UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

                                    FORM 10-Q


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


               For the quarterly period ended: September 30, 2006


                        Commission File Number: 000-31929


                              SONOMA VALLEY BANCORP
             (Exact name of Registrant as specified in its charter)

             California                                   68-0454068
       (State of incorporation)            (I.R.S. Employer Identification No.)

                  202 West Napa Street Sonoma, California 95476
               (Address of principal executive offices) (Zip Code)

                                 (707) 935-3200
              (Registrant's telephone number, including area code)



Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the  preceding 12 months (or for such  shorter  period that the  registrant  was
required  to file  such  reports),  and  (2) has  been  subject  to such  filing
requirements for the past 90 days.
                                    X Yes No

Indicate by a check mark whether the registrant is a large accelerated filer, an
accelerated   filer,  or  a   non-accelerated   filer.  See  the  definition  of
"accelerated  filer and large  accelerated  filer" in Rule 12b-2 of the Exchange
Act.

Large Accelerated filer     Accelerated filer    Non-accelerated filer X


The number of shares outstanding of the registrant's Common Stock, no par value,
as of November, 1, 2006 was 2,283,047






<PAGE>


                                      INDEX
                                                                           Page
PART I  FINANCIAL INFORMATION.................................................3

  Item 1. Financial Statements................................................3

          Consolidated Balance Sheets at September 30, 2006,
          December 31, 2005 and September 30, 2005............................3

          Consolidated Statements of Operations for the
          three months and nine months ended September 30, 2006 and 2005......4

          Consolidated Statements of Changes in Shareholders' Equity
          for the nine months ended September 30, 2006,
          and the years ended December 31, 2005 and 2004......................5

          Consolidated Statements of Cash Flows for the
          nine months ended September 30, 2006 and 2005.......................7

          Notes to Consolidated Financial Statements..........................8

  Item 2. Management's Discussion and Analysis of
          Financial Condition and Results of Operation.......................10

          Average Balances, Yields and Rates Paid
          for the nine months ended September 30, 2006 and 2005..............11

          Average Balances, Yields and Rates Paid
          for the three months ended September 30, 2006 and 2005.............27

  Item 3. Quantitative and Qualitative Disclosure About Market Risk..........28

  Item 4. Controls and Procedures............................................28

 PART II   OTHER INFORMATION.................................................28

  Item 1. Legal Proceedings..................................................28

  Item 1A.Risk Factors.......................................................28

  Item 2. Unregistered Sales of Equity Securities and Use of Proceeds........29

  Item 3. Defaults Upon Senior Securities....................................29

  Item 4. Submission of Matters to a Vote of Security Holders................29

  Item 5. Other Information..................................................29

  Item 6. Exhibits...........................................................29

 SIGNATURES..................................................................30

 CERTIFICATIONS..............................................................31



                                     Page 2
<PAGE>





                          Part I FINANCIAL INFORMATION
Item 1. Financial Statements
The information  furnished in these interim statements  reflects all adjustments
and  accruals  which are, in the  opinion of  management,  necessary  for a fair
statement  of the results for such  periods.  The results of  operations  in the
interim  statements  are not  necessarily  indicative of the results that may be
expected for the full year.

