----

----

**Form      10-Q**

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

**June      30, 2005**

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

**TOWER      FINANCIAL CORPORATION**

----

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

----

----

----

**1**

----

**INDEX**

| **PART                I.  **FINANCIAL                INFORMATION**** |                   |
|---------------------------------------------------------------------------|------------------------|
|                                                                      |                   |   |   |
|                                                                      | Item                1. | Financial                Statements | page                no. |
|                                                                      |                   |   |   |
|                                                                      |                   | Consolidated                Balance Sheets at June 30, 2005                (unaudited) and December 31, 2004 | 3   |
|                                                                      |                   |   |   |
|                                                                      |                   | Consolidated                Statements of Operations for                the three and six months ended June 30, 2005 and June 30, 2004                (unaudited) | 4   |
|                                                                      |                   |   |   |
|                                                                      |                   | Consolidated                Statements of Changes in                Stockholders' Equity for the six months ended June 30, 2005 and June                30,                2004 (unaudited) | 5   |
|                                                                      |                   |   |   |
|                                                                      |                   | Consolidated                Statements of Cash Flows for the                six months ended June 30, 2005 and June 30, 2004                (unaudited) | 6   |
|                                                                      |                   |   |   |
|                                                                      |                   | Notes                to Consolidated Financial                Statements | 7   |
|                                                                      |                   |   |   |
|                                                                      | Item                2. | Management's                Discussion and Analysis of Financial Condition                and Results of Operations | 9   |
|                                                                      |                   |   |   |
|                                                                      | Item                3. | Quantitative                and Qualitative                Disclosures About Market Risk | 17 |
|                                                                      |                   |   |   |
|                                                                      | Item                4. | Controls                and Procedures | 19 |
|                                                                      |                   |   |   |
|                                                                      |                   |   |   |
| **PART                II.  **OTHER                INFORMATION****    |                   |
|                                                                      |                   |   |   |
|                                                                      | Item                1. | Legal                Proceedings | 20 |
|                                                                      |                   |   |   |
|                                                                      | Item                4. | Submission                of maters to a vote of security                holders | 20 |
|                                                                      |                   |   |   |
|                                                                      | Item                6. | Exhibits | 20 |
|                                                                      |                   |   |   |
|                                                                      |                   |   |   |
| **SIGNATURES**                                                            | 21                     |

**2**

----

*Index*

**PART      I.  FINANCIAL INFORMATION**

| **Item                1.** | **FINANCIAL                STATEMENTS** |
|----------------------------|-----------------------------------------|

**Tower      Financial Corporation**

**Consolidated      Balance Sheets**

|                                                                                                                                                                                                                                                |   | *(unaudited)*                       |        |                                    |   |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|-------------------------------------|-------------|-----------------------------------------|--------|
|                                                                                                                                                                                                                                                |   | **June                30,****2005** |        | **December                31,****2004** |   |
| **ASSETS**                                                                                                                                                                                                                                          |   |                                |        |                                    |   |
| Cash                and due from banks                                                                                                                                                                                                              |   | $                                   | 16,103,495  |                                    | $      | 11,911,033 |   |
| Short-term                investments and interest-earning deposits                                                                                                                                                                                 |   |                                | 7,288,779   |                                    |   | 8,109,456 |   |
| Federal                funds sold                                                                                                                                                                                                                   |   |                                | 8,070,223   |                                    |   | 17,204,536 |   |
| Total                cash and cash equivalents                                                                                                                                                                                                      |   |                                | 31,462,497  |                                    |   | 37,225,025 |   |
| Securities                available for sale, at fair value                                                                                                                                                                                         |   |                                | 31,130,188  |                                    |   | 35,024,966 |   |
| FHLB                and FRB stock                                                                                                                                                                                                                   |   |                                | 3,421,300   |                                    |   | 3,232,500 |   |
| Loans                                                                                                                                                                                                                                               |   |                                | 429,330,502 |                                    |   | 400,510,491 |   |
| Allowance                for loan losses                                                                                                                                                                                                            |   |                                | (5,927,453  | )                                       |   | (5,607,992 | ) |
| Net                loans                                                                                                                                                                                                                            |   |                                | 423,403,049 |                                    |   | 394,902,499 |   |
| Premises                and equipment, net                                                                                                                                                                                                          |   |                                | 2,805,166   |                                    |   | 2,984,596 |   |
| Accrued                interest receivable                                                                                                                                                                                                          |   |                                | 2,258,330   |                                    |   | 1,969,610 |   |
| Bank                owned life insurance (BOLI)                                                                                                                                                                                                     |   |                                | 10,262,237  |                                    |   | 3,205,785 |   |
| Other                assets                                                                                                                                                                                                                         |   |                                | 2,775,905   |                                    |   | 2,572,020 |   |
|                                                                                                                                                                                                                                                |   |                                |        |                                    |   |   |   |
| Total                assets                                                                                                                                                                                                                         |   | $                                   | 507,518,672 |                                    | $      | 481,117,001 |   |
|                                                                                                                                                                                                                                                |   |                                |        |                                    |   |   |   |
| **LIABILITIES                AND STOCKHOLDERS' EQUITY**                                                                                                                                                                                             |   |                                |        |                                    |   |   |   |
| LIABILITIES                                                                                                                                                                                                                                         |   |                                |        |                                    |   |   |   |
| Deposits:                                                                                                                                                                                                                                           |   |                                |        |                                    |   |   |   |
| Noninterest-bearing                                                                                                                                                                                                                                 |   | $                                   | 64,514,586  |                                    | $      | 57,800,311 |   |
| Interest-bearing                                                                                                                                                                                                                                    |   |                                | 365,163,112 |                                    |   | 328,579,595 |   |
| Total                deposits                                                                                                                                                                                                                       |   |                                | 429,677,698 |                                    |   | 386,379,906 |   |
| Short-term                borrowings                                                                                                                                                                                                                |   |                                | -           |                                    |   | 200,000 |   |
| Federal                Home Loan Bank (FHLB) advances                                                                                                                                                                                               |   |                                | 26,200,000  |                                    |   | 45,000,000 |   |
| Junior                subordinated debt                                                                                                                                                                                                             |   |                                | 3,608,000   |                                    |   | 3,608,000 |   |
| Accrued                interest payable                                                                                                                                                                                                             |   |                                | 665,315     |                                    |   | 559,213 |   |
| Other                liabilities                                                                                                                                                                                                                    |   |                                | 1,655,753   |                                    |   | 1,356,412 |   |
|                                                                                                                                                                                                                                                |   |                                |        |                                    |   |   |   |
| Total                liabilities                                                                                                                                                                                                                    |   |                                | 461,806,766 |                                    |   | 437,103,531 |   |
|                                                                                                                                                                                                                                                |   |                                |        |                                    |   |   |   |
| STOCKHOLDERS'                EQUITY                                                                                                                                                                                                                 |   |                                |        |                                    |   |   |   |
| Preferred                stock, no par value, 4,000,000 shares authorized; no shares issued                and                outstanding                                                                                                           |   |                                |        |                                    |   |   |   |
| Common                stock and paid-in-capital, no par value, 6,000,000 shares authorized;                4,007,686 shares issued and outstanding at June 30, 2005 and 4,003,156                shares issued and outstanding at December 31, 2004 |   |                                | 38,003,894  |                                    |   | 37,952,860 |   |
| Retained                earnings                                                                                                                                                                                                                    |   |                                | 7,608,579   |                                    |   | 6,040,155 |   |
| Accumulated                other comprehensive income, net of tax of $55,931 at June 30, 2005                and                $13,637 at                                                                                                          |   |                                |        |                                    |   |   |   |
| December                31, 2004                                                                                                                                                                                                                    |   |                                | 99,433      |                                    |   | 20,455 |   |
| Total                stockholders' equity                                                                                                                                                                                                           |   |                                | 45,711,906  |                                    |   | 44,013,470 |   |
|                                                                                                                                                                                                                                                |   |                                |        |                                    |   |   |   |
| Total                liabilities and stockholders' equity                                                                                                                                                                                           |   | $                                   | 507,518,672 |                                    | $      | 481,117,001 |   |

