----

----

**Form        10-Q**

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

**September        30, 2005**

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

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

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

| (260)                  427-7000                        |
|--------------------------------------------------------|
| (Registrant’s                  telephone number) |

|   |   | Indicate                  by check whether the Registrant (1) has filed all reports required                  to be                  filed by Section 13 or 15(d) of the Exchange Act of 1934 during                  the                  preceding 12 months (or for such shorter period that the registrant                  was                  required to file such reports), and (2) has been subject to such                  filing                  requirements for the past 90 days. |
|--------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

----

----

**INDEX**

| **PART                  I. FINANCIAL INFORMATION** |                     |
|----------------------------------------------------|--------------------------|
|                                               |                     |   |   |
|                                               | Item                  1. | Financial                  Statements | page                  no. |
|                                               |                     |   |   |
|                                               |                     | Consolidated                  Balance Sheets at September 30, 2005 (unaudited)                  and December 31, 2004 | 3 |
|                                               |                     |   |   |
|                                               |                     | Consolidated                  Statements of Operations for the                  three and nine months ended September 30, 2005 and September 30,                  2004                  (unaudited) | 4 |
|                                               |                     |   |   |
|                                               |                     | Consolidated                  Statements of Changes in                  Stockholders’ Equity for the nine months ended September 30, 2005 and                  September 30, 2004 (unaudited) | 5 |
|                                               |                     |   |   |
|                                               |                     | Consolidated                  Statements of Cash Flows for the nine months                  ended September 30, 2005 and September 30, 2004                  (unaudited) | 6 |
|                                               |                     |   |   |
|                                               |                     | Notes                  to Consolidated Financial                  Statements | 7 |
|                                               |                     |   |   |
|                                               | Item                  2. | Management’s                  Discussion and Analysis of Financial                  Condition and Results of Operations | 9 |
|                                               |                     |   |   |
|                                               | 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        Balance Sheets**

|                                                                                                                                                                                                                                                                            |   | *(unaudited)*                     |        |                              |   |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|-----------------------------------|-------------|-----------------------------------|--------|
|                                                                                                                                                                                                                                                                            |   | **September                  30** |        | **December                  31,** |   |
|                                                                                                                                                                                                                                                                            |   | **2005**                          |        | **2004**                          |   |
| **ASSETS**                                                                                                                                                                                                                                                                      |   |                              |        |                              |   |
| Cash                  and due from banks                                                                                                                                                                                                                                        |   | $                                 | 16,236,559  |                              | $      | 11,911,033 |   |
| Short-term                  investments and interest-earning deposits                                                                                                                                                                                                           |   |                              | 26,712,330  |                              |   | 8,109,456 |   |
| Federal                  funds sold                                                                                                                                                                                                                                             |   |                              | 3,816,104   |                              |   | 17,204,536 |   |
| Total                  cash and cash equivalents                                                                                                                                                                                                                                |   |                              | 46,764,993  |                              |   | 37,225,025 |   |
| Securities                  available for sale, at fair value                                                                                                                                                                                                                   |   |                              | 35,721,634  |                              |   | 35,024,966 |   |
| FHLB                  and FRB stock                                                                                                                                                                                                                                             |   |                              | 3,421,300   |                              |   | 3,232,500 |   |
| Loans                                                                                                                                                                                                                                                                           |   |                              | 443,365,485 |                              |   | 400,510,491 |   |
| Allowance                  for loan losses                                                                                                                                                                                                                                      |   |                              | (5,829,697  | )                                 |   | (5,607,992 | ) |
| Net                  loans                                                                                                                                                                                                                                                      |   |                              | 437,535,788 |                              |   | 394,902,499 |   |
| Premises                  and equipment, net                                                                                                                                                                                                                                    |   |                              | 3,892,134   |                              |   | 2,984,596 |   |
| Accrued                  interest receivable                                                                                                                                                                                                                                    |   |                              | 2,162,878   |                              |   | 1,969,610 |   |
| Bank                  owned life insurance (BOLI)                                                                                                                                                                                                                               |   |                              | 10,364,477  |                              |   | 3,205,785 |   |
| Other                  assets                                                                                                                                                                                                                                                   |   |                              | 2,769,041   |                              |   | 2,572,020 |   |
|                                                                                                                                                                                                                                                                            |   |                              |        |                              |   |   |   |
| Total                  assets                                                                                                                                                                                                                                                   |   | $                                 | 542,632,245 |                              | $      | 481,117,001 |   |
|                                                                                                                                                                                                                                                                            |   |                              |        |                              |   |   |   |
| **LIABILITIES                  AND STOCKHOLDERS' EQUITY**                                                                                                                                                                                                                       |   |                              |        |                              |   |   |   |
| LIABILITIES                                                                                                                                                                                                                                                                     |   |                              |        |                              |   |   |   |
| Deposits:                                                                                                                                                                                                                                                                       |   |                              |        |                              |   |   |   |
| Noninterest-bearing                                                                                                                                                                                                                                                             |   | $                                 | 83,254,826  |                              | $      | 57,800,311 |   |
| Interest-bearing                                                                                                                                                                                                                                                                |   |                              | 384,283,278 |                              |   | 328,579,595 |   |
| Total                  deposits                                                                                                                                                                                                                                                 |   |                              | 467,538,104 |                              |   | 386,379,906 |   |
| Short-term                  borrowings                                                                                                                                                                                                                                          |   |                              | -           |                              |   | 200,000 |   |
| Federal                  Home Loan Bank (FHLB) advances                                                                                                                                                                                                                         |   |                              | 22,200,000  |                              |   | 45,000,000 |   |
| Junior                  subordinated debt                                                                                                                                                                                                                                       |   |                              | 3,608,000   |                              |   | 3,608,000 |   |
| Accrued                  interest payable                                                                                                                                                                                                                                       |   |                              | 777,337     |                              |   | 559,213 |   |
| Other                  liabilities                                                                                                                                                                                                                                              |   |                              | 1,972,050   |                              |   | 1,356,412 |   |
|                                                                                                                                                                                                                                                                            |   |                              |        |                              |   |   |   |
| Total                  liabilities                                                                                                                                                                                                                                              |   |                              | 496,095,491 |                              |   | 437,103,531 |   |
|                                                                                                                                                                                                                                                                            |   |                              |        |                              |   |   |   |
| 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;                  4,007,686 shares issued and outstanding at September 30, 2005 and                  4,003,156 shares issued and outstanding at December 31,                  2004 |   |                              | 38,006,930  |                              |   | 37,952,860 |   |
| Retained                  earnings                                                                                                                                                                                                                                              |   |                              | 8,541,238   |                              |   | 6,040,155 |   |
| Accumulated                  other comprehensive income (loss), net of tax of $(6,420) at September                  30,                  2005 and $13,637 at December 31, 2004                                                                                                 |   |                              | (11,414     | )                                 |   | 20,455 |   |
| Total                  stockholders' equity                                                                                                                                                                                                                                     |   |                              | 46,536,754  |                              |   | 44,013,470 |   |
|                                                                                                                                                                                                                                                                            |   |                              |        |                              |   |   |   |
| Total                  liabilities and stockholders' equity                                                                                                                                                                                                                     |   | $                                 | 542,632,245 |                              | $      | 481,117,001 |   |

