |                                | $      | 1,568,424 |   |
| Adjustments                to reconcile net income to net cash from operating                activities: |   |                                |        |                                |   |   |   |
|  Depreciation                and amortization                                                       |   |                                | 403,893     |                                |   | 334,046 |   |
|  Provision                for loan losses                                                           |   |                                | 1,050,000   |                                |   | 1,117,000 |   |
|  Stock                option compensation expense                                                   |   |                                | 57,666      |                                |   |   |   |
|  Earnings                on life insurance                                                          |   |                                | (192,504    | )                                   |   | (56,452 | ) |
|  FHLB                stock dividend                                                                 |   |                                |        |                                |   | (38,800 | ) |
|  Change                in accrued interest receivable                                               |   |                                | (293,890    | )                                   |   | (288,720 | ) |
|  Change                in other assets                                                              |   |                                | (1,602,290  | )                                   |   | (246,179 | ) |
|  Change                in accrued interest payable                                                  |   |                                | 297,025     |                                |   | 106,102 |   |
|  Change                in other liabilities                                                         |   |                                | (171,480    | )                                   |   | 299,339 |   |
|  Net                cash from operating activities                                                  |   |                                | 1,453,501   |                                |   | 2,794,760 |   |
| **Cash                flows from investing activities:**                                                 |   |                                |        |                                |   |   |   |
| Net                change in loans                                                                       |   |                                | (55,233,583 | )                                   |   | (32,604,363 | ) |
| Purchase                of loans                                                                         |   |                                | (9,136,078  | )                                   |   |   |   |
| Purchase                of securities available for sale                                                 |   |                                | (8,735,350  | )                                   |   |   |   |
| Proceeds                from maturities of securities available for sale                                 |   |                                | 1,849,222   |                                |   | 4,006,638 |   |
| Purchase                of FHLB and FRB stock                                                            |   |                                |        |                                |   | (150,000 | ) |
| Purchase                of life insurance                                                                |   |                                |        |                                |   | (7,000,000 | ) |
| Proceeds                from sale of participation loans                                                 |   |                                | 8,161,735   |                                |   | 2,986,813 |   |
| Purchase                of premises, equipment and leasehold expenditures                                |   |                                | (1,570,603  | )                                   |   | (145,202 | ) |
|  Net                cash from investing activities                                                  |   |                                | (64,664,657 | )                                   |   | (32,906,114 | ) |
| **Cash                flows from financing activities:**                                                 |   |                                |        |                                |   |   |   |
| Net                change in deposits                                                                    |   |                                | 49,283,996  |                                |   | 43,297,792 |   |
| Net                change in short-term borrowings                                                       |   |                                |        |                                |   | (200,000 | ) |
| Cash                dividends paid                                                                       |   |                                | (321,009    | )                                   |   |   |   |
| Proceeds                from issuance of common stock from exercise of stock options                |   |                                | 114,571     |                                |   | 46,768 |   |
| Tax                benefit from exercise of stock options                                                |   |                                | 31,737      |                                |   | 4,266 |   |
| Proceeds                from FHLB advances                                                               |   |                                | 53,000,000  |                                |   | 10,900,000 |   |
| Repayment                of FHLB advances                                                                |   |                                | (51,500,000 | )                                   |   | (29,700,000 | ) |
|  Net                cash from financing activities                                                  |   |                                | 50,609,295  |                                |   | 24,348,826 |   |
| **Net                change in cash and cash equivalents**                                               |   |                                | (12,601,861 | )                                   |   | (5,762,528 | ) |
| Cash                and cash equivalents, beginning of period                                            |   |                                | 37,908,337  |                                |   | 37,225,025 |   |
| **Cash                and cash equivalents, end of period**                                              |   | $                                   | 25,306,476  |                                | $      | 31,462,497 |   |
|                                                                                                     |   |                                |        |                                |   |   |   |
| Supplemental                disclosures of cash flow information                                         |   |                                |        |                                |   |   |   |
| Cash                paid during the year for:                                                            |   |                                |        |                                |   |   |   |
| Interest                                                                                                 |   | $                                   | 8,825,953   |                                | $      | 4,642,095 |   |
| Income                taxes                                                                              |   |                                | 1,455,141   |                                |   | 920,349 |   |

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

----

*Index*

**Tower      Financial Corporation**

**Notes      to Consolidated Condensed Financial Statements**

**Note      1 -- Summary of Significant Accounting Policies**

|   | **a.** | **Organization**:                Tower                Financial Corporation, collectively with its subsidiaries, the “Company,”                was incorporated as an Indiana corporation on July 8, 1998. The Company                is                a holding company with one bank subsidiary, Tower Bank & Trust (or the                “Bank”), a newly formed (effective January 1, 2006) trust company, Tower                Trust Company, (or the “Trust Company”), two unconsolidated subsidiary                guarantor trusts, Tower Capital Trust 1 and Tower Capital Trust 2,                and a                newly formed (effective July 1, 2006) subsidiary of the Bank, Tower                Capital Investments, Inc. (“Investment Company”), which in turn formed and                wholly owns a real estate investment subsidiary, Tower Funding Corp.                (“REIT”). The Bank is an Indiana chartered bank with depository accounts                insured by the Federal Deposit Insurance Corporation (“FDIC”) and is a                member of the Federal Reserve System. The Trust Company is an Indiana                Corporation, and Tower Capital Trust 1 and Tower Capital Trust 2                are                unconsolidated, wholly owned Delaware statutory business trusts formed                in                November 2001 and December 2005, respectively, for the exclusive                purpose                of issuing and selling 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, 2006                and                its consolidated results of operations, comprehensive income, changes                in                stockholders’ equity and cash flows for the three and six-month periods                ended June 30, 2006 and June 30, 2005. The results for the period                ended                June 30, 2006 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, 2005, 2004, and 2003 and related notes included in the                Company’s Annual Report on Form 10-K for the year ended December 31,                2005. |
|--------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | **c.** | **Principles                of Consolidation:**The                accompanying consolidated condensed financial statements include                the                accounts of the Company and its subsidiaries. All significant intercompany                accounts and transactions have been eliminated in consolidation. |
|--------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | **d.** | **Stock                Compensation**:                Prior                to January 1, 2006, the Company accounted for its stock-based employee                compensation under the recognition and measurement principles of                APB                Opinion 25, *Accounting                for Stock Issued to Employees*,                and related interpretations. No stock-based employee compensation                cost is                reflected in the income statements for the periods ending December                31,                2005, or before. Effective January 1, 2006, the Company adopted Statement                of Financial Accounting Standards (“SFAS”) No. 123(R), *Share-based                Payment*,                and has included stock-based employee compensation expense of $57,666                in                its income statement for the six months ended June 30,                2006. |
|--------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