                              FINANCIAL STATEMENTS
                      SONOMA VALLEY BANCORP AND SUBSIDIARY
                           CONSOLIDATED BALANCE SHEETS
         September 30, 2006 (Unaudited) and December 31, 2005 (Audited)
                       and September 30, 2005 (Unaudited)
<TABLE>
<S>                                                             <C>              <C>              <C>
                                                            September 30,     December 31,    September 30,
                                                                2006             2005             2005
ASSETS                                                      ------------     ------------     ------------
Cash and due from banks                                     $  5,780,940     $  6,988,820     $  6,172,079
Federal funds sold                                                     0        2,050,000                0
Interest-bearing due from banks                                   61,044           39,521           55,267
                                                            ------------     ------------     ------------
                        total cash and cash equivalents        5,841,984        9,078,341        6,227,346
Investment securities available-for-sale, at fair value       23,724,471       33,917,094       34,977,162
Investment securities held-to-maturity (fair
  value of $16,063,118, $16,634,519 and
 $17,065,719, respectively)                                   15,819,063       16,499,865       16,789,147
Loans and lease financing receivables, net                   206,519,540      168,418,085      159,344,237
Premises and equipment, net                                    1,010,581        1,178,666        1,250,525
Accrued interest receivable                                    1,529,675        1,400,255        1,294,295
Cash surrender value of life insurance                         9,485,945        9,239,439        9,147,268
Other assets                                                   5,075,402        4,331,172        3,596,711
                                                            ------------     ------------     ------------
                                           Total assets     $269,006,661     $244,062,917     $232,626,691
                                                            ============     ============     ============
LIABILITIES
Non interest-bearing demand deposits                        $ 53,221,766     $ 49,460,864     $ 48,746,030
Interest-bearing transaction deposits                         29,508,898       35,586,113       34,139,432
Savings and money market deposits                             74,083,499       74,218,076       73,459,066
Time deposits, $100,000 and over                              43,738,653       32,011,640       26,890,840
Other time deposits                                           27,382,790       24,482,074       21,791,961
                                                            ------------     ------------     ------------
                                         Total deposits      227,935,606      215,758,767      205,027,329
Other borrowings                                              10,000,000                0          650,000
Accrued interest payable and other liabilities                 5,541,541        4,864,357          509,919
                                                            ------------     ------------     ------------
                                      Total liabilities      243,477,147      220,623,124      210,187,248
SHAREHOLDERS' EQUITY
Common stock, no par value; 10,000,000 shares authorized;
2,264,192 shares at September 30, 2006, 2,204,949 shares at
December 31, 2005 and 2,204,949 shares at September 30, 2005
issued & outstanding
                                                              17,404,765       16,256,427       16,230,507
Retained earnings                                              8,321,212        7,493,757        6,494,016
Accumulated other comprehensive loss                            (196,463)        (310,391)        (285,080)
                                                            ------------     ------------     ------------
                             Total shareholders' equity       25,529,514       23,439,793       22,439,443
                                                            ------------     ------------     ------------
             Total liabilities and shareholders' equity     $269,006,661     $244,062,917     $232,626,691
                                                            ============     ============     ============

</TABLE>
   The accompanying notes are an integral part of these financial statements.


                                     Page 3






<PAGE>


                      SONOMA VALLEY BANCORP AND SUBSIDIARY
                CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
<TABLE>
<S>                                                             <C>             <C>            <C>               <C>
                                                                 For the Three Months         For the Nine Months
                                                                  Ended September 30,          Ended September 30,
INTEREST INCOME                                                2006            2005           2006              2005
                                                           -----------     -----------     -----------     -----------
  Loans and leases                                         $ 4,183,272     $ 3,060,940     $11,318,809     $ 8,727,198
  Taxable securities                                           206,996         277,469         669,251         781,959
  Tax-exempt securities                                        151,933         155,884         452,794         472,752
  Federal funds sold & other                                     1,378             724          76,457          46,501
  Dividends                                                     13,734           8,609          34,808          23,129
                                                           -----------     -----------     -----------     -----------
                                 Total interest income       4,557,313       3,503,626      12,552,119      10,051,539
INTEREST EXPENSE
  Interest-bearing transaction deposits                         12,396          14,183          38,232          42,999
  Savings and money market deposits                            406,518         231,021         955,802         586,123
  Time deposits, $100,000 and over                             425,347         221,459       1,087,741         600,855
  Other time deposits                                          267,484         151,829         718,309         387,368
  Other borrowings                                             146,886          20,019         270,791          81,821
                                                           -----------     -----------     -----------     -----------
                                Total interest expense       1,258,631         638,511       3,070,875       1,699,166
                                                           -----------     -----------     -----------     -----------
                                   NET INTEREST INCOME       3,298,682       2,865,115       9,481,244       8,352,373
  Provision for loan and lease losses                           30,000          95,000         320,000         345,000
                                                           -----------     -----------     -----------     -----------
                                   NET INTEREST INCOME
                                   AFTER PROVISION FOR
                                        LOAN AND LEASE
                                                LOSSES       3,268,682       2,770,115       9,161,244       8,007,373

NON-INTEREST INCOME                                            533,752         497,931       1,558,138       1,443,620
NON-INTEREST EXPENSE
  Salaries and employee benefits                             1,401,805       1,120,639       3,694,825       3,346,883
  Premises and equipment                                       251,209         268,641         754,912         745,665
  Other                                                        577,509         578,003       1,757,593       1,792,276
                                                           -----------     -----------     -----------     -----------
                            Total non-interest expense       2,230,523       1,967,283       6,207,330       5,884,824
                                                           -----------     -----------     -----------     -----------
                               Income before provision
                                      for income taxes       1,571,911       1,300,763       4,512,052       3,566,169
  Provision for income taxes                                   560,004         453,212       1,608,831       1,217,381
                                                           -----------     -----------     -----------     -----------

                                            NET INCOME     $ 1,011,907     $   847,551     $ 2,903,221     $ 2,348,788
                                                           ===========     ===========     ===========     ===========
NET INCOME PER SHARE                                       $       .45     $       .39     $      1.29     $      1.09
                                                           ===========     ===========     ===========     ===========
NET INCOME PER SHARE-
ASSUMING DILUTION                                          $       .43     $       .37     $      1.23     $      1.02
                                                           ===========     ===========     ===========     ===========

</TABLE>


   The accompanying notes are an integral part of these financial statements.





