----

----

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

| £ | 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 itscharter) |

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

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

| Large      accelerated filer £ | Accelerated      filer £    |
|-------------------------------------|----------------------------------|
| Non-accelerated      filer £   | Smaller      reporting company S |

----

----

----

|   | · | Our      dependence on key managementpersonnel; |
|--------|--------|-------------------------------------------------|

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

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

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

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

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

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

----

INDEX

| PART      I.   FINANCIAL INFORMATION |   |
|-----------------------------------------------------|--------|
|                                                |   |   |   |   |
| Item      1.                                        |   | Financial      Statements | page      no. |   |
|                                                |   |   |   |   |
|                                                |   |   |   |   |
|                                                |   | Consolidated Condensed Balance Sheets at March 31, 2008      (unaudited) and December 31, 2007 | 4 |   |
|                                                |   |   |   |   |
|                                                |   | Consolidated Condensed Statements of Operations for the      three months ended March 31, 2008 and March 31, 2007      (unaudited) | 5 |   |
|                                                |   |   |   |   |
|                                                |   | Consolidated Condensed Statements of Changes in      Stockholders’ Equity for the three months ended March 31, 2008 and March      31, 2007 (unaudited) | 7 |   |
|                                                |   |   |   |   |
|                                                |   | Consolidated      Condensed Statements of Cash Flows for the three months ended March      31, 2008 and March 31, 2007 (unaudited) | 8 |   |
|                                                |   |   |   |   |
|                                                |   | Notes to Consolidated Condensed Financial Statements      (unaudited) | 9 |   |
|                                                |   |   |   |   |
| Item      2.                                        |   | Management’s Discussion and Analysis of Financial      Condition and Results of Operations | 17 |   |
|                                                |   |   |   |   |
| Item      4.                                        |   | Controls and Procedures | 22 |   |
|                                                |   |   |   |   |
| PART      II.   OTHER INFORMATION    |   |
|                                                |   |   |   |   |
| Item      1.                                        |   | Legal Proceedings | 23 |   |
|                                                |   |   |   |   |
| Item      2.                                        |   | Unregistered sales of equity securities and use of      proceeds | 23 |   |
|                                                |   |   |   |   |
| Item      6.                                        |   | Exhibits | 23 |   |
|                                                |   |   |   |   |
| SIGNATURES                                          | 24     |   |

----

Index

Balance 

|                                                                                                                                                                                                                       |   | (unaudited)    |        |   |              |   |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|----------------|-------------|--------|-------------------|--------|
|                                                                                                                                                                                                                       |   | March 31, |        |   | December 31, |   |
|                                                                                                                                                                                                                       |   | 2008           |        |   | 2007              |   |
| ASSETS                                                                                                                                                                                                                     |   |           |        |   |              |   |
| Cash      and due from banks                                                                                                                                                                                               |   | $              | 14,464,669  |   |              | $      | 25,913,449 |   |
| Short-term      investments and interest-earning deposits                                                                                                                                                                  |   |           | 8,588,209   |   |              |   | 1,781,161 |   |
| Federal      funds sold                                                                                                                                                                                                    |   |           | 10,011,579  |   |              |   | 6,135,779 |   |
| Total      cash and cash equivalents                                                                                                                                                                                       |   |           | 33,064,457  |   |              |   | 33,830,389 |   |
|                                                                                                                                                                                                                       |   |           |        |   |              |   |   |   |
| Securities      available for sale, at fair value                                                                                                                                                                          |   |           | 68,794,701  |   |              |   | 65,227,694 |   |
| FHLB      and FRB stock                                                                                                                                                                                                    |   |           | 3,589,700   |   |              |   | 3,589,700 |   |
| Loans      held for sale                                                                                                                                                                                                   |   |           | 686,529     |   |              |   | 3,189,545 |   |
|                                                                                                                                                                                                                       |   |           |        |   |              |   |   |   |
| Loans                                                                                                                                                                                                                      |   |           | 562,234,854 |   |              |   | 575,744,207 |   |
| Allowance      for loan losses                                                                                                                                                                                             |   |           | (9,035,370  | )      |              |   | (8,208,162 | ) |
| Net      loans                                                                                                                                                                                                             |   |           | 553,199,484 |   |              |   | 567,536,045 |   |
|                                                                                                                                                                                                                       |   |           |        |   |              |   | - |   |
| Premises      and equipment, net                                                                                                                                                                                           |   |           | 9,597,339   |   |              |   | 9,549,233 |   |
| Accrued      interest receivable                                                                                                                                                                                           |   |           | 2,781,066   |   |              |   | 3,246,455 |   |
| Bank      owned life insurance                                                                                                                                                                                             |   |           | 11,362,127  |   |              |   | 11,258,517 |   |
| Other      assets                                                                                                                                                                                                          |   |           | 8,132,962   |   |              |   | 9,065,564 |   |
|                                                                                                                                                                                                                       |   |           |        |   |              |   |   |   |
| Total      assets                                                                                                                                                                                                          |   | $              | 691,208,365 |   |              | $      | 706,493,142 |   |
|                                                                                                                                                                                                                       |   |           |        |   |              |   |   |   |
| LIABILITIES      AND STOCKHOLDERS' EQUITY                                                                                                                                                                                  |   |           |        |   |              |   |   |   |
| LIABILITIES                                                                                                                                                                                                                |   |           |        |   |              |   |   |   |
| Deposits:                                                                                                                                                                                                                  |   |           |        |   |              |   |   |   |
| Noninterest-bearing                                                                                                                                                                                                        |   | $              | 69,643,584  |   |              | $      | 71,705,395 |   |
| Interest-bearing                                                                                                                                                                                                           |   |           | 518,090,945 |   |              |   | 528,984,076 |   |
| Total      deposits                                                                                                                                                                                                        |   |           | 587,734,529 |   |              |   | 600,689,471 |   |
|                                                                                                                                                                                                                       |   |           |        |   |              |   |   |   |
| Federal      Home Loan Bank (FHLB) advances                                                                                                                                                                                |   |           | 32,200,000  |   |              |   | 35,100,000 |   |
| Junior      subordinated debt                                                                                                                                                                                              |   |           | 17,527,000  |   |              |   | 17,527,000 |   |
| Accrued      interest payable                                                                                                                                                                                              |   |           | 1,347,760   |   |              |   | 1,721,972 |   |
| Other      liabilities                                                                                                                                                                                                     |   |           | 2,994,306   |   |              |   | 3,247,145 |   |
|                                                                                                                                                                                                                       |   |           |        |   |              |   |   |   |
| Total      liabilities                                                                                                                                                                                                     |   |           | 641,803,595 |   |              |   | 658,285,588 |   |
|                                                                                                                                                                                                                       |   |           |        |   |              |   |   |   |
| 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, 6,000,000shares authorized;      4,115,805 and 4,113,805 shares issued; and 4,056,769 and 4,060,769 shares      outstanding at at March 31,2008 and December 31, 2007 |   |           | 39,497,429  |   |              |   | 39,482,669 |   |
| Treasury      stock, at cost, 59,036 and 53,036 shares at March 31, 2008and December 31,      2007                                                                                                                         |   |           | (824,447    | )      |              |   | (758,827 | ) |
| Retained      earnings                                                                                                                                                                                                     |   |           | 9,740,787   |   |              |   | 9,208,719 |   |
| Accumulated      other comprehensive income, net of tax of $510,516 at March 31, 2008 and      $141,663 at December 31, 2007                                                                                               |   |           | 991,001     |   |              |   | 274,993 |   |
| Total      stockholders' equity                                                                                                                                                                                            |   |           | 49,404,770  |   |              |   | 48,207,554 |   |
|                                                                                                                                                                                                                       |   |           |        |   |              |   |   |   |
| Total      liabilities and stockholders' equity                                                                                                                                                                            |   | $              | 691,208,365 |   |              | $      | 706,493,142 |   |