*Index*

|                                                                                                            |   | **Three                Months Ended** |    | **Six                Months Ended** |   |
|-----------------------------------------------------------------------------------------------------------------|--------|---------------------------------------|---------|-------------------------------------|--------|
|                                                                                                            |   | **June                30**            |    | **June                30**          |   |
|                                                                                                            |   | **2006**                              |    | **2005**                            |   | **2006** |   | **2005** |   |
|                                                                                                            |   |                                  |    |                                |   |   |   |   |   |
| Net                income as reported                                                                           |   | $                                     | 911,979 |                                | $      | 841,573 |   | $ | 1,905,081 |   | $ | 1,568,424 |   |
| Deduct:                Stock-based compensation expense determined under fair value-based                method |   |                                  | -       |                                |   | (38,632 | ) |   | - |   |   | (74,432 | ) |
| Pro                forma net income                                                                             |   | $                                     | 911,979 |                                | $      | 802,941 |   | $ | 1,905,081 |   | $ | 1,493,992 |   |
|                                                                                                            |   |                                  |         |                                |   |  |   |   |  |   |   |  |   |
| Basic                earnings per share as reported                                                             |   | $                                     | 0.23    |                                | $      | 0.21 |   | $ | 0.47 |   | $ | 0.39 |   |
| Pro                forma basic earnings per share                                                               |   |                                  | n/a     |                                |   | 0.20 |   |   | 0.47 |   |   | 0.37 |   |
| Diluted                earnings per share as reported                                                           |   |                                  | 0.22    |                                |   | 0.21 |   |   | 0.46 |   |   | 0.39 |   |
| Pro                forma diluted earnings per share                                                             |   |                                  | n/a     |                                |   | 0.20 |   |   | 0.46 |   |   | 0.37 |   |

|   | **e.** | **Effect                of Newly Issued But Not Yet Effective Accounting                Standards:**                In                June 2006, the FASB issued Interpretation No. 48, Accounting for                Uncertainty in Income Taxes - an Interpretation of FASB Statement                No. 109                (FIN 48, which clarifies the accounting for uncertainty in income                taxes                recognized in a company’s financial statements in accordance with SFAS                109, Accounting for Income Taxes. FIN 48 prescribes a recognition                and                measurement threshold for a tax position taken or expected to be                taken in                a tax return. FIN 48 also provides guidance on derecognition,                classification, interest and penalties, accounting for interim periods,                disclosure, and transition. FIN 48 is effective for fiscal years                beginning                after December 15, 2006. The Company has not yet completed its evaluation                of the impact of the adoption of FIN                48. |
|--------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | **f.** | **Reclassifications:**                Certain items from the prior period financial statements were reclassified                to conform to the current                presentation. |
|--------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

**Note      2 - Earnings Per Share**

|                                                                                                          |   | **Three                Months Ended** |      | **Six                Months Ended** |   |
|---------------------------------------------------------------------------------------------------------------|--------|---------------------------------------|-----------|-------------------------------------|--------|
|                                                                                                          |   | **June                30**            |      | **June                30**          |   |
|                                                                                                          |   | **2006**                              |      | **2005**                            |   | **2006** |   | **2005** |   |
| **Basic**                                                                                                     |   |                                  |      |                                |   |   |   |   |   |
| Net                income                                                                                     |   | $                                     | 911,979   |                                | $      | 841,573 |   | $ | 1,905,081 |   | $ | 1,568,424 |   |
| Weighted                average common shares outstanding                                                     |   |                                  | 4,017,254 |                                |   | 4,005,824 |   |   | 4,012,652 |   |   | 4,004,497 |   |
| Basic                earnings per common share                                                                |   | $                                     | 0.23      |                                | $      | 0.21 |   | $ | 0.47 |   | $ | 0.39 |   |
|                                                                                                          |   |                                  |           |                                |   |  |   |   |  |   |   |  |   |
| **Diluted**                                                                                                   |   |                                  |           |                                |   |  |   |   |  |   |   |  |   |
| Net                income                                                                                     |   | $                                     | 911,979   |                                | $      | 841,573 |   | $ | 1,905,081 |   | $ | 1,568,424 |   |
| Weighted                average common shares outstanding                                                     |   |                                  | 4,017,254 |                                |   | 4,005,824 |   |   | 4,012,652 |   |   | 4,004,497 |   |
| Add:                dilutive effect of assumed stock option exercises                                         |   |                                  | 102,652   |                                |   | 64,802 |   |   | 115,521 |   |   | 65,260 |   |
| Weighted                average common shares and dilutive potential common shares                outstanding |   |                                  | 4,119,906 |                                |   | 4,070,626 |   |   | 4,128,173 |   |   | 4,069,757 |   |
| Diluted                earnings per common share                                                              |   | $                                     | 0.22      |                                | $      | 0.21 |   | $ | 0.46 |   | $ | 0.39 |   |

