----

----

**Form      10-Q**

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

**March      31, 2006**

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

**TOWER      FINANCIAL CORPORATION**

----

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

----

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

----

----

----

**Forward-Looking      Statements**

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

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

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

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

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

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

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

----

**INDEX**

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

----

*Index*

**PARTI.**
**  **
**FINANCIAL      INFORMATION**

**Item      1.    FINANCIAL      STATEMENTS**

**TowerFinancial      Corporation**

**Consolidated      Condensed Balance Sheets**

|                                                                                                                                                                                                                                  |   | *(unaudited)*                        |        |                                    |   |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|--------------------------------------|-------------|-----------------------------------------|--------|
|                                                                                                                                                                                                                                  |   | **March                31,****2006** |        | **December                31,****2005** |   |
| **ASSETS**                                                                                                                                                                                                                            |   |                                 |        |                                    |   |
| Cash                and due from banks                                                                                                                                                                                                |   | $                                    | 16,752,996  |                                    | $      | 14,326,710 |   |
| Short-term                investments and interest-earning deposits                                                                                                                                                                   |   |                                 | 3,667,190   |                                    |   | 16,393,439 |   |
| Federal                funds sold                                                                                                                                                                                                     |   |                                 | 4,260,941   |                                    |   | 7,188,188 |   |
| Total                cash and cash equivalents                                                                                                                                                                                        |   |                                 | 24,681,127  |                                    |   | 37,908,337 |   |
| Securities                available for sale, at fair value                                                                                                                                                                           |   |                                 | 53,839,882  |                                    |   | 50,642,276 |   |
| FHLB                and FRB stock                                                                                                                                                                                                     |   |                                 | 3,421,300   |                                    |   | 3,421,300 |   |
| Loans                                                                                                                                                                                                                                 |   |                                 | 473,997,965 |                                    |   | 450,390,935 |   |
| Allowance                for loan losses                                                                                                                                                                                              |   |                                 | (6,062,256  | )                                       |   | (5,645,301 | ) |
| Net                loans                                                                                                                                                                                                              |   |                                 | 467,935,709 |                                    |   | 444,745,634 |   |
| Premises                and equipment, net                                                                                                                                                                                            |   |                                 | 5,313,102   |                                    |   | 4,638,436 |   |
| Accrued                interest receivable                                                                                                                                                                                            |   |                                 | 2,745,348   |                                    |   | 2,802,189 |   |
| Bank                owned life insurance                                                                                                                                                                                              |   |                                 | 10,557,700  |                                    |   | 10,462,402 |   |
| Other                assets                                                                                                                                                                                                           |   |                                 | 4,138,245   |                                    |   | 3,200,086 |   |
|                                                                                                                                                                                                                                  |   |                                 |        |                                    |   |   |   |
| Total                assets                                                                                                                                                                                                           |   | $                                    | 572,632,413 |                                    | $      | 557,820,660 |   |
|                                                                                                                                                                                                                                  |   |                                 |        |                                    |   |   |   |
| **LIABILITIES                AND STOCKHOLDERS' EQUITY**                                                                                                                                                                               |   |                                 |        |                                    |   |   |   |
| LIABILITIES                                                                                                                                                                                                                           |   |                                 |        |                                    |   |   |   |
| Deposits:                                                                                                                                                                                                                             |   |                                 |        |                                    |   |   |   |
| Noninterest-bearing                                                                                                                                                                                                                   |   | $                                    | 75,188,378  |                                    | $      | 66,742,748 |   |
| Interest-bearing                                                                                                                                                                                                                      |   |                                 | 396,989,718 |                                    |   | 394,208,113 |   |
| Total                deposits                                                                                                                                                                                                         |   |                                 | 472,178,096 |                                    |   | 460,950,861 |   |
| Short-term                borrowings                                                                                                                                                                                                  |   |                                 | -           |                                    |   | - |   |
| Federal                Home Loan Bank (FHLB) advances                                                                                                                                                                                 |   |                                 | 37,700,000  |                                    |   | 34,700,000 |   |
| Junior                subordinated debt                                                                                                                                                                                               |   |                                 | 11,856,000  |                                    |   | 11,856,000 |   |
| Accrued                interest payable                                                                                                                                                                                               |   |                                 | 1,117,028   |                                    |   | 954,075 |   |
| Other                liabilities                                                                                                                                                                                                      |   |                                 | 1,830,503   |                                    |   | 2,091,670 |   |
|                                                                                                                                                                                                                                  |   |                                 |        |                                    |   |   |   |
| Total                liabilities                                                                                                                                                                                                      |   |                                 | 524,681,627 |                                    |   | 510,552,606 |   |
|                                                                                                                                                                                                                                  |   |                                 |        |                                    |   |   |   |
| STOCKHOLDERS'                EQUITY                                                                                                                                                                                                   |   |                                 |        |                                    |   |   |   |
| Preferred                stock, no par value, 4,000,000 shares authorized; no shares issued                and                outstanding                                                                                             |   |                                 |        |                                    |   |   |   |
| Common                stock and paid-in-capital, no par value, 6,000,000 shares authorized;                4,008,092 shares issued and outstanding at March 31, 2006 and 4,007,936                at                December 31, 2005 |   |                                 | 38,039,443  |                                    |   | 38,006,929 |   |
| Retained                earnings                                                                                                                                                                                                      |   |                                 | 10,311,449  |                                    |   | 9,478,812 |   |
| Accumulated                other comprehensive income(loss), net of tax of $(225,060) at March                31,                2006 and $(122,448) at December 31, 2005                                                             |   |                                 | (400,106    | )                                       |   | (217,687 | ) |
| Total                stockholders' equity                                                                                                                                                                                             |   |                                 | 47,950,786  |                                    |   | 47,268,054 |   |
|                                                                                                                                                                                                                                  |   |                                 |        |                                    |   |   |   |
| Total                liabilities and stockholders' equity                                                                                                                                                                             |   | $                                    | 572,632,413 |                                    | $      | 557,820,660 |   |