----

Index

Statements 

|                                                     |   | (unaudited)             |       |
|----------------------------------------------------------|--------|-------------------------|------------|
|                                                     |   | Three      Months Ended |       |
|                                                     |   | March 31           |       |
|                                                     |   | 2008                    |       |   | 2007 |   |
| Interest      income:                                    |   |                    |       |   |   |   |
| Loans,      including fees                               |   | $                       | 9,267,399  |   |   | $ | 10,317,566 |   |
| Securities      - taxable                                |   |                    | 614,514    |   |   |   | 653,945 |   |
| Securities      - tax exempt                             |   |                    | 214,034    |   |   |   | 200,775 |   |
| Other      interest income                               |   |                    | 182,352    |   |   |   | 219,080 |   |
| Total      interest income                               |   |                    | 10,278,299 |   |   |   | 11,391,366 |   |
| Interest      expense:                                   |   |                    |       |   |   |   |   |   |
| Deposits                                                 |   |                    | 4,642,135  |   |   |   | 5,675,885 |   |
| FHLB      advances                                       |   |                    | 274,140    |   |   |   | 191,744 |   |
| Junior      subordinated debt                            |   |                    | 281,649    |   |   |   | 281,649 |   |
| Total      interest expense                              |   |                    | 5,197,924  |   |   |   | 6,149,278 |   |
| Net      interest income                                 |   |                    | 5,080,375  |   |   |   | 5,242,088 |   |
| Provision      for loan losses                           |   |                    | 300,000    |   |   |   | 1,425,000 |   |
| Net      interest income after provision for loan losses |   |                    | 4,780,375  |   |   |   | 3,817,088 |   |
| Noninterest      income:                                 |   |                    |       |   |   |   |   |   |
| Trust      and brokerage fees                            |   |                    | 894,392    |   |   |   | 845,893 |   |
| Service      charges                                     |   |                    | 321,210    |   |   |   | 201,865 |   |
| Loan      broker fees                                    |   |                    | 61,058     |   |   |   | 29,195 |   |
| Gain      on sale of securities                          |   |                    | 59,837     |   |   |   | - |   |
| Other      fees                                          |   |                    | 304,277    |   |   |   | 357,129 |   |
| Total      noninterest income                            |   |                    | 1,640,774  |   |   |   | 1,434,082 |   |
| Noninterest      expense:                                |   |                    |       |   |   |   |   |   |
| Salaries      and benefits                               |   |                    | 3,086,398  |   |   |   | 2,995,501 |   |
| Occupancy      and equipment                             |   |                    | 758,315    |   |   |   | 688,194 |   |
| Marketing                                                |   |                    | 150,202    |   |   |   | 79,043 |   |
| Data      processing                                     |   |                    | 280,758    |   |   |   | 163,961 |   |
| Loan      and professional costs                         |   |                    | 243,650    |   |   |   | 358,813 |   |
| Office      supplies and postage                         |   |                    | 114,032    |   |   |   | 123,385 |   |
| Courier      services                                    |   |                    | 89,465     |   |   |   | 100,810 |   |
| Business      development                                |   |                    | 154,873    |   |   |   | 157,753 |   |
| Communication      Expense                               |   |                    | 70,792     |   |   |   | 74,755 |   |
| FDIC      Insurance Premiums                             |   |                    | 167,514    |   |   |   | 16,901 |   |
| Other      expense                                       |   |                    | 362,785    |   |   |   | 339,191 |   |
| Total      noninterest expense                           |   |                    | 5,478,784  |   |   |   | 5,098,307 |   |
| Income      before income taxes                          |   |                    | 942,365    |   |   |   | 152,863 |   |
| Income      taxes expense (benefit)                      |   |                    | 231,193    |   |   |   | (23,750 | ) |
|                                                     |   |                    |       |   |   |   |   |   |
| Net      income                                          |   | $                       | 711,172    |   |   | $ | 176,613 |   |

----

Index

Statements 

|                                                                             |   | (unaudited)             |      |
|----------------------------------------------------------------------------------|--------|-------------------------|-----------|
|                                                                             |   | Three      Months Ended |      |
|                                                                             |   | March 31           |      |
|                                                                             |   | 2008                    |      |   | 2007 |   |
|                                                                             |   |                    |      |   |   |   |
| Other      comprehensive income net of tax:                                      |   |                    |      |   |   |   |
| Unrealized      appreciation (depreciation) on available for sale    securities  |   |                    | 422,460   |   |   |   | 30,273 |   |
| Unrealized      gain (loss) on cash flow hedge                                   |   |                    | 293,548   |   |   |   | (2,205 | ) |
| Total      comprehensive income                                                  |   | $                       | 1,427,180 |   |   | $ | 204,681 |   |
|                                                                             |   |                    |      |   |   |   |   |   |
| Basic      earnings per common share                                             |   | $                       | 0.18      |   |   | $ | 0.04 |   |
| Diluted      earnings per common share                                           |   | $                       | 0.17      |   |   | $ | 0.04 |   |
| Average      common shares outstanding                                           |   |                    | 4,062,145 |   |   |   | 4,068,657 |   |
| Average      common shares and dilutive potential common shares      outstanding |   |                    | 4,088,684 |   |   |   | 4,163,169 |   |
|                                                                             |   |                    |      |   |   |   |   |   |
| Dividends      declared per share                                                |   | $                       | 0.044     |   |   | $ | 0.044 |   |