**Note      3 - Stock Option Plans**

----

*Index*

|                                       | 2006   |   | 2005                           |
|--------------------------------------------|--------|--------|--------------------------------|
| Expected                volatility         | n/a    |   | 26.29%                - 26.65% |
|                                       |   |   |                           |
| Weighted-average                volatility | n/a    |   | 26.52%                         |
|                                       |   |   |                           |
| Expected                dividends          | n/a    |   | n/a                            |
|                                       |   |   |                           |
| Expected                term (in years)    | n/a    |   | 7                years         |
|                                       |   |   |                           |
| Risk-free                rate              | n/a    |   | 4.04%                          |

|                                  |   |   |    |     |   | Weighted-   |   |      |   |
|---------------------------------------|--------|--------|---------|----------|--------|-------------|--------|-----------|--------|
|                                  |   |   |    | Weighted |   | Average     |   |      |   |
|                                  |   |   |    | Average  |   | Remaining   |   | Aggregate |   |
|                                  |   |   |    | Exercise |   | Contractual |   | Intrinsic |   |
| Options                               |   | Shares |    | Price    |   | Term        |   | Value     |   |
|                                  |   |   |    |     |   |        |   |      |   |
| Outstanding                at 1/1/06  |   |   | 352,296 |     | $      | 11.21       |   |      |   |   |   |   |   |
|                                  |   |   |    |     |   |        |   |      |   |   |   |   |   |
| Granted                               |   |   | 0       |     |   |        |   |      |   |   |   |   |   |
|                                  |   |   |    |     |   |        |   |      |   |   |   |   |   |
| Exercised                             |   |   | (11,374 | )        | $      | 10.07       |   |      |   |   |   |   |   |
|                                  |   |   |    |     |   |        |   |      |   |   |   |   |   |
| Forfeited                or expired   |   |   | 0       |     |   |        |   |      |   |   |   |   |   |
|                                  |   |   |    |     |   |        |   |      |   |   |   |   |   |
| Outstanding                at 6/30/06 |   |   | 340,922 |     | $      | 11.25       |   |      | 4.36   |   | $ | 2,608,053 |   |
|                                  |   |   |    |     |   |        |   |      |   |   |   |   |   |
| Exercisable                at 6/30/06 |   |   | 290,525 |     | $      | 10.66       |   |      | 4.36   |   | $ | 2,399,926 |   |

|                                |   |   |    | Weighted-Average          |   |
|-------------------------------------|--------|--------|---------|---------------------------|--------|
|                                |   |   |    | Grant-Date                |   |
| Non-vested                shares    |   | Shares |    | Fair                Value |   |
|                                |   |   |    |                      |   |
| Nonvested                at 1/1/06  |   |   | 69,522  |                      | $      | 14.40 |   |
|                                |   |   |    |                      |   |   |   |
| Granted                             |   |   | 0       |                      |   |   |   |
|                                |   |   |    |                      |   |   |   |
| Vested                              |   |   | (19,125 | )                         | $      | 13.68 |   |
|                                |   |   |    |                      |   |   |   |
| Nonvested                at 6/30/06 |   |   | 50,397  |                      | $      | 14.68 |   |

----

*Index*

**Item      2.   MANAGEMENT’S DISCUSSION AND ANALYSIS OF      FINANCIAL CONDITION AND RESULTS OF OPERATIONS**

**Critical      Accounting Policies**

**Financial      Condition**

*Cash      and Investments*

*Loans*

----

*Index*

|                                     |   | **June                30, 2006** |        | **December                31, 2005** |   |
|------------------------------------------|--------|----------------------------------|-------------|--------------------------------------|--------|
|                                     |   | **Balance**                      |        | **%**                                |   | **Balance** |   | **%** |   |
|                                     |   |                             |        |                                 |   |   |   |   |   |
| Commercial                               |   | $                                | 222,548,356 |                                 |   | 44.0 | % | $ | 208,867,595 |   |   | 46.4 | % |
| Commercial                real estate    |   |                             | 161,573,226 |                                 |   | 31.9 | % |   | 145,558,639 |   |   | 32.3 | % |
| Residential                real estate   |   |                             | 71,392,281  |                                 |   | 14.1 | % |   | 50,293,491 |   |   | 11.2 | % |
| Home                equity               |   |                             | 33,695,001  |                                 |   | 6.7 | % |   | 30,251,837 |   |   | 6.7 | % |
| Consumer                                 |   |                             | 16,859,202  |                                 |   | 3.3 | % |   | 15,390,374 |   |   | 3.4 | % |
| Total                loans               |   |                             | 506,068,066 |                                 |   | 100.0 | % |   | 450,361,936 |   |   | 100.0 | % |
| Net                deferred loan costs   |   |                             | 9,054       |                                 |   |  |   |   | 28,999 |   |   |   |   |
| Allowance                for loan losses |   |                             | (6,173,559  | )                                    |   |  |   |   | (5,645,301 | ) |   |   |   |
|                                     |   |                             |        |                                 |   |  |   |   |   |   |   |   |   |
| Net                loans                 |   | $                                | 499,903,561 |                                 |   |  |   | $ | 444,745,634 |   |   |   |   |

*Nonperforming      Assets.*

|                                                          |   | **June                30, 2006** |      | **December                31, 2005** |   |
|---------------------------------------------------------------|--------|----------------------------------|-----------|--------------------------------------|--------|
|                                                          |   |                             |      |                                 |   |
| Loans                past due over 90 days and still accruing |   | $                                | 1,303,839 |                                 | $      | 863,862 |   |
| Nonaccrual                loans                               |   |                             | 2,861,809 |                                 |   | 1,332,472 |   |
| Total                nonperforming loans                      |   | $                                | 4,165,648 |                                 | $      | 2,196,334 |   |
| Other                real estate owned                        |   |                             | 430,000   |                                 |   | 244,050 |   |
| Total                nonperforming assets                     |   | $                                | 4,595,648 |                                 | $      | 2,440,384 |   |
|                                                          |   |                             |           |                                 |   |  |   |
| Nonperforming                assets to total assets           |   |                             | 0.75      | %                                    |   | 0.44 | % |
|                                                          |   |                             |           |                                 |   |  |   |
| Nonperforming                loans to total loans             |   |                             | 0.82      | %                                    |   | 0.49 | % |

