----

----

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

| TOWER      FINANCIAL CORPORATION                           |
|------------------------------------------------------------|
| (Exact      name of Registrant as specified in itscharter) |

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

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

| Large      accelerated filer   ̈ | Accelerated      filer   ̈    |
|------------------------------------------------|---------------------------------------------|
| Non-accelerated      filer   ̈   | Smaller      reporting company  x |

----

----

----

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

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

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

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

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

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

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

----

INDEX

|                                             | Item      1.  | Financial      Statements                                                                                                                                 | page      no. |
|--------------------------------------------------|---------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------|---------------|
|                                             |          |                                                                                                                                                      |          |
|                                             |          | Consolidated Condensed Balance Sheets at June 30, 2008 and      December 31, 2007 (unaudited)                                                             | 4             |
|                                             |          |                                                                                                                                                      |          |
|                                             |          | Consolidated Condensed Statements of Operations for the      three and six months ended June 30, 2008 and June 30, 2007      (unaudited)                  | 5             |
|                                             |          |                                                                                                                                                      |          |
|                                             |          | Consolidated Condensed Statements of Changes in      Stockholders’ Equity for the six months ended June 30, 2008 and June 30,      2007 (unaudited) | 7             |
|                                             |          |                                                                                                                                                      |          |
|                                             |          | Consolidated Condensed Statements of Cash Flows for the six      months ended June 30, 2008 and June 30, 2007    (unaudited)                              | 8             |
|                                             |          |                                                                                                                                                      |          |
|                                             |          | Notes to Consolidated Condensed Financial      Statements                                                                                                 | 10            |
|                                             |          |                                                                                                                                                      |          |
|                                             | Item      2.  | Management’s Discussion and Analysis of Financial Condition      and Results of Operations                                                          | 19            |
|                                             |          |                                                                                                                                                      |          |
|                                             | Item      4.  | Controls and Procedures                                                                                                                                   | 27            |
|                                             |          |                                                                                                                                                      |          |
|                                             |          |                                                                                                                                                      |          |
| PART      II.   OTHER INFORMATION |          |
|                                             |          |                                                                                                                                                      |          |
|                                             | Item      1.  | Legal Proceedings                                                                                                                                         | 28            |
|                                             |          |                                                                                                                                                      |          |
|                                             | Item      1a. | Risk Factors                                                                                                                                              | 28            |
|                                             |          |                                                                                                                                                      |          |
|                                             | Item      4.  | Submission of Matters to a Vote of Security      Holders                                                                                                  | 28            |
|                                             |          |                                                                                                                                                      |          |
|                                             | Item      6.  | Exhibits                                                                                                                                                  | 28            |
|                                             |          |                                                                                                                                                      |          |
| SIGNATURES                                       | 29            |

----

Index

Consolidated Condensed Balance Sheets

|                                                                                                                                                                                                                                                        |   | (unaudited)June      30, 2008 |        |   | (unaudited)December      31, 2007 |   |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|-------------------------------|-------------|--------|-----------------------------------|--------|
| ASSETS                                                                                                                                                                                                                                                      |   |                          |        |   |                              |   |
| Cash      and due from banks                                                                                                                                                                                                                                |   | $                             | 22,508,927  |   |                              | $      | 25,913,449 |   |
| Short-term      investments and interest-earning deposits                                                                                                                                                                                                   |   |                          | 5,794,850   |   |                              |   | 1,781,161 |   |
| Federal      funds sold                                                                                                                                                                                                                                     |   |                          | 11,175,161  |   |                              |   | 6,135,779 |   |
| Total      cash and cash equivalents                                                                                                                                                                                                                        |   |                          | 39,478,938  |   |                              |   | 33,830,389 |   |
|                                                                                                                                                                                                                                                        |   |                          |        |   |                              |   |   |   |
| Securities      available for sale, at fair value                                                                                                                                                                                                           |   |                          | 73,942,131  |   |                              |   | 65,227,694 |   |
| FHLB      and FRB stock                                                                                                                                                                                                                                     |   |                          | 3,589,700   |   |                              |   | 3,589,700 |   |
| Loans      held for sale                                                                                                                                                                                                                                    |   |                          | 869,308     |   |                              |   | 3,189,545 |   |
|                                                                                                                                                                                                                                                        |   |                          |        |   |                              |   |   |   |
| Loans                                                                                                                                                                                                                                                       |   |                          | 553,842,920 |   |                              |   | 575,744,207 |   |
| Allowance      for loan losses                                                                                                                                                                                                                              |   |                          | (8,974,052  | )      |                              |   | (8,208,162 | ) |
| Net      loans                                                                                                                                                                                                                                              |   |                          | 544,868,868 |   |                              |   | 567,536,045 |   |
|                                                                                                                                                                                                                                                        |   |                          |        |   |                              |   | - |   |
| Premises      and equipment, net                                                                                                                                                                                                                            |   |                          | 9,340,820   |   |                              |   | 9,549,233 |   |
| Accrued      interest receivable                                                                                                                                                                                                                            |   |                          | 2,635,972   |   |                              |   | 3,246,455 |   |
| Bank      owned life insurance                                                                                                                                                                                                                              |   |                          | 11,468,330  |   |                              |   | 11,258,517 |   |
| Other      assets                                                                                                                                                                                                                                           |   |                          | 9,389,872   |   |                              |   | 9,065,564 |   |
|                                                                                                                                                                                                                                                        |   |                          |        |   |                              |   |   |   |
| Total      assets                                                                                                                                                                                                                                           |   | $                             | 695,583,939 |   |                              | $      | 706,493,142 |   |
|                                                                                                                                                                                                                                                        |   |                          |        |   |                              |   |   |   |
| LIABILITIES      AND STOCKHOLDERS' EQUITY                                                                                                                                                                                                                   |   |                          |        |   |                              |   |   |   |
| LIABILITIES                                                                                                                                                                                                                                                 |   |                          |        |   |                              |   |   |   |
| Deposits:                                                                                                                                                                                                                                                   |   |                          |        |   |                              |   |   |   |
| Noninterest-bearing                                                                                                                                                                                                                                         |   | $                             | 84,281,872  |   |                              | $      | 71,705,395 |   |
| Interest-bearing                                                                                                                                                                                                                                            |   |                          | 515,835,743 |   |                              |   | 528,984,076 |   |
| Total      deposits                                                                                                                                                                                                                                         |   |                          | 600,117,615 |   |                              |   | 600,689,471 |   |
|                                                                                                                                                                                                                                                        |   |                          |        |   |                              |   |   |   |
| Federal      Home Loan Bank (FHLB) advances                                                                                                                                                                                                                 |   |                          | 24,200,000  |   |                              |   | 35,100,000 |   |
| Junior      subordinated debt                                                                                                                                                                                                                               |   |                          | 17,527,000  |   |                              |   | 17,527,000 |   |
| Accrued      interest payable                                                                                                                                                                                                                               |   |                          | 835,656     |   |                              |   | 1,721,972 |   |
| Other      liabilities                                                                                                                                                                                                                                      |   |                          | 4,072,354   |   |                              |   | 3,247,145 |   |
|                                                                                                                                                                                                                                                        |   |                          |        |   |                              |   |   |   |
| Total      liabilities                                                                                                                                                                                                                                      |   |                          | 646,752,625 |   |                              |   | 658,285,588 |   |
|                                                                                                                                                                                                                                                        |   |                          |        |   |                              |   |   |   |
| STOCKHOLDERS'      EQUITY                                                                                                                                                                                                                                   |   |                          |        |   |                              |   |   |   |
| Preferred      stock, no par value, 4,000,000 shares authorized; no shares issued and      outstanding                                                                                                                                                      |   |                          | -           |   |                              |   | - |   |
| Common      stock and paid-in-capital, no par value, 6,000,000 shares authorized;      4,151,432 shares issued and 4,084,432 shares outstanding at June 30, 2008      and 4,113,805 shares issued and 4,060,769 shares oustanding at December      31, 2007 |   |                          | 39,735,315  |   |                              |   | 39,482,669 |   |
| Treasury      stock, at cost, 65,000 and 53,036 shares at June 30, 2008 and December 31,      2007                                                                                                                                                          |   |                          | (884,376    | )      |                              |   | (758,827 | ) |
| Retained      earnings                                                                                                                                                                                                                                      |   |                          | 10,083,494  |   |                              |   | 9,208,719 |   |
| Accumulated      other comprehensive income, net of tax of ($53,116) at June 30, 2008 and      $141,663 at December 31, 2007                                                                                                                                |   |                          | (103,119    | )      |                              |   | 274,993 |   |
| Total      stockholders' equity                                                                                                                                                                                                                             |   |                          | 48,831,314  |   |                              |   | 48,207,554 |   |
|                                                                                                                                                                                                                                                        |   |                          |        |   |                              |   |   |   |
| Total      liabilities and stockholders' equity                                                                                                                                                                                                             |   | $                             | 695,583,939 |   |                              | $      | 706,493,142 |   |