----

Index

Equity

|                                                                                                                                |   | Common         |       |   |     |   |       | Accumulated        |   |   |     |   |   |   |     |
|-------------------------------------------------------------------------------------------------------------------------------------|--------|----------------|------------|--------|----------|--------|------------|--------------------|--------|--------|----------|--------|--------|--------|----------|
|                                                                                                                                |   | Stock      and |       |   |     |   |       | Other              |   |   |     |   |   |   |     |
|                                                                                                                                |   | Paid-in        |       |   | Retained |   |       | Comprehensive      |   |   | Treasury |   |   |   |     |
|                                                                                                                                |   | Capital        |       |   | Earnings |   |       | Income      (Loss) |   |   | Stock    |   |   | Total  |     |
|                                                                                                                                |   |           |       |   |     |   |       |               |   |   |     |   |   |   |     |
| Balance,      January 1, 2007                                                                                                  |   | $              | 38,536,406 |   |     | $      | 12,523,750 |               |   | $      | (102,317 | )      |   |   |     |   | $ | 50,957,839 |   |
|                                                                                                                                |   |           |       |   |     |   |       |               |   |   |     |   |   |   |     |   |   |   |   |
| Net      income for 2007                                                                                                            |   |           |       |   |     |   | 176,613    |               |   |   |     |   |   |   |     |   |   | 176,613 |   |
|                                                                                                                                |   |           |       |   |     |   |       |               |   |   |     |   |   |   |     |   |   |   |   |
| Change      in net unrealized appreciation (depreciation) on securities available, for      sale, net of tax of $17,397             |   |           |       |   |     |   |       |               |   |   | 30,273   |   |   |   |     |   |   | 30,273 |   |
|                                                                                                                                |   |           |       |   |     |   |       |               |   |   |     |   |   |   |     |   |   |   |   |
| Change      in net unrealized gain (loss) on cash flow hedge, net of tax of      $(1,136)                                           |   |           |       |   |     |   |       |               |   |   | (2,205   | )      |   |   |     |   |   | (2,205 | ) |
|                                                                                                                                |   |           |       |   |     |   |       |               |   |   |     |   |   |   |     |   |   |   |   |
| Total      Comprehensive Income                                                                                                     |   |           |       |   |     |   |       |               |   |   |     |   |   |   |     |   |   | 204,681 |   |
|                                                                                                                                |   |           |       |   |     |   |       |               |   |   |     |   |   |   |     |   |   |   |   |
| Cash      dividends paid ($0.044 per share)                                                                                         |   |           |       |   |     |   | (179,095   | )                  |   |   |     |   |   |   |     |   |   | (179,095 | ) |
|                                                                                                                                |   |           |       |   |     |   |       |               |   |   |     |   |   |   |     |   |   |   |   |
| Issuance      of 28,000 shares of common stock for stock options exercised, including      tax benefit                              |   |           | 380,823    |   |     |   |       |               |   |   |     |   |   |   |     |   |   | 380,823 |   |
|                                                                                                                                |   |           |       |   |     |   |       |               |   |   |     |   |   |   |     |   |   |   |   |
| Stock      based compensation expense                                                                                               |   |           | 21,930     |   |     |   |       |               |   |   |     |   |   |   |     |   |   | 21,930 |   |
|                                                                                                                                |   |           |       |   |     |   |       |               |   |   |     |   |   |   |     |   |   |   |   |
| Balance,      March 31, 2007                                                                                                   |   | $              | 38,939,159 |   |     | $      | 12,521,268 |               |   | $      | (74,249  | )      |   | $      | -        |   |   | $ | 51,386,178 |   |
|                                                                                                                                |   |           |       |   |     |   |       |               |   |   |     |   |   |   |     |   |   |   |   |   |
|                                                                                                                                |   |           |       |   |     |   |       |               |   |   |     |   |   |   |     |   |   |   |   |   |
| Balance,      January 1, 2008                                                                                                  |   | $              | 39,482,669 |   |     | $      | 9,208,719  |               |   | $      | 274,993  |   |   | $      | (758,827 | ) |   | $ | 48,207,554 |   |
|                                                                                                                                |   |           |       |   |     |   |       |               |   |   |     |   |   |   |     |   |   |   |   |   |
| Net      income for 2008                                                                                                            |   |           |       |   |     |   | 711,172    |               |   |   |     |   |   |   |     |   |   |   | 711,172 |   |
|                                                                                                                                |   |           |       |   |     |   |       |               |   |   |     |   |   |   |     |   |   |   |   |   |
| Change      in net unrealized appreciation (depreciation) on securities      available,  for sale, net of tax of $217,631 |   |           |       |   |     |   |       |               |   |   | 422,460  |   |   |   |     |   |   |   | 422,460 |   |
|                                                                                                                                |   |           |       |   |     |   |       |               |   |   |     |   |   |   |     |   |   |   |   |   |
| Change      in net unrealized gain (loss) on cash flow hedge, net of tax of      $151,222                                           |   |           |       |   |     |   |       |               |   |   | 293,548  |   |   |   |     |   |   |   | 293,548 |   |
|                                                                                                                                |   |           |       |   |     |   |       |               |   |   |     |   |   |   |     |   |   |   |   |   |
| Total      Comprehensive Income                                                                                                     |   |           |       |   |     |   |       |               |   |   |     |   |   |   |     |   |   |   | 1,427,180 |   |
|                                                                                                                                |   |           |       |   |     |   |       |               |   |   |     |   |   |   |     |   |   |   |   |   |
| Cash      dividends paid ($0.044 per share)                                                                                         |   |           |       |   |     |   | (179,104   | )                  |   |   |     |   |   |   |     |   |   |   | (179,104 | ) |
|                                                                                                                                |   |           |       |   |     |   |       |               |   |   |     |   |   |   |     |   |   |   |   |   |
| Stock      based compensation expense                                                                                               |   |           | 14,760     |   |     |   |       |               |   |   |     |   |   |   |     |   |   |   | 14,760 |   |
|                                                                                                                                |   |           |       |   |     |   |       |               |   |   |     |   |   |   |     |   |   |   |   |   |
| Repurchase      of 6,000 shares of common stock                                                                                     |   |           | -          |   |     |   |       |               |   |   |     |   |   |   | (65,620  | ) |   |   | (65,620 | ) |
|                                                                                                                                |   |           |       |   |     |   |       |               |   |   |     |   |   |   |     |   |   |   |   |   |
| Balance,      March 31, 2008                                                                                                   |   | $              | 39,497,429 |   |     | $      | 9,740,787  |               |   | $      | 991,001  |   |   | $      | (824,447 | ) |   | $ | 49,404,770 |   |