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

----

*Index*

**Tower      Financial Corporation**

**Consolidated      Condensed Statements of Operations**

|                                                                                                 |   | *(unaudited)***Three                Months ended****March                31** |      |
|------------------------------------------------------------------------------------------------------|--------|-------------------------------------------------------------------------------|-----------|
|                                                                                                 |   | **2006**                                                                      |      | **2005** |   |
| **Interest                income:**                                                                  |   |                                                                          |      |   |   |
| Loans,                including fees                                                                 |   | $                                                                             | 8,145,444 |   | $ | 5,760,581 |   |
| Securities                - taxable                                                                  |   |                                                                          | 490,564   |   |   | 247,291 |   |
| Securities                - tax exempt                                                               |   |                                                                          | 147,392   |   |   | 134,729 |   |
| Other                interest income                                                                 |   |                                                                          | 145,002   |   |   | 81,784 |   |
| Total                interest income                                                                 |   |                                                                          | 8,928,402 |   |   | 6,224,385 |   |
| **Interest                expense:**                                                                 |   |                                                                          |      |   |   |   |   |
| Deposits                                                                                             |   |                                                                          | 3,593,755 |   |   | 1,863,603 |   |
| FHLB                advances                                                                         |   |                                                                          | 352,179   |   |   | 246,989 |   |
| Junior                subordinated debt                                                              |   |                                                                          | 209,230   |   |   | 81,180 |   |
| Total                interest expense                                                                |   |                                                                          | 4,155,164 |   |   | 2,191,772 |   |
| Net                interest income                                                                   |   |                                                                          | 4,773,238 |   |   | 4,032,613 |   |
| **Provision                for loan losses**                                                         |   |                                                                          | 575,000   |   |   | 581,000 |   |
| Net                interest income after provision for loan losses                                   |   |                                                                          | 4,198,238 |   |   | 3,451,613 |   |
| **Noninterest                income:**                                                               |   |                                                                          |      |   |   |   |   |
| Trust                and brokerage fees                                                              |   |                                                                          | 790,956   |   |   | 500,141 |   |
| Service                charges                                                                       |   |                                                                          | 178,681   |   |   | 148,152 |   |
| Loan                broker fees                                                                      |   |                                                                          | 30,620    |   |   | 62,193 |   |
| Other                fees                                                                            |   |                                                                          | 391,045   |   |   | 196,437 |   |
| Total                noninterest income                                                              |   |                                                                          | 1,391,302 |   |   | 906,923 |   |
| **Noninterest                expense:**                                                              |   |                                                                          |      |   |   |   |   |
| Salaries                and benefits                                                                 |   |                                                                          | 2,502,982 |   |   | 1,924,839 |   |
| Occupancy                and equipment                                                               |   |                                                                          | 480,177   |   |   | 435,716 |   |
| Marketing                                                                                            |   |                                                                          | 172,346   |   |   | 156,533 |   |
| Data                processing                                                                       |   |                                                                          | 145,968   |   |   | 122,318 |   |
| Loan                and professional costs                                                           |   |                                                                          | 220,787   |   |   | 176,407 |   |
| Office                supplies and postage                                                           |   |                                                                          | 106,639   |   |   | 70,801 |   |
| Courier                services                                                                      |   |                                                                          | 92,706    |   |   | 79,232 |   |
| Business                development                                                                  |   |                                                                          | 104,944   |   |   | 95,252 |   |
| Other                expense                                                                         |   |                                                                          | 273,337   |   |   | 184,695 |   |
| Total                noninterest expense                                                             |   |                                                                          | 4,099,886 |   |   | 3,245,793 |   |
| **Income                before income taxes**                                                        |   |                                                                          | 1,489,654 |   |   | 1,112,743 |   |
| Income                taxes expense                                                                  |   |                                                                          | 496,700   |   |   | 385,890 |   |
|                                                                                                 |   |                                                                          |      |   |   |   |   |
| **Net                income**                                                                        |   | $                                                                             | 992,954   |   | $ | 726,853 |   |
|                                                                                                 |   |                                                                          |      |   |   |   |   |
| **Basic                earnings per common share**                                                   |   | $                                                                             | 0.25      |   | $ | 0.18 |   |
| **Diluted                earnings per common share**                                                 |   | $                                                                             | 0.24      |   | $ | 0.18 |   |
| Average                common shares outstanding                                                     |   |                                                                          | 4,008,000 |   |   | 4,003,156 |   |
| Average                common shares and dilutive potential common shares                outstanding |   |                                                                          | 4,098,997 |   |   | 4,070,758 |   |
|                                                                                                 |   |                                                                          |      |   |   |   |   |
| Dividends                declared per share                                                          |   | $                                                                             | 0.04      |   |   |   |   |

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

----

*Index*

**TowerFinancial      Corporation**

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

*(unaudited)*

|                                                                                                                                                  |   | **Common****Stock                and****Paid-in****Capital** |               | **Retained****Earnings** |   | **Accumulated****Other****Comprehensive****Income                (Loss)** |   | **Total** |         |
|------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|--------------------------------------------------------------|--------------------|--------------------------|--------|---------------------------------------------------------------------------|--------|-----------|--------------|
|                                                                                                                                                       |   |                                                         |               |                     |   |                                                                      |   |      |         |
| **Balance,                January 1, 2005**                                                                                                                |   | $                                                            | 37,952,860         |                     | $      | 6,040,155                                                                 |   | $         | 20,455       |   | $ | 44,013,470 |   |
|                                                                                                                                                       |   |                                                         |               |                     |   |                                                                      |   |      |         |   |   |   |   |
| Net                income for 2005                                                                                                                         |   |                                                         |               |                     |   | 726,853                                                                   |   |      |         |   |   | 726,853 |   |
| Change                in net unrealized appreciation (depreciation) on securities available                for                sale, net of tax of $163,127 |   |                                                         |               |                     |   |                                                                      |   |      | (264,811     | ) |   | (264,811 | ) |
| Total                Comprehensive Income                                                                                                                  |   |                                                         |     |                     |   |                                                                 |   |      |    |   |   | 462,042 |   |
|                                                                                                                                                       |   |                                                         |               |                     |   |                                                                      |   |      |         |   |   |   |   |
| **Balance,                March 31, 2005**                                                                                                                 |   | $                                                            | 37,952,860         |                     | $      | 6,767,008                                                                 |   | $         | (244,356     | ) | $ | 44,475,512 |   |
|                                                                                                                                                       |   |                                                         |               |                     |   |                                                                      |   |      |         |   |   |   |   |
| **Balance,                January 1, 2006**                                                                                                                |   | $                                                            | 38,006,929         |                     | $      | 9,478,812                                                                 |   | $         | (217,687     | ) | $ | 47,268,054 |   |
|                                                                                                                                                       |   |                                                         |               |                     |   |                                                                      |   |      |         |   |   |   |   |
| Net                income for 2006                                                                                                                         |   |                                                         |               |                     |   | 992,954                                                                   |   |      |         |   |   | 992,954 |   |
| Change                in net unrealized appreciation (depreciation) on securities available                for                sale, net of tax of $102,611 |   |                                                         |               |                     |   |                                                                      |   |      | (182,419     | ) |   | (182,419 | ) |
| Total                Comprehensive Income                                                                                                                  |   |                                                         |               |                     |   |                                                                      |   |      |         |   |   | 810,535 |   |
|                                                                                                                                                       |   |                                                         |               |                     |   |                                                                      |   |      |         |   |   |   |   |
| Cash                dividends paid ($0.04 per share)                                                                                                       |   |                                                         |               |                     |   | (160,317                                                                  | )      |      |         |   |   | (160,317 | ) |
|                                                                                                                                                       |   |                                                         |               |                     |   |                                                                      |   |      |         |   |   |   |   |
| Issuance                of 156 shares of common stock for stock options exercised                                                                          |   |                                                         | 2,013              |                     |   |                                                                      |   |      |         |   |   | 2,013 |   |
|                                                                                                                                                       |   |                                                         |               |                     |   |                                                                      |   |      |         |   |   |   |   |
| Stock                option compensation expense                                                                                                           |   |                                                         | 30,501             |                     |   |                                                                 |   |      |    |   |   | 30,501 |   |
|                                                                                                                                                       |   |                                                         |          |                     |   |                                                                 |   |      |    |   |   |    |   |
| **Balance,                March 31, 2006**                                                                                                                 |   | $                                                            | 38,039,443         |                     | $      | 10,311,449                                                                |   | $         | (400,106     | ) | $ | 47,950,786 |   |