----

Index

Consolidated Condensed Statements of Operations

|                                                     |   | (unaudited)Three      Months ended June 30 |      |   | (unaudited)Six      Months Ended June 30 |   |
|----------------------------------------------------------|--------|--------------------------------------------|-----------|--------|------------------------------------------|--------|
|                                                     |   | 2008                                       |      |   | 2007                                     |   |   | 2008 |   |   | 2007 |   |
| Interest      income:                                    |   |                                       |      |   |                                     |   |   |   |   |   |   |   |
| Loans,      including fees                               |   | $                                          | 8,348,159 |   |                                     | $      | 11,088,346 |   |   | $ | 17,615,558 |   |   | $ | 21,406,436 |   |
| Securities      - taxable                                |   |                                       | 648,256   |   |                                     |   | 668,747 |   |   |   | 1,262,770 |   |   |   | 1,331,162 |   |
| Securities      - tax exempt                             |   |                                       | 223,312   |   |                                     |   | 195,166 |   |   |   | 437,346 |   |   |   | 395,941 |   |
| Other      interest income                               |   |                                       | 89,634    |   |                                     |   | 21,574 |   |   |   | 271,986 |   |   |   | 240,653 |   |
| Total      interest income                               |   |                                       | 9,309,361 |   |                                     |   | 11,973,833 |   |   |   | 19,587,660 |   |   |   | 23,374,192 |   |
| Interest      expense:                                   |   |                                       |      |   |                                     |   |   |   |   |   |   |   |   |   |   |   |
| Deposits                                                 |   |                                       | 3,433,023 |   |                                     |   | 5,712,457 |   |   |   | 8,075,158 |   |   |   | 11,388,342 |   |
| Short-term      borrowings                               |   |                                       | -         |   |                                     |   | 516 |   |   |   | - |   |   |   | 516 |   |
| FHLB      advances                                       |   |                                       | 298,637   |   |                                     |   | 397,313 |   |   |   | 572,777 |   |   |   | 589,057 |   |
| Junior      subordinated debt                            |   |                                       | 283,071   |   |                                     |   | 279,957 |   |   |   | 564,720 |   |   |   | 561,606 |   |
| Total      interest expense                              |   |                                       | 4,014,731 |   |                                     |   | 6,390,243 |   |   |   | 9,212,655 |   |   |   | 12,539,521 |   |
| Net      interest income                                 |   |                                       | 5,294,630 |   |                                     |   | 5,583,590 |   |   |   | 10,375,005 |   |   |   | 10,834,671 |   |
| Provision      for loan losses                           |   |                                       | 875,000   |   |                                     |   | 1,500,000 |   |   |   | 1,175,000 |   |   |   | 2,925,000 |   |
| Net      interest income after provision for loan losses |   |                                       | 4,419,630 |   |                                     |   | 4,083,590 |   |   |   | 9,200,005 |   |   |   | 7,909,671 |   |
| Noninterest      income:                                 |   |                                       |      |   |                                     |   |   |   |   |   |   |   |   |   |   |   |
| Trust      and brokerage fees                            |   |                                       | 938,634   |   |                                     |   | 718,607 |   |   |   | 1,833,026 |   |   |   | 1,564,490 |   |
| Service      charges                                     |   |                                       | 314,144   |   |                                     |   | 220,494 |   |   |   | 635,354 |   |   |   | 489,525 |   |
| Loan      broker fees                                    |   |                                       | 66,812    |   |                                     |   | 57,093 |   |   |   | 127,870 |   |   |   | 82,590 |   |
| Gain      (Loss) on sale of securities                   |   |                                       | -         |   |                                     |   | (1,760 | ) |   |   | 59,837 |   |   |   | (1,760 | ) |
| Other      fees                                          |   |                                       | 148,879   |   |                                     |   | 435,599 |   |   |   | 453,156 |   |   |   | 784,265 |   |
| Total      noninterest income                            |   |                                       | 1,468,469 |   |                                     |   | 1,430,033 |   |   |   | 3,109,243 |   |   |   | 2,919,110 |   |
| Noninterest      expense:                                |   |                                       |      |   |                                     |   |   |   |   |   |   |   |   |   |   |   |
| Salaries      and benefits                               |   |                                       | 3,051,846 |   |                                     |   | 2,976,922 |   |   |   | 6,138,244 |   |   |   | 5,972,423 |   |
| Occupancy      and equipment                             |   |                                       | 731,588   |   |                                     |   | 660,552 |   |   |   | 1,489,903 |   |   |   | 1,348,745 |   |
| Marketing                                                |   |                                       | 224,014   |   |                                     |   | 99,380 |   |   |   | 374,216 |   |   |   | 178,422 |   |
| Data      processing                                     |   |                                       | 220,172   |   |                                     |   | 230,228 |   |   |   | 500,930 |   |   |   | 458,177 |   |
| Loan      and professional costs                         |   |                                       | 386,418   |   |                                     |   | 367,022 |   |   |   | 630,068 |   |   |   | 725,835 |   |
| Office      supplies and postage                         |   |                                       | 81,947    |   |                                     |   | 117,458 |   |   |   | 195,979 |   |   |   | 240,842 |   |
| Courier      services                                    |   |                                       | 75,070    |   |                                     |   | 94,962 |   |   |   | 164,535 |   |   |   | 195,771 |   |
| Business      development                                |   |                                       | 173,959   |   |                                     |   | 183,996 |   |   |   | 328,832 |   |   |   | 341,748 |   |
| Communication      Expense                               |   |                                       | 80,931    |   |                                     |   | 51,470 |   |   |   | 151,723 |   |   |   | 126,225 |   |
| FDIC      Insurance Premiums                             |   |                                       | 200,241   |   |                                     |   | 218,278 |   |   |   | 367,755 |   |   |   | 235,179 |   |
| Other      expense                                       |   |                                       | 394,239   |   |                                     |   | 302,308 |   |   |   | 757,024 |   |   |   | 641,504 |   |
| Total      noninterest expense                           |   |                                       | 5,620,425 |   |                                     |   | 5,302,576 |   |   |   | 11,099,209 |   |   |   | 10,464,871 |   |
| Income      before income taxes                          |   |                                       | 267,674   |   |                                     |   | 211,047 |   |   |   | 1,210,039 |   |   |   | 363,910 |   |
| Income      tax expense (benefit)                        |   |                                       | (75,033   | )      |                                     |   | (6,065 | ) |   |   | 156,160 |   |   |   | (29,815 | ) |
|                                                     |   |                                       |      |   |                                     |   |   |   |   |   |   |   |   |   |   |   |
| Net      income                                          |   | $                                          | 342,707   |   |                                     | $      | 217,112 |   |   | $ | 1,053,879 |   |   | $ | 393,725 |   |

----

Index

|                                                                            |   | (unaudited)Three      Months Ended June 30 |       |   | (unaudited)Six      Months Ended June 30 |   |
|---------------------------------------------------------------------------------|--------|--------------------------------------------|------------|--------|------------------------------------------|--------|
|                                                                            |   | 2008                                       |       |   | 2007                                     |   |   | 2008 |   |   | 2007 |   |
|                                                                            |   |                                       |       |   |                                     |   |   |   |   |   |   |   |
| Other      comprehensive income net of tax:                                     |   |                                       |       |   |                                     |   |   |   |   |   |   |   |
| Unrealized      appreciation (depreciation) on available for sale    securities |   |                                       | (1,158,713 | )      |                                     |   | (717,217 | ) |   |   | (579,370 | ) |   |   | (686,944 | ) |
| Unrealized      gain (loss) on cash flow hedge                                  |   |                                       | (92,290    | )      |                                     |   | (60,826 | ) |   |   | 201,258 |   |   |   | (63,031 | ) |
| Total      comprehensive income (loss)                                          |   | $                                          | (908,296   | )      |                                     | $      | (560,931 | ) |   | $ | 675,767 |   |   | $ | (356,250 | ) |
|                                                                            |   |                                       |       |   |                                     |   |   |   |   |   |   |   |   |   |   |   |
| Basic      earnings per common share                                            |   | $                                          | 0.08       |   |                                     | $      | 0.05 |   |   | $ | 0.26 |   |   | $ | 0.10 |   |
| Diluted      earnings per common share                                          |   | $                                          | 0.08       |   |                                     | $      | 0.05 |   |   | $ | 0.26 |   |   | $ | 0.09 |   |
| Average      common shares outstanding                                          |   |                                       | 4,073,582  |   |                                     |   | 4,073,678 |   |   |   | 4,066,864 |   |   |   | 4,071,181 |   |
| Average      common shares and dilutive potential common shares    outstanding  |   |                                       | 4,075,871  |   |                                     |   | 4,146,386 |   |   |   | 4,080,137 |   |   |   | 4,152,975 |   |
|                                                                            |   |                                       |       |   |                                     |   |   |   |   |   |   |   |   |   |   |   |
| Dividends      declared per share                                               |   | $                                          | -          |   |                                     | $      | 0.044 |   |   | $ | 0.044 |   |   | $ | 0.088 |   |