----

Index

Cash 

|                                                                                       |   | (unaudited)              |        |   | (unaudited)              |   |
|--------------------------------------------------------------------------------------------|--------|--------------------------|-------------|--------|--------------------------|--------|
|                                                                                       |   | Three      Months ended  |        |   | Three      Months ended  |   |
|                                                                                       |   | March 31,      2008 |        |   | March 31,      2007 |   |
| Cash      flows from operating activities:                                                 |   |                     |        |   |                     |   |
| Net      income                                                                            |   | $                        | 711,172     |   |                     | $      | 176,613 |   |
| Adjustments      to reconcile net income to net cash from operating    activities:         |   |                     |        |   |                     |   |   |   |
| Depreciation      and amortization                                                         |   |                     | 347,590     |   |                     |   | 236,327 |   |
| Provision      for loan losses                                                             |   |                     | 300,000     |   |                     |   | 1,425,000 |   |
| Stock      based compensation expense                                                      |   |                     | 14,760      |   |                     |   | 21,930 |   |
| Earnings      on life insurance                                                            |   |                     | (103,610    | )      |                     |   | (97,189 | ) |
| Gain      on sale of securities AFS                                                        |   |                     | (59,837     | )      |                     |   | - |   |
| Loss      on disposal of premises and equipment                                            |   |                     | 7,492       |   |                     |   | - |   |
| Loans      originated for sale                                                             |   |                     | (2,173,000  | )      |                     |   | - |   |
| Proceeds      from sale of loans                                                           |   |                     | 4,676,016   |   |                     |   | - |   |
| Tax      benefit from exercise of stock options                                            |   |                     | -           |   |                     |   | (59,509 | ) |
| Change      in accrued interest receivable                                                 |   |                     | 465,389     |   |                     |   | 9,470 |   |
| Proceeds      from settlement of interest rate floor                                       |   |                     | 833,750     |   |                     |   | - |   |
| Change      in other assets                                                                |   |                     | 461,578     |   |                     |   | (627,337 | ) |
| Change      in accrued interest payable                                                    |   |                     | (374,212    | )      |                     |   | 24,548 |   |
| Change      in other liabilities                                                           |   |                     | (252,839    | )      |                     |   | (547,625 | ) |
| Net      cash from operating activities                                                    |   |                     | 4,854,249   |   |                     |   | 562,228 |   |
| Cash      flows from investing activities:                                                 |   |                     |        |   |                     |   |   |   |
| Net      change in loans                                                                   |   |                     | 10,520,081  |   |                     |   | (21,397,312 | ) |
| Purchase      of loans                                                                     |   |                     | -           |   |                     |   | (3,103,568 | ) |
| Purchase      of securities AFS                                                            |   |                     | (11,274,040 | )      |                     |   | - |   |
| Proceeds      from calls and maturities of securities AFS                                  |   |                     | 4,908,222   |   |                     |   | 1,658,020 |   |
| Proceeds      from sale of securities AFS                                                  |   |                     | 3,476,412   |   |                     |   | - |   |
| Proceeds      from sale of participation loans                                             |   |                     | 3,216,561   |   |                     |   | 5,837,926 |   |
| Purchase      of premises and equipment                                                    |   |                     | (367,751    | )      |                     |   | (720,041 | ) |
| Net      cash from (used in) investing activities                                          |   |                     | 10,479,485  |   |                     |   | (17,724,975 | ) |
| Cash      flows from financing activities:                                                 |   |                     |        |   |                     |   |   |   |
| Net      change in deposits                                                                |   |                     | (12,954,942 | )      |                     |   | 3,031,442 |   |
| Cash      dividends paid                                                                   |   |                     | (179,104    | )      |                     |   | (179,095 | ) |
| Proceeds      from issuance of common stock from exercise of stock      options            |   |                     | -           |   |                     |   | 321,314 |   |
| Tax      benefit from issuance of common stock                                             |   |                     | -           |   |                     |   | 59,509 |   |
| Proceeds      from FHLB advances                                                           |   |                     | 24,950,000  |   |                     |   | 23,200,000 |   |
| Repayment      of FHLB advances                                                            |   |                     | (27,850,000 | )      |                     |   | (14,200,000 | ) |
| Repurchase      of common stock                                                            |   |                     | (65,620     | )      |                     |   | - |   |
| Net      cash from (used in) financing activities                                          |   |                     | (16,099,666 | )      |                     |   | 12,233,170 |   |
| Net      change in cash and cash equivalents                                               |   |                     | (765,932    | )      |                     |   | (4,929,577 | ) |
| Cash      and cash equivalents, beginning of period                                        |   |                     | 33,830,389  |   |                     |   | 28,864,966 |   |
| Cash      and cash equivalents, end of period                                              |   | $                        | 33,064,457  |   |                     | $      | 23,935,389 |   |
|                                                                                       |   |                     |        |   |                     |   |   |   |
| Supplemental      disclosures of cash flow information Cash paid during the year      for: |   |                     |        |   |                     |   |   |   |
| Interest                                                                                   |   | $                        | 5,572,135   |   |                     | $      | 6,124,730 |   |
| Income      taxes                                                                          |   |                     | -           |   |                     |   | - |   |
| Noncash      items:                                                                        |   |                     |        |   |                     |   |   |   |
| Transfer      of loans to other real estate owned                                          |   |                     | 299,919     |   |                     |   | - |   |

----

Index

Notes 

----

Index

----

Index

|                                                                                      |   | Three      Months Ended |      |
|-------------------------------------------------------------------------------------------|--------|-------------------------|-----------|
|                                                                                      |   | March 31           |      |
|                                                                                      |   | 2008                    |      |   | 2007 |   |
| Basic                                                                                     |   |                    |      |   |   |   |
| Net      income                                                                           |   | $                       | 711,172   |   |   | $ | 176,613 |   |
| Weighted      average common shares outstanding                                           |   |                    | 4,062,145 |   |   |   | 4,068,657 |   |
| Basic      earnings per common share                                                      |   | $                       | 0.18      |   |   | $ | 0.04 |   |
|                                                                                      |   |                    |      |   |   |   |   |   |
| Diluted                                                                                   |   |                    |      |   |   |   |   |   |
| Net      income                                                                           |   | $                       | 711,172   |   |   | $ | 176,613 |   |
| Weighted      average common shares outstanding                                           |   |                    | 4,062,145 |   |   |   | 4,068,657 |   |
| Add:      dilutive effect of assumed stock option exercises                               |   |                    | 26,539    |   |   |   | 94,512 |   |
| Weighted      average common shares and dilutive potential common shares      outstanding |   |                    | 4,088,684 |   |   |   | 4,163,169 |   |
| Diluted      earnings per common share                                                    |   | $                       | 0.17      |   |   | $ | 0.04 |   |

|                                              |   |   |    |   | Weighted- |   |   | Weighted-   |   |   |       |   |
|---------------------------------------------------|--------|--------|---------|--------|-----------|--------|--------|-------------|--------|--------|------------|--------|
|                                              |   |   |    |   | Average   |   |   | Average     |   |   |       |   |
|                                              |   |   |    |   | Aggregate |   |   | Remaining   |   |   |       |   |
|                                              |   |   |    |   | Exercise  |   |   | Contractual |   |   | Instrinsic |   |
| Options                                           |   | Shares |    |   | Price     |   |   | Term        |   |   | Value      |   |
|                                              |   |   |    |   |      |   |   |        |   |   |       |   |
| Outstanding      at January 1, 2008               |   |   | 239,802 |   |      | $      | 11.52  |        |   |   |       |   |   |   |
|                                              |   |   |    |   |      |   |   |        |   |   |       |   |   |   |
| Granted                                           |   |   | -       |   |      |   | -      |        |   |   |       |   |   | - |   |
|                                              |   |   |    |   |      |   |   |        |   |   |       |   |   |   |   |
| Exercised                                         |   |   | -       |   |      |   | -      |        |   |   |       |   |   |   |   |
|                                              |   |   |    |   |      |   |   |        |   |   |       |   |   |   |   |
| Forfeited      or expired                         |   |   | (1,000  | )      |      |   | 14.39  |        |   |   |       |   |   |   |   |
|                                              |   |   |    |   |      |   |   |        |   |   |       |   |   |   |   |
| Outstanding      at March 31, 2008                |   |   | 238,802 |   |      |   | 11.51  |        |   |   | 3.05       |   |   |   | 165,269 |   |
|                                              |   |   |    |   |      |   |   |        |   |   |       |   |   |   |   |   |
| Vested      or expected to vest at March 31, 2008 |   |   | 236,611 |   |      |   | 11.48  |        |   |   | 3.02       |   |   |   | 165,269 |   |
|                                              |   |   |    |   |      |   |   |        |   |   |       |   |   |   |   |   |
| Exercisable      at March 31, 2008                |   |   | 219,747 |   |      |   | 11.20  |        |   |   | 2.70       |   |   |   | 165,269 |   |