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

----

*Index*

**TowerFinancial      Corporation**

**Consolidated      Condensed Statements of Cash Flows**

|                                                                                                                                |   | *(unaudited)***Three                Months ended****March                31, 2006** |        | *(unaudited)***Three                Months ended****March                31, 2005** |   |
|-------------------------------------------------------------------------------------------------------------------------------------|--------|-------------------------------------------------------------------------------------|-------------|-------------------------------------------------------------------------------------|--------|
| **Cash                flows from operating activities:**                                                                            |   | __________________                                                                  |        | __________________                                                                  |   |
| Net                income                                                                                                           |   | $                                                                                   | 992,954     |                                                                                | $      | 726,853 |   |
| Adjustments                to reconcile net income to net cash from operating                activities:                            |   |                                                                                |        |                                                                                |   |   |   |
| Depreciation                and amortization                                                                                        |   |                                                                                | 192,665     |                                                                                |   | 162,711 |   |
| Provision                for loan losses                                                                                            |   |                                                                                | 575,000     |                                                                                |   | 581,000 |   |
| Stock                option compensation expense                                                                                    |   |                                                                                | 30,501      |                                                                                |   |   |   |
| Earnings                on life insurance                                                                                           |   |                                                                                | (95,298     | )                                                                                   |   | (20,467 | ) |
| FHLB                stock dividend                                                                                                  |   |                                                                                |        |                                                                                |   | (15,200 | ) |
| Change                in accrued interest receivable                                                                                |   |                                                                                | 56,841      |                                                                                |   | 49,481 |   |
| Change                in other assets                                                                                               |   |                                                                                | (835,548    | )                                                                                   |   | (660,225 | ) |
| Change                in accrued interest payable                                                                                   |   |                                                                                | 162,953     |                                                                                |   | (8,787 | ) |
| Change                in other liabilities                                                                                          |   |                                                                                | (261,167    | )                                                                    |   | (54,750 | ) |
| Net                cash from operating activities                                                                                   |   |                                                                                | 818,901     |                                                                                |   | 760,616 |   |
| **Cash                flows from investing activities:**                                                                            |   |                                                                                |        |                                                                                |   |   |   |
| Net                change in loans                                                                                                  |   |                                                                                | (18,314,352 | )                                                                                   |   | (14,644,035 | ) |
| Purchase                of loans                                                                                                    |   |                                                                                | (9,207,992  | )                                                                                   |   |   |   |
| Purchase                of securities available for sale                                                                            |   |                                                                                | (4,456,890  | )                                                                                   |   |   |   |
| Proceeds                from maturities of securities available for sale                                                            |   |                                                                                | 974,254     |                                                                                |   | 2,622,456 |   |
| Purchase                of FHLB and FRB stock                                                                                       |   |                                                                                |        |                                                                                |   | (150,000 | ) |
| Proceeds                from sale of participation loans                                                                            |   |                                                                                | 3,757,269   |                                                                                |   | 267,295 |   |
| Purchase                of premises, equipment and leasehold expenditures                                                           |   |                                                                                | (867,331    | )                                                                                   |   | (79,415 | ) |
| Net                cash from investing activities                                                                                   |   |                                                                                | (28,115,042 | )                                                                                   |   | (11,983,699 | ) |
| **Cash                flows from financing activities:**                                                                            |   |                                                                                |        |                                                                                |   |   |   |
| Net                change in deposits                                                                                               |   |                                                                                | 11,227,235  |                                                                                |   | 13,517,206 |   |
| Net                change in short-term borrowings                                                                                  |   |                                                                                |        |                                                                                |   | (200,000 | ) |
| Cash                dividends paid                                                                                                  |   |                                                                                | (160,317    | )                                                                                   |   |   |   |
| Proceeds                from issuance of common stock from exercise of stock options and                tax                benefits |   |                                                                                | 2,013       |                                                                                |   |   |   |
| Proceeds                from FHLB advances                                                                                          |   |                                                                                | 23,000,000  |                                                                                |   | 3,000,000 |   |
| Repayment                of FHLB advances                                                                                           |   |                                                                                | (20,000,000 | )                                                                                   |   | (10,000,000 | ) |
| Net                cash from financing activities                                                                                   |   |                                                                                | 14,068,931  |                                                                                |   | 6,317,206 |   |
| **Net                change in cash and cash equivalents**                                                                          |   |                                                                                | (13,227,210 | )                                                                                   |   | (4,905,877 | ) |
| Cash                and cash equivalents, beginning of period                                                                       |   |                                                                                | 37,908,337  |                                                                                |   | 37,225,025 |   |
| **Cash                and cash equivalents, end of period**                                                                         |   | $                                                                                   | 24,681,127  |                                                                                | $      | 32,319,148 |   |
|                                                                                                                                |   |                                                                                |        |                                                                                |   |   |   |
| Supplemental                disclosures of cash flow information                                                                    |   |                                                                                |        |                                                                                |   |   |   |
| Cash                paid during the year for:                                                                                       |   |                                                                                |        |                                                                                |   |   |   |
| Interest                                                                                                                            |   | $                                                                                   | 3,992,211   |                                                                                | $      | 2,200,559 |   |
| Income                taxes                                                                                                         |   |                                                                                |        |                                                                                |   | 39,462 |   |