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

**3**

----

*Index*

**Tower      Financial Corporation**

**Consolidated      Statements of Operations**

|                                                                                                 |   | *(unaudited)*                         |      | *(unaudited)*                       |   |
|------------------------------------------------------------------------------------------------------|--------|---------------------------------------|-----------|-------------------------------------|--------|
|                                                                                                 |   | **Three                Months ended** |      | **Six                Months ended** |   |
|                                                                                                 |   | **June                30, 2005**      |      | **June                30, 2005**    |   |
|                                                                                                 |   | **2005**                              |      | **2004**                            |   | **2005** |   | **2004** |   |
| **Interest                income:**                                                                  |   |                                  |      |                                |   |   |   |   |   |
| Loans,                including fees                                                                 |   | $                                     | 6,372,476 |                                | $      | 4,494,231 |   | $ | 12,133,057 |   | $ | 8,937,882 |   |
| Securities                - taxable                                                                  |   |                                  | 231,258   |                                |   | 243,623 |   |   | 478,548 |   |   | 429,984 |   |
| Securities                - tax exempt                                                               |   |                                  | 134,632   |                                |   | 124,807 |   |   | 269,361 |   |   | 214,089 |   |
| Other                interest income                                                                 |   |                                  | 122,003   |                                |   | 41,979 |   |   | 203,787 |   |   | 71,907 |   |
| Total                interest income                                                                 |   |                                  | 6,860,369 |                                |   | 4,904,640 |   |   | 13,084,753 |   |   | 9,653,862 |   |
| **Interest                expense:**                                                                 |   |                                  |      |                                |   |   |   |   |   |   |   |   |   |
| Deposits                                                                                             |   |                                  | 2,293,840 |                                |   | 1,356,259 |   |   | 4,157,443 |   |   | 2,587,479 |   |
| Short-term                borrowings                                                                 |   |                                  | -         |                                |   | 495 |   |   | 289 |   |   | 4,131 |   |
| FHLB                advances                                                                         |   |                                  | 181,405   |                                |   | 176,830 |   |   | 428,105 |   |   | 340,561 |   |
| Junior                subordinated debt                                                              |   |                                  | 81,180    |                                |   | 81,180 |   |   | 162,360 |   |   | 162,360 |   |
| Total                interest expense                                                                |   |                                  | 2,556,425 |                                |   | 1,614,764 |   |   | 4,748,197 |   |   | 3,094,531 |   |
| Net                interest income                                                                   |   |                                  | 4,303,944 |                                |   | 3,289,876 |   |   | 8,336,556 |   |   | 6,559,331 |   |
| **Provision                for loan losses**                                                         |   |                                  | 536,000   |                                |   | 310,000 |   |   | 1,117,000 |   |   | 810,000 |   |
| Net                interest income after provision for loan losses                                   |   |                                  | 3,767,944 |                                |   | 2,979,876 |   |   | 7,219,556 |   |   | 5,749,331 |   |
| **Noninterest                income:**                                                               |   |                                  |      |                                |   |   |   |   |   |   |   |   |   |
| Trust                fees                                                                            |   |                                  | 538,442   |                                |   | 411,501 |   |   | 1,038,583 |   |   | 818,333 |   |
| Service                charges                                                                       |   |                                  | 169,285   |                                |   | 147,520 |   |   | 317,437 |   |   | 305,879 |   |
| Loan                broker fees                                                                      |   |                                  | 48,602    |                                |   | 82,651 |   |   | 110,795 |   |   | 170,415 |   |
| Net                gain on sale of securities                                                        |   |                                  | -         |                                |   | 376 |   |   | - |   |   | 3,286 |   |
| Other                fees                                                                            |   |                                  | 244,513   |                                |   | 173,940 |   |   | 440,950 |   |   | 306,509 |   |
| Total                noninterest income                                                              |   |                                  | 1,000,842 |                                |   | 815,988 |   |   | 1,907,765 |   |   | 1,604,422 |   |
| **Noninterest                expense:**                                                              |   |                                  |      |                                |   |   |   |   |   |   |   |   |   |
| Salaries                and benefits                                                                 |   |                                  | 2,063,704 |                                |   | 1,701,328 |   |   | 3,988,543 |   |   | 3,233,025 |   |
| Occupancy                and equipment                                                               |   |                                  | 461,541   |                                |   | 412,129 |   |   | 897,257 |   |   | 748,794 |   |
| Marketing                                                                                            |   |                                  | 153,211   |                                |   | 111,891 |   |   | 309,743 |   |   | 300,541 |   |
| Data                processing                                                                       |   |                                  | 101,602   |                                |   | 102,262 |   |   | 223,920 |   |   | 190,780 |   |
| Loan                and professional costs                                                           |   |                                  | 217,743   |                                |   | 327,355 |   |   | 394,149 |   |   | 568,102 |   |
| Office                supplies and postage                                                           |   |                                  | 70,843    |                                |   | 67,086 |   |   | 141,043 |   |   | 159,336 |   |
| Courier                services                                                                      |   |                                  | 83,464    |                                |   | 78,670 |   |   | 162,696 |   |   | 149,847 |   |
| Business                development                                                                  |   |                                  | 101,060   |                                |   | 78,955 |   |   | 196,741 |   |   | 154,085 |   |
| Other                expense                                                                         |   |                                  | 206,885   |                                |   | 235,532 |   |   | 391,755 |   |   | 417,489 |   |
| Total                noninterest expense                                                             |   |                                  | 3,460,053 |                                |   | 3,115,208 |   |   | 6,705,847 |   |   | 5,921,999 |   |
| **Income                before income taxes**                                                        |   |                                  | 1,308,733 |                                |   | 680,656 |   |   | 2,421,474 |   |   | 1,431,754 |   |
| Income                taxes expense                                                                  |   |                                  | 467,160   |                                |   | 226,230 |   |   | 853,050 |   |   | 496,880 |   |
|                                                                                                 |   |                                  |      |                                |   |   |   |   |   |   |   |   |   |
| **Net                income**                                                                        |   | $                                     | 841,573   |                                | $      | 454,426 |   | $ | 1,568,424 |   | $ | 934,874 |   |
| **Basic                earnings per common share**                                                   |   | $                                     | 0.21      |                                | $      | 0.12 |   | $ | 0.39 |   | $ | 0.24 |   |
| **Diluted                earnings per common share**                                                 |   | $                                     | 0.21      |                                | $      | 0.11 |   | $ | 0.39 |   | $ | 0.23 |   |
| Average                common shares outstanding                                                     |   |                                  | 4,005,824 |                                |   | 3,944,394 |   |   | 4,004,497 |   |   | 3,943,953 |   |
| Average                common shares and dilutive potential common shares                outstanding |   |                                  | 4,070,626 |                                |   | 4,017,018 |   |   | 4,069,757 |   |   | 4,031,425 |   |