                                    Page 4
<PAGE>



                      SONOMA VALLEY BANCORP AND SUBSIDIARY
           CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY

  For the nine months ended September 30, 2006 (Unaudited), and the years ended
                 December 31, 2005 (Audited) and 2004 (Audited)

<TABLE>
<S>                                     <C>               <C>               <C>         <C>             <C>              <C>
                                                                                                Accumulated
                                                          Common Stock                             Other
                                    Comprehensive      -----------------         Retained      Comprehensive
                                       Income         Shares       Amount        Earnings          Income            Total
                                    -------------    ---------   -----------    ----------      -------------     -----------

BALANCE AT
 JANUARY 1, 2004                                     1,457,594   $15,061,636    $6,386,083      $    23,560       $21,471,279
Redemption and retirement
 of stock                                                 (601)       (6,218)      (11,839)                           (18,057)
Stock options exercised and
 related tax benefits                                   97,494     1,786,065                                        1,786,065
Redemption of stock
 under tender offer                                   (126,208)   (1,416,223)   (3,071,903)                        (4,488,126)
Cash dividend                                                                     (906,732)                          (906,732)
 Stock options granted                                               103,680                                          103,680
3 for 2 stock split                                    713,825
Fractional shares                                                                   (7,498)                            (7,498)
Net income for the year             $ 2,907,621                                  2,907,621                          2,907,621
Other comprehensive
 income, net of tax:
 Unrealized holding losses
  on securities available-
  for-sale arising during
  the year, net of taxes
  of $116,844                          (167,072)
Other comprehensive                 -----------
 loss, net of taxes                    (167,072)                                                   (167,072)         (167,072)
                                    -----------      ---------   -----------    ----------      -----------       -----------
Total comprehensive income          $ 2,740,549
                                    ===========
BALANCE AT
 DECEMBER 31, 2004                                   2,142,104    15,528,940     5,295,732         (143,512)       20,681,160
Redemption and retirement                               (5,616)      (41,165)      (72,503)                          (113,668)
 of stock
Stock options exercised and
 related tax benefits                                   68,461       664,972                                          664,972
Cash dividend                                                                   (1,078,001)                        (1,078,001)
Stock options granted                                                103,680                                          103,680
Net income for the year             $ 3,348,529                                  3,348,529                          3,348,529
Other comprehensive
 income, net of tax:
 Unrealized holding losses
  on securities available-
  for-sale arising during
  the year, net of taxes
  of $116,709                          (166,879)
                                    -----------
Other comprehensive
 loss, net of taxes                    (166,879)                                                   (166,879)         (166,879)
                                    -----------      ---------   -----------    ----------      -----------        ----------
Total comprehensive income          $ 3,181,650
                                    ===========
   </TABLE>

                                     Page 5

<PAGE>

                      SONOMA VALLEY BANCORP AND SUBSIDIARY
           CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY

  For the nine months ended September 30, 2006 (Unaudited), and the years ended
                 December 31, 2005 (Audited) and 2004 (Audited)

<TABLE>
<S>                                     <C>               <C>               <C>         <C>             <C>              <C>
                                                                                                  Accumulated
                                                          Common Stock                              Other
                                 Comprehensive         -----------------          Retained       Comprehensive
                                 Income Amount        Shares           Amount     Earnings          Income           Total
                                 -------------     --------------------------    -----------     -------------    -----------

BALANCE AT
 DECEMBER 31, 2005                                 2,204,949      $16,256,427    $ 7,493,757     $    (310,391)   $23,439,793

Redemption and retirement
 of stock                                            (44,883)        (333,308)      (822,809)                      (1,156,117)
Cash dividend                                                                     (1,252,957)                      (1,252,957)
Stock options granted                                                  75,785                                          75,785
Restricted stock granted                                               81,375                                          81,375
Stock options exercised and
 related tax benefits                                104,126        1,324,486                                       1,324,486
Net income for the period        $ 2,903,221                                       2,903,221                        2,903,221
Other comprehensive loss,
 net of tax:
 Unrealized holding gains
  on securities available-
  for-sale arising during
  the year, net of taxes
  of $76,677                        (113,928)
Other comprehensive              -----------
 loss, net of taxes                 (113,928)                                                         (113,928)      (113,928)
                                 -----------       ---------      -----------    -----------     -------------    -----------
Total comprehensive              $ 3,017,149
income                           ===========
BALANCE AT
 September 30, 2006                                2,264,192      $17,404,765    $ 8,321,212     $    (196,463)   $25,529,514
                                                   =========      ===========    ===========     =============    ===========
   </TABLE>
   The accompanying notes are an integral part of these financial statements.