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

----

*Index*

**TowerFinancial      Corporation**

**Notes      to Consolidated Condensed Financial Statements**

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

|   | **a.** | **Organization**:                Tower                Financial Corporation, collectively with its subsidiaries, the “Company,”                was incorporated as an Indiana corporation on July 8, 1998. The Company                is                a holding company with one bank subsidiary, Tower Bank & Trust (or the                “Bank”), a newly formed (effective January 1, 2006) trust company, Tower                Trust Company, (or the “Trust Company”), and two unconsolidated subsidiary                guarantor trusts, Tower Capital Trust 1 and Tower Capital Trust 2.                The                Bank is an Indiana chartered bank with depository accounts insured                by the                Federal Deposit Insurance Corporation (“FDIC”) and is a member of the                Federal Reserve System. The Trust Company is an Indiana Corporation,                and                Tower Capital Trust 1 and Tower Capital Trust 2 are unconsolidated,                wholly                owned Delaware statutory business trusts formed in November 2001                and                December 2005, respectively, for the exclusive purpose of issuing                and                selling trust preferred securities.  |
|--------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | **b.** | **Basis                of Presentation:**The                accompanying unaudited consolidated condensed financial statements                were                prepared in accordance with generally accepted accounting principles                for                interim periods and with instructions for Form 10-Q and, therefore,                do not                include all disclosures required by generally accepted accounting                principles for complete presentation of the Company’s financial                statements. In the opinion of management, the unaudited consolidated                condensed financial statements contain all adjustments necessary                to                present fairly its consolidated financial position at March 31, 2006                and                its consolidated results of operations, comprehensive income, changes                in                stockholders’ equity and cash flows for the three-month periods ended                March 31, 2006 and March 31, 2005. The results for the period ended                March                31, 2006 should not be considered as indicative of results for a                full                year. These consolidated condensed financial statements should be                read in                conjunction with the audited financial statements for the years ended                December 31, 2005, 2004, and 2003 and related notes included in the                Company’s Annual Report on Form 10-K for the year ended December 31,                2005. |
|--------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

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

|   | **d.** | **Stock                Compensation**:                Prior to January 1, 2006, the Company accounted for its stock-based                employee compensation under the recognition and measurement principles                of                APB Opinion 25, *Accounting                for Stock Issued to Employees*,                and related interpretations. No stock-based employee compensation                cost is                reflected in the income statements for the periods ending December                31,                2005, or before. Effective January 1, 2006, the Company adopted Statement                of Financial Accounting Standards (“SFAS”) No. 123(R), *Share-based                Payment*,                and has included stock-based employee compensation expense of $30,501                in                its income statement for the three months ended March 31,                2006. |
|--------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

*Index*

|                                                                                                            |   | **Three                Months Ended****March                31** |    |
|-----------------------------------------------------------------------------------------------------------------|--------|------------------------------------------------------------------|---------|
|                                                                                                            |   | **2006**                                                         |    | **2005** |   |
|                                                                                                            |   |                                                             |    |   |   |
| Net                income as reported                                                                           |   | $                                                                | 992,954 |   | $ | 726,853 |   |
| Deduct:                Stock-based compensation expense determined under fair value-based                method |   |                                                             | -       |   |   | (35,800 | ) |
| Pro                forma net income                                                                             |   | $                                                                | 992,954 |   | $ | 691,053 |   |
|                                                                                                            |   |                                                             |    |   |   |   |   |
| Basic                earnings per share as reported                                                             |   | $                                                                | 0.25    |   | $ | 0.18 |   |
| Pro                forma basic earnings per share                                                               |   |                                                             | N/A     |   |   | 0.17 |   |
| Diluted                earnings per share as reported                                                           |   |                                                             | 0.24    |   |   | 0.18 |   |
| Pro                forma diluted earnings per share                                                             |   |                                                             | N/A     |   |   | 0.17 |   |

|                                             |   | **Three                  Months Ended****March                  31** |   |
|--------------------------------------------------|--------|----------------------------------------------------------------------|--------|
|                                             |   | **2006**                                                             |   | **2005** |   |
|                                             |   |                                                                 |   |   |   |
| Risk-free                  interest rate         |   |                                                                 | n/a    |   |   | 4.04 | % |
| Expected                  option life            |   |                                                                 | n/a    |   |   | 7                  yrs |   |
| Expected                  stock price volatility |   |                                                                 | n/a    |   |   | 26.52 | % |
| Dividend                  yield                  |   |                                                                 | n/a    |   |   | None |   |

|   | **e.** | **Effect                of Newly Issued But Not Yet Effective Accounting                Standards:** None |
|--------|--------|----------------------------------------------------------------------------------------------------------------|

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

**Note      2 - Earnings Per Share**

|                                                                                                          |   | **Three                Months Ended****March                31** |      |
|---------------------------------------------------------------------------------------------------------------|--------|------------------------------------------------------------------|-----------|
|                                                                                                          |   | **2006**                                                         |      | **2005** |   |
| **Basic**                                                                                                     |   |                                                             |      |   |   |
| Net                income                                                                                     |   | $                                                                | 992,954   |   | $ | 726,853 |   |
| Weighted                average common shares outstanding                                                     |   |                                                             | 4,008,000 |   |   | 4,003,156 |   |
| Basic                earnings per common share                                                                |   | $                                                                | 0.25      |   | $ | 0.18 |   |
|                                                                                                          |   |                                                             |      |   |   |   |   |
| **Diluted**                                                                                                   |   |                                                             |      |   |   |   |   |
| Net                income                                                                                     |   | $                                                                | 992,954   |   | $ | 726,853 |   |
| Weighted                average common shares outstanding                                                     |   |                                                             | 4,008,000 |   |   | 4,003,156 |   |
| Add:                dilutive effect of assumed stock option exercises                                         |   |                                                             | 90,997    |   |   | 67,602 |   |
| Weighted                average common shares and dilutive potential common shares                outstanding |   |                                                             | 4,098,997 |   |   | 4,070,758 |   |
| Diluted                earnings per common share                                                              |   | $                                                                | 0.24      |   | $ | 0.18 |   |

----

*Index*

**Note      3 - Stock Option Plans**

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

| Options                               |   | Shares |    | WeightedAverageExercisePrice |   | Weighted-AverageRemainingContractualTerm |   | AggregateIntrinsicValue |         |
|---------------------------------------|--------|--------|---------|------------------------------|--------|------------------------------------------|--------|-------------------------|--------------|
|                                  |   |   |    |                         |   |                                     |   |                    |         |
| Outstanding                at 1/1/06  |   |   | 352,296 |                         | $      | 11.21                                    |   |                    |         |   |   |   |   |
|                                  |   |   |    |                         |   |                                     |   |                    |         |   |   |   |   |
| Granted                               |   |   | 0       |                         |   |                                     |   |                    |         |   |   |   |   |
|                                  |   |   |    |                         |   |                                     |   |                    |         |   |   |   |   |
| Exercised                             |   |   | (156    | )                            | $      | 12.90                                    |   |                    |         |   |   |   |   |
|                                  |   |   |    |                         |   |                                     |   |                    |         |   |   |   |   |
| Forfeited                or expired   |   |   | 0       |                         |   |                                |   |                    |    |   |   |    |   |
|                                  |   |   |    |                         |   |                                     |   |                    |         |   |   |   |   |
| Outstanding                at 3/31/06 |   |   | 352,140 |                         | $      | 11.21                                    |   |                    | 4.56         |   | $ | 1,986,070 |   |
|                                  |   |   |    |                         |   |                                     |   |                    |         |   |   |   |   |
| Exercisable                at 3/31/06 |   |   | 296,493 |                         | $      | 10.58                                    |   |                    | 4.56         |   | $ | 1,859,011 |   |