----

Index

Consolidated Condensed Statements of Changes in Stockholders’Equity

|                                                                                                                      |   | Common      Stock and Paid-in Capital |       |   | Retained      Earnings |   |       | Accumulated      Other Comprehensive Income (Loss) |   |   | Treasury      Stock |   |   | Total  |     |
|---------------------------------------------------------------------------------------------------------------------------|--------|---------------------------------------|------------|--------|------------------------|--------|------------|----------------------------------------------------|--------|--------|---------------------|--------|--------|--------|----------|
|                                                                                                                      |   |                                  |       |   |                   |   |       |                                               |   |   |                |   |   |   |     |
| Balance,      January 1, 2007                                                                                             |   | $                                     | 38,536,406 |   |                   | $      | 12,523,750 |                                               |   | $      | (102,317            | )      |   | $      | -        |   |   | $ | 50,957,839 |   |
|                                                                                                                      |   |                                  |       |   |                   |   |       |                                               |   |   |                |   |   |   |     |   |   |   |   |   |
| Net      income for 2007                                                                                                  |   |                                  |       |   |                   |   | 393,725    |                                               |   |   |                |   |   |   |     |   |   |   | 393,725 |   |
| Change      in net unrealized appreciation (depreciation) on securities available for      sale, net of tax of ($352,804) |   |                                  |       |   |                   |   |       |                                               |   |   | (686,944            | )      |   |   |     |   |   |   | (686,944 | ) |
|                                                                                                                      |   |                                  |       |   |                   |   |       |                                               |   |   |                |   |   |   |     |   |   |   |   |   |
| Change      in net unrealized gain (loss) on cash flow hedge, net of tax of      ($32,470)                                |   |                                  |       |   |                   |   |       |                                               |   |   | (63,031             | )      |   |   |     |   |   |   | (63,031 | ) |
| Total      Comprehensive Income                                                                                           |   |                                  |       |   |                   |   |       |                                               |   |   |                |   |   |   |     |   |   |   | (356,250 | ) |
|                                                                                                                      |   |                                  |       |   |                   |   |       |                                               |   |   |                |   |   |   |     |   |   |   |   |   |
| Cash      dividends paid ($0.088 per share)                                                                               |   |                                  |       |   |                   |   | (358,190   | )                                                  |   |   |                |   |   |   |     |   |   |   | (358,190 | ) |
|                                                                                                                      |   |                                  |       |   |                   |   |       |                                               |   |   |                |   |   |   |     |   |   |   |   |   |
| Issuance      of 36,500 shares of common stock for stock options exercised, including      tax benefit                    |   |                                  | 473,418    |   |                   |   |       |                                               |   |   |                |   |   |   |     |   |   |   | 473,418 |   |
|                                                                                                                      |   |                                  |       |   |                   |   |       |                                               |   |   |                |   |   |   |     |   |   |   |   |   |
| Stock      compensation expense                                                                                           |   |                                  | 43,861     |   |                   |   |       |                                               |   |   |                |   |   |   |     |   |   |   | 43,861 |   |
|                                                                                                                      |   |                                  |       |   |                   |   |       |                                               |   |   |                |   |   |   |     |   |   |   |   |   |
| Repurchase      14,735 shares of common stock                                                                             |   |                                  |       |   |                   |   |       |                                               |   |   |                |   |   | $      | (224,655 | ) |   | $ | (224,655 | ) |
|                                                                                                                      |   |                                  |       |   |                   |   |       |                                               |   |   |                |   |   |   |     |   |   |   |   |   |
| Balance,      June 30, 2007                                                                                               |   | $                                     | 39,053,685 |   |                   | $      | 12,559,285 |                                               |   | $      | (852,292            | )      |   | $      | (224,655 | ) |   | $ | 50,536,023 |   |
|                                                                                                                      |   |                                  |       |   |                   |   |       |                                               |   |   |                |   |   |   |     |   |   |   |   |   |
|                                                                                                                      |   |                                  |       |   |                   |   |       |                                               |   |   |                |   |   |   |     |   |   |   |   |   |
| Balance,      January 1, 2008                                                                                             |   | $                                     | 39,482,669 |   |                   | $      | 9,208,719  |                                               |   | $      | 274,993             |   |   | $      | (758,827 | ) |   | $ | 48,207,554 |   |
|                                                                                                                      |   |                                  |       |   |                   |   |       |                                               |   |   |                |   |   |   |     |   |   |   |   |   |
| Net      income for 2008                                                                                                  |   |                                  |       |   |                   |   | 1,053,879  |                                               |   |   |                |   |   |   |     |   |   |   | 1,053,879 |   |
| Change      in net unrealized appreciation (depreciation) on securities available for      sale, net of tax of ($298,458) |   |                                  |       |   |                   |   |       |                                               |   |   | (579,370            | )      |   |   |     |   |   |   | (579,370 | ) |
|                                                                                                                      |   |                                  |       |   |                   |   |       |                                               |   |   |                |   |   |   |     |   |   |   |   |   |
| Change      in net unrealized gain (loss) on cash flow hedge, net of tax of      $103,679                                 |   |                                  |       |   |                   |   |       |                                               |   |   | 201,258             |   |   |   |     |   |   |   | 201,258 |   |
| Total      Comprehensive Income                                                                                           |   |                                  |       |   |                   |   |       |                                               |   |   |                |   |   |   |     |   |   |   | 675,767 |   |
|                                                                                                                      |   |                                  |       |   |                   |   |       |                                               |   |   |                |   |   |   |     |   |   |   |   |   |
| Cash      dividends paid ($0.044 per share)                                                                               |   |                                  |       |   |                   |   | (179,104   | )                                                  |   |   |                |   |   |   |     |   |   |   | (179,104 | ) |
|                                                                                                                      |   |                                  |       |   |                   |   |       |                                               |   |   |                |   |   |   |     |   |   |   |   |   |
| Issuance      of 22,127 shares of common stock for stock options exercised, including      tax benefit                    |   |                                  | 220,639    |   |                   |   |       |                                               |   |   |                |   |   |   |     |   |   |   | 220,639 |   |
|                                                                                                                      |   |                                  |       |   |                   |   |       |                                               |   |   |                |   |   |   |     |   |   |   |   |   |
| Stock      compensation expense                                                                                           |   |                                  | 32,007     |   |                   |   |       |                                               |   |   |                |   |   |   |     |   |   |   | 32,007 |   |
|                                                                                                                      |   |                                  |       |   |                   |   |       |                                               |   |   |                |   |   |   |     |   |   |   |   |   |
| Repurchase      11,964 shares of common stock                                                                             |   |                                  |       |   |                   |   |       |                                               |   |   |                |   |   |   | (125,549 | ) |   |   | (125,549 | ) |
|                                                                                                                      |   |                                  |       |   |                   |   |       |                                               |   |   |                |   |   |   |     |   |   |   |   |   |
|                                                                                                                      |   |                                  |       |   |                   |   |       |                                               |   |   |                |   |   |   |     |   |   |   |   |   |
| Balance,      June 30, 2008                                                                                               |   | $                                     | 39,735,315 |   |                   | $      | 10,083,494 |                                               |   | $      | (103,119            | )      |   | $      | (884,376 | ) |   | $ | 48,831,314 |   |

----

Index

Consolidated Condensed Statements of Cash Flows

|                                                                               |   | (unaudited)Six Months endedJune 30,      2008 |        |   | (unaudited)Six Months endedJune 30,      2007 |   |
|------------------------------------------------------------------------------------|--------|--------------------------------------------------------------|-------------|--------|--------------------------------------------------------------|--------|
| Cash      flows from operating activities:                                         |   |                                                         |        |   |                                                         |   |
| Net      income                                                                    |   | $                                                            | 1,053,879   |   |                                                         | $      | 393,725 |   |
| Adjustments      to reconcile net income to net cash from operating    activities: |   |                                                         |        |   |                                                         |   |   |   |
| Depreciation      and amortization                                                 |   |                                                         | 701,825     |   |                                                         |   | 500,908 |   |
| Provision      for loan losses                                                     |   |                                                         | 1,175,000   |   |                                                         |   | 2,925,000 |   |
| Stock      based compensation expense                                              |   |                                                         | 32,007      |   |                                                         |   | 43,861 |   |
| Earnings      on life insurance                                                    |   |                                                         | (209,813    | )      |                                                         |   | (195,878 | ) |
| Gain      on sale of securities AFS                                                |   |                                                         | (59,837     | )      |                                                         |   | (1,760 | ) |
| Loss      on disposal of premises and equipment                                    |   |                                                         | 7,492       |   |                                                         |   | - |   |
| Loans      originated for sale                                                     |   |                                                         | (4,654,333  | )      |                                                         |   | - |   |
| Proceeds      from sale of loans                                                   |   |                                                         | 6,974,570   |   |                                                         |   | - |   |
| Change      in accrued interest receivable                                         |   |                                                         | 610,483     |   |                                                         |   | (158,743 | ) |
| Proceeds      from settlement of interest rate floor                               |   |                                                         | 833,750     |   |                                                         |   | - |   |
| Gain      on sale of interest rate floor                                           |   |                                                         | (156,327    | )      |                                                         |   |   |   |
| Change      in other assets                                                        |   |                                                         | 906,127     |   |                                                         |   | (1,107,063 | ) |
| Change      in accrued interest payable                                            |   |                                                         | (886,316    | )      |                                                         |   | (93,566 | ) |
| Change      in other liabilities                                                   |   |                                                         | 825,209     |   |                                                         |   | (436,285 | ) |
| Net      cash from operating activities                                            |   |                                                         | 7,153,716   |   |                                                         |   | 1,870,199 |   |
| Cash      flows from investing activities:                                         |   |                                                         |        |   |                                                         |   |   |   |
| Net      change in loans                                                           |   |                                                         | 9,054,201   |   |                                                         |   | (51,605,447 | ) |
| Purchase      of loans                                                             |   |                                                         | -           |   |                                                         |   | (3,869,618 | ) |
| Purchase      of securities AFS                                                    |   |                                                         | (21,129,663 | )      |                                                         |   | (3,685,633 | ) |
| Proceeds      from calls and maturities of securities AFS                          |   |                                                         | 8,070,800   |   |                                                         |   | 2,751,037 |   |
| Proceeds      from sale of securities AFS                                          |   |                                                         | 3,476,412   |   |                                                         |   | 1,490,040 |   |
| Purchase      of FHLB and FRB Stock                                                |   |                                                         | -           |   |                                                         |   | (34,100 | ) |
| Proceeds      from sale of participation loans                                     |   |                                                         | 11,000,231  |   |                                                         |   | 12,068,126 |   |
| Purchase      of premises and equipment                                            |   |                                                         | (421,278    | )      |                                                         |   | (1,414,610 | ) |
| Net      cash from (used in) investing activities                                  |   |                                                         | 10,050,703  |   |                                                         |   | (44,300,205 | ) |
| Cash      flows from financing activities:                                         |   |                                                         |        |   |                                                         |   |   |   |
| Net      change in deposits                                                        |   |                                                         | (571,856    | )      |                                                         |   | 8,787,732 |   |
| Cash      dividends paid                                                           |   |                                                         | (179,104    | )      |                                                         |   | (358,190 | ) |
| Proceeds      from issuance of common stock from exercise of stock    options      |   |                                                         | 220,639     |   |                                                         |   | 403,913 |   |
| Tax      benefit from issuance of common stock                                     |   |                                                         | -           |   |                                                         |   | 69,505 |   |
| Proceeds      from FHLB advances                                                   |   |                                                         | 54,450,000  |   |                                                         |   | 71,100,000 |   |
| Repayment      of FHLB advances                                                    |   |                                                         | (65,350,000 | )      |                                                         |   | (48,450,000 | ) |
| Repurchase      of common stock                                                    |   |                                                         | (125,549    | )      |                                                         |   | (224,655 | ) |
| Net      cash from (used in) financing activities                                  |   |                                                         | (11,555,870 | )      |                                                         |   | 31,328,305 |   |
| Net      change in cash and cash equivalents                                       |   |                                                         | 5,648,549   |   |                                                         |   | (11,101,701 | ) |
| Cash      and cash equivalents, beginning of period                                |   |                                                         | 33,830,389  |   |                                                         |   | 28,864,966 |   |
| Cash      and cash equivalents, end of period                                      |   | $                                                            | 39,478,938  |   |                                                         | $      | 17,763,265 |   |