----

Index

|                              |   | As      of and for the three months ending March 31, 2008 |        |
|-----------------------------------|--------|----------------------------------------------------------------|-------------|
|                              |   |                                                           |        |   | Wealth |   |   | Corporate      & |   |   |   |   |   |   |   |
|                              |   | Bank                                                           |        |   | Management |   |   | Intercompany |   |   | Eliminations |   |   | Total |   |
| Income      Statement Information |   |                                                           |        |   |   |   |   |   |   |   |   |   |   |   |   |
| Net      interest income          |   | $                                                              | 5,329,431   |   |   | $ | 32,594 |   |   | $ | (281,650 | ) |   | $ | - |   |   | $ | 5,080,375 |   |
|                              |   |                                                           |        |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Non-interest      income          |   |                                                           | 764,133     |   |   |   | 894,631 |   |   |   | 969,069 |   |   |   | (987,059 | ) |   |   | 1,640,774 |   |
|                              |   |                                                           |        |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Non-interest      expense         |   |                                                           | 4,625,239   |   |   |   | 704,828 |   |   |   | 148,717 |   |   |   | - |   |   |   | 5,478,784 |   |
|                              |   |                                                           |        |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Noncash      items                |   |                                                           |        |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Provision      for loan losses    |   |                                                           | 300,000     |   |   |   | - |   |   |   | - |   |   |   | - |   |   |   | 300,000 |   |
| Depreciation/Amortization         |   |                                                           | 337,644     |   |   |   | 9,946 |   |   |   | - |   |   |   | - |   |   |   | 347,590 |   |
|                              |   |                                                           |        |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Income      tax expense           |   |                                                           | 303,513     |   |   |   | 100,150 |   |   |   | (172,470 | ) |   |   | - |   |   |   | 231,193 |   |
|                              |   |                                                           |        |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Segment      Profit               |   |                                                           | 864,812     |   |   |   | 122,247 |   |   |   | 711,172 |   |   |   | (987,059 | ) |   |   | 711,172 |   |
|                              |   |                                                           |        |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Balance      Sheet Information    |   |                                                           |        |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Segment      Assets               |   |                                                           | 687,243,063 |   |   |   | 6,286,638 |   |   |   | 69,964,576 |   |   |   | (72,285,912 | ) |   |   | 691,208,365 |   |

----

Index

|                              |   | As      of and for the three months ended March 31, 2007 |        |
|-----------------------------------|--------|---------------------------------------------------------------|-------------|
|                              |   |                                                          |        |   |   |   |   |   |   |   |   |   |   |   |   |
|                              |   |                                                          |        |   | Wealth |   |   | Corporate      & |   |   |   |   |   |   |   |
| March 31,      2007          |   | Bank                                                          |        |   | Management |   |   | Intercompany |   |   | Eliminations |   |   | Total |   |
| Income      Statement Information |   |                                                          |        |   |   |   |   |   |   |   |   |   |   |   |   |
| Net      interest income          |   | $                                                             | 5,492,334   |   |   | $ | 31,403 |   |   | $ | (281,649 | ) |   | $ | - |   |   | $ | 5,242,088 |   |
|                              |   |                                                          |        |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Non-interest      income          |   |                                                          | 645,634     |   |   |   | 845,892 |   |   |   | 451,613 |   |   |   | (445,069 | ) |   |   | 1,498,070 |   |
|                              |   |                                                          |        |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Non-interest      expense         |   |                                                          | 4,397,565   |   |   |   | 605,670 |   |   |   | 159,060 |   |   |   | - |   |   |   | 5,162,295 |   |
|                              |   |                                                          |        |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Noncash      items                |   |                                                          |        |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Provision      for loan losses    |   |                                                          | 1,425,000   |   |   |   | - |   |   |   | - |   |   |   | - |   |   |   | 1,425,000 |   |
| Depreciation/Amortization         |   |                                                          | 227,171     |   |   |   | 9,156 |   |   |   |   |   |   |   |   |   |   |   | 236,327 |   |
|                              |   |                                                          |        |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Income      tax expense (benefit) |   |                                                          | 23,090      |   |   |   | 118,870 |   |   |   | (165,710 | ) |   |   | - |   |   |   | (23,750 | ) |
|                              |   |                                                          |        |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Segment      Profit               |   |                                                          | 292,313     |   |   |   | 152,755 |   |   |   | 176,614 |   |   |   | (445,069 | ) |   |   | 176,613 |   |
|                              |   |                                                          |        |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Balance      Sheet Information    |   |                                                          |        |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Segment      Assets               |   |                                                          | 681,311,900 |   |   |   | 5,754,192 |   |   |   | 71,946,599 |   |   |   | (75,980,684 | ) |   |   | 683,032,007 |   |

|                                |   | March      31, 2008 |        |   | December      31, 2007 |   |
|-------------------------------------|--------|---------------------|-------------|--------|------------------------|--------|
|                                |   | Balance             |        |   | %                      |   |   | Balance |   |   | % |   |
|                                |   |                |        |   |                   |   |   |   |   |   |   |   |
| Commercial                          |   | $                   | 249,969,824 |   |                   |   | 44.5 | % |   | $ | 252,256,668 |   |   |   | 43.8 | % |
| Commercial      real estate         |   |                | 163,777,290 |   |                   |   | 29.1 | % |   |   | 170,291,883 |   |   |   | 29.6 | % |
| Residential      real estate        |   |                | 97,515,311  |   |                   |   | 17.3 | % |   |   | 102,162,024 |   |   |   | 17.7 | % |
| Home      equity                    |   |                | 29,993,928  |   |                   |   | 5.3 | % |   |   | 29,508,246 |   |   |   | 5.1 | % |
| Consumer                            |   |                | 21,219,411  |   |                   |   | 3.8 | % |   |   | 21,750,106 |   |   |   | 3.8 | % |
| Total      loans                    |   |                | 562,475,764 |   |                   |   | 100.0 | % |   |   | 575,968,927 |   |   |   | 100.0 | % |
| Net      deferred loan costs/(fees) |   |                | (240,910    | )      |                   |   |   |   |   |   | (224,720 | ) |   |   |   |   |
| Allowance      for loan losses      |   |                | (9,035,370  | )      |                   |   |   |   |   |   | (8,208,162 | ) |   |   |   |   |
|                                |   |                |        |   |                   |   |   |   |   |   |   |   |   |   |   |   |
| Net      loans                      |   | $                   | 553,199,484 |   |                   |   |   |   |   | $ | 567,536,045 |   |   |   |   |   |

|                                               |   | 2008   |      |   | 2007   |   |
|----------------------------------------------------|--------|--------|-----------|--------|--------|--------|
|                                               |   |   |      |   |   |   |
| Beginning      balance, January 1                  |   | $      | 8,208,162 |   |   | $      | 6,870,442 |   |
| Provision      expense                             |   |   | 300,000   |   |   |   | 1,425,000 |   |
| Charge-offs                                        |   |   | (237,165  | )      |   |   | (782,434 | ) |
| Recoveries                                         |   |   | 764,373   |   |   |   | 149,824 |   |
|                                               |   |   |      |   |   |   |   |   |
| Ending      balance, March 31                      |   | $      | 9,035,370 |   |   | $      | 7,662,832 |   |
|                                               |   |   |      |   |   |   |   |   |
| Net      charge-offs to average loans (annualized) |   |   | -0.37     | %      |   |   | 0.46 | % |