----

*Index*

| Non-vested                shares    |   | Shares           |    | Weighted-AverageGrant-DateFair                Value |   |
|-------------------------------------|--------|------------------|---------|-----------------------------------------------------|--------|
|                                |   | ________________ |    | ________________                                    |   |
| Nonvested                at 1/1/06  |   |             | 69,522  |                                                | $      | 14.40 |   |
|                                |   |             |    |                                                |   |   |   |
| Granted                             |   |             | 0       |                                                |   |   |   |
|                                |   |             |    |                                                |   |   |   |
| Vested                              |   |             | (13,875 | )                                    | $      | 13.59 |   |
|                                |   |             |    |                                                |   |   |   |
| Nonvested                at 3/31/06 |   |             | 55,647  |                                                | $      | 14.61 |   |

**Item2.    MANAGEMENT’S      DISCUSSION AND      ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS**

**Critical      Accounting Policies**

**Financial      Condition**

*Cash      and Investments*

*Loans*

----

*Index*

|                                     |   | **March                31, 2006** |        | **December                31, 2005** |   |
|------------------------------------------|--------|-----------------------------------|-------------|--------------------------------------|--------|
|                                     |   | **Balance**                       |        | **%**                                |   | **Balance** |   | **%** |   |
|                                     |   |                              |        |                                 |   |   |   |   |   |
| Commercial                               |   | $                                 | 208,895,137 |                                 |   | 44.1% |   | $ | 208,867,595 |   |   | 46.4% |   |
| Commercial                real estate    |   |                              | 155,110,106 |                                 |   | 32.7% |   |   | 145,558,639 |   |   | 32.3% |   |
| Residential                real estate   |   |                              | 63,317,058  |                                 |   | 13.4% |   |   | 50,293,491 |   |   | 11.2% |   |
| Home                equity               |   |                              | 30,312,123  |                                 |   | 6.4% |   |   | 30,251,837 |   |   | 6.7% |   |
| Consumer                                 |   |                              | 16,356,751  |                                 |   | 3.4% |   |   | 15,390,374 |   |   | 3.4% |   |
| Total                loans               |   |                              | 473,991,175 |                                 |   | 100.0% |   |   | 450,361,936 |   |   | 100.0% |   |
| Net                deferred loan costs   |   |                              | 6,790       |                                 |   |   |   |   | 28,999 |   |   |   |   |
| Allowance                for loan losses |   |                              | (6,062,256  | )                                    |   |   |   |   | (5,645,301 | ) |   |   |   |
|                                     |   |                              |        |                                 |   |   |   |   |   |   |   |   |   |
| Net                loans                 |   | $                                 | 467,935,709 |                                 |   |   |   | $ | 444,745,634 |   |   |   |   |

*Nonperforming      Assets.*

|                                                          |   | **March                31, 2006** |      | **December                31, 2005** |   |
|---------------------------------------------------------------|--------|-----------------------------------|-----------|--------------------------------------|--------|
|                                                          |   | _________________                 |      | _________________                    |   |
| Loans                past due over 90 days and still accruing |   | $                                 | 1,379,782 |                                 | $      | 863,862 |   |
| Nonaccrual                loans                               |   |                              | 1,547,328 |                                 |   | 1,332,472 |   |
| Total                nonperforming loans                      |   | $                                 | 2,927,110 |                                 | $      | 2,196,334 |   |
| Other                real estate owned                        |   |                              | 509,050   |                                 |   | 244,050 |   |
| Total                nonperforming assets                     |   | $                                 | 3,436,160 |                                 | $      | 2,440,384 |   |
|                                                          |   |                              |      |                                 |   |   |   |
| Nonperforming                assets to total assets           |   |                              | 0.60      | %                          |   | 0.44 | % |
|                                                          |   |                              |      |                                 |   |   |   |
| Nonperforming                loans to total loans             |   |                              | 0.62      | %                                    |   | 0.49 | % |

*Allowance      for Loan Losses. *

----

*Index*

|                                            |   | March                31, 2006 |      | December                31, 2005 |   |
|-------------------------------------------------|--------|-------------------------------|-----------|----------------------------------|--------|
|                                            |   | ________________              |      | _________________                |   |
| Specific                allocations             |   | $                             | 3,829,000 |                             | $      | 3,692,000 |   |
| Loan                pool percentage allocations |   |                          | 2,152,000 |                             |   | 1,942,000 |   |
| Unallocated                                     |   |                          | 81,256    |                             |   | 11,301 |   |
|                                            |   |                          |      |                             |   |   |   |
| Total                allowance for loan losses  |   | $                             | 6,062,256 |                             | $      | 5,645,301 |   |

|                                                         |   | **2006** |      | **2005**            |   |
|--------------------------------------------------------------|--------|----------|-----------|---------------------|--------|
|                                                         |   |     |      |                |   |
| Beginning                balance, January 1                  |   | $        | 5,645,301 |                | $      | 5,607,992 |   |
| Provision                charged to operating expense        |   |     | 575,000   |                |   | 581,000 |   |
| Charge-offs                                                  |   |     | (335,057  | )         |   | (540,702 | ) |
| Recoveries                                                   |   |     | 177,012   |                |   | 76,866 |   |
|                                                         |   |     |      |                |   |   |   |
| Ending                balance, March 31                      |   | $        | 6,062,256 |                | $      | 5,725,156 |   |
|                                                         |   |     |      |                |   |   |   |
| Net                charge-offs to average loans (annualized) |   |     | 0.14      | %    |   | 0.46 | % |