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

----

Index

**Tower        Financial Corporation**

**Consolidated        Statements of Operations**

|                                                                                                     |   | *(unaudited)*                           |      | *(unaudited)*                          |   |
|----------------------------------------------------------------------------------------------------------|--------|-----------------------------------------|-----------|----------------------------------------|--------|
|                                                                                                     |   | **Three                  Months ended** |      | **Nine                  Months ended** |   |
|                                                                                                     |   | **September                  30**       |      | **September                  30**      |   |
|                                                                                                     |   | **2005**                                |      | **2004**                               |   | **2005** |   | **2004** |   |
| **Interest                  income:**                                                                    |   |                                    |      |                                   |   |   |   |   |   |
| Loans,                  including fees                                                                   |   | $                                       | 7,084,500 |                                   | $      | 4,860,428 |   | $ | 19,217,557 |   | $ | 13,798,309 |   |
| Securities                  - taxable                                                                    |   |                                    | 225,580   |                                   |   | 338,249 |   |   | 704,128 |   |   | 768,233 |   |
| Securities                  - tax exempt                                                                 |   |                                    | 131,878   |                                   |   | 138,245 |   |   | 401,239 |   |   | 352,335 |   |
| Other                  interest income                                                                   |   |                                    | 150,666   |                                   |   | 62,677 |   |   | 354,453 |   |   | 134,584 |   |
|  Total                  interest income                                                             |   |                                    | 7,592,624 |                                   |   | 5,399,599 |   |   | 20,677,377 |   |   | 15,053,461 |   |
| **Interest                  expense:**                                                                   |   |                                    |      |                                   |   |   |   |   |   |   |   |   |   |
| Deposits                                                                                                 |   |                                    | 2,836,590 |                                   |   | 1,457,706 |   |   | 6,994,033 |   |   | 4,045,185 |   |
| Short-term                  borrowings                                                                   |   |                                    | -         |                                   |   | 654 |   |   | 289 |   |   | 4,785 |   |
| FHLB                  advances                                                                           |   |                                    | 221,888   |                                   |   | 185,077 |   |   | 649,993 |   |   | 525,638 |   |
| Junior                  subordinated debt                                                                |   |                                    | 81,180    |                                   |   | 81,180 |   |   | 243,540 |   |   | 243,540 |   |
|  Total                  interest expense                                                            |   |                                    | 3,139,658 |                                   |   | 1,724,617 |   |   | 7,887,855 |   |   | 4,819,148 |   |
| Net                  interest income                                                                     |   |                                    | 4,452,966 |                                   |   | 3,674,982 |   |   | 12,789,522 |   |   | 10,234,313 |   |
| **Provision                  for loan losses**                                                           |   |                                    | 600,000   |                                   |   | 655,000 |   |   | 1,717,000 |   |   | 1,465,000 |   |
| Net                  interest income after provision for loan losses                                     |   |                                    | 3,852,966 |                                   |   | 3,019,982 |   |   | 11,072,522 |   |   | 8,769,313 |   |
| **Noninterest                  income:**                                                                 |   |                                    |      |                                   |   |   |   |   |   |   |   |   |   |
| Trust                  fees                                                                              |   |                                    | 541,191   |                                   |   | 429,278 |   |   | 1,579,775 |   |   | 1,247,611 |   |
| Service                  charges                                                                         |   |                                    | 232,195   |                                   |   | 152,184 |   |   | 549,632 |   |   | 458,063 |   |
| Loan                  broker fees                                                                        |   |                                    | 64,723    |                                   |   | 89,139 |   |   | 175,518 |   |   | 259,555 |   |
| Net                  gain on sale of securities                                                          |   |                                    | -         |                                   |   | 14,926 |   |   | - |   |   | 18,212 |   |
| Other                  fees                                                                              |   |                                    | 309,108   |                                   |   | 167,972 |   |   | 750,059 |   |   | 474,481 |   |
|  Total                  noninterest income                                                          |   |                                    | 1,147,217 |                                   |   | 853,499 |   |   | 3,054,984 |   |   | 2,457,922 |   |
| **Noninterest                  expense:**                                                                |   |                                    |      |                                   |   |   |   |   |   |   |   |   |   |
| Salaries                  and benefits                                                                   |   |                                    | 2,154,043 |                                   |   | 1,616,252 |   |   | 6,142,586 |   |   | 4,849,277 |   |
| Occupancy                  and equipment                                                                 |   |                                    | 447,331   |                                   |   | 428,816 |   |   | 1,344,588 |   |   | 1,177,610 |   |
| Marketing                                                                                                |   |                                    | 115,340   |                                   |   | 111,778 |   |   | 425,083 |   |   | 412,319 |   |
| Data                  processing                                                                         |   |                                    | 111,974   |                                   |   | 98,278 |   |   | 335,894 |   |   | 289,058 |   |
| Loan                  and professional costs                                                             |   |                                    | 271,081   |                                   |   | 213,323 |   |   | 665,229 |   |   | 781,425 |   |
| Office                  supplies and postage                                                             |   |                                    | 75,638    |                                   |   | 100,766 |   |   | 216,681 |   |   | 260,103 |   |
| Courier                  services                                                                        |   |                                    | 83,308    |                                   |   | 74,322 |   |   | 246,004 |   |   | 224,169 |   |
| Business                  development                                                                    |   |                                    | 108,733   |                                   |   | 76,140 |   |   | 305,474 |   |   | 230,225 |   |
| Other                  expense                                                                           |   |                                    | 210,805   |                                   |   | 192,588 |   |   | 602,564 |   |   | 610,077 |   |
|  Total                  noninterest expense                                                         |   |                                    | 3,578,253 |                                   |   | 2,912,263 |   |   | 10,284,103 |   |   | 8,834,263 |   |
| **Income                  before income taxes**                                                          |   |                                    | 1,421,930 |                                   |   | 961,218 |   |   | 3,843,403 |   |   | 2,392,972 |   |
| Income                  taxes expense                                                                    |   |                                    | 489,270   |                                   |   | 332,010 |   |   | 1,342,320 |   |   | 828,890 |   |
|                                                                                                     |   |                                    |      |                                   |   |   |   |   |   |   |   |   |   |
| **Net                  income**                                                                          |   | $                                       | 932,660   |                                   | $      | 629,208 |   | $ | 2,501,083 |   | $ | 1,564,082 |   |
|                                                                                                     |   |                                    |      |                                   |   |   |   |   |   |   |   |   |   |
| **Basic                  earnings per common share**                                                     |   | $                                       | 0.23      |                                   | $      | 0.16 |   | $ | 0.62 |   | $ | 0.40 |   |
| **Diluted                  earnings per common share**                                                   |   | $                                       | 0.23      |                                   | $      | 0.16 |   | $ | 0.61 |   | $ | 0.39 |   |
| Average                  common shares outstanding                                                       |   |                                    | 4,007,697 |                                   |   | 3,947,941 |   |   | 4,005,572 |   |   | 3,945,292 |   |
| Average                  common shares and dilutive potential common shares                  outstanding |   |                                    | 4,094,187 |                                   |   | 4,025,947 |   |   | 4,078,027 |   |   | 4,039,567 |   |