----

Index

|                                  |   | March 31,      2008 |      |   | December 31,      2007 |   |
|---------------------------------------|--------|--------------------------|-----------|--------|-----------------------------|--------|
|                                  |   |                     |      |   |                        |   |
| Specific      allocations             |   | $                        | 2,746,000 |   |                        | $      | 1,983,000 |   |
| Loan      pool percentage allocations |   |                     | 6,191,000 |   |                        |   | 6,181,000 |   |
| Unallocated                           |   |                     | 98,370    |   |                        |   | 44,162 |   |
|                                  |   |                     |      |   |                        |   |   |   |
| Total      allowance for loan losses  |   | $                        | 9,035,370 |   |                        | $      | 8,208,162 |   |

|                                                |   | March 31,      2008 |       |   | December 31,      2007 |   |
|-----------------------------------------------------|--------|--------------------------|------------|--------|-----------------------------|--------|
|                                                |   |                     |       |   |                        |   |
| Loans      past due over 90 days and still accruing |   | $                        | 546,718    |   |                        | $      | - |   |
| Nonaccrual      loans                               |   |                     | 19,725,564 |   |                        |   | 17,954,861 |   |
| Total      nonperforming loans                      |   | $                        | 20,272,282 |   |                        | $      | 17,954,861 |   |
| Restructured      loans                             |   | $                        | 632,507    |   |                        | $      | 639,332 |   |
| Other      real estate owned                        |   |                     | 1,527,484  |   |                        |   | 1,451,573 |   |
| Total      nonperforming assets                     |   | $                        | 22,432,273 |   |                        | $      | 20,045,766 |   |
|                                                |   |                     |       |   |                        |   |   |   |
| Nonperforming      assets to total assets           |   |                     | 3.25       | %      |                        |   | 2.84 | % |
|                                                |   |                     |       |   |                        |   |   |   |
| Nonperforming      loans to total loans             |   |                     | 3.61       | %      |                        |   | 3.12 | % |

|                                                   |   | March 31,      2008 |       |   | December 31,      2007 |   |
|--------------------------------------------------------|--------|--------------------------|------------|--------|-----------------------------|--------|
|                                                   |   |                     |       |   |                        |   |
| Loans      with no allocated allowance for loan losses |   | $                        | 8,197,393  |   |                        | $      | 11,403,559 |   |
| Loans      with allocated allowance for loan losses    |   |                     | 14,867,132 |   |                        |   | 9,827,566 |   |
| Total      Impaired Loans                              |   | $                        | 23,064,524 |   |                        | $      | 21,231,125 |   |
|                                                   |   |                     |       |   |                        |   |   |   |
| Amount      of allowance for loan losses allocated     |   | $                        | 2,746,000  |   |                        | $      | 1,983,000 |   |
|                                                   |   |                     |       |   |                        |   |   |   |
| Average      impaired loans during the period          |   | $                        | 21,976,132 |   |                        | $      | 13,271,813 |   |
|                                                   |   |                     |       |   |                        |   |   |   |
| Interest      recognized on impaired loans             |   | $                        | 82,487     |   |                        | $      | 469,400 |   |
|                                                   |   |                     |       |   |                        |   |   |   |
| Cash-basis      interest income recognized             |   | $                        | 82,487     |   |                        | $      | 469,400 |   |

----

Index

|                                                                                |   | March 31,      2008 |       |   | December 31,      2007 |   |
|-------------------------------------------------------------------------------------|--------|--------------------------|------------|--------|-----------------------------|--------|
| 5.29%      bullet advance, principal due at maturity January 7, 2008                |   | $                        | -          |   |                        | $      | 3,950,000 |   |
| 5.08%      bullet advance, principal due at maturity March 17, 2008                 |   |                     | -          |   |                        |   | 3,500,000 |   |
| 4.69%      bullet advance, principal due at maturity March 26, 2008                 |   |                     | -          |   |                        |   | 6,000,000 |   |
| 5.16%      bullet advance, principal due at maturity April 28, 2008                 |   |                     | 2,000,000  |   |                        |   | 2,000,000 |   |
| 3.75%      variable rate advance, principal due at maturity May 13,    2008         |   |                     | -          |   |                        |   | 3,000,000 |   |
| 3.75%      variable rate advance, principal due at maturity June 11,    2008        |   |                     | -          |   |                        |   | 1,700,000 |   |
| 3.75%      variable rate advance, principal due at maturity June 16,    2008        |   |                     | -          |   |                        |   | 750,000 |   |
| 3.75%      variable rate advance, principal due at maturity June 30,    2008        |   |                     | -          |   |                        |   | 5,000,000 |   |
| 2.25%      variable rate advance, principal due at maturity September 2,      2008  |   |                     | 1,000,000  |   |                        |   | - |   |
| 2.25%      variable rate advance, principal due at maturity September 8,      2008  |   |                     | 6,000,000  |   |                        |   | - |   |
| 2.25%      variable rate advance, principal due at maturity September 8,      2008  |   |                     | 4,000,000  |   |                        |   | - |   |
| 2.25%      variable rate advance, principal due at maturity September 15,      2008 |   |                     | 2,000,000  |   |                        |   | - |   |
| 5.00%      bullet advance, principal due at maturity April 27, 2009                 |   |                     | 4,000,000  |   |                        |   | 4,000,000 |   |
| 5.16%      bullet advance, principal due at maturity August 18, 2009                |   |                     | 4,000,000  |   |                        |   | 4,000,000 |   |
| 2.29%      bullet advance, principal due at maturity March 22, 2010                 |   |                     | 2,000,000  |   |                        |   | - |   |
| 4.32%      bullet advance, principal due at maturity June 29, 2010                  |   |                     | 1,200,000  |   |                        |   | 1,200,000 |   |
| 3.19%      bullet advance, principal due at maturity March 28, 2011                 |   |                     | 2,000,000  |   |                        |   | - |   |
| 3.55%      bullet advance, principal due at maturity March 26, 2012                 |   |                     | 2,000,000  |   |                        |   | - |   |
| 3.81%      bullet advance, principal due at maturity March 26, 2013                 |   |                     | 2,000,000  |   |                        |   | - |   |
|                                                                                |   |                     |       |   |                        |   |   |   |
|                                                                                |   | $                        | 32,200,000 |   |                        | $      | 35,100,000 |   |

| Year   |   | Advances |       |
|--------|--------|----------|------------|
| 2008   |   |     | 15,000,000 |   |
| 2009   |   |     | 8,000,000  |   |
| 2010   |   |     | 3,200,000  |   |
| 2011   |   |     | 2,000,000  |   |
| 2012   |   |     | 2,000,000  |   |
| 2013   |   |     | 2,000,000  |   |
|   |   | $        | 32,200,000 |   |

|   | · | Level      One – Quoted prices for identical instruments      in active markets |
|--------|--------|---------------------------------------------------------------------------------------|

|   | · | Level      Two – Observable inputs for similar instruments in      active markets; quoted prices for identical or similar instruments in      markets that are not active; and model-derived valuations in which all      significant inputs and significant value drivers are observable in active      markets or can be corroborated by observable market  data |
|--------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | · | Level      Three – Valuations derived from valuation techniques in which one or more      significant inputs or significant value drivers are unobservable that      reflect our own assumptions about the assumptions that market participants      would use in pricing an asset orliability |
|--------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