*Allowance      for Loan Losses. *

----

*Index*

|                                            |   | June                30, 2006 |      | December                31, 2005 |   |
|-------------------------------------------------|--------|------------------------------|-----------|----------------------------------|--------|
|                                            |   |                         |      |                             |   |
| Specific                allocations             |   | $                            | 3,825,000 |                             | $      | 3,692,000 |   |
| Loan                pool percentage allocations |   |                         | 2,238,000 |                             |   | 1,942,000 |   |
| Unallocated                                     |   |                         | 110,559   |                             |   | 11,301 |   |
|                                            |   |                         |           |                             |   |   |   |
| Total                allowance for loan losses  |   | $                            | 6,173,559 |                             | $      | 5,645,301 |   |

|                                                         |   | **2006** |      | **2005** |   |
|--------------------------------------------------------------|--------|----------|-----------|----------|--------|
|                                                         |   |     |      |     |   |
| Beginning                balance, January 1                  |   | $        | 5,645,301 |     | $      | 5,607,992 |   |
| Provision                charged to operating expense        |   |     | 1,050,000 |     |   | 1,117,000 |   |
| Charge-offs                                                  |   |     | (738,977  | )        |   | (889,685 | ) |
| Recoveries                                                   |   |     | 217,235   |     |   | 92,146 |   |
|                                                         |   |     |           |     |   |  |   |
| Ending                balance, June 30                       |   | $        | 6,173,559 |     | $      | 5,927,453 |   |
|                                                         |   |     |           |     |   |  |   |
| Net                charge-offs to average loans (annualized) |   |     | 0.22      | %        |   | 0.39 | % |

*Other      Assets*

*Deposits*

----

*Index*

|                                      |   | **June                30, 2006** |        | **December                31, 2005** |   |
|-------------------------------------------|--------|----------------------------------|-------------|--------------------------------------|--------|
|                                      |   | **Balance**                      |        | **%**                                |   | **Balance** |   | **%** |   |
|                                      |   |                             |        |                                 |   |   |   |   |   |
| Noninterest-bearing                demand |   | $                                | 69,658,330  |                                 |   | 13.7 | % | $ | 66,742,748 |   |   | 14.5 | % |
| Interest-bearing                checking  |   |                             | 30,856,410  |                                 |   | 6.0 | % |   | 32,684,869 |   |   | 7.1 | % |
| Money                market               |   |                             | 102,572,624 |                                 |   | 20.1 | % |   | 76,437,818 |   |   | 16.6 | % |
| Savings                                   |   |                             | 14,070,456  |                                 |   | 2.8 | % |   | 14,081,131 |   |   | 3.1 | % |
| Time,                under $100,000       |   |                             | 75,358,800  |                                 |   | 14.8 | % |   | 64,560,749 |   |   | 14.0 | % |
| Time,                $100,000 and over    |   |                             | 217,718,237 |                                 |   | 42.6 | % |   | 206,443,546 |   |   | 44.7 | % |
|                                      |   |                             |        |                                 |   |  |   |   |   |   |   |   |   |
| Total                deposits             |   | $                                | 510,234,857 |                                 |   | 100.0 | % | $ | 460,950,861 |   |   | 100.0 | % |

*Borrowings*

*Other      Liabilities. *

**Results      of Operations**

| **Performance                  Ratios**      |   | **June                  30** |   |
|----------------------------------------------|--------|------------------------------|--------|
|                                         |   | **2006**                     |   | **2005** |   |
|                                         |   |                         |   |   |   |
| Return                  on average assets *  |   |                         | 0.61   | % |   | 0.69 | % |
| Return                  on average equity *  |   |                         | 7.58   | % |   | 7.48 | % |
| Net                  interest margin (TEY) * |   |                         | 3.60   | % |   | 3.75 | % |
| Efficiency                  ratio            |   |                         | 71.62  | % |   | 65.22 | % |
|                                         |   |                         |   |   |   |   |   |
| *                  annualized                |   |                         |   |   |   |   |   |