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

----

Index

**Tower        Financial Corporation**

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

*(unaudited)*

|                                                                                                                                                              |   | **Common**Stock and Paid-in Capital |       | **Retained                    Earnings** |   | **Accumulated                        Other Comprehensive Income                        (Loss)** |   | **Total** |    |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|-------------------------------------|------------|------------------------------------------|--------|-------------------------------------------------------------------------------------------------|--------|-----------|---------|
|                                                                                                                                                              |   |                                |       |                                     |   |                                                                                            |   |      |    |
| **Balance,                  January 1, 2004**                                                                                                                     |   | $                                   | 37,322,694 |                                     | $      | 3,560,844                                                                                       |   | $         | 25,111  |   | $ | 40,908,649 |   |
|                                                                                                                                                              |   |                                |       |                                     |   |                                                                                            |   |      |    |   |   |   |   |
| Net                  income for 2004                                                                                                                              |   |                                |       |                                     |   | 1,564,082                                                                                       |   |      |    |   |   | 1,564,082 |   |
|                                                                                                                                                              |   |                                |       |                                     |   |                                                                                            |   |      |    |   |   |   |   |
| Change                  in net unrealized appreciation (depreciation) on securities available                  for                  sale, net of tax of $114,803  |   |                                |       |                                     |   |                                                                                            |   |      | 172,204 |   |   | 172,204 |   |
|                                                                                                                                                              |   |                                |       |                                     |   |                                                                                            |   |      |    |   |   |   |   |
| Total                  Comprehensive Income                                                                                                                       |   |                                |       |                                     |   |                                                                                            |   |      |    |   |   | 1,736,286 |   |
|                                                                                                                                                              |   |                                |       |                                     |   |                                                                                            |   |      |    |   |   |   |   |
| Issuance                  of 60,637 shares of common stock for stock options exercised including                  tax                  benefit                    |   |                                | 630,167    |                                     |   |                                                                                            |   |      |    |   |   | 630,167 |   |
|                                                                                                                                                              |   |                                |       |                                     |   |                                                                                            |   |      |    |   |   |   |   |
| **Balance,                  September 30, 2004**                                                                                                                  |   | $                                   | 37,952,861 |                                     | $      | 5,124,926                                                                                       |   | $         | 197,315 |   | $ | 43,275,102 |   |
|                                                                                                                                                              |   |                                |       |                                     |   |                                                                                            |   |      |    |   |   |   |   |
|                                                                                                                                                              |   |                                |       |                                     |   |                                                                                            |   |      |    |   |   |   |   |
| **Balance,                  January 1, 2005**                                                                                                                     |   | $                                   | 37,952,860 |                                     | $      | 6,040,155                                                                                       |   | $         | 20,455  |   | $ | 44,013,470 |   |
|                                                                                                                                                              |   |                                |       |                                     |   |                                                                                            |   |      |    |   |   |   |   |
| Net                  income for 2005                                                                                                                              |   |                                |       |                                     |   | 2,501,083                                                                                       |   |      |    |   |   | 2,501,083 |   |
|                                                                                                                                                              |   |                                |       |                                     |   |                                                                                            |   |      |    |   |   |   |   |
| Change                  in net unrealized appreciation (depreciation) on securities available                  for                  sale, net of tax of $(25,449) |   |                                |       |                                     |   |                                                                                            |   |      | (31,869 | ) |   | (31,869 | ) |
|                                                                                                                                                              |   |                                |       |                                     |   |                                                                                            |   |      |    |   |   |   |   |
| Total                  Comprehensive Income                                                                                                                       |   |                                |       |                                     |   |                                                                                            |   |      |    |   |   | 2,469,214 |   |
|                                                                                                                                                              |   |                                |       |                                     |   |                                                                                            |   |      |    |   |   |   |   |
| Issuance                  of 4,780 shares of common stock for stock options exercised including                  tax                  benefit                     |   |                                | 54,070     |                                     |   |                                                                                            |   |      |    |   |   | 54,070 |   |
|                                                                                                                                                              |   |                                |       |                                     |   |                                                                                            |   |      |    |   |   |   |   |
| **Balance,                  September 30, 2005**                                                                                                                  |   | $                                   | 38,006,930 |                                     | $      | 8,541,238                                                                                       |   | $         | (11,414 | ) | $ | 46,536,754 |   |

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

----

Index

**Tower        Financial Corporation**

**Consolidated        Statements of Cash Flows**

|                                                                                                                         |   | *(unaudited)*                           |        | *(unaudited)*                           |   |
|------------------------------------------------------------------------------------------------------------------------------|--------|-----------------------------------------|-------------|-----------------------------------------|--------|
|                                                                                                                         |   | **Nine                  Months ended**  |        | **Nine                  Months ended**  |   |
|                                                                                                                         |   | **September                  30, 2005** |        | **September                  30, 2004** |   |
| **Cash                  flows from operating activities:**                                                                   |   |                                    |        |                                    |   |
| Net                  income                                                                                                  |   | $                                       | 2,501,083   |                                    | $      | 1,564,082 |   |
| Adjustments                    to reconcile net income to net cash from operating                    activities:             |   |                                    |        |                                    |   |   |   |
|  Depreciation                  and amortization                                                                         |   |                                    | 502,744     |                                    |   | 513,903 |   |
|  Provision                  for loan losses                                                                             |   |                                    | 1,717,000   |                                    |   | 1,465,000 |   |
|  Earnings                  on life insurance                                                                            |   |                                    | (158,692    | )                                       |   | (55,468 | ) |
|  Net                  gain on sale of securities                                                                        |   |                                    | -           |                                    |   | (18,212 | ) |
|  FHLB                  stock dividend                                                                                   |   |                                    | (38,800     | )                                       |   | (50,000 | ) |
|  Change                  in accrued interest receivable                                                                 |   |                                    | (193,268    | )                                       |   | (555,138 | ) |
|  Change                  in other assets                                                                                |   |                                    | (176,964    | )                                       |   | 990,524 |   |
|  Change                  in accrued interest payable                                                                    |   |                                    | 218,124     |                                    |   | 181,600 |   |
|  Change                  in other liabilities                                                                           |   |                                    | 615,638     |                                    |   | 205,641 |   |
|  Net                  cash from operating activities                                                                    |   |                                    | 4,986,865   |                                    |   | 4,241,932 |   |
| **Cash                  flows from investing activities:**                                                                   |   |                                    |        |                                    |   |   |   |
| Net                  change in loans                                                                                         |   |                                    | (47,346,046 | )                                       |   | (26,361,004 | ) |
| Purchase                  of securities available for sale                                                                   |   |                                    | (5,525,771  | )                                       |   | (27,336,538 | ) |
| Proceeds                    from maturities of securities available                    for sale                              |   |                                    | 4,763,139   |                                    |   | 1,486,280 |   |
| Proceeds                    from sale of securities available for sale                                                  |   |                                    | -           |                                    |   | 6,840,139 |   |
| Purchase                  of FHLB and FRB stock                                                                              |   |                                    | (150,000    | )                                       |   | - |   |
| Purchase                  of life insurance                                                                                  |   |                                    | (7,000,000  | )                                       |   | - |   |
| Proceeds                  from sale of participation loans                                                                   |   |                                    | 2,995,757   |                                    |   | 6,300,228 |   |
| Purchase                    of equipment and leasehold expenditures                                                          |   |                                    | (1,396,244  | )                                       |   | (629,760 | ) |
|  Net                  cash from investing activities                                                                    |   |                                    | (53,659,165 | )                                       |   | (39,700,655 | ) |
| **Cash                  flows from financing activities:**                                                                   |   |                                    |        |                                    |   |   |   |
| Net                  change in deposits                                                                                      |   |                                    | 81,158,198  |                                    |   | 38,126,705 |   |
| Net                  change in short-term borrowings                                                                         |   |                                    | (200,000    | )                                       |   | (860,000 | ) |
| Proceeds                    from issuance of common stock from                    exercise of stock options and tax benefits |   |                                    | 54,070      |                                    |   | 630,167 |   |
| Proceeds                  from FHLB advances                                                                                 |   |                                    | 10,900,000  |                                    |   | 16,000,000 |   |
| Repayment                  of FHLB advances                                                                                  |   |                                    | (33,700,000 | )                                       |   | (15,000,000 | ) |
|  Net                  cash from financing activities                                                                    |   |                                    | 58,212,268  |                                    |   | 38,896,872 |   |
| **Net                  change in cash and cash equivalents**                                                                 |   |                                    | 9,539,968   |                                    |   | 3,438,149 |   |
| Cash                  and cash equivalents, beginning of period                                                              |   |                                    | 37,225,025  |                                    |   | 27,842,215 |   |
| **Cash                  and cash equivalents, end of period**                                                                |   | $                                       | 46,764,993  |                                    | $      | 31,280,364 |   |
|                                                                                                                         |   |                                    |        |                                    |   |   |   |
| Supplemental                  disclosures of cash flow information                                                           |   |                                    |        |                                    |   |   |   |
| Cash                  paid during the year for:                                                                              |   |                                    |        |                                    |   |   |   |
| Interest                                                                                                                     |   | $                                       | 7,669,731   |                                    | $      | 4,637,548 |   |
| Income                  taxes net of refund                                                                                  |   |                                    | 1,614,349   |                                    |   | (603,665 | ) |

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

----

Index

**Tower        Financial Corporation**

**Notes        to Consolidated Financial Statements**

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

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

|   | **b.** | **Basis                  of Presentation:**The                  accompanying unaudited consolidated condensed financial statements                  were                  prepared in accordance with generally accepted accounting principles                  for                  interim periods and with instructions for Form 10-Q and, therefore,                  do not                  include all disclosures required by generally accepted accounting                  principles for complete presentation of the Company’s financial                  statements. In the opinion of management, the unaudited consolidated                  condensed financial statements contain all adjustments necessary                  to                  present fairly its consolidated financial position at September                  30, 2005                  and its consolidated results of operations, comprehensive income,                  changes                  in stockholders’ equity and cash flows for the nine-month periods ended                  September 30, 2005 and September 30, 2004. The results for the                  period                  ended September 30, 2005 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, 2004, 2003, and 2002 and related notes included                  in the                  Company’s Annual Report on Form 10-K for the year ended December 31,                  2004. |
|--------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