----

Index

|                                                   |   | (unaudited)Six Months endedJune      30, 2008 |       |   | (unaudited Six Months endedJune 30,      2007 |   |
|--------------------------------------------------------|--------|---------------------------------------------------------|------------|--------|--------------------------------------------------------------|--------|
| Supplemental      disclosures of cash flow information |   |                                                    |       |   |                                                         |   |
| Cash      paid during the year for:                    |   |                                                    |       |   |                                                         |   |
| Interest                                               |   | $                                                       | 10,098,971 |   |                                                         | $      | 12,633,087 |   |
| Income      taxes                                      |   |                                                    | -          |   |                                                         |   | 540,000 |   |
| Noncash      items:                                    |   |                                                    |       |   |                                                         |   |   |   |
| Transfer      of loans to other real estate owned      |   |                                                    | 1,437,745  |   |                                                         |   | - |   |

----

Index

Notes 

----

Index

|                                                                                      |   | Three      Months EndedJune      30 |      |   | Six      Months EndedJune      30 |   |
|-------------------------------------------------------------------------------------------|--------|-------------------------------------|-----------|--------|-----------------------------------|--------|
|                                                                                      |   | 2008                                |      |   | 2007                              |   |   | 2008 |   |   | 2007 |   |
| Basic                                                                                     |   |                                |      |   |                              |   |   |   |   |   |   |   |
| Net      income                                                                           |   | $                                   | 342,707   |   |                              | $      | 217,112 |   |   | $ | 1,053,879 |   |   | $ | 393,725 |   |
| Weighted      average common shares outstanding                                           |   |                                | 4,073,582 |   |                              |   | 4,073,678 |   |   |   | 4,066,864 |   |   |   | 4,071,181 |   |
| Basic      earnings per common share                                                      |   | $                                   | 0.08      |   |                              | $      | 0.05 |   |   | $ | 0.26 |   |   | $ | 0.10 |   |
|                                                                                      |   |                                |      |   |                              |   |   |   |   |   |   |   |   |   |   |   |
| Diluted                                                                                   |   |                                |      |   |                              |   |   |   |   |   |   |   |   |   |   |   |
| Net      income                                                                           |   | $                                   | 342,707   |   |                              | $      | 217,112 |   |   | $ | 1,053,879 |   |   | $ | 393,725 |   |
| Weighted      average common shares outstanding                                           |   |                                | 4,073,582 |   |                              |   | 4,073,678 |   |   |   | 4,066,864 |   |   |   | 4,071,181 |   |
| Add:  dilutive      effect of assumed stock option exercises                    |   |                                | 2,289     |   |                              |   | 72,708 |   |   |   | 13,273 |   |   |   | 81,794 |   |
| Weighted      average common shares and dilutive potential common shares      outstanding |   |                                | 4,075,871 |   |                              |   | 4,146,386 |   |   |   | 4,080,137 |   |   |   | 4,152,975 |   |
| Diluted      earnings per common share                                                    |   | $                                   | 0.08      |   |                              | $      | 0.05 |   |   | $ | 0.26 |   |   | $ | 0.09 |   |

----

Index

| Options                                          |   | Shares |    |   | Weighted      Average Exercise Price |   |   | Weighted      Average Remaining Contractual Term |   |   | Aggregate      Intrinsic Value |   |
|--------------------------------------------------|--------|--------|---------|--------|--------------------------------------|--------|--------|--------------------------------------------------|--------|--------|--------------------------------|--------|
| Outstanding      at January 1, 2008              |   |   | 239,802 |   |                                 | $      | 11.52  |                                             |   |   |                           |   | $ | - |   |
| Granted                                          |   |   | -       |   |                                 |   |   |                                             |   |   |                           |   |   |   |   |
| Exercised                                        |   |   | (22,127 | )      |                                 | $      | 9.96   |                                             |   |   |                           |   |   | - |   |
| Forfeited      or Expired                        |   |   | (1,000  | )      |                                 | $      | 14.39  |                                             |   |   |                           |   |   | - |   |
|                                             |   |   |    |   |                                 |   |   |                                             |   |   |                           |   |   |   |   |
| Oustanding      at June 30, 2008                 |   |   | 216,675 |   |                                 | $      | 11.67  |                                             |   |   | 3.02                           |   |   |   |   |   |
|                                             |   |   |    |   |                                 |   |   |                                             |   |   |                           |   |   |   |   |   |
| Vested      or expected to vest at June 30, 2008 |   |   | 214,915 |   |                                 | $      | 11.64  |                                             |   |   | 2.99                           |   |   | $ | - |   |
|                                             |   |   |    |   |                                 |   |   |                                             |   |   |                           |   |   |   |   |   |
| Exercisable      at June 30, 2008                |   |   | 201,370 |   |                                 | $      | 11.39  |                                             |   |   | 2.71                           |   |   | $ | - |   |

----

Index

| Nonvested      Restricted Shares                 |   | Shares |   |   | Weighted      Average Grant Date Fair Value |   |
|--------------------------------------------------|--------|--------|--------|--------|---------------------------------------------|--------|
| Nonvested      at January 1, 2008                |   |   | -      |   |                                        | $      | - |   |
| Granted                                          |   |   | 13,500 |   |                                        |   | 135,000 |   |
| Vested                                           |   |   | -      |   |                                        |   | - |   |
| Forfeited      or expired                        |   |   | -      |   |                                        |   | - |   |
|                                             |   |   |   |   |                                        |   |   |   |
| Outstanding      at June 30, 2008                |   |   | 13,500 |   |                                        |   | 135,000 |   |
|                                             |   |   |   |   |                                        |   |   |   |
| Vested      or expected to vest at June 30, 2008 |   |   | 11,948 |   |                                        |   | 119,480 |   |
|                                             |   |   |   |   |                                        |   |   |   |
| Nonvested      at June 30, 2008                  |   |   | 13,500 |   |                                        |   |   |   |

----

Index

|                              |   | As      of and for the three months ended June 30, 2008 |        |
|-----------------------------------|--------|---------------------------------------------------------|-------------|
|                              |   | Bank                                                    |        |   | Wealth      Management |   |   | Corporate      & Intercompany |   |   | Eliminations |   |   | Total |   |
| Income      Statement Information |   |                                                    |        |   |   |   |   |   |   |   |   |   |   |   |   |
| Net      interest income          |   | $                                                       | 5,551,759   |   |   | $ | 25,942 |   |   | $ | (283,071 | ) |   | $ | - |   |   | $ | 5,294,630 |   |
|                              |   |                                                    |        |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Non-interest      income          |   |                                                    | 704,064     |   |   |   | 938,763 |   |   |   | 577,496 |   |   |   | (751,854 | ) |   | $ | 1,468,469 |   |
|                              |   |                                                    |        |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Non-interest      expense         |   |                                                    | 4,704,058   |   |   |   | 697,799 |   |   |   | 218,568 |   |   |   | - |   |   | $ | 5,620,425 |   |
|                              |   |                                                    |        |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Noncash      items                |   |                                                    |        |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Provision      for loan losses    |   |                                                    | 875,000     |   |   |   | - |   |   |   | - |   |   |   | - |   |   | $ | 875,000 |   |
| Depreciation/Amortization         |   |                                                    | 343,723     |   |   |   | 10,512 |   |   |   | - |   |   |   | - |   |   | $ | 354,235 |   |
|                              |   |                                                    |        |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Income      tax expense (benefit) |   |                                                    | 55,407      |   |   |   | 136,411 |   |   |   | (266,851 | ) |   |   |   |   |   | $ | (75,033 | ) |
|                              |   |                                                    |        |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Segment      Profit/(Loss)        |   |                                                    | 621,358     |   |   |   | 130,495 |   |   |   | 342,708 |   |   |   | (751,854 | ) |   | $ | 342,707 |   |
|                              |   |                                                    |        |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Balance      Sheet Information    |   |                                                    |        |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Segment      Assets               |   |                                                    | 691,288,156 |   |   |   | 6,422,677 |   |   |   | 69,234,163 |   |   |   | (71,361,057 | ) |   | $ | 695,583,939 |   |