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

**4**

----

*Index*

**Tower      Financial Corporation**

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

*(unaudited)*

|                                                                                             |   | **Common****Stock                and****Paid-in****Capital** |       | **Retained****Earnings** |   | **Accumulated****Other****Comprehensive****Income                (Loss)** |   | **Total** |     |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|--------------------------------------------------------------|------------|--------------------------|--------|---------------------------------------------------------------------------|--------|-----------|----------|
|                                                                                                                                                         |   |                                                         |       |                     |   |                                                                      |   |      |     |
| **Balance,                January 1, 2004**                                                                                                                  |   | $                                                            | 37,322,694 |                     | $      | 3,560,844                                                                 |   | $         | 25,111   |   | $ | 40,908,649 |   |
|                                                                                                                                                         |   |                                                         |       |                     |   |                                                                      |   |      |     |   |   |   |   |
| Net                income for 2004                                                                                                                           |   |                                                         |       |                     |   | 934,874                                                                   |   |      |     |   |   | 934,874 |   |
|                                                                                                                                                         |   |                                                         |       |                     |   |                                                                      |   |      |     |   |   |   |   |
| Change                in net unrealized appreciation (depreciation) on securities available                for                sale, net of tax of $(401,806) |   |                                                         |       |                     |   |                                                                      |   |      | (602,709 | ) |   | (602,709 | ) |
|                                                                                                                                                         |   |                                                         |       |                     |   |                                                                      |   |      |     |   |   |   |   |
| Total                Comprehensive Income                                                                                                                    |   |                                                         |       |                     |   |                                                                      |   |      |     |   |   | 332,165 |   |
|                                                                                                                                                         |   |                                                         |       |                     |   |                                                                      |   |      |     |   |   |   |   |
| Issuance                of 1,875 shares of common stock for stock options exercised including                tax                benefit                      |   |                                                         | 25,167     |                     |   |                                                                      |   |      |     |   |   | 25,167 |   |
|                                                                                                                                                         |   |                                                         |       |                     |   |                                                                      |   |      |     |   |   |   |   |
| **Balance,                June 30, 2004**                                                                                                                    |   | $                                                            | 37,347,861 |                     | $      | 4,495,718                                                                 |   | $         | (577,598 | ) | $ | 41,265,981 |   |
|                                                                                                                                                         |   |                                                         |       |                     |   |                                                                      |   |      |     |   |   |   |   |
|                                                                                                                                                         |   |                                                         |       |                     |   |                                                                      |   |      |     |   |   |   |   |
|                                                                                                                                                         |   |                                                         |       |                     |   |                                                                      |   |      |     |   |   |   |   |
| **Balance,                January 1, 2005**                                                                                                                  |   | $                                                            | 37,952,860 |                     | $      | 6,040,155                                                                 |   | $         | 20,455   |   | $ | 44,013,470 |   |
|                                                                                                                                                         |   |                                                         |       |                     |   |                                                                      |   |      |     |   |   |   |   |
| Net                income for 2005                                                                                                                           |   |                                                         |       |                     |   | 1,568,424                                                                 |   |      |     |   |   | 1,568,424 |   |
|                                                                                                                                                         |   |                                                         |       |                     |   |                                                                      |   |      |     |   |   |   |   |
| Change                in net unrealized appreciation (depreciation) on securities available                for                sale, net of tax of $42,294    |   |                                                         |       |                     |   |                                                                      |   |      | 78,978   |   |   | 78,978 |   |
|                                                                                                                                                         |   |                                                         |       |                     |   |                                                                      |   |      |     |   |   |   |   |
| Total                Comprehensive Income                                                                                                                    |   |                                                         |       |                     |   |                                                                      |   |      |     |   |   | 1,647,402 |   |
|                                                                                                                                                         |   |                                                         |       |                     |   |                                                                      |   |      |     |   |   |   |   |
| Issuance                of 4,530 shares of common stock for stock options exercised including                tax                benefit                      |   |                                                         | 51,034     |                     |   |                                                                      |   |      |     |   |   | 51,034 |   |
|                                                                                                                                                         |   |                                                         |       |                     |   |                                                                      |   |      |     |   |   |   |   |
| **Balance,                June 30, 2005**                                                                                                                    |   | $                                                            | 38,003,894 |                     | $      | 7,608,579                                                                 |   | $         | 99,433   |   | $ | 45,711,906 |   |

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

**5**

----

*Index*

**Tower      Financial Corporation**

**Consolidated      Statements of Cash Flows**

|                                                                                                                                |   | *(unaudited)*                                                       |        | *(unaudited)*                                                       |   |
|-------------------------------------------------------------------------------------------------------------------------------------|--------|---------------------------------------------------------------------|-------------|---------------------------------------------------------------------|--------|
|                                                                                                                                |   | **Six                Months ended****June                30, 2005** |        | **Six                Months ended****June                30, 2004** |   |
| **Cash                flows from operating activities:**                                                                            |   |                                                                |        |                                                                |   |
| Net                income                                                                                                           |   | $                                                                   | 1,568,424   |                                                                | $      | 934,874 |   |
| Adjustments                to reconcile net income to net cash from operating                activities:                            |   |                                                                |        |                                                                |   |   |   |
| Depreciation                and amortization                                                                                        |   |                                                                | 334,046     |                                                                |   | 342,100 |   |
| Provision                for loan losses                                                                                            |   |                                                                | 1,117,000   |                                                                |   | 810,000 |   |
| Earnings                on life insurance                                                                                           |   |                                                                | (56,452     | )                                                                   |   | (31,318 | ) |
| Net                gain on sale of securities                                                                                       |   |                                                                | -           |                                                                |   | (3,286 | ) |
| FHLB                stock dividend                                                                                                  |   |                                                                | (38,800     | )                                                                   |   | (29,200 | ) |
| Change                in accrued interest receivable                                                                                |   |                                                                | (288,720    | )                                                                   |   | (315,473 | ) |
| Change                in other assets                                                                                               |   |                                                                | (246,179    | )                                                                   |   | 977,765 |   |
| Change                in accrued interest payable                                                                                   |   |                                                                | 106,102     |                                                                |   | 167,770 |   |
| Change                in other liabilities                                                                                          |   |                                                                | 299,339     |                                                                |   | 146,659 |   |
| Net                cash from operating activities                                                                                   |   |                                                                | 2,794,760   |                                                                |   | 2,999,891 |   |
| **Cash                flows from investing activities:**                                                                            |   |                                                                |        |                                                                |   |   |   |
| Net                change in loans                                                                                                  |   |                                                                | (32,604,363 | )                                                                   |   | (11,595,283 | ) |
| Purchase                of securities available for sale                                                                            |   |                                                                | -           |                                                                |   | (20,361,188 | ) |
| Proceeds                from maturities of securities available for sale                                                            |   |                                                                | 4,006,638   |                                                                |   | 2,966,212 |   |
| Proceeds                from sale of securities available for sale                                                                  |   |                                                                | -           |                                                                |   | 501,769 |   |
| Purchase                of FHLB and FRB stock                                                                                       |   |                                                                | (150,000    | )                                                                   |   | - |   |
| Purchase                of life insurance                                                                                           |   |                                                                | (7,000,000  | )                                                                   |   | - |   |
| Proceeds                from sale of participation loans                                                                            |   |                                                                | 2,986,813   |                                                                |   | 5,855,669 |   |
| Purchase                of equipment and leasehold expenditures                                                                     |   |                                                                | (145,202    | )                                                                   |   | (557,853 | ) |
| Net                cash from investing activities                                                                                   |   |                                                                | (32,906,114 | )                                                                   |   | (23,190,674 | ) |
| **Cash                flows from financing activities:**                                                                            |   |                                                                |        |                                                                |   |   |   |
| Net                change in deposits                                                                                               |   |                                                                | 43,297,792  |                                                                |   | 37,334,992 |   |
| Net                change in short-term borrowings                                                                                  |   |                                                                | (200,000    | )                                                                   |   | (860,000 | ) |
| Proceeds                from issuance of common stock from exercise of stock options and                tax                benefits |   |                                                                | 51,034      |                                                                |   | 25,167 |   |
| Proceeds                from FHLB advances                                                                                          |   |                                                                | 10,900,000  |                                                                |   | 13,000,000 |   |
| Repayment                of FHLB advances                                                                                           |   |                                                                | (29,700,000 | )                                                                   |   | (13,000,000 | ) |
| Net                cash from financing activities                                                                                   |   |                                                                | 24,348,826  |                                                                |   | 36,500,159 |   |
| **Net                change in cash and cash equivalents**                                                                          |   |                                                                | (5,762,528  | )                                                                   |   | 16,309,376 |   |
| Cash                and cash equivalents, beginning of period                                                                       |   |                                                                | 37,225,025  |                                                                |   | 27,842,215 |   |
| **Cash                and cash equivalents, end of period**                                                                         |   | $                                                                   | 31,462,497  |                                                                | $      | 44,151,591 |   |
|                                                                                                                                |   |                                                                |        |                                                                |   |   |   |
| Supplemental                disclosures of cash flow information                                                                    |   |                                                                |        |                                                                |   |   |   |
| Cash                paid during the year for:                                                                                       |   |                                                                |        |                                                                |   |   |   |
| Interest                                                                                                                            |   | $                                                                   | 4,642,095   |                                                                | $      | 2,926,761 |   |
| Income                taxes net of refund                                                                                           |   |                                                                | 920,349     |                                                                |   | (603,665 | ) |