*Other      Assets*

*Deposits*

|                                      |   | **March                31, 2006** |        | **December                31, 2005** |   |
|-------------------------------------------|--------|-----------------------------------|-------------|--------------------------------------|--------|
|                                      |   | **Balance**                       |        | **%**                                |   | **Balance** |   | **%** |   |
|                                      |   |                              |        |                                 |   |   |   |   |   |
| Noninterest-bearing                demand |   | $                                 | 75,188,378  |                                 |   | 15.9% |   | $ | 66,742,748 |   |   | 14.5% |   |
| Interest-bearing                checking  |   |                              | 29,145,377  |                                 |   | 6.2% |   |   | 32,684,869 |   |   | 7.1% |   |
| Money                market               |   |                              | 77,729,926  |                                 |   | 16.5% |   |   | 76,437,818 |   |   | 16.6% |   |
| Savings                                   |   |                              | 14,426,930  |                                 |   | 3.1% |   |   | 14,081,131 |   |   | 3.1% |   |
| Time,                under $100,000       |   |                              | 69,989,352  |                                 |   | 14.8% |   |   | 64,560,749 |   |   | 14.0% |   |
| Time,                $100,000 and over    |   |                              | 205,698,133 |                                 |   | 43.5% |   |   | 206,443,546 |   |   | 44.7% |   |
|                                      |   |                              |        |                                 |   |   |   |   |   |   |   |   |   |
| Total                deposits             |   | $                                 | 472,178,096 |                                 |   | 100.0% |   | $ | 460,950,861 |   |   | 100.0% |   |

----

*Index*

*Borrowings*

*Other      Liabilities. *

**Results      of Operations**

| **Performance                Ratios**      |   | **March                31** |   |
|--------------------------------------------|--------|-----------------------------|--------|
|                                       |   | **2006**                    |   | **2005** |   |
|                                       |   |                        |   |   |   |
| Return                on average assets *  |   |                        | 0.72   | %    |   | 0.62 | % |
| Return                on average equity *  |   |                        | 8.42   | % |   | 6.61 | % |
| Net                interest margin (TEY) * |   |                        | 3.74   | % |   | 3.63 | % |
| Efficiency                ratio            |   |                        | 66.52  | % |   | 65.72 | % |
|                                       |   |                        |   |   |   |   |   |
| *                 annualized          |   |                        |   |   |   |   |   |

*Net      Interest Income*

----

*Index*

|                                                                                         |   | **At                and For The Three Month Period Ended** |    |
|----------------------------------------------------------------------------------------------|--------|------------------------------------------------------------|---------|
|                                                                                         |   | **March                31, 2006**                          |    | **March                31, 2005** |   |
| ($                in thousands)                                                              |   | **Average****Balance**                                     |    | **Interest****Earned****or                Paid** |   | **Annualized****Yield****or                Cost** |   | **Average****Balance** |   | **Interest****Earned****or                Paid** |   | **Annualized****Yield****or                Cost** |   |
| **Assets**                                                                                   |   |                                                       |    |   |   |   |   |   |   |   |   |   |   |
| Short-term                investments and interest-earning deposits                          |   | $                                                          | 6,951   |   | $ | 82 |   |   | 4.78 | %    | $ | 7,362 |   | $ | 27 |   |   | 1.49 | % |
| Federal                funds sold                                                            |   |                                                       | 5,944   |   |   | 63 |   |   | 4.30 | % |   | 9,089 |   |   | 54 |   |   | 2.41 | % |
| Securities                - taxable                                                          |   |                                                       | 40,842  |   |   | 491 |   |   | 4.88 | % |   | 24,329 |   |   | 247 |   |   | 4.12 | % |
| Securities                - tax exempt (1)                                                   |   |                                                       | 14,044  |   |   | 223 |   |   | 6.44 | % |   | 12,550 |   |   | 205 |   |   | 6.62 | % |
| Loans                                                                                        |   |                                                       | 458,642 |   |   | 8,145 |   |   | 7.20 | % |   | 404,794 |   |   | 5,761 |   |   | 5.77 | % |
| Total                interest-earning assets                                                 |   |                                                       | 526,423 |   |   | 9,004 |   |   | 6.94 | % |   | 458,124 |   |   | 6,294 |   |   | 5.51 | % |
| Allowance                for loan losses                                                     |   |                                                       | (5,915  | )   |   |   |   |   |   |   |   | (5,691 | )   |   |   |   |   |   |   |
| Cash                and due from banks                                                       |   |                                                       | 14,628  |   |   |   |   |   |   |   |   | 14,784 |   |   |   |   |   |   |   |
| Other                assets                                                                  |   |                                                       | 21,343  |   |   |   |   |   |   |   |   | 10,522 |   |   |   |   |   |   |   |
| Total                assets                                                                  |   | $                                                          | 556,479 |   |   |   |   |   |   |   | $ | 477,739 |   |   |   |   |   |   |   |
| **Liabilities                and Stockholders' Equity**                                      |   |                                                       |    |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Interest-bearing                checking                                                     |   | $                                                          | 28,749  |   | $ | 68 |   |   | 0.96 | % | $ | 27,533 |   | $ | 31 |   |   | 0.46 | % |
| Savings                                                                                      |   |                                                       | 14,692  |   |   | 25 |   |   | 0.69 | % |   | 12,841 |   |   | 12 |   |   | 0.38 | % |
| Money                market                                                                  |   |                                                       | 77,215  |   |   | 491 |   |   | 2.58 | % |   | 73,398 |   |   | 252 |   |   | 1.39 | % |
| Certificates                of deposit                                                       |   |                                                       | 271,382 |   |   | 3,010 |   |   | 4.50 | % |   | 218,256 |   |   | 1,569 |   |   | 2.92 | % |
| Short-term                borrowings                                                         |   |                                                       | -       |   |   | - |   |   | 0.00 | % |   | 51 |   |   | - |   |   | 0.00 | % |
| FHLB                advances                                                                 |   |                                                       | 34,120  |   |   | 352 |   |   | 4.18 | % |   | 35,247 |   |   | 247 |   |   | 2.84 | % |
| Junior                subordinated debt                                                      |   |                                                       | 11,856  |   |   | 209 |   |   | 7.15 | % |   | 3,608 |   |   | 81 |   |   | 9.03 | % |
| Total                interest-bearing liabilities                                            |   |                                                       | 438,014 |   |   | 4,155 |   |   | 3.85 | % |   | 370,934 |   |   | 2,192 |   |   | 2.40 | % |
| Noninterest-bearing                checking                                                  |   |                                                       | 67,764  |   |   |   |   |   |   |   |   | 60,324 |   |   |   |   |   |   |   |
| Other                liabilities                                                             |   |                                                       | 2,854   |   |   |   |   |   |   |   |   | 1,888 |   |   |   |   |   |   |   |
| Stockholders'                equity                                                          |   |                                                       | 47,846  |   |   |   |   |   |   |   |   | 44,593 |   |   |   |   |   |   |   |
| Total                liabilities and stockholders' equity                                    |   | $                                                          | 556,478 |   |   |   |   |   |   |   | $ | 477,739 |   |   |   |   |   |   |   |
| **Net                interest income**                                                       |   |                                                       |    |   | $ | 4,849 |   |   |   |   |   |   |   | $ | 4,102 |   |   |   |   |
| **Rate                spread**                                                               |   |                                                       |    |   |   |   |   |   | 3.09 | % |   |   |   |   |   |   |   | 3.11 | % |
| **Net                interest income as a percent of average earning                assets** |   |                                                       |    |   |   |   |   |   | 3.74 | % |   |   |   |   |   |   |   | 3.63 | % |

| (1) | Computed                on a tax equivalent basis for tax exempt securities using a 35% statutory                tax rate. |
|-----|----------------------------------------------------------------------------------------------------------------------------|