|                              |   | As      of and for the six months ended June 30, 2008 |        |
|-----------------------------------|--------|-------------------------------------------------------|-------------|
|                              |   | Bank                                                  |        |   | Wealth      Management |   |   | Corporate      & Intercompany |   |   | Eliminations |   |   | Total |   |
| Income      Statement Information |   |                                                  |        |   |   |   |   |   |   |   |   |   |   |   |   |
| Net      interest income          |   | $                                                     | 10,881,189  |   |   | $ | 58,536 |   |   | $ | (564,720 | ) |   | $ | - |   |   | $ | 10,375,005 |   |
|                              |   |                                                  |        |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Non-interest      income          |   |                                                  | 1,468,198   |   |   |   | 1,833,394 |   |   |   | 1,546,563 |   |   |   | (1,738,912 | ) |   | $ | 3,109,243 |   |
|                              |   |                                                  |        |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Non-interest      expense         |   |                                                  | 9,329,297   |   |   |   | 1,402,627 |   |   |   | 367,285 |   |   |   | - |   |   | $ | 11,099,209 |   |
|                              |   |                                                  |        |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Noncash      items                |   |                                                  |        |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Provision      for loan losses    |   |                                                  | 1,175,000   |   |   |   | - |   |   |   | - |   |   |   | - |   |   | $ | 1,175,000 |   |
| Depreciation/Amortization         |   |                                                  | 681,367     |   |   |   | 20,458 |   |   |   | - |   |   |   | - |   |   | $ | 701,825 |   |
|                              |   |                                                  |        |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Income      tax expense (benefit) |   |                                                  | 358,920     |   |   |   | 236,561 |   |   |   | (439,321 | ) |   |   | - |   |   | $ | 156,160 |   |
|                              |   |                                                  |        |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Segment      Profit/(Loss)        |   |                                                  | 1,486,170   |   |   |   | 252,742 |   |   |   | 1,053,879 |   |   |   | (1,738,912 | ) |   | $ | 1,053,879 |   |
|                              |   |                                                  |        |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Balance      Sheet Information    |   |                                                  |        |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Segment      Assets               |   |                                                  | 691,288,156 |   |   |   | 6,422,677 |   |   |   | 69,234,163 |   |   |   | (71,361,057 | ) |   | $ | 695,583,939 |   |

----

Index

|                              |   | As      of and for the three months ended June 30, 2007 |        |
|-----------------------------------|--------|---------------------------------------------------------|-------------|
|                              |   | Bank                                                    |        |   | Wealth      Management |   |   | Corporate      & Intercompany |   |   | Eliminations |   |   | Total |   |
| Income      Statement Information |   |                                                    |        |   |   |   |   |   |   |   |   |   |   |   |   |
| Net      interest income          |   | $                                                       | 5,839,686   |   |   | $ | 32,854 |   |   | $ | (288,950 | ) |   | $ | - |   |   | $ | 5,583,590 |   |
|                              |   |                                                    |        |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Non-interest      income          |   |                                                    | 717,026     |   |   |   | 718,708 |   |   |   | 304,906 |   |   |   | (310,607 | ) |   |   | 1,430,033 |   |
|                              |   |                                                    |        |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Non-interest      expense         |   |                                                    | 4,558,122   |   |   |   | 575,550 |   |   |   | 168,904 |   |   |   | - |   |   |   | 5,302,576 |   |
|                              |   |                                                    |        |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Noncash      items                |   |                                                    |        |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Provision      for loan losses    |   |                                                    | 1,500,000   |   |   |   | - |   |   |   | - |   |   |   | - |   |   |   | 1,500,000 |   |
| Depreciation/Amortization         |   |                                                    | 254,942     |   |   |   | 9,639 |   |   |   | - |   |   |   | - |   |   |   | 264,581 |   |
|                              |   |                                                    |        |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Income      tax expense (benefit) |   |                                                    | 86,834      |   |   |   | 84,660 |   |   |   | (177,559 | ) |   |   | - |   |   |   | (6,065 | ) |
|                              |   |                                                    |        |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Segment      Profit/(Loss)        |   |                                                    | 411,756     |   |   |   | 91,352 |   |   |   | 24,611 |   |   |   | (310,607 | ) |   |   | 217,112 |   |
|                              |   |                                                    |        |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Balance      Sheet Information    |   |                                                    |        |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Segment      Assets               |   |                                                    | 699,797,435 |   |   |   | 5,879,983 |   |   |   | 71,226,752 |   |   |   | (75,263,293 | ) |   |   | 701,640,877 |   |

|                              |   | As      of and for the six months ended June 30, 2007 |        |
|-----------------------------------|--------|-------------------------------------------------------|-------------|
|                              |   | Bank                                                  |        |   | Wealth      Management |   |   | Corporate      & Intercompany |   |   | Eliminations |   |   | Total |   |
| Income      Statement Information |   |                                                  |        |   |   |   |   |   |   |   |   |   |   |   |   |
| Net      interest income          |   | $                                                     | 11,332,020  |   |   | $ | 64,257 |   |   | $ | (561,606 | ) |   | $ | - |   |   | $ | 10,834,671 |   |
|                              |   |                                                  |        |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Non-interest      income          |   |                                                  | 1,362,660   |   |   |   | 1,564,600 |   |   |   | 747,526 |   |   |   | (755,676 | ) |   |   | 2,919,110 |   |
|                              |   |                                                  |        |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Non-interest      expense         |   |                                                  | 8,955,687   |   |   |   | 1,181,220 |   |   |   | 327,964 |   |   |   | - |   |   |   | 10,464,871 |   |
|                              |   |                                                  |        |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Noncash      items                |   |                                                  |        |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Provision      for loan losses    |   |                                                  | 2,925,000   |   |   |   | - |   |   |   | - |   |   |   | - |   |   |   | 2,925,000 |   |
| Depreciation/Amortization         |   |                                                  | 482,113     |   |   |   | 18,795 |   |   |   | - |   |   |   | - |   |   |   | 500,908 |   |
|                              |   |                                                  |        |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Income      tax expense (benefit) |   |                                                  | 109,924     |   |   |   | 203,530 |   |   |   | (343,269 | ) |   |   | - |   |   |   | (29,815 | ) |
|                              |   |                                                  |        |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Segment      Profit/(Loss)        |   |                                                  | 704,069     |   |   |   | 244,107 |   |   |   | 201,225 |   |   |   | (755,676 | ) |   |   | 393,725 |   |
|                              |   |                                                  |        |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Balance      Sheet Information    |   |                                                  |        |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Segment      Assets               |   |                                                  | 699,797,435 |   |   |   | 5,879,983 |   |   |   | 71,226,752 |   |   |   | (75,263,293 | ) |   |   | 701,640,877 |   |

----

Index

|                           |   | June      30, 2008 |        |   | December      31, 2007 |   |
|--------------------------------|--------|--------------------|-------------|--------|------------------------|--------|
|                           |   | Balance            |        |   | %                      |   |   | Balance |   |   | % |   |
|                           |   |               |        |   |                   |   |   |   |   |   |   |   |
| Commercial                     |   | $                  | 244,664,528 |   |                   |   | 44.2 | % |   | $ | 252,256,668 |   |   |   | 43.8 | % |
| Commercial      real estate    |   |               | 155,236,231 |   |                   |   | 28.0 | % |   |   | 170,291,883 |   |   |   | 29.6 | % |
| Residential      real estate   |   |               | 100,882,024 |   |                   |   | 18.2 | % |   |   | 102,162,024 |   |   |   | 17.7 | % |
| Home      equity               |   |               | 30,753,034  |   |                   |   | 5.6 | % |   |   | 29,508,246 |   |   |   | 5.1 | % |
| Consumer                       |   |               | 22,502,889  |   |                   |   | 4.0 | % |   |   | 21,750,106 |   |   |   | 3.8 | % |
| Total      loans               |   |               | 554,038,706 |   |                   |   | 100.0 | % |   |   | 575,968,927 |   |   |   | 100.0 | % |
| Net      deferred loan costs   |   |               | (195,786    | )      |                   |   |   |   |   |   | (224,720 | ) |   |   |   |   |
| Allowance      for loan losses |   |               | (8,974,052  | )      |                   |   |   |   |   |   | (8,208,162 | ) |   |   |   |   |
|                           |   |               |        |   |                   |   |   |   |   |   |   |   |   |   |   |   |
| Net      loans                 |   | $                  | 544,868,868 |   |                   |   |   |   |   | $ | 567,536,045 |   |   |   |   |   |