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

**6**

----

*Index*

**Tower      Financial Corporation**

**Notes      to Consolidated Financial Statements**

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

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

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

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

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

|                                                                                                            |   | **Three                Months Ended** |                           | **Six                Months Ended** |   |
|-----------------------------------------------------------------------------------------------------------------|--------|---------------------------------------|--------------------------------|-------------------------------------|--------|
|                                                                                                            |   | **June                30**            |                           | **June                30**          |   |
|                                                                         |   | **2005**                              |                           | **2004**                            |   | **2005** |   | **2004** |   |
|                                                                                                            |   |                                  |                           |                                |   |   |   |   |   |
| Net                income as reported                                                                           |   | $                                     | 841,573                        |                                | $      | 454,436 |   | $ | 1,568,424 |   | $ | 934,874 |   |
| Deduct:                Stock-based compensation expense determined under fair value-based                method |   |                                  | (38,632                        | )                                   |   | (28,422 | ) |   | (74,432 | ) |   | (56,199 | ) |
|                                                                                                            |   |                                  |       |                                |   |      |   |   |     |   |   |     |   |
| Pro                forma net income                                                                             |   | $                                     | 802,941                        |                                | $      | 426,014 |   | $ | 1,493,992 |   | $ | 878,675 |   |
|                                                                                                            |   |                                  |                           |                                |   |   |   |   |   |   |   |   |   |
| Basic                earnings per share as reported                                                             |   | $                                     | 0.21                           |                                | $      | 0.12 |   | $ | 0.39 |   | $ | 0.24 |   |
| Pro                forma basic earnings per share                                                               |   |                                  | 0.20                           |                                |   | 0.11 |   |   | 0.37 |   |   | 0.22 |   |
| Diluted                earnings per share as reported                                                           |   |                                  | 0.21                           |                                |   | 0.11 |   |   | 0.39 |   |   | 0.23 |   |
| Pro                forma diluted earnings per share                                                             |   |                                  | 0.20                           |                                |   | 0.11 |   |   | 0.37 |   |   | 0.22 |   |

**7**

----

*Index*

|                                           |   | **Three                Months Ended** |                      | **Six                Months Ended** |   |
|------------------------------------------------|--------|---------------------------------------|---------------------------|-------------------------------------|--------|
|                                           |   | **June                30**            |                      | **June                30**          |   |
|                  |   | **2005**                              |                      | **2004**                            |   | **2005** |   | **2004** |   |
|                                           |   |                                  |                      |                                |   |   |   |   |   |
| Risk-free                interest rate         |   |                                  | 4.15                      | %                                   |   | 4.47 | % |   | 4.10 | % |   | 4.47 | % |
| Expected                option life            |   |                                  | 7.01                years |                                |   | 8.0                years |   |   | 7.0                years |   |   | 8.0                years |   |
| Expected                stock price volatility |   |                                  | 26.29                     | %                                   |   | 36.88 | % |   | 26.39 | % |   | 36.88 | % |
| Dividend                yield                  |   |                                  | None                      |                                |   | None |   |   | None |   |   | None |   |

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

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

**Note      2 - Earnings Per Share**

|                                                                                                          |         | **Three                Months Ended** |      | **Six                Months Ended** |   |
|---------------------------------------------------------------------------------------------------------------|--------------|---------------------------------------|-----------|-------------------------------------|--------|
|                                                                                                          |         | **June                30**            |      | **June                30**          |   |
|                                                                       |    | **2005**                              |      | **2004**                            |   | **2005** |   | **2004** |   |
| **Basic**                                                                                                     |         |                                  |      |                                |   |   |   |   |   |
| Net                income                                                                                     |         | $                                     | 841,573   |                                | $      | 454,436 |   | $ | 1,568,424 |   | $ | 934,874 |   |
| Weighted                average common shares outstanding                                                     |         |                                  | 4,005,824 |                                |   | 3,944,394 |   |   | 4,004,497 |   |   | 3,943,953 |   |
| Basic                earnings per common share                                                                |         | $                                     | 0.21      |                                | $      | 0.12 |   | $ | 0.39 |   | $ | 0.24 |   |
|                                                                                                          |         |                                  |      |                                |   |   |   |   |   |   |   |   |   |
| **Diluted**                                                                                                   |         |                                  |      |                                |   |   |   |   |   |   |   |   |   |
| Net                income                                                                                     |         | $                                     | 841,573   |                                | $      | 454,436 |   | $ | 1,568,424 |   | $ | 934,874 |   |
| Weighted                average common shares outstanding                                                     |         |                                  | 4,005,824 |                                |   | 3,944,394 |   |   | 4,004,497 |   |   | 3,943,953 |   |
| Add:                dilutive effect of assumed stock option exercises                                         |         |                                  | 64,802    |                                |   | 72,624 |   |   | 65,260 |   |   | 87,472 |   |
| Weighted                average common shares and dilutive potential common shares                outstanding |         |                                  | 4,070,626 |                                |   | 4,017,018 |   |   | 4,069,757 |   |   | 4,031,425 |   |
| Diluted                earnings per common share                                                              |         | $                                     | 0.21      |                                | $      | 0.11 |   | $ | 0.39 |   | $ | 0.23 |   |

**Note      3 - Stock Option Plans**

**8**

----

*Index*

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

**Forward-Looking      Statements**

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

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

|   | Ÿ | the                Company's dependence on key management                personnel; |
|--------|--------|-------------------------------------------------------------------------------------|

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

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

|   | Ÿ | the                Bank's dependence on net interest spread for                profitability; |
|--------|--------|-----------------------------------------------------------------------------------------------|

|   | Ÿ | the                Bank's ability to implement developments in technology to be                competitive; |
|--------|--------|-------------------------------------------------------------------------------------------------------------|

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

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

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

**Critical      Accounting Policies**

**Financial      Condition**

**9**

----

*Index*

*Cash      and Investments*

*Loans*

|                                     |   | **June                30, 2005** |        | **December                31, 2004** |       |
|------------------------------------------|--------|----------------------------------|-------------|--------------------------------------|------------|
|                 |   | **Balance**                      | ** **  | **%**                                | ** ** | **Balance** | ** ** | ** %** |   |
|                                     |   |                             |        |                                 |       |   |   |   |   |
| Commercial                               |   | $                                | 198,303,940 |                                 |       | 46.2 | % | $ | 189,716,723 |   |   | 47.4 | % |
| Commercial                real estate    |   |                             | 137,507,089 |                                 |       | 32.0 | % |   | 124,721,982 |   |   | 31.2 | % |
| Residential                real estate   |   |                             | 48,018,740  |                                 |       | 11.2 | % |   | 45,080,544 |   |   | 11.3 | % |
| Home                equity               |   |                             | 30,494,742  |                                 |       | 7.1 | % |   | 28,430,284 |   |   | 7.1 | % |
| Consumer                                 |   |                             | 14,769,022  |                                 |       | 3.5 | % |   | 12,239,365 |   |   | 3.0 | % |
| Total                loans               |   |                             | 429,093,533 |                                 |       | 100.0 | % |   | 400,188,898 |   |   | 100.0 | % |
| Net                deferred loan costs   |   |                             | 236,969     |                                 |       |   |   |   | 321,593 |   |   |   |   |
| Allowance                for loan losses |   |                             | (5,927,453  | )                                    |       |   |   |   | (5,607,992 | ) |   |   |   |
|                                     |   |                             |        |                                 |       |   |   |   |   |   |   |   |   |
| Net                loans                 |   | $                                | 423,403,049 |                                 |       |   |   | $ | 394,902,499 |   |   |   |   |