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

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

|                                                                                                                |   | **Three                  Months Ended** |    | **Nine                  Months Ended** |   |
|---------------------------------------------------------------------------------------------------------------------|--------|-----------------------------------------|---------|----------------------------------------|--------|
|                                                                                                                |   | **September                  30**       |    | **September                  30**      |   |
|                                                                                                                |   | **2005**                                |    | **2004**                               |   | **2005** |   | **2004** |   |
|                                                                                                                |   |                                    |    |                                   |   |   |   |   |   |
| Net                  income as reported                                                                             |   | $                                       | 932,660 |                                   | $      | 629,208 |   | $ | 2,501,083 |   | $ | 1,564,082 |   |
| Deduct:                  Stock-based compensation expense determined under fair value-based                  method |   |                                    | (32,245 | )                                      |   | (21,134 | ) |   | (106,677 | ) |   | (58,761 | ) |
| Pro                  forma net income                                                                               |   | $                                       | 900,415 |                                   | $      | 608,074 |   | $ | 2,394,406 |   | $ | 1,505,321 |   |
|                                                                                                                |   |                                    |         |                                   |   |  |   |   |  |   |   |  |   |
| Basic                  earnings per share as reported                                                               |   | $                                       | 0.23    |                                   | $      | 0.16 |   | $ | 0.62 |   | $ | 0.40 |   |
| Pro                  forma basic earnings per share                                                                 |   |                                    | 0.22    |                                   |   | 0.15 |   |   | 0.60 |   |   | 0.38 |   |
| Diluted                  earnings per share as reported                                                             |   |                                    | 0.23    |                                   |   | 0.16 |   |   | 0.61 |   |   | 0.39 |   |
| Pro                  forma diluted earnings per share                                                               |   |                                    | 0.22    |                                   |   | 0.15 |   |   | 0.59 |   |   | 0.37 |   |

----

Index

|                                             |   | **Three                  Months Ended** |   | **Nine                  Months Ended** |   |
|--------------------------------------------------|--------|-----------------------------------------|--------|----------------------------------------|--------|
|                                             |   | **September                  30**       |   | **September                  30**      |   |
|                                             |   | **2005**                                |   | **2004**                               |   | **2005** |   | **2004** |   |
|                                             |   |                                    |   |                                   |   |   |   |   |   |
| Risk-free                  interest rate         |   |                                    | n/a    |                                   |   | 3.89 | % |   | 4.10 | % |   | 4.22 | % |
| Expected                  option life            |   |                                    | n/a    |                                   |   | 7.0                  years |   |   | 7.0                  years |   |   | 7.57                  years |   |
| Expected                  stock price volatility |   |                                    | n/a    |                                   |   | 36.67 | % |   | 26.39 | % |   | 36.80 | % |
| Dividend                  yield                  |   |                                    | None   |                                   |   | None |   |   | None |   |   | None |   |

|   | **e.** | **Effect                  of Newly Issued But Not Yet Effective Accounting                  Standards:**                  In                  December 2004, the Financial Accounting Standards Board (“FASB”) issued                  Statement No. 123R, “Share-Based Payment”, that revises FASB Statement No.                  123, “Accounting for Stock-Based Compensation” and supercedes APB Opinion                  No. 25, “Accounting for Stock Issued to Employees.” Under this revised                  standard, all share-based payments to employees, including grants                  of                  employee stock options, must be reflected in the financial statements                  using the fair value method with the related expenses recognized                  over the                  service period. The pro forma disclosures previously permitted                  under FASB                  No. 123 (see Note 1d above) no longer will be an alternative to                  financial                  statement recognition. On April 14, 2005, the Securities and Exchange                  Commission amended the compliance dates for FASB Statement No.                  123R to                  allow companies to implement the revised standard with the first                  fiscal                  year beginning after June 15, 2005. The company is currently evaluating                  the impact that FASB Statement No. 123R will have on the financial                  condition and results of                  operations. |
|--------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

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

**Note        2 - Earnings Per Share**

|                                                                                                              |   | **Three                  Months Ended** |      | **Nine                  Months Ended** |   |
|-------------------------------------------------------------------------------------------------------------------|--------|-----------------------------------------|-----------|----------------------------------------|--------|
|                                                                                                              |   | **September                  30**       |      | **September                  30**      |   |
|                                                                                                              |   | **2005**                                |      | **2004**                               |   | **2005** |   | **2004** |   |
| **Basic**                                                                                                         |   |                                    |      |                                   |   |   |   |   |   |
| Net                  income                                                                                       |   | $                                       | 932,660   |                                   | $      | 629,208 |   | $ | 2,501,083 |   | $ | 1,564,082 |   |
| Weighted                  average common shares outstanding                                                       |   |                                    | 4,007,697 |                                   |   | 3,947,941 |   |   | 4,005,572 |   |   | 3,945,292 |   |
| Basic                  earnings per common share                                                                  |   | $                                       | 0.23      |                                   | $      | 0.16 |   | $ | 0.62 |   | $ | 0.40 |   |
|                                                                                                              |   |                                    |      |                                   |   |   |   |   |   |   |   |   |   |
| **Diluted**                                                                                                       |   |                                    |      |                                   |   |   |   |   |   |   |   |   |   |
| Net                  income                                                                                       |   | $                                       | 932,660   |                                   | $      | 629,208 |   | $ | 2,501,083 |   | $ | 1,564,082 |   |
| Weighted                  average common shares outstanding                                                       |   |                                    | 4,007,697 |                                   |   | 3,947,941 |   |   | 4,005,572 |   |   | 3,945,292 |   |
| Add:                  dilutive effect of assumed stock option exercises                                           |   |                                    | 86,490    |                                   |   | 78,006 |   |   | 72,455 |   |   | 94,275 |   |
| Weighted                  average common shares and dilutive potential common shares                  outstanding |   |                                    | 4,094,187 |                                   |   | 4,025,947 |   |   | 4,078,027 |   |   | 4,039,567 |   |
| Diluted                  earnings per common share                                                                |   | $                                       | 0.23      |                                   | $      | 0.16 |   | $ | 0.61 |   | $ | 0.39 |   |

**Note        3 - Stock Option Plans**

----

Index

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

**Forward-Looking        Statements**

|   | · | the                  effect of extensive banking regulation on the Bank’s ability to grow and                  compete; |
|--------|--------|-------------------------------------------------------------------------------------------------------------------------------|

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

|   | · | the                  Company’s dependence on key management                  personnel; |
|--------|--------|-----------------------------------------------------------------------------------------------|

|   | · | the                  increased risk of losses due to loan defaults caused by the Bank’s                  commercial loan concentration; |
|--------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------|

|   | · | the                  Company’s dependence on a favorable local economy in the Bank’s primary                  service area; |
|--------|--------|-----------------------------------------------------------------------------------------------------------------------------------------|

|   | · | the                  Bank’s dependence on net interest spread for                  profitability; |
|--------|--------|---------------------------------------------------------------------------------------------------------|

|   | · | the                  Bank’s ability to implement developments in technology to be                  competitive; |
|--------|--------|-----------------------------------------------------------------------------------------------------------------------|

|   | · | failure                  of a significant number of borrowers to repay their                  loans; |
|--------|--------|------------------------------------------------------------------------------------------------------|

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

|   | · | restrictions                  imposed on the Company by regulators or regulations of the banking                  industry. |
|--------|--------|-----------------------------------------------------------------------------------------------------------------------------|