|                                               |   | 2008   |       |   | 2007   |   |
|----------------------------------------------------|--------|--------|------------|--------|--------|--------|
|                                               |   |   |       |   |   |   |
| Beginning      balance, January 1                  |   | $      | 8,208,162  |   |   | $      | 6,870,442 |   |
| Provision      charged to operating expense        |   |   | 1,175,000  |   |   |   | 2,925,000 |   |
| Charge-offs                                        |   |   | (1,657,598 | )      |   |   | (2,786,440 | ) |
| Recoveries                                         |   |   | 1,248,488  |   |   |   | 166,807 |   |
|                                               |   |   |       |   |   |   |   |   |
| Ending      balance, June 30                       |   | $      | 8,974,052  |   |   | $      | 7,175,809 |   |
|                                               |   |   |       |   |   |   |   |   |
| Net      charge-offs to average loans (annualized) |   |   | 0.14       | %      |   |   | 0.92 | % |

|                                  |   | June      30, 2008 |      |   | December      31, 2007 |   |
|---------------------------------------|--------|--------------------|-----------|--------|------------------------|--------|
|                                  |   |               |      |   |                   |   |
| Specific      allocations             |   | $                  | 2,770,000 |   |                   | $      | 1,983,000 |   |
| Loan      pool percentage allocations |   |               | 6,094,000 |   |                   |   | 6,181,000 |   |
| Unallocated                           |   |               | 110,052   |   |                   |   | 44,162 |   |
|                                  |   |               |      |   |                   |   |   |   |
| Total      allowance for loan losses  |   | $                  | 8,974,052 |   |                   | $      | 8,208,162 |   |

|                                                |   | June      30, 2008 |       |   | December      31, 2007 |   |
|-----------------------------------------------------|--------|--------------------|------------|--------|------------------------|--------|
|                                                |   |               |       |   |                   |   |
| Loans      past due over 90 days and still accruing |   | $                  | 1,840,160  |   |                   | $      | - |   |
| Nonaccrual      loans                               |   |               | 19,411,717 |   |                   |   | 17,954,861 |   |
| Total      nonperforming loans                      |   | $                  | 21,251,877 |   |                   | $      | 17,954,861 |   |
| Other      real estate owned                        |   |               | 2,500,310  |   |                   |   | 1,451,573 |   |
| Total      nonperforming assets                     |   | $                  | 23,752,187 |   |                   | $      | 20,045,766 |   |
|                                                |   |               |       |   |                   |   |   |   |
| Nonperforming      assets to total assets           |   |               | 3.42       | %      |                   |   | 2.84 | % |
|                                                |   |               |       |   |                   |   |   |   |
| Nonperforming      loans to total loans             |   |               | 3.84       | %      |                   |   | 3.12 | % |

----

Index

|                                                                         |   | June      30, 2008 |       |   | December      31, 2007 |   |
|------------------------------------------------------------------------------|--------|--------------------|------------|--------|------------------------|--------|
| 5.29%      bullet advance, principal due at maturity January 7, 2008         |   | $                  | -          |   |                   | $      | 3,950,000 |   |
| 5.08%      bullet advance, principal due at maturity March 17, 2008          |   |               | -          |   |                   |   | 3,500,000 |   |
| 4.69%      bullet advance, principal due at maturity March 26, 2008          |   |               | -          |   |                   |   | 6,000,000 |   |
| 5.16%      bullet advance, principal due at maturity April 28, 2008          |   |               | -          |   |                   |   | 2,000,000 |   |
| 3.75%      variable rate advance, principal due at maturity May 13,    2008  |   |               | -          |   |                   |   | 3,000,000 |   |
| 3.75%      variable rate advance, principal due at maturity June 11,    2008 |   |               | -          |   |                   |   | 1,700,000 |   |
| 3.75%      variable rate advance, principal due at maturity June 16,    2008 |   |               | -          |   |                   |   | 750,000 |   |
| 3.75%      variable rate advance, principal due at maturity June 30,    2008 |   |               | -          |   |                   |   | 5,000,000 |   |
| 5.00%      bullet advance, principal due at maturity April 27, 2009          |   |               | 4,000,000  |   |                   |   | 4,000,000 |   |
| 5.16%      bullet advance, principal due at maturity August 18, 2009         |   |               | 4,000,000  |   |                   |   | 4,000,000 |   |
| 2.29%      bullet advance, principal due at maturity March 22, 2010          |   |               | 2,000,000  |   |                   |   | - |   |
| 3.26%      bullet advance, principal due at maturity April 28, 2010          |   |               | 1,500,000  |   |                   |   |   |   |
| 3.63%      bullet advance, principal due at maturity June 28, 2010           |   |               | 4,000,000  |   |                   |   |   |   |
| 4.32%      bullet advance, principal due at maturity June 29, 2010           |   |               | 1,200,000  |   |                   |   | 1,200,000 |   |
| 3.19%      bullet advance, principal due at maturity March 28, 2011          |   |               | 2,000,000  |   |                   |   |   |   |
| 3.60%      bullet advance, principal due at maturity April 28, 2011          |   |               | 1,500,000  |   |                   |   | - |   |
| 3.55%      bullet advance, principal due at maturity March 26, 2012          |   |               | 2,000,000  |   |                   |   | - |   |
| 3.81%      bullet advance, principal due at maturity March 26, 2013          |   |               | 2,000,000  |   |                   |   | - |   |
|                                                                         |   |               |       |   |                   |   |   |   |
|                                                                         |   | $                  | 24,200,000 |   |                   | $      | 35,100,000 |   |

| Year   |   | Advances |       |
|--------|--------|----------|------------|
| 2009   |   |     | 8,000,000  |   |
| 2010   |   |     | 8,700,000  |   |
| 2011   |   |     | 3,500,000  |   |
| 2012   |   |     | 2,000,000  |   |
| 2013   |   |     | 2,000,000  |   |
|   |   | $        | 24,200,000 |   |

----

Index

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

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

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

|                               |   | Level      1 |   |   | Level      2 |   |       | Level      3 |   |   | Total   |   |
|------------------------------------|--------|--------------|--------|--------|--------------|--------|------------|--------------|--------|--------|---------|--------|
| Available-for-sale      securities |   | $            | -      |   |         | $      | 73,306,363 |         |   | $      | 635,768 |   |   | $ | 73,942,131 |   |

|                                                                                                                                                                                 |   | Available-for-sale      securities |     |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|------------------------------------|----------|
|                                                                                                                                                                                 |   |                               |     |
| Beginning      Balance, January 1, 2008                                                                                                                                              |   | $                                  | 869,055  |   |
| Net      realized/unrealized gains (losses)                                                                                                                                          |   |                               |     |   |
| Included      in earnings                                                                                                                                                            |   |                               | -        |   |
| Included      in other comprehensive income                                                                                                                                          |   |                               | (233,287 | ) |
| Ending      Balance, June 30, 2008                                                                                                                                                   |   | $                                  | 635,768  |   |
|                                                                                                                                                                                 |   |                               |     |   |
| Total      gains (losses) for the period included in earnings attributable to the      changes in unrealized gains (losses) relating to assets still held at the      reporting date |   |                               | -        |   |

----

Index

|                |   | Level      1 |   |   | Level      2 |   |   | Level      3 |   |   | Total      |   |
|---------------------|--------|--------------|--------|--------|--------------|--------|--------|--------------|--------|--------|------------|--------|
| Impaired      loans |   |         | -      |   |         |   | -      |         |   |   | 11,266,251 |   |   |   | 11,266,251 |   |

Item 2

----

Index

----

Index

|                                  |   | June      30, 2008 |        |   | December      31, 2007 |   |
|---------------------------------------|--------|--------------------|-------------|--------|------------------------|--------|
|                                  |   | Balance            |        |   | %                      |   |   | Balance |   |   | % |   |
|                                  |   |               |        |   |                   |   |   |   |   |   |   |   |
| Core      Deposits:                   |   |               |        |   |                   |   |   |   |   |   |   |   |
| Noninterest-bearing      demand       |   | $                  | 84,281,872  |   |                   |   | 14.0 | % |   | $ | 71,705,395 |   |   |   | 11.9 | % |
| Interest-bearing      checking        |   |               | 66,305,732  |   |                   |   | 11.1 | % |   |   | 54,928,439 |   |   |   | 9.2 | % |
| Money      market                     |   |               | 138,207,481 |   |                   |   | 23.0 | % |   |   | 135,304,113 |   |   |   | 22.5 | % |
| Savings                               |   |               | 17,041,773  |   |                   |   | 2.9 | % |   |   | 13,746,704 |   |   |   | 2.3 | % |
| Time,      under $100,000             |   |               | 95,053,054  |   |                   |   | 15.8 | % |   |   | 94,604,892 |   |   |   | 15.7 | % |
| Total      Core Deposits              |   |               | 400,889,912 |   |                   |   | 66.8 | % |   |   | 370,289,543 |   |   |   | 61.6 | % |
| Non-core      Deposits:               |   |               |        |   |                   |   |   |   |   |   |   |   |   |   |   |   |
| In      Market Non-core Deposits:     |   |               |        |   |                   |   |   |   |   |   |   |   |   |   |   |   |
| Time,      $100,000 and over          |   |               | 134,795,804 |   |                   |   | 22.5 | % |   |   | 155,224,215 |   |   |   | 25.9 | % |
| Out-of-Market      Non-Core Deposits: |   |               |        |   |                   |   |   |   |   |   |   |   |   |   |   |   |
| Brokered      CD's                    |   |               | 64,431,899  |   |                   |   | 10.7 | % |   |   | 75,175,713 |   |   |   | 12.5 | % |
| Total      Non-core Deposits          |   |               | 199,227,703 |   |                   |   | 33.2 | % |   |   | 230,399,928 |   |   |   | 38.4 | % |
|                                  |   |               |        |   |                   |   |   |   |   |   |   |   |   |   |   |   |
| Total      deposits                   |   | $                  | 600,117,615 |   |                   |   | 100.0 | % |   | $ | 600,689,471 |   |   |   | 100.0 | % |