*Nonperforming      Assets.*

|                                                          |    | **June                30, 2005** |      | **December                31, 2004** |   |
|---------------------------------------------------------------|--------------|----------------------------------|-----------|--------------------------------------|--------|
|                                                          |         |                             |      |                                 |   |
| Loans                past due over 90 days and still accruing |         | $                                | 764,777   |                                 | $      | 676,866 |   |
| Nonaccrual                loans                               |         |                             | 1,921,866 |                                 |   | 1,580,003 |   |
| Total                nonperforming loans                      |         | $                                | 2,686,643 |                                 | $      | 2,256,869 |   |
| Other                real estate owned                        |         |                             | 400,000   |                                 |   | 430,000 |   |
| Total                nonperforming assets                     |         | $                                | 3,086,643 |                                 | $      | 2,686,869 |   |
|                                                          |         |                             |      |                                 |   |   |   |
| Nonperforming                assets to total assets           |         |                             | 0.61      | %                                    |   | 0.56 | % |
|                                                          |         |                             |      |                                 |   |   |   |
| Nonperforming                loans to total loans             |         |                             | 0.63      | %                                    |   | 0.56 | % |

*Allowance      for Loan Losses. *

**10**

----

*Index*

|                                            |   | June                30, 2005 |      | December                31, 2004 |   |
|-------------------------------------------------|--------|------------------------------|-----------|----------------------------------|--------|
|                                            |   |                         |      |                             |   |
| Specific                allocations             |   | $                            | 4,251,453 |                             | $      | 3,900,992 |   |
| Loan                pool percentage allocations |   |                         | 1,545,000 |                             |   | 1,600,000 |   |
| Unallocated                                     |   |                         | 131,000   |                             |   | 107,000 |   |
|                                            |   |                         |      |                             |   |   |   |
| Total                allowance for loan losses  |   | $                            | 5,927,453 |                             | $      | 5,607,992 |   |

|                                                         |   | **2005** |      | **2004** |   |
|--------------------------------------------------------------|--------|----------|-----------|----------|--------|
|                                                         |   |     |      |     |   |
| Beginning                balance, January 1                  |   | $        | 5,607,992 |     | $      | 5,259,273 |   |
| Provision                charged to operating expense        |   |     | 1,117,000 |     |   | 810,000 |   |
| Charge-offs                                                  |   |     | (889,685  | )        |   | (904,782 | ) |
| Recoveries                                                   |   |     | 92,146    |     |   | 16,305 |   |
|                                                         |   |     |      |     |   |   |   |
| Ending                balance, June 30                       |   | $        | 5,927,453 |     | $      | 5,180,796 |   |
|                                                         |   |     |      |     |   |   |   |
| Net                charge-offs to average loans (annualized) |   |     | 0.39      | %        |   | 0.35 | % |

*Other      Assets*

*Deposits*

**11**

----

*Index*

|                                      |   | **June                30, 2005** |        | **December                31, 2004** |       |
|-------------------------------------------|--------|----------------------------------|-------------|--------------------------------------|------------|
|                                      |   | **Balance**                      | ** **  | **%**                                | ** ** | **Balance** | ** ** | **%** |   |
|                                      |   |                             |        |                                 |       |   |   |   |   |
| Noninterest-bearing                demand |   | $                                | 64,514,586  |                                 |       | 15.0% |   | $ | 57,800,311 |   |   | 15.0% |   |
| Interest-bearing                checking  |   |                             | 30,271,157  |                                 |       | 7.0% |   |   | 27,786,693 |   |   | 7.2% |   |
| Money                market               |   |                             | 71,731,997  |                                 |       | 16.7% |   |   | 74,017,465 |   |   | 19.2% |   |
| Savings                                   |   |                             | 12,809,673  |                                 |       | 3.0% |   |   | 12,935,798 |   |   | 3.3% |   |
| Time,                under $100,000       |   |                             | 63,864,623  |                                 |       | 14.9% |   |   | 69,220,287 |   |   | 17.9% |   |
| Time,                $100,000 and over    |   |                             | 186,485,662 |                                 |       | 43.4% |   |   | 144,619,352 |   |   | 37.4% |   |
|                                      |   |                             |        |                                 |       |   |   |   |   |   |   |   |   |
| Total                deposits             |   | $                                | 429,677,698 |                                 |       | 100.0% |   | $ | 386,379,906 |   |   | 100.0% |   |

*Borrowings*

*Other      Liabilities. *

**Results      of Operations**

| **Performance                Ratios**     |   | **June                30** |   |
|-------------------------------------------|--------|----------------------------|--------|
|                                      |   | **2005**                   |   | **2004** |   |
|                                      |   |                       |   |   |   |
| Return                on average assets * |   |                       | 0.69   | % |   | 0.40 | % |
| Return                on average equity * |   |                       | 7.48   | % |   | 4.38 | % |
| Net                interest margin (TEY)* |   |                       | 3.75   | % |   | 3.06 | % |
| Efficiency                ratio           |   |                       | 65.22  | % |   | 75.87 | % |
|                                      |   |                       |   |   |   |   |   |
| *                annualized               |   |                       |   |   |   |   |   |