**Critical        Accounting Policies**

**Financial        Condition**

----

Index

*Cash        and Investments*

*Loans*

|                                       |   | **September                  30, 2005** |        | **December                  31, 2004** |       |
|--------------------------------------------|--------|-----------------------------------------|-------------|----------------------------------------|------------|
|                                       |   | **Balance**                             | ** **  | **%**                                  | ** ** | **Balance** | ** ** | **%** |   |
|                                       |   |                                    |        |                                   |       |   |   |   |   |
| Commercial                                 |   | $                                       | 207,828,257 |                                   |       | 46.9 | %       | $ | 189,716,723 |   |   | 47.4 | % |
| Commercial                  real estate    |   |                                    | 138,874,935 |                                   |       | 31.3 | % |   | 124,721,982 |   |   | 31.2 | % |
| Residential                  real estate   |   |                                    | 31,102,719  |                                   |       | 7.0 | % |   | 45,080,544 |   |   | 11.3 | % |
| Home                  equity               |   |                                    | 48,165,334  |                                   |       | 10.9 | % |   | 28,430,284 |   |   | 7.1 | % |
| Consumer                                   |   |                                    | 17,296,810  |                                   |       | 3.9 | % |   | 12,239,365 |   |   | 3.0 | % |
| Total                  loans               |   |                                    | 443,268,055 |                                   |       | 100.0 | % |   | 400,188,898 |   |   | 100.0 | % |
| Net                  deferred loan costs   |   |                                    | 97,430      |                                   |       |  |   |   | 321,593 |   |   |   |   |
| Allowance                  for loan losses |   |                                    | (5,829,697  | )                                      |       |  |   |   | (5,607,992 | ) |   |   |   |
|                                       |   |                                    |        |                                   |       |  |   |   |   |   |   |   |   |
| Net                  loans                 |   | $                                       | 437,535,788 |                                   |       |  |   | $ | 394,902,499 |   |   |   |   |

*Nonperforming        Assets.*

|                                                            |   | **September                  30, 2005** |      | **December                  31, 2004** |   |
|-----------------------------------------------------------------|--------|-----------------------------------------|-----------|----------------------------------------|--------|
|                                                            |   |                                    |      |                                   |   |
| Loans                  past due over 90 days and still accruing |   | $                                       | 1,136,477 |                                   | $      | 676,866 |   |
| Nonaccrual                  loans                               |   |                                    | 1,707,572 |                                   |   | 1,580,003 |   |
| Total                  nonperforming loans                      |   | $                                       | 2,844,049 |                                   | $      | 2,256,869 |   |
| Other                  real estate owned                        |   |                                    | -         |                                   |   | 430,000 |   |
| Total                  nonperforming assets                     |   | $                                       | 2,844,049 |                                   | $      | 2,686,869 |   |
|                                                            |   |                                    |      |                                   |   |   |   |
| Nonperforming                  assets to total assets           |   |                                    | 0.52      | %                                      |   | 0.56 | % |
|                                                            |   |                                    |      |                                   |   |   |   |
| Nonperforming                  loans to total loans             |   |                                    | 0.64      | %                                      |   | 0.56 | % |

*Allowance        for Loan Losses. *

----

Index

|                                              |   | September                  30, 2005 |      | December                  31, 2004 |   |
|---------------------------------------------------|--------|-------------------------------------|-----------|------------------------------------|--------|
|                                              |   |                                |      |                               |   |
| Specific                  allocations             |   | $                                   | 3,970,697 |                               | $      | 3,900,992 |   |
| Loan                  pool percentage allocations |   |                                | 1,822,000 |                               |   | 1,600,000 |   |
| Unallocated                                       |   |                                | 37,000    |                               |   | 107,000 |   |
|                                              |   |                                |      |                               |   |   |   |
| Total                  allowance for loan losses  |   | $                                   | 5,829,697 |                               | $      | 5,607,992 |   |

|                                                           |   | **2005** |       | **2004** |   |
|----------------------------------------------------------------|--------|----------|------------|----------|--------|
|                                                           |   |     |       |     |   |
| Beginning                  balance, January 1                  |   | $        | 5,607,992  |     | $      | 5,259,273 |   |
| Provision                  charged to operating expense        |   |     | 1,717,000  |     |   | 1,465,000 |   |
| Charge-offs                                                    |   |     | (1,620,541 | )        |   | (1,043,792 | ) |
| Recoveries                                                     |   |     | 125,246    |     |   | 26,944 |   |
|                                                           |   |     |            |     |   |  |   |
| Ending                  balance, September 30                  |   | $        | 5,829,697  |     | $      | 5,707,425 |   |
|                                                           |   |     |            |     |   |  |   |
| Net                  charge-offs to average loans (annualized) |   |     | 0.48       | %        |   | 0.32 | % |

*Other        Assets*

*Deposits*

----

Index

|                                        |   | **September                  30, 2005** |        | **December                  31, 2004** |       |
|---------------------------------------------|--------|-----------------------------------------|-------------|----------------------------------------|------------|
|                                        |   | **Balance**                             | ** **  | **%**                                  | ** ** | **Balance** | ** ** | **%** |   |
|                                        |   |                                    |        |                                   |       |   |   |   |   |
| Noninterest-bearing                  demand |   | $                                       | 83,254,827  |                                   |       | 17.8 | %       | $ | 57,800,311 |   |   | 15.0 | % |
| Interest-bearing                  checking  |   |                                    | 32,027,001  |                                   |       | 6.9 | % |   | 27,786,693 |   |   | 7.2 | % |
| Money                  market               |   |                                    | 71,794,681  |                                   |       | 15.4 | % |   | 74,017,465 |   |   | 19.2 | % |
| Savings                                     |   |                                    | 14,546,049  |                                   |       | 3.1 | % |   | 12,935,798 |   |   | 3.3 | % |
| Time,                  under $100,000       |   |                                    | 61,810,592  |                                   |       | 13.2 | % |   | 69,220,287 |   |   | 17.9 | % |
| Time,                  $100,000 and over    |   |                                    | 204,104,954 |                                   |       | 43.6 | % |   | 144,619,352 |   |   | 37.4 | % |
|                                        |   |                                    |        |                                   |       |  |   |   |   |   |   |   |   |
| Total                  deposits             |   | $                                       | 467,538,104 |                                   |       | 100.0 | % | $ | 386,379,906 |   |   | 100.0 | % |

*Borrowings*

*Other        Liabilities. *

**Results        of Operations**

| **Performance                  Ratios**     |   | **September                  30** |   |
|---------------------------------------------|--------|-----------------------------------|--------|
|                                        |   | **2005**                          |   | **2004** |   |
|                                        |   |                              |   |   |   |
| Return                  on average assets * |   |                              | 0.71   | % |   | 0.53 | % |
| Return                  on average equity * |   |                              | 8.02   | % |   | 5.93 | % |
| Net                  interest margin (TEY)* |   |                              | 3.64   | % |   | 3.30 | % |
| Efficiency                  ratio           |   |                              | 63.89  | % |   | 64.30 | % |
|                                        |   |                              |   |   |   |   |   |
| *                  annualized               |   |                              |   |   |   |   |   |