*Net      Interest Income*

----

*Index*

|                                                                                                                                          |   | **At                and For The Three Month Period Ended** |    |
|-----------------------------------------------------------------------------------------------------------------------------------------------|--------|------------------------------------------------------------|---------|
|                                                                                                                                          |   | **June                30, 2006**                           |    | **June                30, 2005** |   |
|                                                                                                                                          |   |                                                       |    | **Interest** |   | **Annualized** |   |   |   | **Interest** |   | **Annualized** |   |
|                                                                                                                                          |   | **Average**                                                |    | **Earned** |   | **Yield** |   | **Average** |   | **Earned** |   | **Yield** |   |
| ($                in thousands)                                                                                                               |   | **Balance**                                                |    | **or                Paid** |   | **or                Cost** |   | **Balance** |   | **or                Paid** |   | **or                Cost** |   |
| **Assets**                                                                                                                                    |   |                                                       |    |   |   |   |   |   |   |   |   |   |   |
| Short-term                investments and interest-earning deposits                                                                           |   | $                                                          | 8,899   |   | $ | 107 |   |   | 4.82 | % | $ | 8,763 |   | $ | 80 |   |   | 3.66 | % |
| Federal                funds sold                                                                                                             |   |                                                       | 4,684   |   |   | 56 |   |   | 4.80 | % |   | 5,862 |   |   | 42 |   |   | 2.87 | % |
| Securities                - taxable                                                                                                           |   |                                                       | 42,622  |   |   | 525 |   |   | 4.94 | % |   | 22,690 |   |   | 231 |   |   | 4.08 | % |
| Securities                - tax exempt (1)                                                                                                    |   |                                                       | 16,120  |   |   | 261 |   |   | 6.49 | % |   | 12,478 |   |   | 204 |   |   | 6.56 | % |
| Loans                                                                                                                                         |   |                                                       | 491,533 |   |   | 9,076 |   |   | 7.41 | % |   | 418,564 |   |   | 6,372 |   |   | 6.11 | % |
| Total                interest-earning assets                                                                                                  |   |                                                       | 563,858 |   |   | 10,025 |   |   | 7.13 | % |   | 468,357 |   |   | 6,929 |   |   | 5.93 | % |
| Allowance                for loan losses                                                                                                      |   |                                                       | (6,251  | ) |   |   |   |   |  |   |   | (5,790 | ) |   |   |   |   |  |   |
| Cash                and due from banks                                                                                                        |   |                                                       | 15,245  |   |   |   |   |   |  |   |   | 11,760 |   |   |   |   |   |  |   |
| Other                assets                                                                                                                   |   |                                                       | 23,441  |   |   |   |   |   |   |   |   | 13,102 |   |   |   |   |   |   |   |
| Total                assets                                                                                                                   |   | $                                                          | 596,293 |   |   |   |   |   |  |   | $ | 487,429 |   |   |   |   |   |  |   |
| **Liabilities                and Stockholders' Equity**                                                                                       |   |                                                       |    |   |   |   |   |   |  |   |   |   |   |   |   |   |   |  |   |
| Interest-bearing                checking                                                                                                      |   | $                                                          | 30,326  |   | $ | 78 |   |   | 1.03 | % | $ | 28,083 |   | $ | 40 |   |   | 0.57 | % |
| Savings                                                                                                                                       |   |                                                       | 13,942  |   |   | 27 |   |   | 0.78 | % |   | 13,779 |   |   | 13 |   |   | 0.38 | % |
| Money                market                                                                                                                   |   |                                                       | 103,313 |   |   | 850 |   |   | 3.30 | % |   | 73,364 |   |   | 292 |   |   | 1.60 | % |
| Certificates                of deposit                                                                                                        |   |                                                       | 283,924 |   |   | 3,434 |   |   | 4.85 | % |   | 230,971 |   |   | 1,949 |   |   | 3.38 | % |
| Short-term                borrowings                                                                                                          |   |                                                       | -       |   |   |   |   |   | 0.00 | % |   | - |   |   | - |   |   | - |   |
| FHLB                advances                                                                                                                  |   |                                                       | 31,952  |   |   | 369 |   |   | 4.63 | % |   | 26,638 |   |   | 181 |   |   | 2.73 | % |
| Junior                subordinated debt                                                                                                       |   |                                                       | 11,856  |   |   | 209 |   |   | 7.07 | % |   | 3,608 |   |   | 81 |   |   | 9.00 | % |
| Total                interest-bearing liabilities                                                                                             |   |                                                       | 475,313 |   |   | 4,967 |   |   | 4.19 | % |   | 376,443 |   |   | 2,556 |   |   | 2.72 | % |
| Noninterest-bearing                checking                                                                                                   |   |                                                       | 69,507  |   |   |   |   |   |  |   |   | 63,822 |   |   |   |   |   |  |   |
| Other                liabilities                                                                                                              |   |                                                       | 3,241   |   |   |   |   |   |  |   |   | 2,033 |   |   |   |   |   |  |   |
| Stockholders'                equity                                                                                                           |   |                                                       | 48,232  |   |   |   |   |   |  |   |   | 45,131 |   |   |   |   |   |  |   |
| Total                liabilities and stockholders' equity                                                                                     |   | $                                                          | 596,293 |   |   |   |   |   |   |   | $ | 487,429 |   |   |   |   |   |   |   |
| **Net                interest income**                                                                                                        |   |                                                       |    |   | $ | 5,058 |   |   |  |   |   |   |   | $ | 4,373 |   |   |  |   |
| **Rate                spread**                                                                                                                |   |                                                       |    |   |   |   |   |   | 2.94 | % |   |   |   |   |   |   |   | 3.21 | % |
| **Net                interest income as a percent of average earning                assets**                                                  |   |                                                       |    |   |   |   |   |   | 3.60 | % |   |   |   |   |   |   |   | 3.75 | % |
|                                                                                                                                          |   |                                                       |    |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| (1)                Computed on a tax equivalent basis for tax exempt securities using                a 35%                statutory tax rate. |   |                                                       |    |   |   |   |   |   |   |

*Provision      for Loan Losses*

*Noninterest      Income*

----

*Index*

*Noninterest      Expense*

*Income      Taxes. *

| **Performance                  Ratios**      |   | **June                  30** |   |
|----------------------------------------------|--------|------------------------------|--------|
|                                         |   | **2006**                     |   | **2005** |   |
| Return                  on average assets *  |   |                         | 0.67   | % |   | 0.66 | % |
| Return                  on average equity *  |   |                         | 8.00   | % |   | 7.05 | % |
| Net                  interest margin (TEY) * |   |                         | 3.67   | % |   | 3.69 | % |
| Efficiency                  ratio            |   |                         | 69.05  | % |   | 65.46 | % |
|                                         |   |                         |   |   |   |   |   |
| *                  annualized                |   |                         |   |   |   |   |   |