----

Index

| Performance      Ratios          |   | June      30 |   |
|----------------------------------|--------|--------------|--------|
|                             |   | 2008         |   |   | 2007 |   |
|                             |   |         |   |   |   |   |
| Return      on average assets *  |   |         | 0.20   | % |   |   | 0.12 | % |
| Return      on average equity *  |   |         | 2.78   | % |   |   | 1.68 | % |
| Net      interest margin (TEY) * |   |         | 3.37   | % |   |   | 3.44 | % |
| Efficiency      ratio            |   |         | 83.10  | % |   |   | 75.60 | % |
|                             |   |         |   |   |   |   |   |   |
| *      annualized                |   |         |   |   |   |   |   |   |

----

Index

|                                                            |   | At      and For The Three Month Period Ended |    |
|-----------------------------------------------------------------|--------|----------------------------------------------|---------|
|                                                            |   | June      30, 2008                           |    |   | June      30, 2007 |   |
| ($      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       |   | $                                            | 5,264   |   |   | $ | 41 |   |   |   | 3.13 | % |   | $ | 1,423 |   |   | $ | (19 | ) |   |   | -5.36 | % |
| Federal      funds sold                                         |   |                                         | 4,781   |   |   |   | 48 |   |   |   | 4.04 | % |   |   | 4,856 |   |   |   | 41 |   |   |   | 3.39 | % |
| Securities      - taxable                                       |   |                                         | 52,706  |   |   |   | 648 |   |   |   | 4.94 | % |   |   | 51,696 |   |   |   | 668 |   |   |   | 5.18 | % |
| Securities      - tax exempt (1)                                |   |                                         | 21,830  |   |   |   | 344 |   |   |   | 6.34 | % |   |   | 19,956 |   |   |   | 296 |   |   |   | 5.95 | % |
| Loan      Held for Sale                                         |   |                                         | 551     |   |   |   | - |   |   |   | 0.00 | % |   |   | 72 |   |   |   | - |   |   |   | 0.00 | % |
| Loans                                                           |   |                                         | 561,647 |   |   |   | 8,348 |   |   |   | 5.98 | % |   |   | 585,407 |   |   |   | 11,088 |   |   |   | 7.60 | % |
| Total      interest-earning assets                              |   |                                         | 646,779 |   |   |   | 9,429 |   |   |   | 5.87 | % |   |   | 663,410 |   |   |   | 12,074 |   |   |   | 7.30 | % |
| Allowance      for loan losses                                  |   |                                         | (9,299  | ) |   |   |   |   |   |   |   |   |   |   | (7,724 | ) |   |   |   |   |   |   |   |   |
| Cash      and due from banks                                    |   |                                         | 15,845  |   |   |   |   |   |   |   |   |   |   |   | 13,262 |   |   |   |   |   |   |   |   |   |
| Other      assets                                               |   |                                         | 32,221  |   |   |   |   |   |   |   |   |   |   |   | 33,225 |   |   |   |   |   |   |   |   |   |
| Total      assets                                               |   | $                                            | 685,546 |   |   |   |   |   |   |   |   |   |   | $ | 702,173 |   |   |   |   |   |   |   |   |   |
| Liabilities      and Stockholders' Equity                       |   |                                         |    |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Interest-bearing      checking                                  |   | $                                            | 66,866  |   |   | $ | 199 |   |   |   | 1.20 | % |   | $ | 47,043 |   |   | $ | 175 |   |   |   | 1.49 | % |
| Savings                                                         |   |                                         | 16,777  |   |   |   | 45 |   |   |   | 1.08 | % |   |   | 16,419 |   |   |   | 34 |   |   |   | 0.83 | % |
| Money      market                                               |   |                                         | 135,542 |   |   |   | 747 |   |   |   | 2.22 | % |   |   | 128,377 |   |   |   | 1,070 |   |   |   | 3.34 | % |
| Certificates      of deposit                                    |   |                                         | 289,527 |   |   |   | 2,442 |   |   |   | 3.39 | % |   |   | 343,033 |   |   |   | 4,433 |   |   |   | 5.18 | % |
| Short-term      borrowings                                      |   |                                         | -       |   |   |   | - |   |   |   | 0.00 | % |   |   | - |   |   |   | 1 |   |   |   | - |   |
| FHLB      advances                                              |   |                                         | 34,041  |   |   |   | 299 |   |   |   | 3.53 | % |   |   | 30,610 |   |   |   | 397 |   |   |   | 5.20 | % |
| Junior      subordinated debt                                   |   |                                         | 17,527  |   |   |   | 283 |   |   |   | 6.49 | % |   |   | 17,527 |   |   |   | 280 |   |   |   | 6.41 | % |
| Total      interest-bearing liabilities                         |   |                                         | 560,280 |   |   |   | 4,015 |   |   |   | 2.90 | % |   |   | 583,009 |   |   |   | 6,390 |   |   |   | 4.40 | % |
| Noninterest-bearing      checking                               |   |                                         | 71,851  |   |   |   |   |   |   |   |   |   |   |   | 63,039 |   |   |   |   |   |   |   |   |   |
| Other      liabilities                                          |   |                                         | 4,164   |   |   |   |   |   |   |   |   |   |   |   | 4,576 |   |   |   |   |   |   |   |   |   |
| Stockholders'      equity                                       |   |                                         | 49,251  |   |   |   |   |   |   |   |   |   |   |   | 51,549 |   |   |   |   |   |   |   |   |   |
| Total      liabilities and stockholders' equity                 |   | $                                            | 685,546 |   |   |   |   |   |   |   |   |   |   | $ | 702,173 |   |   |   |   |   |   |   |   |   |
| Net      interest income                                        |   |                                         |    |   |   | $ | 5,414 |   |   |   |   |   |   |   |   |   |   | $ | 5,684 |   |   |   |   |   |
| Rate      spread                                                |   |                                         |    |   |   |   |   |   |   |   | 2.97 | % |   |   |   |   |   |   |   |   |   |   | 2.90 | % |
| Net      interest income as a percent of average earning assets |   |                                         |    |   |   |   |   |   |   |   | 3.37 | % |   |   |   |   |   |   |   |   |   |   | 3.44 | % |

----

Index

| Performance      Ratios          |   | June      30 |   |
|----------------------------------|--------|--------------|--------|
|                             |   | 2008         |   |   | 2007 |   |
|                             |   |         |   |   |   |   |
| Return      on average assets *  |   |         | 0.31   | % |   |   | 0.12 | % |
| Return      on average equity *  |   |         | 4.34   | % |   |   | 1.54 | % |
| Net      interest margin (TEY) * |   |         | 3.26   | % |   |   | 3.43 | % |
| Efficiency      ratio            |   |         | 82.31  | % |   |   | 76.10 | % |
|                             |   |         |   |   |   |   |   |   |
| *      annualized                |   |         |   |   |   |   |   |   |