*Provision      for Loan Losses*

*Noninterest      Income*

----

*Index*

*Noninterest      Expense*

*Income      Taxes. *

**Liquidity      and Capital Resources**

*Liquidity*

*Capital      Resources. *

----

*Index*

|                             |   | **March                31, 2006** |   | **December                31, 2005** |   |
|----------------------------------|--------|-----------------------------------|--------|--------------------------------------|--------|
|                        |   | Actual                            |   | Well-Capitalized                     |   | MinimumRequired |   | Actual |   | Well-Capitalized |   | MinimumRequired |   |
|                             |   |                              |   |                                 |   |   |   |   |   |   |   |   |   |
| **The                Company**   |   |                              |   |                                 |   |   |   |   |   |   |   |   |   |
| Leverage                capital  |   |                              | 10.76  | %                                    |   | 5.00 | % |   | 4.00 | % |   | 11.08 | % |   | 5.00 | % |   | 4.00 | % |
| Tier                1 risk-based |   |                              | 11.88  | %                                    |   | 6.00 | % |   | 4.00 | % |   | 12.16 | % |   | 6.00 | % |   | 4.00 | % |
| Total                risk-based  |   |                              | 13.00  | %                                    |   | 10.00 | % |   | 8.00 | % |   | 13.23 | % |   | 10.00 | % |   | 8.00 | % |
|                             |   |                              |   |                                 |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| **The                Bank**      |   |                              |   |                                 |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Leverage                capital  |   |                              | 9.03   | %                                    |   | 5.00 | % |   | 4.00 | % |   | 9.28 | % |   | 5.00 | % |   | 4.00 | % |
| Tier                1 risk-based |   |                              | 9.99   | %                                    |   | 6.00 | % |   | 4.00 | % |   | 10.18 | % |   | 6.00 | % |   | 4.00 | % |
| Total                risk-based  |   |                              | 11.20  | %                                    |   | 10.00 | % |   | 8.00 | % |   | 11.34 | % |   | 10.00 | % |   | 8.00 | % |

**Commitments      and Off-Balance Sheet Risk**

**Item3.    QUANTITATIVE      AND QUALITATIVE      DISCLOSURES ABOUT MARKET RISK**

----

*Index*

**Rate      Sensitivity Analysis**

| ($                in thousands)                                                                        |   | **Within****Three****Months** |   | **Three                to****Twelve****Months** |   | **One                to****Five****Years** |                | **After****Five****Years** |    | **Total**           |   |
|--------------------------------------------------------------------------------------------------------|--------|-------------------------------|--------|-------------------------------------------------|--------|--------------------------------------------|---------------------|----------------------------|---------|---------------------|--------|
| **Assets**                                                                                             |   |                          |   |                                            |   |                                       |                |                       |    |                |   |
| Federal                funds sold, short-term investments and interest-earning                deposits |   | $                             | 7,928  |                                            |   |                                       |                |                       |    |                |   |   |   | $ | 7,928 |   |
| Securities                available for sale                                                           |   |                          | 4,703  |                                            |   | 2,680                                      |                |                       | 23,786  |                |   | 22,670 |   |   | 53,839 |   |
| FHLBI                and FRB stock                                                                     |   |                          |   |                                            |   |                                       |                |                       |    |                |   | 3,421 |   |   | 3,421 |   |
| Fixed                rate loans                                                                        |   |                          | 23,724 |                                            |   | 32,413                                     |                |                       | 107,785 |                |   | 26,668 |   |   | 190,590 |   |
| Variable                rate loans                                                                     |   |                          | 42,296 |                                            |   | 136,473                                    |                |                       | 102,490 |                |   | 2,149 |   |   | 283,408 |   |
| Allowance                for loan losses                                                               |   |                          |   |                                            |   |                                       |                |                       |    |                |   |   |   |   | (6,062 | ) |
| Other                assets                                                                            |   |                          |   |                                            |   |                                       |                |                       |    |                |   |   |   |   | 37,508 |   |
| Total                assets                                                                            |   | $                             | 78,651 |                                            | $      | 171,566                                    |                | $                          | 234,061 |                | $      | 54,908 |   | $ | 570,632 |   |
| **Liabilities**                                                                                        |   |                          |   |                                            |   |                                       |                |                       |    |                |   |   |   |   |   |   |
| Interest-bearing                checking                                                               |   | $                             | 2,260  |                                            | $      | 6,780                                      |                | $                          | 20,105  |                |   |   |   | $ | 29,145 |   |
| Savings                accounts                                                                        |   |                          | 1,601  |                                            |   | 4,804                                      |                |                       | 8,021   |                |   |   |   |   | 14,426 |   |
| Money                market accounts                                                                   |   |                          | 18,671 |                                            |   | 55,967                                     |                |                       | 3,092   |                |   |   |   |   | 77,730 |   |
| Time                deposits < $100,000                                                             |   |                          | 6,888  |                                            |   | 29,419                                     |                |                       | 33,644  |                |   | 38 |   |   | 69,989 |   |
| Time                deposits $100,000 and over                                                         |   |                          | 38,073 |                                            |   | 68,262                                     |                |                       | 99,364  |                |   |   |   |   | 205,699 |   |
| Short-term                borrowings                                                                   |   |                          |   |                                            |   |                                       |                |                       |    |                |   |   |   |   | - |   |
| FHLB                advances                                                                           |   |                          | 8,000  |                                            |   | 22,500                                     |                |                       | 7,200   |                |   |   |   |   | 37,700 |   |
| Junior                subordinated debt                                                                |   |                          |   |                                            |   |                                       |                |                       |    |                |   | 11,856 |   |   | 11,856 |   |
| Noninterest-bearing                checking                                                            |   |                          |   |                                            |   |                                       |                |                       |    |                |   |   |   |   | 75,188 |   |
| Other                liabilities                                                                       |   |                          |   |                                            |   |                                       |                |                       |    |                |   |   |   |   | 2,948 |   |
| Total                liabilities                                                                       |   |                          | 75,493 |                                            |   | 187,732                                    |                |                       | 171,426 |                |   | 11,894 |   |   | 524,681 |   |
| **Stockholders'                Equity**                                                                |   |                          |   |                                            |   |                                       |                |                       |    |                |   |   |   |   | 47,951 |   |
| Total                sources of funds                                                                  |   | $                             | 75,493 |                                            | $      | 187,732                                    |                | $                          | 171,426 |                | $      | 11,894 |   | $ | 572,632 |   |
| Net                asset (liability) GAP                                                               |   | $                             | 3,158  |                                            | $      | (16,166                                    | )                   | $                          | 62,635  |                | $      | 43,014 |   | $ |     |   |
| **Cumulative                GAP**                                                                      |   | $                             | 3,158  |                                            | $      | (13,008                                    | )                   | $                          | 49,627  |                | $      | 92,641 |   | $ |     |   |
| **Percent                of cumulative GAP to total assets**                                           |   |                          | 0.6    | %                                |   | -2.3                                       | %    |                       | 8.7     | %    |   | 16.2 | %    |   |   |   |