                                     Page 6


<PAGE>


                      SONOMA VALLEY BANCORP AND SUBSIDIARY
                CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
              For the nine months ended September 30, 2006 and 2005

<TABLE>
<S>                                                                                 <C>               <C>

OPERATING ACTIVITIES                                                               2006              2005
                                                                                -----------      -----------
 Net income                                                                     $ 2,903,221      $ 2,348,788
 Adjustments to reconcile net income to net cash provided by operating
  activities:
     Provision for loan losses                                                      320,000          345,000
     Depreciation                                                                   488,681          230,659
     Gain on sale of securities                                                           0           (5,094)
     Amortization and other                                                          97,443          124,933
     Stock options granted                                                          157,160           77,760
     Net change in interest receivable                                             (129,420)        (155,688)
     Net change in cash surrender value of life insurance                          (246,506)        (234,132)
     Net change in other assets                                                    (823,907)        (417,964)
     Net change in interest payable and other liabilities                           677,184          606,632
                                                                                -----------      -----------
                             NET CASH PROVIDED BY OPERATING ACTIVITIES            3,443,856        2,920,894
INVESTING ACTIVITIES
     Purchases of securities held-to-maturity                                      (438,272)        (399,570)
     Purchases of securities available-for sale                                     (42,141)     (15,014,860)
     Proceeds from maturing securities held-to-maturity                           1,055,000          959,500
     Proceeds from maturing securities available-for sale                        10,395,000                0
     Net change in loans                                                        (38,421,455)      (8,957,150)
     Purchases of premises and equipment                                           (320,596)        (116,305)
                                                                                -----------      -----------
                                NET CASH USED FOR INVESTING ACTIVITIES          (27,772,464)     (23,528,385)
FINANCING ACTIVITIES
     Net change in demand, interest-bearing transaction and savings deposits     (2,450,890)       6,620,020
     Net change in time deposits                                                 14,627,729        4,744,294
     Cash dividend paid                                                          (1,252,957)      (1,078,001)
     Net change in FHLB borrowings                                               10,000,000          650,000
     Exercise of stock options                                                    1,324,486          664,972
     Stock repurchases                                                           (1,156,117)        (113,668)
                                                                                -----------      -----------
                             NET CASH PROVIDED BY FINANCING ACTIVITIES           21,092,251       11,487,617
                                                                                -----------      -----------
                               NET CHANGE IN CASH AND CASH EQUIVALENTS           (3,236,357)      (9,119,874)
     Cash and cash equivalents at beginning of period                             9,078,341       15,347,220
                                                                                -----------      -----------
                            CASH AND CASH EQUIVALENTS AT END OF PERIOD          $ 5,841,984     $  6,227,346
                                                                                ===========     ============
SUPPLEMENTAL DISCLOSURES:
     Cash paid during the period for:
      Interest                                                                  $ 3,031,172      $ 1,678,070
      Income taxes                                                                1,745,000        1,273,047
     Change in unrealized gains and losses
      on securities available-for-sale                                              193,605         (240,575)
     Change in deferred income taxes on
      unrealized holding gains and losses on securities                             (79,677)          99,007

</TABLE>

   The accompanying notes are an integral part of these financial statements.



                                     Page 7
<PAGE>





                      SONOMA VALLEY BANCORP AND SUBSIDIARY
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                               SEPTEMBER 30, 2006
                                   (Unaudited)

Note 1 - Basis of Presentation

In the opinion of the management of Sonoma Valley  Bancorp and our  wholly-owned
subsidiary  Sonoma  Valley Bank  ("Bank"),  the unaudited  interim  consolidated
financial statements contain all adjustments of a normal recurring nature, which
are necessary to present  fairly our  financial  condition at September 30, 2006
and results of operations for the three and nine months then ended.

Certain information and footnote  disclosures  presented in the Company's annual
financial  statements  are not included in these interim  financial  statements.
Accordingly,   the  accompanying   unaudited  interim   consolidated   financial
statements  should  be read  in  conjunction  with  the  consolidated  financial
statements  and notes thereto  included in the  Company's  2005 Annual Report on
Form  10-K.  The  results  of  operations  for the three and nine  months  ended
September  30, 2006 are not  necessarily  indicative  of the  operating  results
through December 31, 2006.