*Net      Interest Income*

**12**

----

*Index*

|                                                                                         |   | **At                and For The Three Month Period Ended** |    |
|----------------------------------------------------------------------------------------------|--------|------------------------------------------------------------|---------|
|                                                                                         |   | **June                30, 2005**                           |    | **June                30, 2004** |   |
| ($                in thousands)                                                              |   | **Average****Balance**                                     |    | **Interest****Earned****or                Paid** |   | **Annualized****Yield****or                Cost** |   | **Average****Balance** |   | **Interest****Earned****or                Paid** |   | **Annualized****Yield****or                Cost** |   |
| **Assets**                                                                                   |   |                                                       |    |   |   |   |   |   |   |   |   |   |   |
| Short-term                investments and interest-earning deposits                          |   | $                                                          | 8,763   |   | $ | 80 |   |   | 3.66 | % | $ | 6,920 |   | $ | 16 |   |   | 9.30 | % |
| Federal                funds sold                                                            |   |                                                       | 5,862   |   |   | 42 |   |   | 2.87 | % |   | 12,015 |   |   | 26 |   |   | 8.70 | % |
| Securities                - taxable                                                          |   |                                                       | 22,690  |   |   | 231 |   |   | 4.08 | % |   | 24,386 |   |   | 244 |   |   | 4.01 | % |
| Securities                - tax exempt (1)                                                   |   |                                                       | 12,478  |   |   | 204 |   |   | 6.56 | % |   | 11,687 |   |   | 168 |   |   | 5.77 | % |
| Loans                held for sale                                                           |   |                                                       | -       |   |   | - |   |   | 0.00 | % |   | - |   |   | - |   |   | 0.00 | % |
| Loans                                                                                        |   |                                                       | 418,564 |   |   | 6,372 |   |   | 6.11 | % |   | 381,613 |   |   | 4,494 |   |   | 4.72 | % |
| Total                interest-earning assets                                                 |   |                                                       | 468,357 |   |   | 6,929 |   |   | 5.93 | % |   | 436,621 |   |   | 4,948 |   |   | 4.55 | % |
| Allowance                for loan losses                                                     |   |                                                       | (5,790  | ) |   |   |   |   |   |   |   | (5,201 | ) |   |   |   |   |   |   |
| Cash                and due from banks                                                       |   |                                                       | 11,760  |   |   |   |   |   |   |   |   | 12,333 |   |   |   |   |   |   |   |
| Other                assets                                                                  |   |                                                       | 13,102  |   |   |   |   |   |   |   |   | 10,347 |   |   |   |   |   |   |   |
| Total                assets                                                                  |   | $                                                          | 487,429 |   |   |   |   |   |   |   | $ | 454,100 |   |   |   |   |   |   |   |
| **Liabilities                and Stockholders' Equity**                                      |   |                                                       |    |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Interest-bearing                checking                                                     |   | $                                                          | 28,083  |   | $ | 40 |   |   | 0.57 | % | $ | 22,770 |   | $ | 20 |   |   | 0.35 | % |
| Savings                                                                                      |   |                                                       | 13,779  |   |   | 13 |   |   | 0.38 | % |   | 10,891 |   |   | 7 |   |   | 0.26 | % |
| Money                market                                                                  |   |                                                       | 73,364  |   |   | 292 |   |   | 1.60 | % |   | 86,392 |   |   | 193 |   |   | 0.90 | % |
| Certificates                of deposit                                                       |   |                                                       | 230,971 |   |   | 1,949 |   |   | 3.38 | % |   | 210,102 |   |   | 1,136 |   |   | 2.17 | % |
| Short-term                borrowings                                                         |   |                                                       | -       |   |   | - |   |   | 0.00 | % |   | 200 |   |   | 1 |   |   | 2.01 | % |
| FHLB                advances                                                                 |   |                                                       | 26,638  |   |   | 181 |   |   | 2.73 | % |   | 27,000 |   |   | 177 |   |   | 2.63 | % |
| Junior                subordinated debt                                                      |   |                                                       | 3,608   |   |   | 81 |   |   | 9.00 | % |   | 3,608 |   |   | 81 |   |   | 9.00 | % |
| Total                interest-bearing liabilities                                            |   |                                                       | 376,443 |   |   | 2,556 |   |   | 2.72 | % |   | 360,963 |   |   | 1,615 |   |   | 1.79 | % |
| Noninterest-bearing                checking                                                  |   |                                                       | 63,822  |   |   |   |   |   |   |   |   | 50,422 |   |   |   |   |   |   |   |
| Other                liabilities                                                             |   |                                                       | 2,033   |   |   |   |   |   |   |   |   | 1,100 |   |   |   |   |   |   |   |
| Stockholders'                equity                                                          |   |                                                       | 45,131  |   |   |   |   |   |   |   |   | 41,615 |   |   |   |   |   |   |   |
| Total                liabilities and stockholders' equity                                    |   | $                                                          | 487,429 |   |   |   |   |   |   |   | $ | 454,100 |   |   |   |   |   |   |   |
| **Net                interest income**                                                       |   |                                                       |    |   | $ | 4,373 |   |   |   |   |   |   |   | $ | 3,333 |   |   |   |   |
| **Rate                spread**                                                               |   |                                                       |    |   |   |   |   |   | 3.21 | % |   |   |   |   |   |   |   | 2.76 | % |
| **Net                interest income as a percent of average earning                assets** |   |                                                       |    |   |   |   |   |   | 3.75 | % |   |   |   |   |   |   |   | 3.06 | % |

*Provision      for Loan Losses*

*Noninterest      Income*

**13**

----

*Index*

*Noninterest      Expense*

*Income      Taxes. *

| **Performance                Ratios**      |   | **June                30** |   |
|--------------------------------------------|--------|----------------------------|--------|
|                                       |   | **2005**                   |   | **2004** |   |
|                                       |   |                       |   |   |   |
| Return                on average assets *  |   |                       | 0.66   | % |   | 0.42 | % |
| Return                on average equity *  |   |                       | 7.05   | % |   | 4.51 | % |
| Net                interest margin (TEY) * |   |                       | 3.69   | % |   | 3.11 | % |
| Efficiency                ratio            |   |                       | 65.46  | % |   | 72.54 | % |
| *                annualized                |   |                       |   |   |   |   |   |

*Net      Interest Income*

**14**

----

*Index*

|                                                                                         |   | **At                and For The Six Month Periods Ended** |    |
|----------------------------------------------------------------------------------------------|--------|-----------------------------------------------------------|---------|
|                                                                                         |   | **June                30, 2005**                          |    | **June                30, 2004** |   |
| ($                in thousands)                                                              |   | **Average****Balance**                                    |    | **Interest****Earned****or                Paid** |   | **Annualized****Yield****or                Cost** |   | **Average****Balance** |   | **Interest****Earned****or                Paid** |   | **Annualized****Yield****or                Cost** |   |
| **Assets**                                                                                   |   |                                                      |    |   |   |   |   |   |   |   |   |   |   |
| Short-term                investments and interest-earning deposits                          |   | $                                                         | 8,062   |   | $ | 107 |   |   | 2.68 | % | $ | 5,071 |   | $ | 25 |   |   | 0.99 | % |
| Federal                funds sold                                                            |   |                                                      | 7,475   |   |   | 97 |   |   | 2.62 | % |   | 11,872 |   |   | 47 |   |   | 0.80 | % |
| Securities                - taxable                                                          |   |                                                      | 23,509  |   |   | 479 |   |   | 4.11 | % |   | 21,624 |   |   | 430 |   |   | 4.00 | % |
| Securities                - tax exempt (1)                                                   |   |                                                      | 12,514  |   |   | 408 |   |   | 6.57 | % |   | 10,229 |   |   | 287 |   |   | 5.64 | % |
| Loans                held for sale                                                           |   |                                                      | -       |   |   | - |   |   | 0.00 | % |   | - |   |   | - |   |   | 0.00 | % |
| Loans                                                                                        |   |                                                      | 411,679 |   |   | 12,133 |   |   | 5.94 | % |   | 379,775 |   |   | 8,938 |   |   | 4.73 | % |
| Total                interest-earning assets                                                 |   |                                                      | 463,239 |   |   | 13,224 |   |   | 5.76 | % |   | 428,571 |   |   | 9,727 |   |   | 4.56 | % |
| Allowance                for loan losses                                                     |   |                                                      | (5,741  | ) |   |   |   |   |   |   |   | (5,261 | ) |   |   |   |   |   |   |
| Cash                and due from banks                                                       |   |                                                      | 13,272  |   |   |   |   |   |   |   |   | 12,259 |   |   |   |   |   |   |   |
| Other                assets                                                                  |   |                                                      | 11,813  |   |   |   |   |   |   |   |   | 10,182 |   |   |   |   |   |   |   |
| Total                assets                                                                  |   | $                                                         | 482,583 |   |   |   |   |   |   |   | $ | 445,751 |   |   |   |   |   |   |   |
| **Liabilities                and Stockholders' Equity**                                      |   |                                                      |    |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Interest-bearing                checking                                                     |   | $                                                         | 27,808  |   | $ | 71 |   |   | 0.51 | % | $ | 22,073 |   | $ | 37 |   |   | 0.34 | % |
| Savings                                                                                      |   |                                                      | 13,310  |   |   | 24 |   |   | 0.36 | % |   | 10,882 |   |   | 15 |   |   | 0.28 | % |
| Money                market                                                                  |   |                                                      | 73,381  |   |   | 544 |   |   | 1.49 | % |   | 89,912 |   |   | 397 |   |   | 0.89 | % |
| Certificates                of deposit                                                       |   |                                                      | 224,613 |   |   | 3,518 |   |   | 3.16 | % |   | 197,048 |   |   | 2,139 |   |   | 2.18 | % |
| Short-term                borrowings                                                         |   |                                                      | 26      |   |   | - |   |   | 0.00 | % |   | 782 |   |   | 4 |   |   | 1.03 | % |
| FHLB                advances                                                                 |   |                                                      | 30,942  |   |   | 429 |   |   | 2.80 | % |   | 27,000 |   |   | 341 |   |   | 2.54 | % |
| Junior                subordinated debt                                                      |   |                                                      | 3,608   |   |   | 162 |   |   | 9.05 | % |   | 3,608 |   |   | 162 |   |   | 9.03 | % |
| Total                interest-bearing liabilities                                            |   |                                                      | 373,688 |   |   | 4,748 |   |   | 2.56 | % |   | 351,305 |   |   | 3,095 |   |   | 1.77 | % |
| Noninterest-bearing                checking                                                  |   |                                                      | 62,073  |   |   |   |   |   |   |   |   | 50,929 |   |   |   |   |   |   |   |
| Other                liabilities                                                             |   |                                                      | 1,961   |   |   |   |   |   |   |   |   | 2,015 |   |   |   |   |   |   |   |
| Stockholders'                equity                                                          |   |                                                      | 44,862  |   |   |   |   |   |   |   |   | 41,502 |   |   |   |   |   |   |   |
| Total                liabilities and stockholders' equity                                    |   | $                                                         | 482,584 |   |   |   |   |   |   |   | $ | 445,751 |   |   |   |   |   |   |   |
| **Net                interest income**                                                       |   |                                                      |    |   | $ | 8,476 |   |   |   |   |   |   |   | $ | 6,632 |   |   |   |   |
| **Rate                spread**                                                               |   |                                                      |    |   |   |   |   |   | 3.20 | % |   |   |   |   |   |   |   | 2.79 | % |
| **Net                interest income as a percent of average earning                assets** |   |                                                      |    |   |   |   |   |   | 3.69 | % |   |   |   |   |   |   |   | 3.11 | % |