----

*Index*

|                                             |   | **Principal                Amount Maturing in:** |
|--------------------------------------------------|--------|--------------------------------------------------|
| ($                in thousands)                  |   | **03/31/07**                                     |   | **03/30/08** |   | **03/30/09** |   | **03/31/10** |   | **03/31/11** |   | **Thereafter** |   | **Total** |   | **Fair                Value****3/31/2006** |   |
| Rate                sensitive assets:            |   |                                             |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Fixed                interest rate loans         |   | $                                                | 56,137 |   | $ | 37,295 |   | $ | 33,562 |   | $ | 19,564 |   | $ | 17,360 |   | $ | 26,672 |   | $ | 190,590 |   | $ | 176,820 |   |
| Average                interest rate             |   |                                             | 5.67 | %    |   | 5.63 | %    |   | 6.61 | %    |   | 6.46 | %    |   | 7.62 | %    |   | 5.30 | %    |   | 6.09 | %    |   |   |   |
| Variable                interest rate loans      |   |                                             | 135,335 |   |   | 97,036 |   |   | 23,593 |   |   | 13,917 |   |   | 11,381 |   |   | 2,143 |   |   | 283,405 |   |   | 283,405 |   |
| Average                interest rate             |   |                                             | 7.86 | % |   | 7.92 | % |   | 7.80 | % |   | 7.73 | % |   | 7.60 | % |   | 7.47 | % |   | 7.85 | % |   |   |   |
| Fixed                interest rate securities    |   |                                             | 7,383 |   |   | 6,316 |   |   | 2,775 |   |   | 6,487 |   |   | 8,209 |   |   | 22,669 |   |   | 53,839 |   |   | 51,803 |   |
| Average                interest rate             |   |                                             | 4.91 | % |   | 5.02 | % |   | 4.53 | % |   | 4.49 | % |   | 4.61 | % |   | 4.66 | % |   | 4.70 | % |   |   |   |
| Other                interest bearing assets     |   |                                             | 7,928 |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   | 7,928 |   |   | 7,928 |   |
| Average                interest rate             |   |                                             | 3.35 | % |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   | 3.35 | % |   |   |   |
|                                             |   |                                             |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Rate                sensitive liabilities:       |   |                                             |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Interest                bearing checking         |   |                                             | 9,041 |   |   | 9,041 |   |   | 6,396 |   |   | 4,286 |   |   | 381 |   |   |   |   |   | 29,145 |   |   | 29,145 |   |
| Average                interest rate             |   |                                             | 0.96 | % |   | 0.96 | % |   | 1.02 | % |   | 1.04 | % |   | 0.95 | % |   |   |   |   | 0.99 | % |   |   |   |
| Savings                accounts                  |   |                                             | 6,406 |   |   | 6,406 |   |   | 1,615 |   |   |   |   |   |   |   |   |   |   |   | 14,427 |   |   | 14,427 |   |
| Average                interest rate             |   |                                             | 0.75 | % |   | 0.75 | % |   | 0.75 | % |   |   |   |   |   |   |   |   |   |   | 0.75 | % |   |   |   |
| Money                market accounts             |   |                                             | 74,638 |   |   | 3,092 |   |   |   |   |   |   |   |   |   |   |   |   |   |   | 77,730 |   |   | 77,730 |   |
| Average                interest rate             |   |                                             | 2.91 | % |   | 2.54 | % |   |   |   |   |   |   |   |   |   |   |   |   |   | 2.90 | % |   |   |   |
| Time                deposits                     |   |                                             | 142,642 |   |   | 91,761 |   |   | 17,221 |   |   | 23,980 |   |   | 46 |   |   | 37 |   |   | 275,687 |   |   | 273,517 |   |
| Average                interest rate             |   |                                             | 4.62 | % |   | 4.74 | % |   | 4.07 | % |   | 4.09 | % |   | 4.23 | % |   | 4.50 | % |   | 4.58 | % |   |   |   |
| Fixed                interest rate borrowings    |   |                                             | 8,000 |   |   | 6,000 |   |   |   |   |   |   |   |   | 1,200 |   |   | 11,856 |   |   | 27,056 |   |   | 27,056 |   |
| Average                interest rate             |   |                                             | 3.56 | % |   | 4.70 | % |   |   |   |   |   |   |   | 4.32 | % |   | 7.14 | % |   | 5.42 | % |   |   |   |
| Variable                interest rate borrowings |   |                                             | 22,500 |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   | 22,500 |   |   | 22,500 |   |
| Average                interest rate             |   |                                             | 4.98 | % |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   | 4.98 | % |   |   |   |

**Item4.    CONTROLS      AND      PROCEDURES**

*Evaluation      of Disclosure Controls and Procedures*

*Changes      in Internal Control*

----

*Index*

**PARTII.      OTHER INFORMATION**

**Item1.    LEGAL      PROCEEDINGS**

**Item1a.    RISK      FACTORS**

**Item6.    EXHIBITS**

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

31.1

31.2

32.1

32.2

**SIGNATURES**

|                               | TOWER                FINANCIAL CORPORATION                                                     |
|------------------------------------|------------------------------------------------------------------------------------------------|
|                               |                                                                                           |
|                               |                                                                                           |
| Dated:                May 12, 2006 |                    / s / Donald F. Schenkel                                     |
|                               | Donald                F. Schenkel, Chairman of the Board,                                      |
|                               | President                and Chief Executive Officer                                           |
|                               |                                                                                           |
|                               |                                                                                           |
| Dated:                May 12, 2006 |                    / s / Michael D. Cahill                                      |
|                               | Michael                D. Cahill                                                               |
|                               | Executive                Vice President, Chief Financial Officer, and                Secretary |

----