Note 2 - Consolidation

The  consolidated  financial  statements  include the accounts of Sonoma  Valley
Bancorp  and its wholly  owned  subsidiary  Sonoma  Valley  Bank.  All  material
intercompany accounts and transactions have been eliminated in consolidation.

Note 3 - Commitments

We have no outstanding  performance  letters of credit at September 30, 2006 and
September 30, 2005.

Note 4 - Net Income Per Common Share

Net income per share is calculated by using the weighted  average  common shares
outstanding.  The weighted average number of common shares used in computing the
net  income  per  common  share for the period  ending  September  30,  2006 was
2,244,887 and for the period ending September 30, 2005 was 2,159,380.

Net income per share  (diluted)  is  calculated  by using the  weighted  average
common  shares  (diluted)  outstanding.  The weighted  average  number of common
shares (diluted) used in computing the net income per common share (diluted) for
the period  ending  September  30, 2006 was  2,369,077 and for the period ending
September 30, 2005 was 2,299,258.



                                     Page 8
<PAGE>






Note 5 - Share-Based Compensation Awards

We have a stock-based employee and director  compensation plan. Prior to January
1, 2003,  we  accounted  for this plan  under the  recognition  and  measurement
principles of APB Opinion No. 25, Accounting for Stock Issued to Employees,  and
Related  Interpretations.  No stock-based  compensation cost is reflected in net
income for stock  options  granted  prior to January  1,  2003,  as all  options
granted under those plans had an exercise price equal to the market value of the
underlying  common  stock on the date of grant.  Effective  January 1, 2003,  we
adopted the fair value  recognition  provisions of SFAS No. 123,  Accounting for
Stock-Based   Compensation,   prospectively  to  all  employee  awards  granted,
modified,  or settled after January 1, 2003.  Options were granted in 2004 under
the fair value  method.  Awards under our plan vest over five years.  Restricted
stock was  granted in July 2006 that vest over five years  beginning  July 2007.
The cost  related  to  stock-based  employee  compensation  is  included  in the
determination of net income for the periods ended September 30, 2006 and 2005.


Note 6 - Employee Benefit Plans

We provide  retirement  plans to its key officers and  directors.  The plans are
unfunded and provide for us to pay the officers and directors  specified amounts
for specified periods after retirement. The amount of pension expense related to
this plan,  and the  components  of pension  expense for the nine  months  ended
September 30, 2006 and 2005 are as follows:

<TABLE>
<S>                                                  <C>         <C>          <C>           <C>
                                                        Directors                Officers
                                                        ---------                --------
                                                    2006         2005         2006         2005
                                                  --------     --------     --------     --------

Service cost                                      $ 29,221     $ 21,405     $234,553     $101,216

Interest cost on projected benefit obligation       45,288       24,981      172,365       67,544

Amortization of unrecognized liability at           21,395        5,593      (28,841)     (13,307)
 transition                                       --------     --------     --------      -------

Net periodic pension cost recognized              $ 95,904     $ 51,979     $378,077     $155,453
                                                  ========     ========     ========     ========
</TABLE>

                                     Page 9

<PAGE>


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

Forward Looking Statements

With the exception of historical facts stated herein,  the matters  discussed in
this  Form  10-Q  are  "forward  looking"  statements  that  involve  risks  and
uncertainties  that  could  cause  actual  results  to  differ  materially  from
projected  results.  Such  "forward  looking"  statements  include,  but are not
necessarily  limited  to  statements  regarding  anticipated  levels  of  future
revenues and earnings from the operation of Sonoma Valley Bancorp's wholly owned
subsidiary, Sonoma Valley Bank ("Bank"), projected costs and expenses related to
operations of our liquidity,  capital resources,  and the availability of future
equity capital on commercially reasonable terms. Factors that could cause actual
results to differ materially include, in addition to the other factors discussed
in our Form 10-K for the year ended December 31, 2005,  and subsequent  periodic
reports, the following;  (i) increased competition from other banks, savings and
loan  associations,  thrift and loan  associations,  finance  companies,  credit
unions, offerors of money market funds, and other financial  institutions;  (ii)
the  risks  and  uncertainties   relating  to  general  economic  and  political
conditions,  both domestically and internationally,  including,  but not limited
to, inflation,  or natural  disasters  affecting the primary service area of our
major  industries;  or (iii) changes in the laws and  regulations  governing the
Bank's  activities  at either the state or federal  level.  Readers of this Form
10-Q are cautioned  not to put undue  reliance on "forward  looking"  statements
which,  by  their  nature,  are  uncertain  as  reliable  indicators  of  future
performance.  We disclaim  any  obligation  to publicly  update  these  "forward
looking" statements,  whether as a result of new information,  future events, or
otherwise.