*Provision      for Loan Losses*

*Noninterest      Income*

*Noninterest      Expense*

**15**

----

*Index*

*Income      Taxes. *

**Liquidity      and Capital Resources**

*Liquidity*

*Capital      Resources. *

|                             |   | **June                30, 2005** |   | **June                30, 2004** |   |
|----------------------------------|--------|----------------------------------|--------|----------------------------------|--------|
|                             |   | Actual                           |   | Well-Capitalized                 |   | MinimumRequired |   | Actual |   | Well-Capitalized |   | MinimumRequired |   |
|                             |   |                             |   |                             |   |   |   |   |   |   |   |   |   |
| **The                Company**   |   |                             |   |                             |   |   |   |   |   |   |   |   |   |
| Leverage                capital  |   |                             | 10.12  | %                                |   | 5.00 | % |   | 4.00 | % |   | 9.99 | % |   | 5.00 | % |   | 4.00 | % |
| Tier                1 risk-based |   |                             | 10.74  | %                                |   | 6.00 | % |   | 4.00 | % |   | 11.18 | % |   | 6.00 | % |   | 4.00 | % |
| Total                risk-based  |   |                             | 11.96  | %                                |   | 10.00 | % |   | 8.00 | % |   | 12.39 | % |   | 10.00 | % |   | 8.00 | % |
|                             |   |                             |   |                             |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| **The                Bank**      |   |                             |   |                             |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Leverage                capital  |   |                             | 9.73   | %                                |   | 5.00 | % |   | 4.00 | % |   | 8.53 | % |   | 5.00 | % |   | 4.00 | % |
| Tier                1 risk-based |   |                             | 10.34  | %                                |   | 6.00 | % |   | 4.00 | % |   | 9.54 | % |   | 6.00 | % |   | 4.00 | % |
| Total                risk-based  |   |                             | 11.59  | %                                |   | 10.00 | % |   | 8.00 | % |   | 10.79 | % |   | 10.00 | % |   | 8.00 | % |

**16**

----

*Index*

**Commitments      and Off-Balance Sheet Risk**

* *

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

**17**

----

*Index*

| **Rate                Sensitivity Analysis**                                                           |   |                          |         |                                            |   |                                       |   |                       |         |      |   |
|--------------------------------------------------------------------------------------------------------|--------|-------------------------------|--------------|-------------------------------------------------|--------|--------------------------------------------|--------|----------------------------|--------------|-----------|--------|
| ($                in thousands)                                                                        |   | **Within****Three****Months** |         | **Three                to****Twelve****Months** |   | **One                to****Five****Years** |   | **After****Five****Years** |         | **Total** |   |
| **Assets**                                                                                             |   |                          |         |                                            |   |                                       |   |                       |         |      |   |
| Federal                funds sold, short-term                investments and interest-earning deposits |   | $                             | 15,359       |                                            |   |                                       |   |                       |         |      |   |   |   | $ | 15,359 |   |
| Securities                available for sale                                                           |   |                          | 1,272        |                                            |   | 6,297                                      |   |                       | 6,853        |      |   | 16,708 |   |   | 31,130 |   |
| FHLBI                and FRB stock                                                                     |   |                          |         |                                            |   |                                       |   |                       |         |      |   | 3,421 |   |   | 3,421 |   |
| Fixed                rate loans                                                                        |   |                          | 16,872       |                                            |   | 42,374                                     |   |                       | 85,421       |      |   | 11,579 |   |   | 156,246 |   |
| Variable                rate loans                                                                     |   |                          | 41,464       |                                            |   | 75,957                                     |   |                       | 116,796      |      |   | 38,868 |   |   | 273,085 |   |
| Allowance                for loan losses                                                               |   |                          |         |                                            |   |                                       |   |                       |         |      |   |   |   |   | (5,927 | ) |
| Other                assets                                                                            |   |                          |    |                                       |   |                                  |   |                       |    |      |   |    |   |   | 34,205 |   |
| Total                assets                                                                            |   | $                             | 74,967       |                                            | $      | 124,628                                    |   | $                          | 209,070      |      | $      | 70,576 |   | $ | 507,519 |   |
| **Liabilities**                                                                                        |   |                          |         |                                            |   |                                       |   |                       |         |      |   |   |   |   |   |   |
| Interest-bearing                checking                                                               |   | $                             | 2,458        |                                            | $      | 7,373                                      |   | $                          | 20,440       |      |   |   |   | $ | 30,271 |   |
| Savings                accounts                                                                        |   |                          | 1,422        |                                            |   | 4,266                                      |   |                       | 7,122        |      |   |   |   |   | 12,810 |   |
| Money                market accounts                                                                   |   |                          | 17,308       |                                            |   | 51,880                                     |   |                       | 2,544        |      |   |   |   |   | 71,732 |   |
| Time                deposits < $100,000                                                             |   |                          | 8,303        |                                            |   | 18,820                                     |   |                       | 36,721       |      |   | 22 |   |   | 63,866 |   |
| Time                deposits $100,000 and over                                                         |   |                          | 44,533       |                                            |   | 49,473                                     |   |                       | 92,480       |      |   |   |   |   | 186,486 |   |
| Short-term                borrowings                                                                   |   |                          |         |                                            |   |                                       |   |                       |         |      |   |   |   |   | - |   |
| FHLB                advances                                                                           |   |                          |         |                                            |   | 13,000                                     |   |                       | 6,700        |      |   | 6,500 |   |   | 26,200 |   |
| Junior                subordinated debt                                                                |   |                          |         |                                            |   |                                       |   |                       |         |      |   | 3,608 |   |   | 3,608 |   |
| Noninterest-bearing                checking                                                            |   |                          |         |                                            |   |                                       |   |                       |         |      |   |   |   |   | 64,514 |   |
| Other                liabilities                                                                       |   |                          |    |                                            |   |                                  |   |                       |    |      |   |    |   |   | 2,320 |   |
| Total                liabilities                                                                       |   |                          | 74,024       |                                            |   | 144,812                                    |   |                       | 166,007      |      |   | 10,130 |   |   | 461,807 |   |
| **Stockholders'                Equity**                                                                |   |                          |    |                                            |   |                                  |   |                       |    |      |   |    |   |   | 45,712 |   |
| Total                sources of funds                                                                  |   | $                             | 74,024       |                                            | $      | 144,812                                    |   | $                          | 166,007      |      | $      | 10,130 |   | $ | 507,519 |   |
| Net                asset (liability) GAP                                                               |   | $                             | 943          |                                            | $      | (20,184                                    | )      | $                          | 43,063       |      | $      | 60,446 |   | $ |    |   |
| **Cumulative                GAP**                                                                      |   | $                             | 943          |                                            | $      | (19,241                                    | )      | $                          | 23,822       |      | $      | 84,268 |   | $ |    |   |
| **Percent                of cumulative GAP to**** ****total                assets**               |   |                          | 0.2          | %                                               |   | -3.8                                       | %      |                       | 4.7          | %         |   | 16.6 | % |   |   |   |