*Net        Interest Income*

----

Index

|                                                                                                 |   | **At                    and For The Three Month Period Ended** |    |
|------------------------------------------------------------------------------------------------------|--------|----------------------------------------------------------------|---------|
|                                                                                                 |   | **September                    30, 2005**                      |    | **September                    30, 2004** |   |
| ($                    in thousands)                                                                  |   | **Average**Balance                                             |    | **Interest                      Earned**or Paid |   | **Annualized**Yield or Cost |   | **Average**Balance |   | **Interest**Earned or Paid |   | **Annualized**Yield or Cost |   |
| **Assets**                                                                                           |   |                                                           |    |   |   |   |   |   |   |   |   |   |   |
| Short-term                    investments and interest-earning deposits                              |   | $                                                              | 16,110  |   | $ | 109 |   |   | 2.68 | %    | $ | 6,572 |   | $ | 24 |   |   | 1.46 | %    |
| Federal                    funds sold                                                                |   |                                                           | 4,857   |   |   | 42 |   |   | 3.43 | % |   | 12,177 |   |   | 39 |   |   | 1.28 | % |
| Securities                    - taxable                                                              |   |                                                           | 22,195  |   |   | 226 |   |   | 4.04 | % |   | 31,154 |   |   | 339 |   |   | 4.36 | % |
| Securities                    - tax exempt (1)                                                       |   |                                                           | 12,349  |   |   | 199 |   |   | 6.39 | % |   | 12,563 |   |   | 209 |   |   | 6.67 | % |
| Loans                    held for sale                                                               |   |                                                           | -       |   |   | - |   |   | 0.00 | % |   | - |   |   | - |   |   | 0.00 | % |
| Loans                                                                                                |   |                                                           | 437,426 |   |   | 7,085 |   |   | 6.43 | % |   | 387,269 |   |   | 4,860 |   |   | 5.03 | % |
| Total                    interest-earning assets                                                     |   |                                                           | 492,937 |   |   | 7,661 |   |   | 6.17 | % |   | 449,735 |   |   | 5,471 |   |   | 4.88 | % |
| Allowance                    for loan losses                                                         |   |                                                           | (5,926  | ) |   |   |   |   |  |   |   | (5,261 | ) |   |   |   |   |  |   |
| Cash                    and due from banks                                                           |   |                                                           | 12,379  |   |   |   |   |   |  |   |   | 12,580 |   |   |   |   |   |  |   |
| Other                    assets                                                                      |   |                                                           | 19,151  |   |   |   |   |   |  |   |   | 10,088 |   |   |   |   |   |  |   |
| Total                    assets                                                                      |   | $                                                              | 518,541 |   |   |   |   |   |   |   | $ | 467,142 |   |   |    |   |   |   |   |
| **Liabilities                    and Stockholders' Equity**                                          |   |                                                           |    |   |   |   |   |   |  |   |   |   |   |   |   |   |   |  |   |
| Interest-bearing                    checking                                                         |   | $                                                              | 28,236  |   | $ | 45 |   |   | 0.63 | % | $ | 23,652 |   | $ | 22 |   |   | 0.37 | % |
| Savings                                                                                              |   |                                                           | 14,250  |   |   | 17 |   |   | 0.47 | % |   | 11,694 |   |   | 9 |   |   | 0.31 | % |
| Money                    market                                                                      |   |                                                           | 70,651  |   |   | 332 |   |   | 1.86 | % |   | 96,912 |   |   | 262 |   |   | 1.08 | % |
| Certificates                    of deposit                                                           |   |                                                           | 261,492 |   |   | 2,443 |   |   | 3.71 | % |   | 206,434 |   |   | 1,165 |   |   | 2.26 | % |
| Short-term                    borrowings                                                             |   |                                                           | -       |   |   | - |   |   | 0.00 | % |   | 200 |   |   | 1 |   |   | 2.01 | % |
| FHLB                    advances                                                                     |   |                                                           | 25,356  |   |   | 222 |   |   | 3.47 | % |   | 26,570 |   |   | 185 |   |   | 2.79 | % |
| Junior                    subordinated debt                                                          |   |                                                           | 3,608   |   |   | 81 |   |   | 8.91 | % |   | 3,608 |   |   | 81 |   |   | 9.00 | % |
| Total                    interest-bearing liabilities                                                |   |                                                           | 403,593 |   |   | 3,140 |   |   | 3.09 | % |   | 369,070 |   |   | 1,725 |   |   | 1.87 | % |
| Noninterest-bearing                    checking                                                      |   |                                                           | 66,339  |   |   |   |   |   |  |   |   | 54,788 |   |   |   |   |   |  |   |
| Other                    liabilities                                                                 |   |                                                           | 2,425   |   |   |   |   |   |  |   |   | 1,226 |   |   |   |   |   |  |   |
| Stockholders'                    equity                                                              |   |                                                           | 46,183  |   |   |   |   |   |    |   |   | 42,058 |   |   |    |   |   |   |   |
| Total                    liabilities and stockholders' equity                                        |   | $                                                              | 518,540 |   |   |   |   |   |  |   | $ | 467,142 |   |   |   |   |   |  |   |
| **Net                    interest income**                                                           |   |                                                           |    |   | $ | 4,521 |   |   |   |   |   |   |   | $ | 3,746 |   |   |   |   |
| **Rate                    spread**                                                                   |   |                                                           |    |   |   |   |   |   | 3.08 | % |   |   |   |   |   |   |   | 3.01 | % |
| **Net                    interest income as a percent of average earning                    assets** |   |                                                           |    |   |   |   |   |   | 3.64 | % |   |   |   |   |   |   |   | 3.30 | % |

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

*Provision        for Loan Losses*

*Noninterest        Income*

*Noninterest        Expense*

----

Index

*Income        Taxes. *

| **Performance                  Ratios**      |   | **September                  30** |   |
|----------------------------------------------|--------|-----------------------------------|--------|
|                                         |   | **2005**                          |   | **2004** |   |
|                                         |   |                              |   |   |   |
| Return                  on average assets *  |   |                              | 0.68   | % |   | 0.46 | % |
| Return                  on average equity *  |   |                              | 7.38   | % |   | 5.01 | % |
| Net                  interest margin (TEY) * |   |                              | 3.67   | % |   | 3.19 | % |
| Efficiency                  ratio            |   |                              | 64.90  | % |   | 69.60 | % |
| *                  annualized                |   |                              |   |   |   |   |   |

*Net        Interest Income*

----

Index

|                                                                                                 |   | **At                    and For The Nine Month Periods Ended** |    |
|------------------------------------------------------------------------------------------------------|--------|----------------------------------------------------------------|---------|
|                                                                                                 |   | **September                    30, 2005**                      |    | **September                    30, 2004** |   |
| ($                    in thousands)                                                                  |   | **Average**Balance                                             |    | **Interest**Earned or Paid |   | **Annualized**Yield or Cost |   | **Average**Balance |   | **Interest**Earned or Paid |   | **Annualized**Yield or Cost |   |
| **Assets**                                                                                           |   |                                                           |    |   |   |   |   |   |   |   |   |   |   |
| Short-term                    investments andinterest-earning deposits                               |   | $                                                              | 10,745  |   | $ | 216 |   |   | 2.69 | %    | $ | 5,558 |   | $ | 48 |   |   | 1.15 | %    |
| Federal                    funds sold                                                                |   |                                                           | 6,602   |   |   | 138 |   |   | 2.79 | % |   | 11,989 |   |   | 86 |   |   | 0.96 | % |
| Securities                    - taxable                                                              |   |                                                           | 23,071  |   |   | 704 |   |   | 4.08 | % |   | 24,801 |   |   | 769 |   |   | 4.14 | % |
| Securities                    - tax exempt (1)                                                       |   |                                                           | 12,459  |   |   | 608 |   |   | 6.52 | % |   | 11,005 |   |   | 533 |   |   | 6.47 | % |
| Loans                    held for sale                                                               |   |                                                           | -       |   |   | - |   |   | 0.00 | % |   | - |   |   | - |   |   | 0.00 | % |
| Loans                                                                                                |   |                                                           | 420,261 |   |   | 19,218 |   |   | 6.11 | % |   | 382,268 |   |   | 13,798 |   |   | 4.82 | % |
| Total                    interest-earning assets                                                     |   |                                                           | 473,138 |   |   | 20,884 |   |   | 5.90 | % |   | 435,621 |   |   | 15,234 |   |   | 4.67 | % |
| Allowance                    for loan losses                                                         |   |                                                           | (5,803  | ) |   |   |   |   |  |   |   | (5,261 | ) |   |   |   |   |  |   |
| Cash                    and due from banks                                                           |   |                                                           | 12,975  |   |   |   |   |   |  |   |   | 12,367 |   |   |   |   |   |  |   |
| Other                    assets                                                                      |   |                                                           | 14,260  |   |   |   |   |   |  |   |   | 10,153 |   |   |   |   |   |  |   |
| Total                    assets                                                                      |   | $                                                              | 494,570 |   |   |   |   |   |   |   | $ | 452,880 |   |   |   |   |   |   |   |
| **Liabilities                    and Stockholders' Equity**                                          |   |                                                           |    |   |   |   |   |   |  |   |   |   |   |   |   |   |   |  |   |
| Interest-bearing                    checking                                                         |   | $                                                              | 27,951  |   | $ | 117 |   |   | 0.56 | % | $ | 22,592 |   | $ | 59 |   |   | 0.35 | % |
| Savings                                                                                              |   |                                                           | 13,624  |   |   | 41 |   |   | 0.40 | % |   | 11,154 |   |   | 24 |   |   | 0.29 | % |
| Money                    market                                                                      |   |                                                           | 72,471  |   |   | 876 |   |   | 1.62 | % |   | 92,234 |   |   | 659 |   |   | 0.95 | % |
| Certificates                    of deposit                                                           |   |                                                           | 236,906 |   |   | 5,960 |   |   | 3.36 | % |   | 200,163 |   |   | 3,303 |   |   | 2.20 | % |
| Short-term                    borrowings                                                             |   |                                                           | 17      |   |   | - |   |   | 0.00 | % |   | 597 |   |   | 4 |   |   | 0.89 | % |
| FHLB                    advances                                                                     |   |                                                           | 29,080  |   |   | 650 |   |   | 2.99 | % |   | 26,857 |   |   | 526 |   |   | 2.62 | % |
| Junior                    subordinated debt                                                          |   |                                                           | 3,608   |   |   | 244 |   |   | 9.04 | % |   | 3,608 |   |   | 244 |   |   | 9.03 | % |
| Total                    interest-bearing liabilities                                                |   |                                                           | 383,657 |   |   | 7,888 |   |   | 2.75 | % |   | 357,205 |   |   | 4,819 |   |   | 1.80 | % |
| Noninterest-bearing                    checking                                                      |   |                                                           | 63,495  |   |   |   |   |   |  |   |   | 52,213 |   |   |   |   |   |  |   |
| Other                    liabilities                                                                 |   |                                                           | 2,116   |   |   |   |   |   |  |   |   | 1,773 |   |   |   |   |   |  |   |
| Stockholders'                    equity                                                              |   |                                                           | 45,302  |   |   |   |   |   |   |   |   | 41,689 |   |   |   |   |   |   |   |
| Total                    liabilities and stockholders' equity                                        |   | $                                                              | 494,570 |   |   |   |   |   |  |   | $ | 452,880 |   |   |   |   |   |  |   |
| **Net                    interest income**                                                           |   |                                                           |    |   | $ | 12,996 |   |   |   |   |   |   |   | $ | 10,415 |   |   |   |   |
| **Rate                    spread**                                                                   |   |                                                           |    |   |   |   |   |   | 3.15 | % |   |   |   |   |   |   |   | 2.87 | % |
| **Net                    interest income as a percent of average earning                    assets** |   |                                                           |    |   |   |   |   |   | 3.67 | % |   |   |   |   |   |   |   | 3.19 | % |