Index

|                               |   | Level      1 |   |   | Level      2 |   |       | Level      3 |   |   | Total   |   |
|------------------------------------|--------|--------------|--------|--------|--------------|--------|------------|--------------|--------|--------|---------|--------|
| Available-for-sale      securities |   | $            | -      |   |         | $      | 68,007,491 |         |   | $      | 787,210 |   |   | $ | 68,794,701 |   |

|                                                                                                                                                                                |   | Available-for-sale      securities |    |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|------------------------------------|---------|
|                                                                                                                                                                                |   |                               |    |
| Beginning      Balance, January 1, 2008                                                                                                                                             |   | $                                  | 869,055 |   |
| Net      realized/unrealized gains (losses)                                                                                                                                         |   |                               |    |   |
| Included      in earnings                                                                                                                                                           |   |                               | -       |   |
| Included      in other comprehensive income                                                                                                                                         |   |                               | (81,845 | ) |
| Ending      Balance, March 31, 2008                                                                                                                                                 |   | $                                  | 787,210 |   |
|                                                                                                                                                                                |   |                               |    |   |
| Total      gains (losses) for the period included in earnings attributable to the      changes in unrealized gains (losses)relating to assets still held at the      reporting date |   |                               | -       |   |

|                |   | Level      1 |   |   | Level      2 |   |   | Level      3 |   |   | Total      |   |
|---------------------|--------|--------------|--------|--------|--------------|--------|--------|--------------|--------|--------|------------|--------|
| Impaired      loans |   |         | -      |   |         |   | -      |         |   |   | 14,867,132 |   |   |   | 14,867,132 |   |

----

Index

MANAGEMENT’S

----

Index

|                            |   | March 31,      2008 |        |   | December 31,      2007 |   |
|---------------------------------|--------|--------------------------|-------------|--------|-----------------------------|--------|
|                            |   | Balance                  |        |   | %                           |   |   | Balance |   |   | % |   |
|                            |   |                     |        |   |                        |   |   |   |   |   |   |   |
| Noninterest-bearing      demand |   | $                        | 69,643,584  |   |                        |   | 11.8 | % |   | $ | 71,705,395 |   |   |   | 11.9 | % |
| Interest-bearing      checking  |   |                     | 63,130,967  |   |                        |   | 10.7 | % |   |   | 54,928,439 |   |   |   | 9.1 | % |
| Money      market               |   |                     | 129,418,981 |   |                        |   | 22.0 | % |   |   | 135,304,113 |   |   |   | 22.5 | % |
| Savings                         |   |                     | 16,875,007  |   |                        |   | 2.9 | % |   |   | 13,746,704 |   |   |   | 2.3 | % |
| Time,      under $100,000       |   |                     | 98,392,073  |   |                        |   | 16.7 | % |   |   | 94,604,892 |   |   |   | 15.8 | % |
| Time,      $100,000 and over    |   |                     | 210,273,917 |   |                        |   | 35.9 | % |   |   | 230,399,928 |   |   |   | 38.4 | % |
|                            |   |                     |        |   |                        |   |   |   |   |   |   |   |   |   |   |   |
| Total      deposits             |   | $                        | 587,734,529 |   |                        |   | 100.0 | % |   | $ | 600,689,471 |   |   |   | 100.0 | % |

----

Index

| Performance      Ratios          |   | March      31 |   |
|----------------------------------|--------|---------------|--------|
|                             |   | 2008          |   |   | 2007 |   |
|                             |   |          |   |   |   |   |
| Return      on average assets *  |   |          | 0.41   | % |   |   | 0.11 | % |
| Return      on average equity *  |   |          | 5.91   | % |   |   | 1.40 | % |
| Net      interest margin (TEY) * |   |          | 3.15   | % |   |   | 3.42 | % |
| Efficiency      ratio            |   |          | 81.52  | % |   |   | 76.24 | % |
|                             |   |          |   |   |   |   |   |   |
| *      annualized                |   |

----

Index

|                                                            |   | As      of and For The Three Month Period Ended |    |
|-----------------------------------------------------------------|--------|-------------------------------------------------|---------|
|                                                            |   | March 31,      2008                        |    |   | March 31,      2007 |   |
|                                                            |   |                                            |    |   | Interest |   |   | Annualized      |   |   |   | Interest |   |   | Annualized |   |
|                                                            |   | Average                                         |    |   | Earned |   |   | Yield |   |   | Average |   |   | Earned |   |   | Yield |   |
| ($      in thousands)                                           |   | Balance                                         |    |   | or      Paid |   |   | or      Cost |   |   | Balance |   |   | or      Paid |   |   | or      Cost |   |
| Assets                                                          |   |                                            |    |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
|                                                            |   |                                            |    |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Short-term      investments and interest-earning deposits       |   | $                                               | 15,503  |   |   | $ | 117 |   |   |   | 3.04 | % |   | $ | 5,367 |   |   | $ | 132 |   |   |   | 9.97 | % |
| Federal      funds sold                                         |   |                                            | 7,427   |   |   |   | 66 |   |   |   | 3.57 | % |   |   | 5,468 |   |   |   | 87 |   |   |   | 6.45 | % |
| Securities      - taxable                                       |   |                                            | 49,803  |   |   |   | 615 |   |   |   | 4.97 | % |   |   | 52,329 |   |   |   | 654 |   |   |   | 5.07 | % |
| Securities      - tax exempt (1)                                |   |                                            | 20,550  |   |   |   | 324 |   |   |   | 6.34 | % |   |   | 19,405 |   |   |   | 304 |   |   |   | 6.35 | % |
| Loans                                                           |   |                                            | 570,240 |   |   |   | 9,267 |   |   |   | 6.54 | % |   |   | 551,000 |   |   |   | 10,318 |   |   |   | 7.59 | % |
| Total      interest-earning assets                              |   |                                            | 663,523 |   |   |   | 10,389 |   |   |   | 6.30 | % |   |   | 633,569 |   |   |   | 11,495 |   |   |   | 7.36 | % |
| Allowance      for loan losses                                  |   |                                            | (8,522  | ) |   |   |   |   |   |   |   |   |   |   | (6,953 | ) |   |   |   |   |   |   |   |   |
| Cash      and due from banks                                    |   |                                            | 13,459  |   |   |   |   |   |   |   |   |   |   |   | 11,546 |   |   |   |   |   |   |   |   |   |
| Other      assets                                               |   |                                            | 32,964  |   |   |   |   |   |   |   |   |   |   |   | 25,831 |   |   |   |   |   |   |   |   |   |
| Total      assets                                               |   | $                                               | 701,424 |   |   |   |   |   |   |   |   |   |   | $ | 663,993 |   |   |   |   |   |   |   |   |   |
| Liabilities      and Stockholders' Equity                       |   |                                            |    |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Interest-bearing      checking                                  |   | $                                               | 62,397  |   |   | $ | 220 |   |   |   | 1.42 | % |   | $ | 38,579 |   |   | $ | 124 |   |   |   | 1.30 | % |
| Savings                                                         |   |                                            | 15,242  |   |   |   | 45 |   |   |   | 1.19 | % |   |   | 12,756 |   |   |   | 32 |   |   |   | 1.02 | % |
| Money      market                                               |   |                                            | 130,492 |   |   |   | 956 |   |   |   | 2.95 | % |   |   | 125,609 |   |   |   | 1,186 |   |   |   | 3.83 | % |
| Certificates      of deposit                                    |   |                                            | 329,976 |   |   |   | 3,421 |   |   |   | 4.17 | % |   |   | 370,501 |   |   |   | 4,334 |   |   |   | 4.74 | % |
| FHLB      advances                                              |   |                                            | 24,189  |   |   |   | 274 |   |   |   | 4.56 | % |   |   | 15,746 |   |   |   | 192 |   |   |   | 4.95 | % |
| Junior      subordinated debt                                   |   |                                            | 17,527  |   |   |   | 282 |   |   |   | 6.47 | % |   |   | 17,527 |   |   |   | 281 |   |   |   | 6.50 | % |
| Total      interest-bearing liabilities                         |   |                                            | 579,823 |   |   |   | 5,198 |   |   |   | 3.61 | % |   |   | 580,718 |   |   |   | 6,149 |   |   |   | 4.29 | % |
| Noninterest-bearing      checking                               |   |                                            | 69,296  |   |   |   |   |   |   |   |   |   |   |   | 61,436 |   |   |   |   |   |   |   |   |   |
| Other      liabilities                                          |   |                                            | 3,878   |   |   |   |   |   |   |   |   |   |   |   | 4,586 |   |   |   |   |   |   |   |   |   |
| Stockholders'      equity                                       |   |                                            | 48,427  |   |   |   |   |   |   |   |   |   |   |   | 50,779 |   |   |   |   |   |   |   |   |   |
| Total      liabilities and stockholders' equity                 |   | $                                               | 701,424 |   |   |   |   |   |   |   |   |   |   | $ | 697,519 |   |   |   |   |   |   |   |   |   |
| Net      interest income                                        |   |                                            |    |   |   | $ | 5,191 |   |   |   |   |   |   |   |   |   |   | $ | 5,346 |   |   |   |   |   |
| Rate      spread                                                |   |                                            |    |   |   |   |   |   |   |   | 2.69 | % |   |   |   |   |   |   |   |   |   |   | 3.07 | % |
| Net      interest income as a percent of average earning assets |   |                                            |    |   |   |   |   |   |   |   | 3.15 | % |   |   |   |   |   |   |   |   |   |   | 3.42 | % |