For the Nine Month Periods
Ended September 30, 2006 and 2005


Overview

We reported net income of $2,903,221 as of September 30, 2006 an increase of
$554,433 from $2,348,788 reported as of September 30, 2005. The 23.6% or
$554,433 increase in net income is largely attributable to loan growth out
pacing deposit growth which generated an increase in net interest income of $1.1
million. On a per share basis, net income equaled $1.29 compared with $1.09 per
share during the same period in 2005.

Return on average total assets on an annualized basis for the nine-month period
was 1.51% in 2006 and 1.37% in 2005. The increase in the return on assets is the
result of the 23.61% growth in net income compared to the 12.08% growth in
average assets from $230.0 million in 2005 to $257.8 million as of September 30,
2006. Return on average shareholders' equity on an annualized basis at the end
of the third quarter 2006 and 2005 was 15.64% and 14.56%, respectively. The
higher return on equity is again the result of stronger growth in income
compared to 15.1% growth in average equity from $21.6 million in 2005 to $24.8
million in 2006.

                                    Page 10





<PAGE>


                              SONOMA VALLEY BANCORP
                     AVERAGE BALANCES/YIELDS AND RATES PAID
              For the nine months ended September 30, 2006 and 2005

<TABLE>
<S>                                                  <C>             <C>          <C>           <C>              <C>         <C>
                                                                     2006                                      2005
                                                                     ----                                      ----
                                                   Average          Income/       Yield/       Average        Income/      Yield/
ASSETS                                             Balance          Expense        Rate        Balance        Expense       Rate

Interest-earning assets:
Loans(2):
  Commercial                                   $ 134,652,288     $  7,906,220    7.85%    $ 107,098,464     $  5,968,483     7.45%
  Consumer                                        24,263,606        1,492,709    8.23%       18,654,492          981,252     7.03%
  Real estate construction                        17,154,596        1,030,129    8.03%       20,648,462        1,166,398     7.55%
  Real estate mortgage                            15,225,617          788,217    6.92%        9,688,980          499,248     6.89%
  Tax exempt loans (1)                             2,401,975          147,609    8.22%        2,669,420          165,242     8.28%
  Leases                                              46,263            4,113   11.89%           40,268            2,758     9.16%
  Tax exempt leases (1)                                    0                0    0.00%                0                0     0.00%
  Unearned loan fees                                (552,097)                                  (477,560)
                                               -------------     ------------             -------------     ------------
         Total loans                             193,192,248       11,368,997    7.87%      158,322,526        8,783,381     7.42%
Investment securities
  Available for sale:
         Taxable                                  26,537,347          664,124    3.35%       33,163,279          774,306     3.12%
         Tax exempt(1)                                     0                0    0.00%                0                0     0.00%
  Hold to maturity:
         Taxable                                     234,471            5,128    2.92%          373,045            7,652     2.74%
         Tax exempt (1)                           15,925,240          686,052    5.76%       16,697,603          716,292     5.74%
                                               -------------     ------------             -------------     ------------
         Total investment securities              42,697,058        1,355,304    4.24%       50,233,927        1,498,250     3.99%
Federal funds sold                                 2,204,231           74,102    4.49%        2,589,245           45,791     2.36%
Federal Home Loan Bank stock                       1,016,714           34,808    4.58%          796,622           23,129     3.88%
Total due from banks/Interest-bearing                 65,460            2,355    4.81%           55,637              710     1.71%
                                               -------------     ------------             -------------     ------------
  Total interest-earning assets                  239,175,711     $ 12,835,566    7.18%      211,997,957     $ 10,351,261     6.53%
                                                                 ============                               ============
Noninterest-bearing assets:
  Reserve for loan losses                         (2,930,833)                                (2,634,249)
  Cash and due from banks                          6,155,797                                  6,680,842
  Premises and equipment                           1,110,291                                  1,302,903
  Other assets                                    14,295,742                                 12,673,007
                                               -------------                              -------------
                                Total assets   $ 257,806,708                              $ 230,020,460
                                               =============                              =============
LIABILITIES AND SHAREHOLDERS' EQUITY
Interest-bearing liabilities:
  Interest-bearing deposits
         Interest-bearing transaction          $  30,845,406     $     38,232    0.17%    $  33,959,362     $     42,999     0.17%
         Savings deposits                         73,509,732          955,802    1.74%       74,005,285          586,122     1.06%
         Time deposits over $100,000              36,644,587        1,087,741    3.97%       26,812,131          600,855     3.00%
         Other time deposits                      26,251,045          718,309    3.66%       19,829,702          387,368     2.61%
                                               -------------     ------------             -------------     ------------
           Total interest-bearing deposits       167,250,770        2,800,084    2.24%      154,606,480        1,617,344     1.40%
  Federal Funds purchased                                  0                0    0.00%                0                0     0.00%
  Other borrowings                                 6,972,125          270,791    5.19%        3,479,004           81,822     3.14%
                                               -------------     ------------             -------------     ------------
           Total interest-bearing liabilities    174,222,895     $  3,070,875    2.36%      158,085,484     $  1,699,166     1.44%
                                                                 ============                               ============
Non interest-bearing liabilities:
  Non interest-bearing demand deposits            53,774,350                                 46,256,797
  Other liabilities                                4,986,832                                  4,107,577
   Shareholders' equity                           24,822,631                                 21,570,602
                                               -------------                              -------------
  Total liabilities and shareholders' equity   $ 257,806,708                              $ 230,020,460
                                               =============                              =============
Interest rate spread                                                             4.82%                                       5.09%
                                                                                =====                                       =====
Interest income                                                  $ 12,835,566    7.18%                      $ 10,351,261     6.53%
Interest expense                                                    3,070,875    1.72%                         1,699,166     1.07%
                                                                 ------------   -----                       ------------    -----
Net interest income/margin                                       $  9,764,691    5.46%                      $  8,652,095     5.46%
                                                                 ============   =====                       ============    =====
</TABLE>