| (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. *

|                               |   | **September                  30, 2005** |   | **September                  30, 2004** |   |
|------------------------------------|--------|-----------------------------------------|--------|-----------------------------------------|--------|
|                               |   | Actual                                  |   | Well-                  Capitalized      |   | Minimum                  Required |   | Actual |   | Well-                  Capitalized |   | Minimum                  Required |   |
|                               |   |                                    |   |                                    |   |   |   |   |   |   |   |   |   |
| **The                  Company**   |   |                                    |   |                                    |   |   |   |   |   |   |   |   |   |
| Leverage                  capital  |   |                                    | 9.67   | %                                       |   | 5.00 | % |   | 4.00 | % |   | 9.97 | % |   | 5.00 | % |   | 4.00 | % |
| Tier                  1 risk-based |   |                                    | 10.44  | %                                       |   | 6.00 | % |   | 4.00 | % |   | 8.00 | % |   | 6.00 | % |   | 4.00 | % |
| Total                  risk-based  |   |                                    | 11.62  | %                                       |   | 10.00 | % |   | 8.00 | % |   | 12.39 | % |   | 10.00 | % |   | 8.00 | % |
|                               |   |                                    |   |                                    |   |   |   |   |  |   |   |   |   |   |   |   |   |  |   |
| **The                  Bank**      |   |                                    |   |                                    |   |   |   |   |  |   |   |   |   |   |   |   |   |  |   |
| Leverage                  capital  |   |                                    | 9.32   | %                                       |   | 5.00 | % |   | 4.00 | % |   | 8.44 | % |   | 5.00 | % |   | 4.00 | % |
| Tier                  1 risk-based |   |                                    | 10.05  | %                                       |   | 6.00 | % |   | 4.00 | % |   | 9.46 | % |   | 6.00 | % |   | 4.00 | % |
| Total                  risk-based  |   |                                    | 11.27  | %                                       |   | 10.00 | % |   | 8.00 | % |   | 10.71 | % |   | 10.00 | % |   | 8.00 | % |

----

Index

**Commitments        and Off-Balance Sheet Risk**

* *

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

----

Index

| **Rate                  Sensitivity Analysis**                                                             |   |                   |                           |                                           |   |                                      |   |                |                                       |      |   |
|------------------------------------------------------------------------------------------------------------|--------|------------------------|--------------------------------|------------------------------------------------|--------|-------------------------------------------|--------|---------------------|--------------------------------------------|-----------|--------|
| ($                  in thousands)                                                                          |   | **Within**Three Months |                           | **Three                      to**Twelve Months |   | **One                      to**Five Years |   | **After**Five Years |                                       | **Total** |   |
| **Assets**                                                                                                 |   |                   |                           |                                           |   |                                      |   |                |                                       |      |   |
| Federal                  funds sold, short-term investments and interest-earning                  deposits |   | $                      | 30,528                         |                                           |   |                                           |   |                |                                            |      |   |  |   | $ | 30,528 |   |
| Securities                  available for sale                                                             |   |                   | 4,945                          |                                           |   | 4,392                                     |   |                | 6,517                                      |      |   | 19,867 |   |   | 35,721 |   |
| FHLBI                  and FRB stock                                                                       |   |                   |                                |                                           |   |                                           |   |                |                                            |      |   | 3,421 |   |   | 3,421 |   |
| Fixed                  rate loans                                                                          |   |                   | 17,692                         |                                           |   | 39,062                                    |   |                | 91,731                                     |      |   | 12,265 |   |   | 160,750 |   |
| Variable                  rate loans                                                                       |   |                   | 39,660                         |                                           |   | 81,528                                    |   |                | 121,485                                    |      |   | 39,943 |   |   | 282,616 |   |
| Allowance                  for loan losses                                                                 |   |                   |                                |                                           |   |                                           |   |                |                                            |      |   |  |   |   | (5,830 | ) |
| Other                  assets                                                                              |   |                   |                 |                                           |   |                            |   |                |                             |      |   |     |   |   | 35,426 |   |
| Total                  assets                                                                              |   | $                      | 92,825                         |                                           | $      | 124,982                                   |   | $                   | 219,733                                    |      | $      | 75,496 |   | $ | 542,632 |   |
| **Liabilities**                                                                                            |   |                   |                                |                                           |   |                                           |   |                |                                            |      |   |  |   |   |  |   |
| Interest-bearing                  checking                                                                 |   | $                      | 2,589                          |                                           | $      | 7,766                                     |   | $                   | 21,672                                     |      |   |  |   | $ | 32,027 |   |
| Savings                  accounts                                                                          |   |                   | 1,615                          |                                           |   | 4,844                                     |   |                | 8,088                                      |      |   |  |   |   | 14,547 |   |
| Money                  market accounts                                                                     |   |                   | 17,331                         |                                           |   | 51,948                                    |   |                | 2,516                                      |      |   |  |   |   | 71,795 |   |
| Time                  deposits < $100,000                                                               |   |                   | 4,119                          |                                           |   | 23,506                                    |   |                | 34,163                                     |      |   | 22 |   |   | 61,810 |   |
| Time                  deposits $100,000 and over                                                           |   |                   | 44,992                         |                                           |   | 57,315                                    |   |                | 101,798                                    |      |   |  |   |   | 204,105 |   |
| Short-term                  borrowings                                                                     |   |                   |                                |                                           |   |                                           |   |                |                                            |      |   |  |   |   | - |   |
| FHLB                  advances                                                                             |   |                   | 3,000                          |                                           |   | 10,000                                    |   |                | 6,700                                      |      |   | 2,500 |   |   | 22,200 |   |
| Junior                  subordinated debt                                                                  |   |                   |                                |                                           |   |                                           |   |                |                                            |      |   | 3,608 |   |   | 3,608 |   |
| Noninterest-bearing                  checking                                                              |   |                   |                                |                                           |   |                                           |   |                |                                            |      |   |  |   |   | 83,255 |   |
| Other                  liabilities                                                                         |   |                   |            |                                           |   |                  |   |                |         |      |   |        |   |   | 2,748 |   |
| Total                  liabilities                                                                         |   |                   | 73,646                         |                                           |   | 155,379                                   |   |                | 174,937                                    |      |   | 6,130 |   |   | 496,095 |   |
| **Stockholders'                  Equity**                                                                  |   |                   |       |                                           |   |                  |   |                |                        |      |   |      |   |   | 46,537 |   |
| Total                  sources of funds                                                                    |   | $                      | 73,646                         |                                           | $      | 155,379                                   |   | $                   | 174,937                                    |      | $      | 6,130 |   | $ | 542,632 |   |
| Net                  asset (liability) GAP                                                                 |   | $                      | 19,179                         |                                           | $      | (30,397                                   | )      | $                   | 44,796                                     |      | $      | 69,366 |   | $ |    |   |
| **Cumulative                  GAP**                                                                        |   | $                      | 19,179                         |                                           | $      | (11,218                                   | )      | $                   | 33,578                                     |      | $      | 102,944 |   | $ |    |   |
| **Percent                  of cumulative GAP to total assets**                                             |   |                   | 3.5                            | %                                              |   | -2.1                                      | %      |                | 6.2                                        | %         |   | 19.0 | % |   |   |   |