*Net      Interest Income*

----

*Index*

|                                                                                             |   | **At                  and For The Six Month Periods Ended** |    |
|--------------------------------------------------------------------------------------------------|--------|-------------------------------------------------------------|---------|
|                                                                                             |   | **June                  30, 2006**                          |    | **June                  30, 2005** |   |
|                                                                                             |   |                                                        |    | **Interest** |   | **Annualized** |   |   |   | **Interest** |   | **Annualized** |   |
|                                                                                             |   | **Average**                                                 |    | **Earned** |   | **Yield** |   | **Average** |   | **Earned** |   | **Yield** |   |
| ($                  in thousands)                                                                |   | **Balance**                                                 |    | **or                  Paid** |   | **or                  Cost** |   | **Balance** |   | **or                  Paid** |   | **or                  Cost** |   |
| **Assets**                                                                                       |   |                                                        |    |   |   |   |   |   |   |   |   |   |   |
| Short-term                  investments and interest-earning deposits                            |   | $                                                           | 7,925   |   | $ | 189 |   |   | 4.81 | % | $ | 8,062 |   | $ | 107 |   |   | 2.68 | % |
| Federal                  funds sold                                                              |   |                                                        | 5,314   |   |   | 119 |   |   | 4.52 | % |   | 7,475 |   |   | 97 |   |   | 2.62 | % |
| Securities                  - taxable                                                            |   |                                                        | 41,732  |   |   | 1,015 |   |   | 4.90 | % |   | 23,509 |   |   | 479 |   |   | 4.11 | % |
| Securities                  - tax exempt (1)                                                     |   |                                                        | 15,082  |   |   | 488 |   |   | 6.52 | % |   | 12,514 |   |   | 408 |   |   | 6.57 | % |
| Loans                                                                                            |   |                                                        | 475,088 |   |   | 17,222 |   |   | 7.31 | % |   | 411,679 |   |   | 12,133 |   |   | 5.94 | % |
| Total                  interest-earning assets                                                   |   |                                                        | 545,141 |   |   | 19,033 |   |   | 7.04 | % |   | 463,239 |   |   | 13,224 |   |   | 5.76 | % |
| Allowance                  for loan losses                                                       |   |                                                        | (6,083  | ) |   |   |   |   |  |   |   | (5,741 | ) |   |   |   |   |  |   |
| Cash                  and due from banks                                                         |   |                                                        | 14,936  |   |   |   |   |   |  |   |   | 13,272 |   |   |   |   |   |  |   |
| Other                  assets                                                                    |   |                                                        | 22,392  |   |   |   |   |   |   |   |   | 11,813 |   |   |    |   |   |   |   |
| Total                  assets                                                                    |   | $                                                           | 576,386 |   |   |   |   |   |  |   | $ | 482,583 |   |   |   |   |   |  |   |
| **Liabilities                  and Stockholders' Equity**                                        |   |                                                        |    |   |   |   |   |   |  |   |   |   |   |   |   |   |   |  |   |
| Interest-bearing                  checking                                                       |   | $                                                           | 29,538  |   | $ | 146 |   |   | 1.00 | % | $ | 27,808 |   | $ | 71 |   |   | 0.51 | % |
| Savings                                                                                          |   |                                                        | 14,317  |   |   | 53 |   |   | 0.75 | % |   | 13,310 |   |   | 24 |   |   | 0.36 | % |
| Money                  market                                                                    |   |                                                        | 90,264  |   |   | 1,340 |   |   | 2.99 | % |   | 73,381 |   |   | 544 |   |   | 1.49 | % |
| Certificates                  of deposit                                                         |   |                                                        | 277,653 |   |   | 6,445 |   |   | 4.68 | % |   | 224,613 |   |   | 3,518 |   |   | 3.16 | % |
| Short-term                  borrowings                                                           |   |                                                        | -       |   |   |   |   |   | 0.00 | % |   | 26 |   |   | - |   |   | 0.00 | % |
| FHLB                  advances                                                                   |   |                                                        | 33,036  |   |   | 721 |   |   | 4.40 | % |   | 30,942 |   |   | 429 |   |   | 2.80 | % |
| Junior                  subordinated debt                                                        |   |                                                        | 11,856  |   |   | 418 |   |   | 7.11 | % |   | 3,608 |   |   | 162 |   |   | 9.05 | % |
| Total                  interest-bearing liabilities                                              |   |                                                        | 456,664 |   |   | 9,123 |   |   | 4.03 | % |   | 373,688 |   |   | 4,748 |   |   | 2.56 | % |
| Noninterest-bearing                  checking                                                    |   |                                                        | 68,636  |   |   |   |   |   |  |   |   | 62,073 |   |   |   |   |   |  |   |
| Other                  liabilities                                                               |   |                                                        | 3,047   |   |   |   |   |   |  |   |   | 1,961 |   |   |   |   |   |  |   |
| Stockholders'                  equity                                                            |   |                                                        | 48,039  |   |   |   |   |   |  |   |   | 44,862 |   |   |   |   |   |  |   |
| Total                  liabilities and stockholders' equity                                      |   | $                                                           | 576,386 |   |   |   |   |   |   |   | $ | 482,584 |   |   |   |   |   |   |   |
| **Net                  interest income**                                                         |   |                                                        |    |   | $ | 9,910 |   |   |  |   |   |   |   | $ | 8,476 |   |   |  |   |
| **Rate                  spread**                                                                 |   |                                                        |    |   |   |   |   |   | 3.01 | % |   |   |   |   |   |   |   | 3.20 | % |
| **Net                  interest income as a percent of average earning                  assets** |   |                                                        |    |   |   |   |   |   | 3.67 | % |   |   |   |   |   |   |   | 3.69 | % |

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

*Provision      for Loan Losses*

*Noninterest      Income*

*Noninterest      Expense*

----

*Index*

*Income      Taxes. *

**Liquidity      and Capital Resources**

*Liquidity*

*Capital      Resources. *

|                               |   | **June                  30, 2006** |   | **December                  31, 2005** |   |
|------------------------------------|--------|------------------------------------|--------|----------------------------------------|--------|
|                               |   |                               |   | Well-                                  |   | Minimum |   |   |   | Well- |   | Minimum |   |
|                               |   | Actual                             |   | Capitalized                            |   | Required |   | Actual |   | Capitalized |   | Required |   |
| **The                  Company**   |   |                               |   |                                   |   |   |   |   |   |   |   |   |   |
| Leverage                  capital  |   |                               | 10.24  | %                                      |   | 5.00 | % |   | 4.00 | % |   | 11.08 | % |   | 5.00 | % |   | 4.00 | % |
| Tier                  1 risk-based |   |                               | 11.52  | %                                      |   | 6.00 | % |   | 4.00 | % |   | 12.16 | % |   | 6.00 | % |   | 4.00 | % |
| Total                  risk-based  |   |                               | 12.62  | %                                      |   | 10.00 | % |   | 8.00 | % |   | 13.23 | % |   | 10.00 | % |   | 8.00 | % |
|                               |   |                               |   |                                   |   |   |   |   |  |   |   |   |   |   |   |   |   |  |   |
| **The                  Bank**      |   |                               |   |                                   |   |   |   |   |  |   |   |   |   |   |   |   |   |  |   |
| Leverage                  capital  |   |                               | 8.60   | %                                      |   | 5.00 | % |   | 4.00 | % |   | 9.28 | % |   | 5.00 | % |   | 4.00 | % |
| Tier                  1 risk-based |   |                               | 9.73   | %                                      |   | 6.00 | % |   | 4.00 | % |   | 10.18 | % |   | 6.00 | % |   | 4.00 | % |
| Total                  risk-based  |   |                               | 10.91  | %                                      |   | 10.00 | % |   | 8.00 | % |   | 11.34 | % |   | 10.00 | % |   | 8.00 | % |