(1)  Fully tax equivalent  adjustments are based on a federal income tax rate of
     34% in 2006 and 2005
(2)  Non accrual loans have been included in loans for the purposes of the above
     presentation.  Loan fees of $285,235 and $259,262 for the nine months ended
     September 30, 2006 and September 30, 2005, respectively,  were amortized to
     the appropriate interest income categories.



                                    Page 11
<PAGE>


At September 30, 2006,  total assets were $269.0  million a 10.2%  increase over
$244.1  million as of December 31, 2005 and a 15.6% increase over $232.6 million
as of September  30, 2005.  We showed loans of $209.6  million at September  30,
2006 compared with $171.2 million and $162.1 million as of December 31, 2005 and
September  30,  2005,  increases  of 22.4%  and  29.3%,  respectively.  Deposits
increased  5.6%,  from $215.8  million as of year end 2005 and 11.2% from $205.0
million as of September 30, 2005 to $227.9 million as of September 30, 2006. The
loan-to-deposit  ratio increased to 92.0% as of September 30, 2006 from 79.3% at
December 31, 2005 and 79.1% at September 30, 2005.  Although  slower loan growth
had been anticipated due to the increase in interest rates,  loan demand in 2006
has been strong.

We continue to experience  loan and deposit growth at the Banco de Sonoma Office
from $11.6 million in deposits and $2.7 million in loans as of December 31, 2005
to $12.7 million in deposits and $5.7 million in loans as of September 30, 2006.
For the nine months  ending  September  30, 2006,  the office showed a profit of
$41,616  compared  with a  loss  of  $81,747  as of  September  30,  2005.  This
profitability  is a result of the growth in interest  income due to the increase
in loan volume.  This office is offering services to the Latino community in our
market place.  Our management  identified  this as a niche which was underserved
and an  opportunity  for future  growth and  profitability.  The majority of the
employees at the branch are bilingual and able to offer full service banking. An
additional  product which has been added is the ability for the customer to make
an immediate  transfer of funds to Mexico.  Our management  anticipates that the
growth in the branch will continue to be slow and steady.

Total  shareholders'  equity  increased  by $2.1 million or 8.9% during the nine
months ended  September  30, 2006. At September 30, 2006, we reported net income
of $2.9 million.  In March, we paid out $562,566 for cash dividends  declared in
February  2006 and in September  2006,  we paid out $690,391 for cash  dividends
declared in August 2006. In 2004, stock options were granted to senior employees
with a fifth of the options vesting each year over a five-year  period. In 2006,
13,050  options vested which  increased  equity by $75,785 year to date. In July
2006,  26,000  restricted  stock options were granted to senior employees with a
fifth of the  options  vesting  each  year  over a  five-year  period  and 3,000
restricted  stock options were granted to a senior  employee with a third of the
options  vesting  over a three-year  period.  In 2006,  equity was  increased by
$81,375 to reflect the expense for these options.  The net income figure of $2.9
million  reflects  an expense for the stock  options of $75,785  and  restricted
stock  options  of  $81,375,  therefore  the  net  effect  of the  stock  option
transactions  relative to equity was zero.  Directors  exercised  64,862 options
which added $515,460 to the capital  accounts.  The tax benefit of these options
was $459,493,  which also increased  equity.  Officers  exercised 39,264 options
which  added  $349,533  to the capital  accounts.  During the nine months  ended
September  30,  2006 we  repurchased  44,883  shares  which  lowered  equity  by
$1,156,117. The net effect of this activity results in capital of $25,529,514 as
of September  30, 2006,  compared to capital of  $23,439,793  as of December 31,
2005. See page 6 for detail of "Changes in Shareholders' Equity".