----

Index

|                                                 |   | **Principal                  Amount Maturing in:** |    |
|------------------------------------------------------|--------|----------------------------------------------------|---------|
| ($                  in thousands)                    |   |                                               |    |   |   |   |   |   |   |   |   |   |   |   |   | **Fair                  Value** |   |
|                                                 |   | **09/30/06**                                       |    | **09/30/07** |   | **09/29/08** |   | **09/30/09** |   | **09/30/10** |   | **Thereafter** |   | **Total** |   | **9/30/2005** |   |
| Rate                  sensitive assets:              |   |                                               |    |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Fixed                  interest rate loans           |   | $                                                  | 56,754  |   | $ | 35,618 |   | $ | 27,220 |   | $ | 18,223 |   | $ | 10,669 |   | $ | 12,266 |   | $ | 160,750 |   | $ | 159,600 |   |
| Average                  interest rate               |   |                                               | 6.34    | % |   | 6.26 | % |   | 6.25 | % |   | 6.00 | % |   | 6.42 | % |   | 5.01 | % |   | 6.17 | % |   |  |   |
| Variable                  interest rate loans        |   |                                               | 121,188 |   |   | 65,154 |   |   | 23,632 |   |   | 17,665 |   |   | 15,035 |   |   | 39,942 |   |   | 282,616 |   |   | 282,616 |   |
| Average                  interest rate               |   |                                               | 6.91    | % |   | 6.86 | % |   | 6.78 | % |   | 6.82 | % |   | 6.74 | % |   | 7.15 | % |   | 6.90 | % |   |  |   |
| Fixed                  interest rate securities      |   |                                               | 9,337   |   |   | 1,483 |   |   | 133 |   |   | 1,120 |   |   | 3,781 |   |   | 19,867 |   |   | 35,721 |   |   | 35,721 |   |
| Average                  interest rate               |   |                                               | 3.63    | % |   | 3.12 | % |   | 4.31 | % |   | 4.84 | % |   | 4.22 | % |   | 4.31 | % |   | 4.09 | % |   |  |   |
| Other                  interest bearing assets       |   |                                               | 30,528  |   |   |  |   |   |  |   |   |  |   |   |  |   |   |  |   |   | 30,528 |   |   | 30,528 |   |
| Average                  interest rate               |   |                                               | 3.73    | % |   |  |   |   |  |   |   |  |   |   |  |   |   |  |   |   | 3.73 | % |   |  |   |
| FHLB                  & FRB Stock                |   |                                               |         |   |   |  |   |   |  |   |   |  |   |   |  |   |   | 3,421 |   |   | 3,421 |   |   | 3,421 |   |
| Average                  interest rate               |   |                                               |         |   |   |  |   |   |  |   |   |  |   |   |  |   |   | 4.92 | % |   | 4.92 | % |   |  |   |
|                                                 |   |                                               |         |   |   |  |   |   |  |   |   |  |   |   |  |   |   |  |   |   |  |   |   |  |   |
| Rate                  sensitive liabilities:         |   |                                               |         |   |   |  |   |   |  |   |   |  |   |   |  |   |   |  |   |   |  |   |   |  |   |
| Interest                  bearing checking           |   |                                               | 10,355  |   |   | 10,355 |   |   | 6,850 |   |   | 4,361 |   |   | 106 |   |   |  |   |   | 32,027 |   |   | 32,027 |   |
| Average                  interest rate               |   |                                               | 0.72    | % |   | 0.72 | % |   | 0.66 | % |   | 0.61 | % |   | 1.09 | % |   |  |   |   | 0.69 | % |   |  |   |
| Savings                  accounts                    |   |                                               | 6,458   |   |   | 6,458 |   |   | 16,341 |   |   |  |   |   |  |   |   |  |   |   | 29,257 |   |   | 14,546 |   |
| Average                  interest rate               |   |                                               | 0.56    | % |   | 0.56 | % |   | 0.56 | % |   |  |   |   |  |   |   |  |   |   | 0.56 | % |   |  |   |
| Money                  market accounts               |   |                                               | 69,279  |   |   | 2,516 |   |   |  |   |   |  |   |   |  |   |   |  |   |   | 71,795 |   |   | 71,795 |   |
| Average                  interest rate               |   |                                               | 2.11    | % |   | 1.75 | % |   |  |   |   |  |   |   |  |   |   |  |   |   | 2.10 | % |   |  |   |
| Time                  deposits                       |   |                                               | 129,932 |   |   | 76,487 |   |   | 24,724 |   |   | 13,088 |   |   | 21,663 |   |   | 21 |   |   | 265,915 |   |   | 266,097 |   |
| Average                  interest rate               |   |                                               | 3.47    | % |   | 4.39 | % |   | 3.99 | % |   | 3.97 | % |   | 4.08 | % |   | 3.93 | % |   | 3.86 | % |   |  |   |
| Fixed                    interest rate borrowings    |   |                                               | 13,000  |   |   | 5,500 |   |   |  |   |   |  |   |   | 1,200 |   |   | 6,108 |   |   | 25,808 |   |   | 25,808 |   |
| Average                  interest rate               |   |                                               | 2.58    | % |   | 4.08 | % |   |  |   |   |  |   |   | 4.32 | % |   | 6.71 | % |   | 3.96 | % |   |  |   |
| Variable                    interest rate borrowings |   |                                               |         |   |   |  |   |   |  |   |   |  |   |   |  |   |   |  |   |   | - |   |   |  |   |
| Average                  interest rate               |   |                                               |         |   |   |  |   |   |  |   |   |  |   |   |  |   |   |  |   |   |  |   |   |  |   |

**Item        4. CONTROLS AND        PROCEDURES**

----

Index

**PART        II. OTHER INFORMATION**

**Item        1. LEGAL PROCEEDINGS**

**Item        6. EXHIBITS **

|   | (a) | Exhibits. |
|--------|-----|-----------|

|   | 3.1 | Restated                  Articles of Incorporation of the Company (incorporated herein by                  reference                  from the same exhibit number to the Company’s Registration Statement on                  Form SB-2 (Registration No.                  333-67235)). |
|--------|-----|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | 3.2 | Amended                  By-Laws of the Company (incorporate by reference from the same                  exhibit                  number to the Company’s Annual Report on Form 10-k for the year ended                  December 31, 2004) |
|--------|-----|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | 10.23 | Real                  Estate Purchase and Sale Contract by and between Tower Bank and                  Trust                  Company and MagniFi, LLC dated June 13, 2005 (incorporate by reference                  from the same exhibit number to the Company’s Current Report on Form 8-K                  filed on July 7, 2005). |
|--------|-------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

31.1

31.2

32.1

32.2

**SIGNATURES**

|                                     |   | TOWER                  FINANCIAL CORPORATION                |   |
|------------------------------------------|--------|-------------------------------------------------------------|--------|
|                                     |   |                                                        |   |
|                                     |   |                                                        |   |
| Dated:                  November 7, 2005 |   | /                  s                  / Donald F. Schenkel  |   |
|                                     |   | Donald                  F. Schenkel, Chairman of the Board, |   |
|                                     |   | President                  and Chief Executive Officer      |   |
|                                     |   |                                                        |   |
|                                     |   |                                                        |   |
| Dated:                  November 7, 2005 |   | /                  s                  / Michael D. Cahill   |   |
|                                     |   | Michael                  D. Cahill                          |   |
|                                     |   | Chief                  Financial Officer and Secretary      |   |

----