----

*Index*

**Commitments      and Off-Balance Sheet Risk**

* *

**Item      3.   QUANTITATIVE AND QUALITATIVE DISCLOSURES      ABOUT MARKET RISK**

----

*Index*

| **Rate                      Sensitivity Analysis**                                                                 |   |       |    |                              |   |                            |   |      |    |      |   |
|--------------------------------------------------------------------------------------------------------------------|--------|------------|---------|-----------------------------------|--------|---------------------------------|--------|-----------|---------|-----------|--------|
|                                                                                                               |   | **Within** |    | **Three                      to** |   | **One                      to** |   | **After** |    |      |   |
|                                                                                                               |   | **Three**  |    | **Twelve**                        |   | **Five**                        |   | **Five**  |    |      |   |
| ($                      in thousands)                                                                              |   | **Months** |    | **Months**                        |   | **Years**                       |   | **Years** |    | **Total** |   |
| **Assets**                                                                                                         |   |       |    |                              |   |                            |   |      |    |      |   |
| Federal                      funds sold, short-term investments and interest-earning                      deposits |   | $          | 8,178   |                              |   |                            |   |      |    |      |   |   |   | $ | 8,178 |   |
| Securities                      available for sale                                                                 |   |       | 4,934   |                              |   | 2,783                           |   |      | 23,392  |      |   | 25,268 |   |   | 56,377 |   |
| FHLBI                      and FRB stock                                                                           |   |       |    |                              |   |                            |   |      |    |      |   | 3,421 |   |   | 3,421 |   |
| Fixed                      rate loans                                                                              |   |       | 20,015  |                              |   | 35,068                          |   |      | 104,467 |      |   | 51,390 |   |   | 210,940 |   |
| Variable                      rate loans                                                                           |   |       | 78,068  |                              |   | 114,963                         |   |      | 95,231  |      |   | 6,875 |   |   | 295,137 |   |
| Allowance                      for loan losses                                                                     |   |       |    |                              |   |                            |   |      |    |      |   |   |   |   | (6,174 | ) |
| Other                      assets                                                                                  |   |       |    |                              |   |                            |   |      |    |      |   |   |   |   | 41,902 |   |
| Total                      assets                                                                                  |   | $          | 111,195 |                              | $      | 152,814                         |   | $         | 223,090 |      | $      | 86,954 |   | $ | 609,781 |   |
| **Liabilities**                                                                                                    |   |       |    |                              |   |                            |   |      |    |      |   |   |   |   |   |   |
| Interest-bearing                      checking                                                                     |   | $          | 1,451   |                              | $      | 3,756                           |   | $         | 13,273  |      | $      | 12,376 |   | $ | 30,856 |   |
| Savings                      accounts                                                                              |   |       | 1,076   |                              |   | 2,759                           |   |      | 7,369   |      |   | 2,866 |   |   | 14,070 |   |
| Money                      market accounts                                                                         |   |       | 7,970   |                              |   | 20,343                          |   |      | 53,831  |      |   | 20,429 |   |   | 102,573 |   |
| Time                      deposits < $100,000                                                                   |   |       | 8,573   |                              |   | 33,101                          |   |      | 33,662  |      |   | 23 |   |   | 75,359 |   |
| Time                      deposits $100,000 and over                                                               |   |       | 54,412  |                              |   | 66,099                          |   |      | 97,207  |      |   |   |   |   | 217,718 |   |
| Short-term                      borrowings                                                                         |   |       |    |                              |   |                            |   |      |    |      |   |   |   |   | - |   |
| FHLB                      advances                                                                                 |   |       | 2,000   |                              |   | 29,500                          |   |      | 4,700   |      |   |   |   |   | 36,200 |   |
| Junior                      subordinated debt                                                                      |   |       |    |                              |   |                            |   |      |    |      |   | 11,856 |   |   | 11,856 |   |
| Noninterest-bearing                      checking                                                                  |   |       |    |                              |   |                            |   |      |    |      |   |   |   |   | 69,658 |   |
| Other                      liabilities                                                                             |   |       |    |                              |   |                            |   |      |    |      |   |   |   |   | 3,172 |   |
| Total                      liabilities                                                                             |   |       | 75,482  |                              |   | 155,558                         |   |      | 210,042 |      |   | 47,550 |   |   | 561,462 |   |
| **Stockholders'                      Equity**                                                                      |   |       |    |                              |   |                            |   |      |    |      |   |   |   |   | 48,319 |   |
| Total                      sources of funds                                                                        |   | $          | 75,482  |                              | $      | 155,558                         |   | $         | 210,042 |      | $      | 47,550 |   | $ | 609,781 |   |
| Net                      asset (liability) GAP                                                                     |   | $          | 35,713  |                              | $      | (2,744                          | )      | $         | 13,048  |      | $      | 39,404 |   | $ |   |   |
| **Cumulative                      GAP**                                                                            |   | $          | 35,713  |                              | $      | 32,969                          |   | $         | 46,017  |      | $      | 85,421 |   | $ |   |   |
| **Percent                      of cumulative GAP to total assets**                                                 |   |       | 5.9     | %                                 |   | 5.4                             | %      |      | 7.5     | %         |   | 14.0 | % |   |   |   |