----

Index

|                                                            |   | At      and For The Six Month Periods Ended |    |
|-----------------------------------------------------------------|--------|---------------------------------------------|---------|
|                                                            |   | June      30, 2008                          |    |   | June      30, 2007 |   |
| ($      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       |   | $                                           | 10,383  |   |   | $ | 156 |   |   |   | 3.02 | % |   | $ | 3,395 |   |   | $ | 117 |   |   |   | 6.95 | % |
| Federal      funds sold                                         |   |                                        | 6,104   |   |   |   | 116 |   |   |   | 3.82 | % |   |   | 5,162 |   |   |   | 124 |   |   |   | 4.84 | % |
| Securities      - taxable                                       |   |                                        | 51,255  |   |   |   | 1,263 |   |   |   | 4.96 | % |   |   | 52,013 |   |   |   | 1,331 |   |   |   | 5.16 | % |
| Securities      - tax exempt (1)                                |   |                                        | 21,190  |   |   |   | 673 |   |   |   | 6.39 | % |   |   | 19,680 |   |   |   | 600 |   |   |   | 6.15 | % |
| Loans      held for sale                                        |   |                                        | 391     |   |   |   | - |   |   |   | 0.00 | % |   |   | 36 |   |   |   | - |   |   |   | 0.00 | % |
| Loans                                                           |   |                                        | 566,104 |   |   |   | 17,616 |   |   |   | 6.26 | % |   |   | 568,204 |   |   |   | 21,406 |   |   |   | 7.60 | % |
| Total      interest-earning assets                              |   |                                        | 655,427 |   |   |   | 19,824 |   |   |   | 6.07 | % |   |   | 648,490 |   |   |   | 23,578 |   |   |   | 7.33 | % |
| Allowance      for loan losses                                  |   |                                        | (8,911  | ) |   |   |   |   |   |   |   |   |   |   | (7,339 | ) |   |   |   |   |   |   |   |   |
| Cash      and due from banks                                    |   |                                        | 14,652  |   |   |   |   |   |   |   |   |   |   |   | 12,402 |   |   |   |   |   |   |   |   |   |
| Other      assets                                               |   |                                        | 32,317  |   |   |   |   |   |   |   |   |   |   |   | 29,546 |   |   |   |   |   |   |   |   |   |
| Total      assets                                               |   | $                                           | 693,485 |   |   |   |   |   |   |   |   |   |   | $ | 683,099 |   |   |   |   |   |   |   |   |   |
| Liabilities      and Stockholders' Equity                       |   |                                        |    |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Interest-bearing      checking                                  |   | $                                           | 64,631  |   |   | $ | 419 |   |   |   | 1.30 | % |   | $ | 42,811 |   |   | $ | 300 |   |   |   | 1.41 | % |
| Savings                                                         |   |                                        | 16,010  |   |   |   | 90 |   |   |   | 1.13 | % |   |   | 14,587 |   |   |   | 67 |   |   |   | 0.93 | % |
| Money      market                                               |   |                                        | 133,017 |   |   |   | 1,702 |   |   |   | 2.57 | % |   |   | 126,993 |   |   |   | 2,256 |   |   |   | 3.58 | % |
| Certificates      of deposit                                    |   |                                        | 309,752 |   |   |   | 5,864 |   |   |   | 3.81 | % |   |   | 340,021 |   |   |   | 8,765 |   |   |   | 5.20 | % |
| FHLB      advances                                              |   |                                        | 29,115  |   |   |   | 573 |   |   |   | 3.96 | % |   |   | 23,178 |   |   |   | 589 |   |   |   | 5.12 | % |
| Junior      subordinated debt                                   |   |                                        | 17,527  |   |   |   | 565 |   |   |   | 6.48 | % |   |   | 17,527 |   |   |   | 562 |   |   |   | 6.47 | % |
| Total      interest-bearing liabilities                         |   |                                        | 570,052 |   |   |   | 9,213 |   |   |   | 3.26 | % |   |   | 565,117 |   |   |   | 12,539 |   |   |   | 4.47 | % |
| Noninterest-bearing      checking                               |   |                                        | 70,573  |   |   |   |   |   |   |   |   |   |   |   | 62,237 |   |   |   |   |   |   |   |   |   |
| Other      liabilities                                          |   |                                        | 4,021   |   |   |   |   |   |   |   |   |   |   |   | 4,581 |   |   |   |   |   |   |   |   |   |
| Stockholders'      equity                                       |   |                                        | 48,839  |   |   |   |   |   |   |   |   |   |   |   | 51,164 |   |   |   |   |   |   |   |   |   |
| Total      liabilities and stockholders' equity                 |   | $                                           | 693,485 |   |   |   |   |   |   |   |   |   |   | $ | 683,099 |   |   |   |   |   |   |   |   |   |
| Net      interest income                                        |   |                                        |    |   |   | $ | 10,611 |   |   |   |   |   |   |   |   |   |   | $ | 11,039 |   |   |   |   |   |
| Rate      spread                                                |   |                                        |    |   |   |   |   |   |   |   | 2.81 | % |   |   |   |   |   |   |   |   |   |   | 2.86 | % |
| Net      interest income as a percent of average earning assets |   |                                        |    |   |   |   |   |   |   |   | 3.26 | % |   |   |   |   |   |   |   |   |   |   | 3.43 | % |

----

Index

|                   |   | June      30, 2008 |   |   | December      31, 2007 |   |
|------------------------|--------|--------------------|--------|--------|------------------------|--------|
|                   |   | Actual             |   |   | Well-      Capitalized |   |   | Minimum      Required |   |   | Actual |   |   | Well-      Capitalized |   |   | Minimum      Required |   |
|                   |   |               |   |   |                   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| The      Company       |   |               |   |   |                   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Leverage      capital  |   |               | 9.52   | %      |                   |   | 5.00 | % |   |   | 4.00 | % |   |   | 9.31 | % |   |   | 5.00 | % |   |   | 4.00 | % |
| Tier      1 risk-based |   |               | 11.55  | %      |                   |   | 6.00 | % |   |   | 4.00 | % |   |   | 10.92 | % |   |   | 6.00 | % |   |   | 4.00 | % |
| Total      risk-based  |   |               | 12.92  | %      |                   |   | 10.00 | % |   |   | 8.00 | % |   |   | 12.08 | % |   |   | 10.00 | % |   |   | 8.00 | % |
|                   |   |               |   |   |                   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| The      Bank          |   |               |   |   |                   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Leverage      capital  |   |               | 8.40   | %      |                   |   | 5.00 | % |   |   | 4.00 | % |   |   | 7.99 | % |   |   | 5.00 | % |   |   | 4.00 | % |
| Tier      1 risk-based |   |               | 10.20  | %      |                   |   | 6.00 | % |   |   | 4.00 | % |   |   | 9.40 | % |   |   | 6.00 | % |   |   | 4.00 | % |
| Total      risk-based  |   |               | 11.45  | %      |                   |   | 10.00 | % |   |   | 8.00 | % |   |   | 10.65 | % |   |   | 10.00 | % |   |   | 8.00 | % |

----

Index

Item 4

----

Index

Item 1.    LEGAL 

Item 1a.   RISK 

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

| Period                          |   | Total      Number of Shares Repurchased |   |   | Average      Price Paid Per Share |   |   | Total      Number of Shares Repurchased as part of Publicly Announced Plan or      Program |   |   | Maximum      Number of Shares (or Dollar Value) that May Yet be Purchased Under Plans      or Programs |   |
|---------------------------------|--------|-----------------------------------------|--------|--------|-----------------------------------|--------|--------|--------------------------------------------------------------------------------------------|--------|--------|--------------------------------------------------------------------------------------------------------|--------|
|                            |   |                                    |   |   |                              |   |   |                                                                                       |   |   |                                                                                                   |   |
| Beginning      Balance 12/31/07 |   |                                    | 53,036 |   |                              | $      | 14.31  |                                                                                       |   |   | 53,036                                                                                                 |   |   |   | 11,964 |   |
| 1/1/2008      - 1/31/2008       |   |                                    | -      |   |                              |   | -      |                                                                                       |   |   | -                                                                                                      |   |   |   | - |   |
| 2/1/2008      - 2/29/2008       |   |                                    | -      |   |                              |   | -      |                                                                                       |   |   | -                                                                                                      |   |   |   | - |   |
| 3/1/2008      - 3/31/2008       |   |                                    | 6,000  |   |                              |   | 10.94  |                                                                                       |   |   | 6,000                                                                                                  |   |   |   | 5,964 |   |
| 4/1/2008      - 4/30/2008       |   |                                    | -      |   |                              |   | -      |                                                                                       |   |   | -                                                                                                      |   |   |   | - |   |
| 5/1/2008      - 5/31/2008       |   |                                    | 5,964  |   |                              |   | 10.05  |                                                                                       |   |   | 5,964                                                                                                  |   |   |   | - |   |
| 6/1/2008      - 6/30/2008       |   |                                    | -      |   |                              |   | -      |                                                                                       |   |   | -                                                                                                      |   |   |   | - |   |
|                            |   |                                    | 65,000 |   |                              | $      | 13.61  |                                                                                       |   |   | 65,000                                                                                                 |   |   |   | - |   |

Item 4.

| (a) | The      annual meeting of the shareholders of the Company was held on May 20,      2008. |
|-----|-------------------------------------------------------------------------------------------|

| (b) | The      following directors were elected at the meeting to serve until the annual      meeting of shareholders in the year2011: |
|-----|----------------------------------------------------------------------------------------------------------------------------------|

|                    |   | Votes      For |      |   | Votes      Withheld |   |
|-------------------------|--------|----------------|-----------|--------|---------------------|--------|
| Keith      E. Busse     |   |           | 2,876,747 |   |                |   | 398,176 |   |
| Michael      D. Cahill  |   |           | 2,921,804 |   |                |   | 353,119 |   |
| Michael      S. Gouloff |   |           | 2,851,656 |   |                |   | 423,267 |   |
| Donald      F. Schenkel |   |           | 2,845,335 |   |                |   | 429,558 |   |
| Irene      A. Walters   |   |           | 2,870,110 |   |                |   | 404,813 |   |

| Kathryn      D. Callen           | 2009 |   |   | William      G. Niezer     | 2010   |
|----------------------------------|------|--------|--------|----------------------------|--------|
| Jerome      F. Henry, Jr.        | 2009 |   |   | Joseph      D. Ruffolo     | 2009   |
| R.V.      Prasad Mantravadi M.D. | 2010 |   |   | John      V. Tippmann, Sr. | 2010   |
| Debra      A. Niezer             | 2009 |   |   |                       |   |

----

Index

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

Item 6.  

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

|   | 31.1   | Rule      13a-14(a) /15-14(a) Certification of Chief Executive    Officer.           |
|--------|--------|--------------------------------------------------------------------------------------|
|   | 31.2   | Rule      13a-14(a) /15-14(a) Certification of Chief Financial    Officer.           |
|   |   |                                                                                 |
|   | 32.1   | Certification      of Chief Executive Officer pursuant to 18 U.S.C. Section    1350. |
|   | 32.2   | Certification      of Chief Financial Officer pursuant to 18 U.S.C. Section    1350. |

|                                  | TOWER      FINANCIAL CORPORATION            |
|---------------------------------------|---------------------------------------------|
|                                  |                                        |
|                                  |                                        |
| Dated:  August      5, 2008 | / s      /  Michael D. Cahill     |
|                                  | Michael      D. Cahill, President and       |
|                                  | Chief      Executive Officer                |
|                                  |                                        |
|                                  |                                        |
| Dated:  August      5, 2008 | / s      /  Richard R. Sawyer     |
|                                  | Richard      R. Sawyer                      |
|                                  | Chief      Financial Officer, and Secretary |

----