----

Index

|                   |   | March 31,      2008 |   |   | December 31,      2007 |   |
|------------------------|--------|--------------------------|--------|--------|-----------------------------|--------|
|                   |   |                     |   |   | Well-                       |   |   | Minimum |   |   |   |   |   | Well- |   |   | Minimum |   |
|                   |   | Actual                   |   |   | Capitalized                 |   |   | Required |   |   | Actual |   |   | Capitalized |   |   | Required |   |
|                   |   |                     |   |   |                        |   |   |   |   |   |   |   |   |   |   |   |   |   |
| The      Company       |   |                     |   |   |                        |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Leverage      capital  |   |                     | 9.20   | %      |                        |   | 5.00 | % |   |   | 4.00 | % |   |   | 9.31 | % |   |   | 5.00 | % |   |   | 4.00 | % |
| Tier      1 risk-based |   |                     | 11.21  | %      |                        |   | 6.00 | % |   |   | 4.00 | % |   |   | 10.92 | % |   |   | 6.00 | % |   |   | 4.00 | % |
| Total      risk-based  |   |                     | 12.61  | %      |                        |   | 10.00 | % |   |   | 8.00 | % |   |   | 12.08 | % |   |   | 10.00 | % |   |   | 8.00 | % |
|                   |   |                     |   |   |                        |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| The      Bank          |   |                     |   |   |                        |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Leverage      capital  |   |                     | 8.13   | %      |                        |   | 5.00 | % |   |   | 4.00 | % |   |   | 7.99 | % |   |   | 5.00 | % |   |   | 4.00 | % |
| Tier      1 risk-based |   |                     | 9.90   | %      |                        |   | 6.00 | % |   |   | 4.00 | % |   |   | 9.40 | % |   |   | 6.00 | % |   |   | 4.00 | % |
| Total      risk-based  |   |                     | 11.16  | %      |                        |   | 10.00 | % |   |   | 8.00 | % |   |   | 10.65 | % |   |   | 10.00 | % |   |   | 8.00 | % |

----

Index

| Item      4.  | CONTROLS      AND PROCEDURES |
|--------------------|------------------------------|

----

Index

| Item      1.  | LEGAL PROCEEDINGS |
|--------------------|-------------------|

| Item      1a.  | RISK      FACTORS |
|---------------------|-------------------|

| Item      2.  | UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF      PROCEEDS |
|--------------------|------------------------------------------------------------------|

|   | (c) | Issuer      Purchase of Equity Securities |
|--------|-----|-------------------------------------------|

| Period                    |   | Total      Number ofShares      Repurchased |   |   | Average      PricePaid      Per Share |   |   | Total      Number ofShares      Repurchasedas      part of PubliclyAnnounced      Planor      Program |   |   | Maximum      Number of Shares (or Dollar Value)      that May Yet be      Purchased Under Plans      or Programs |   |
|---------------------------|--------|---------------------------------------------|--------|--------|---------------------------------------|--------|--------|-------------------------------------------------------------------------------------------------------|--------|--------|----------------------------------------------------------------------------------------------------------------------------|--------|
|                      |   |                                        |   |   |                                  |   |   |                                                                                                  |   |   |                                                                                                                       |   |
| 1/1/2008      - 1/31/2008 |   |                                        | -      |   |                                  | $      | -      |                                                                                                  |   |   | -                                                                                                                          |   |   | $ | - |   |
| 2/1/2008      - 2/29/2008 |   |                                        | -      |   |                                  |   |   |                                                                                                  |   |   | -                                                                                                                          |   |   |   | - |   |
| 3/1/2008      - 3/31/2008 |   |                                        | 6,000  |   |                                  |   | 10.94  |                                                                                                  |   |   | 59,036                                                                                                                     |   |   |   | 65,000 |   |
|                      |   |                                        | 6,000  |   |                                  | $      | 10.94  |                                                                                                  |   |   | 59,036                                                                                                                     |   |   |   | 65,000 |   |

| Item      6.  | EXHIBITS |
|--------------------|----------|

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

31.1

31.2

32.1 

32.2 

SIGNATURES

|                               | TOWER      FINANCIAL CORPORATION                |
|------------------------------------|-------------------------------------------------|
|                               |                                            |
|                               |                                            |
| Dated:  May      9, 2008 | / s      /  Donald F. Schenkel        |
|                               | Donald      F. Schenkel, Chairman of the Board, |
|                               | President      and Chief Executive Officer      |
|                               |                                            |
|                               |                                            |
| Dated:  May      9, 2008 | / s      /  Richard R. Sawyer         |
|                               | Richard      R. Sawyer                          |
|                               | Chief      Financial Officer                    |

----