----

*Index*

|                                             |   | **Principal                Amount Maturing in:** |    |
|--------------------------------------------------|--------|--------------------------------------------------|---------|
| ($                in thousands)                  |   |                                             |    |   |   |   |   |   |   |   |   |   |   |   |   | **Fair                Value** |   |
|                                             |   | **06/30/07**                                     |    | **06/30/08** |   | **06/30/09** |   | **06/30/10** |   | **06/30/11** |   | **Thereafter** |   | **Total** |   | **6/30/2006** |   |
| Rate                sensitive assets:            |   |                                             |    |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Fixed                interest rate loans         |   | $                                                | 55,081  |   | $ | 35,046 |   | $ | 29,071 |   | $ | 18,441 |   | $ | 21,910 |   | $ | 51,391 |   | $ | 210,940 |   | $ | 207,761 |   |
| Average                interest rate             |   |                                             | 6.93    | % |   | 6.69 | % |   | 6.57 | % |   | 6.41 | % |   | 6.77 | % |   | 5.27 | % |   | 6.37 | % |   |  |   |
| Variable                interest rate loans      |   |                                             | 191,115 |   |   | 48,331 |   |   | 27,419 |   |   | 13,859 |   |   | 7,538 |   |   | 6,875 |   | $ | 295,137 |   |   | 295,137 |   |
| Average                interest rate             |   |                                             | 8.09    | % |   | 8.08 | % |   | 8.00 | % |   | 8.12 | % |   | 7.85 | % |   | 7.72 | % |   | 8.07 | % |   |  |   |
| Fixed                interest rate securities    |   |                                             | 7,717   |   |   | 6,531 |   |   | 4,502 |   |   | 4,174 |   |   | 8,184 |   |   | 25,269 |   | $ | 56,377 |   |   | 46,900 |   |
| Average                interest rate             |   |                                             | 5.57    | % |   | 5.05 | % |   | 4.27 | % |   | 4.62 | % |   | 4.47 | % |   | 4.64 | % |   | 4.76 | % |   |  |   |
| Other                interest bearing assets     |   |                                             | 8,178   |   |   |  |   |   |  |   |   |  |   |   |  |   |   |  |   | $ | 8,178 |   |   | 8,178 |   |
| Average                interest rate             |   |                                             | 4.87    | % |   |  |   |   |  |   |   |  |   |   |  |   |   |  |   |   | 4.87 | % |   |  |   |
|                                             |   |                                             |         |   |   |  |   |   |  |   |   |  |   |   |  |   |   |  |   |   |  |   |   |  |   |
| Rate                sensitive liabilities:       |   |                                             |         |   |   |  |   |   |  |   |   |  |   |   |  |   |   |  |   |   |  |   |   |  |   |
| Interest                bearing checking         |   |                                             | 5,208   |   |   | 4,272 |   |   | 3,560 |   |   | 2,967 |   |   | 2,473 |   |   | 12,376 |   | $ | 30,856 |   |   | 28,178 |   |
| Average                interest rate             |   |                                             | 1.03    | % |   | 1.03 | % |   | 1.04 | % |   | 1.04 | % |   | 1.04 | % |   | 1.00 | % |   | 1.04 | % |   |  |   |
| Savings                accounts                  |   |                                             | 3,834   |   |   | 2,789 |   |   | 2,029 |   |   | 1,476 |   |   | 1,074 |   |   | 2,868 |   | $ | 14,070 |   |   | 12,643 |   |
| Average                interest rate             |   |                                             | 0.83    | % |   | 0.83 | % |   | 0.83 | % |   | 0.83 | % |   | 0.83 | % |   | 0.83 | % |   | 0.83 | % |   |  |   |
| Money                market accounts             |   |                                             | 28,313  |   |   | 20,485 |   |   | 14,831 |   |   | 10,739 |   |   | 7,776 |   |   | 20,429 |   | $ | 102,573 |   |   | 112,590 |   |
| Average                interest rate             |   |                                             | 3.37    | % |   | 3.37 | % |   | 3.38 | % |   | 3.39 | % |   | 3.39 | % |   | 3.42 | % |   | 3.38 | % |   |  |   |
| Time                deposits                     |   |                                             | 162,185 |   |   | 91,839 |   |   | 16,106 |   |   | 22,892 |   |   | 32 |   |   | 23 |   | $ | 293,077 |   |   | 290,380 |   |
| Average                interest rate             |   |                                             | 5.05    | % |   | 4.89 | % |   | 4.09 | % |   | 4.11 | % |   | 4.32 | % |   | 3.93 | % |   | 4.87 | % |   |  |   |
| Fixed                interest rate borrowings    |   |                                             | 5,500   |   |   | 3,500 |   |   |  |   |   | 1,200 |   |   |  |   |   | 11,856 |   | $ | 22,056 |   |   | 22,056 |   |
| Average                interest rate             |   |                                             | 4.08    | % |   | 5.08 | % |   |  |   |   | 4.32 | % |   |  |   |   | 7.14 | % |   | 5.90 | % |   |  |   |
| Variable                interest rate borrowings |   |                                             | 26,000  |   |   |  |   |   |  |   |   |  |   |   |  |   |   |  |   | $ | 26,000 |   |   | 26,000 |   |
| Average                interest rate             |   |                                             | 5.37    | % |   |  |   |   |  |   |   |  |   |   |  |   |   |  |   |   | 5.37 | % |   |  |   |

**Item      4.   CONTROLS AND PROCEDURES**

*Evaluation      of Disclosure Controls and Procedures*

*Changes      in Internal Control*

----

*Index*

**PART      II. OTHER INFORMATION**

**Item      1.     LEGAL      PROCEEDINGS**

**Item      1a.   RISK FACTORS**

**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                18,                2006. |
|-----|--------------------------------------------------------------------------------------------------------------------------------|

| (b) | The                following directors were elected at the meeting to serve until the                annual                meeting of shareholders in the year  2009: |
|-----|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|                                |   | Votes                For |      | Votes                Withheld |   |
|-------------------------------------|--------|--------------------------|-----------|-------------------------------|--------|
| Kathryn                D. Callen    |   |                     | 3,546,953 |                          |   | 27,827 |   |
| Jerome                F. Henry, Jr. |   |                     | 3,545,353 |                          |   | 29,427 |   |
| Debra                A. Niezer      |   |                     | 3,540,203 |                          |   | 34,577 |   |
| Joseph                D. Ruffolo    |   |                     | 3,538,183 |                          |   | 36,597 |   |

| Keith                E. Busse             | 2008 |   | John                V. Tippmann, Sr | 2007   |
|-------------------------------------------|------|--------|-------------------------------------|--------|
| Michael                S. Gouloff         | 2008 |   | Irene                A. Walters     | 2008   |
| R.V.                Prasad Mantravadi. MD | 2007 |   | Donald                R. Willis     | 2008   |
| William                G. Niezer          | 2007 |   |                                |   |

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

**Item      6.    EXHIBITS **

|   | (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. |

----

*Index*

**SIGNATURES**

|                                    |   | TOWER                  FINANCIAL CORPORATION                                                       |
|-----------------------------------------|--------|----------------------------------------------------------------------------------------------------|
|                                    |   |                                                                                               |
|                                    |   |                                                                                               |
| Dated:                  August 11, 2006 |   | /                  s                  / Donald F. Schenkel                                         |
|                                    |   | Donald                  F. Schenkel, Chairman of the Board,                                        |
|                                    |   | President                  and Chief Executive Officer                                             |
|                                    |   |                                                                                               |
|                                    |   |                                                                                               |
| Dated:                  August 11, 2006 |   | /                  s                  / Michael D. Cahill                                          |
|                                    |   | Michael                  D. Cahill                                                                 |
|                                    |   | Executive                  Vice President, Chief Financial Officer, and                  Secretary |

----