**18**

----

*Index*

|                                                         |   | **Principal                Amount Maturing in:** |    |
|--------------------------------------------------------------|--------|--------------------------------------------------|---------|
| ($                in thousands)                              |   |                                             |    |   |   |   |   |   |   |   |   |   |   |   |   | **Fair                Value** |   |
|                                                         |   | **06/30/06**                                     |    | **06/30/07** |   | **06/29/08** |   | **06/30/09** |   | **06/30/10** |   | **Thereafter** |   | **Total** |   | **6/30/2005** |   |
| Rate                sensitive assets:                        |   |                                             |    |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Fixed                interest rate loans                     |   | $                                                | 59,246  |   | $ | 33,532 |   | $ | 23,145 |   | $ | 18,280 |   | $ | 10,464 |   | $ | 11,580 |   | $ | 156,247 |   | $ | 155,079 |   |
| Average                interest rate                         |   |                                             | 6.16    | % |   | 6.16 | % |   | 6.12 | % |   | 5.81 | % |   | 6.28 | % |   | 5.00 | % |   | 6.04 | % |   |   |   |
| Variable                interest rate loans                  |   |                                             | 117,421 |   |   | 63,693 |   |   | 21,854 |   |   | 16,774 |   |   | 14,475 |   |   | 38,867 |   |   | 273,084 |   |   | 273,084 |   |
| Average                interest rate                         |   |                                             | 6.18    | % |   | 6.13 | % |   | 6.15 | % |   | 6.13 | % |   | 6.04 | % |   | 6.43 | % |   | 6.19 | % |   |   |   |
| Fixed                interest rate securities                |   |                                             | 7,569   |   |   | 2,489 |   |   | 240 |   |   | 1,146 |   |   | 2,979 |   |   | 16,708 |   |   | 31,131 |   |   | 31,131 |   |
| Average                interest rate                         |   |                                             | 3.72    | % |   | 2.96 | % |   | 4.18 | % |   | 4.48 | % |   | 4.46 | % |   | 4.31 | % |   | 4.08 | % |   |   |   |
| Other                interest bearing assets                 |   |                                             | 15,359  |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   | 15,359 |   |   | 15,359 |   |
| Average                interest rate                         |   |                                             | 2.16    | % |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   | 2.16 | % |   |   |   |
|                                                         |   |                                             |    |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Rate                sensitive liabilities:                   |   |                                             |    |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Interest                bearing checking                     |   |                                             | 9,831   |   |   | 9,831 |   |   | 6,443 |   |   | 4,074 |   |   | 92 |   |   | - |   |   | 30,271 |   |   | 30,271 |   |
| Average                interest rate                         |   |                                             | 0.68    | % |   | 0.68 | % |   | 0.59 | % |   | 0.53 | % |   | 1.21 | % |   |   |   |   | 0.64 | % |   |   |   |
| Savings                accounts                              |   |                                             | 5,687   |   |   | 5,687 |   |   | 1,435 |   |   |   |   |   |   |   |   |   |   |   | 12,809 |   |   | 12,809 |   |
| Average                interest rate                         |   |                                             | 0.40    | % |   | 0.40 | % |   | 0.40 | % |   |   |   |   |   |   |   |   |   |   | 0.40 | % |   |   |   |
| Money                market accounts                         |   |                                             | 69,188  |   |   | 2,544 |   |   |   |   |   |   |   |   |   |   |   |   |   |   | 71,732 |   |   | 71,732 |   |
| Average                interest rate                         |   |                                             | 1.66    | % |   | 1.25 | % |   |   |   |   |   |   |   |   |   |   |   |   |   | 1.64 | % |   |   |   |
| Time                deposits                                 |   |                                             | 121,128 |   |   | 64,930 |   |   | 29,462 |   |   | 12,816 |   |   | 21,993 |   |   | 22 |   |   | 250,351 |   |   | 250,830 |   |
| Average                interest rate                         |   |                                             | 2.87    | % |   | 3.88 | % |   | 3.94 | % |   | 3.97 | % |   | 4.08 | % |   | 3.93 | % |   | 3.42 | % |   |   |   |
| Fixed                interest rate                borrowings |   |                                             | 13,000  |   |   | 5,500 |   |   |   |   |   |   |   |   | 1,200 |   |   | 10,108 |   |   | 29,808 |   |   | 31,181 |   |
| Average                interest rate                         |   |                                             | 2.58    | % |   | 4.08 | % |   |   |   |   |   |   |   | 4.32 | % |   | 5.41 | % |   | 3.89 | % |   |   |   |
| Variable                interest rate borrowings        |   |                                             |    |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   | - |   |   |   |   |
| Average                interest rate                         |   |                                             |    |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |

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

**19**

----

*Index*

**PART      II. OTHER INFORMATION**

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

| **Item              4.** | **SUBMISSION                OF MATTERS TO A VOTE OF SECURITY                HOLDERS** |
|--------------------------|---------------------------------------------------------------------------------------|

| (a) | The                annual meeting of the shareholders of the Company was held on April                19,                2005. |
|-----|--------------------------------------------------------------------------------------------------------------------------------|

| (b) | The                following directors were elected at the meeting to serve until the                annual                meeting of shareholders in the year                2008: |
|-----|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|                              | Votes                For | Votes                Withheld |
|-----------------------------------|--------------------------|-------------------------------|
| Keith                E. Busse     | 3,315,743                | 44,770                        |
| Michael                S. Gouloff | 3,264,957                | 95,556                        |
| Donald                F. Schenkel | 3,291,558                | 68,955                        |
| Irene                A. Walters   | 3,342,613                | 17,900                        |
| Donald                R. Willis   | 3,343,961                | 16,552                        |

| Kathryn                D. Callen      | 2006 |   |   | William                G. Neizer     | 2007   |
|---------------------------------------|------|--------|--------|--------------------------------------|--------|
| Jerome                F. Henry, Jr.   | 2006 |   |   | Joseph                D. Ruffolo     | 2006   |
| R.V.                Prasad Mantravadi | 2007 |   |   | Larry                L. Smith        | 2007   |
| Michael                J. Mirro       | 2007 |   |   | John                V. Tippmann, Sr. | 2007   |
| Debra                A. Neizer        | 2006 |   |   |                                 |   |

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

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

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

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

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

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

|   | 31.1 | 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. |
|--------|------|------------------------------------------------------------------------------------------------------------|

**20**

----

*Index*

**SIGNATURES**

|                                  |   | TOWER                FINANCIAL CORPORATION                |
|---------------------------------------|--------|-----------------------------------------------------------|
|                                  |   |                                                      |
|                                  |   |                                                      |
| Dated:                August 10, 2005 |   | /                s                / Donald F. Schenkel    |
|                                  |   | Donald                F. Schenkel, Chairman of the Board, |
|                                  |   | President                and Chief Executive Officer      |
|                                  |   |                                                      |
|                                  |   |                                                      |
| Dated:                August 10, 2005 |   | /                s                / Michael D. Cahill     |
|                                  |   | Michael                D. Cahill                          |
|                                  |   | Chief                Financial Officer and Secretary      |
|                                  |   |                                                      |

**21**

----