Section  404  of  Sarbanes-Oxley  Act  of  2002  ("Section  404")  requires  the
Securities  and Exchange  Commission  ("SEC") to prescribe  rules  requiring the
establishment,  maintenance  and evaluation of an issuer's  internal  control of
financial  reporting.  Accordingly,  in the annual report for December 31, 2006,
our  management  was  going to be  required  to  include  an  assessment  on the
effectiveness  of our internal  controls over financial  reporting in accordance
with  standards  set  by the  Public  Company  Accounting  Oversight  Board.  On
September  21,  2005,  the SEC  extended  for  another  year  the  deadline  for
non-accelerated  filers to first certify compliance with Section 404. This means
that we




                                    Page 12



<page>



will not have to certify  compliance  until  December  31,  2007.  Our  external
independent  auditors  are  required  to  attest to and  report on  management's
assessment of internal  control over  financial  reporting.  Our  management and
staff are working  diligently  toward  evaluating and  documenting  the internal
control  systems  in  order  to allow  our  management  to  report  on,  and our
independent   auditors  to  attest  to,  our  internal  control  over  financial
reporting.  We have  retained  the  services  of a  consulting  firm  to  assist
management  and staff with this process and to address any  material  weaknesses
and plan accordingly to maintain  adequate  processes.  Even so, there can be no
assurances  that the  evaluation  required by Section 404 will not result in the
identification of significant control  deficiencies or that our auditors will be
able to attest to the  effectiveness  of our internal  controls  over  financial
reporting.

RESULTS OF OPERATIONS

Net interest Income

Net interest  income is the difference  between total interest  income and total
interest expense.  Net interest income,  adjusted to a fully taxable  equivalent
basis, as shown on the table- Average Balance, Yields and Rates Paid on page 11,
is higher  than net  interest  income on the  statement  of  income  because  it
reflects adjustments applicable to tax-exempt income from certain securities and
loans  ($283,447in  2006 and $299,722 in 2005, based on a 34% federal income tax
rate).

The  improvement in net interest  income for the nine months ended September 30,
2006 (stated on a fully taxable  equivalent basis) is a result of the net effect
of a $2.5 million  increase in interest income offset by an increase in interest
expense of $1.4 million, the net effect being an increase of $1.1 million.  This
increase  is a result of the 150 basis point  increase in the federal  funds and
prime lending rates since  September 30, 2005.  The federal funds rate increased
from 3.75% as of September  30, 2005,  to 5.75% as of September 30, 2006 and the
prime lending rate  increased from 6.75% as of September 30, 2005 to 8.25% as of
September 30, 2006. Also  contributing to the increase in net interest income is
the strong loan growth experienced during the year.

Net interest income (stated on a fully taxable  equivalent basis) expressed as a
percentage of average earning assets, is referred to as net interest margin. Our
net interest margin for 2006 remained the same as 2005 at 5.46%.  The continuing
strong  net  interest  margin is a result of strong  loan  growth  offset by the
pressure to raise interest rates on deposit accounts.

Interest Income

As previously  stated,  interest  income  (stated on a fully taxable  equivalent
basis) increased by $2.5 million to $12.8 million in the nine months of 2006, an
increase  of 24.0%  increase  over the $10.4  million  realized  during the same
period in 2005.

The $2.5  million  increase in interest  income was the result of a $1.8 million
increase  due to the  growth in  volume of  average  balances,  together  with a
$664,000  increase in income related to higher interest rates paid. The yield on
earning  assets was 7.18% as of September  2006 compared to 6.53% as of the same
period in 2005, a 65 basis point increase.  The increase is primarily the result
of the $27.2  million or 12.8%  growth in average  earning  assets  from  $212.0
million as of September 2005 to $239.2 million in 2006.


                                    Page 13


<page>




Interest Expense

Total  interest  expense  increased by $1.4 million to $3.1 million in September
2006 compared to $1.7 million  during the same period of 2005.  The average rate
paid on all interest-bearing  liabilities  increased from 1.44% in 2005 to 2.36%
in 2006,  a 92 basis point  increase.  Average  balances  increased  from $158.1
million to $174.2 million, a 10.2% gain in earning liabilities.  Of the increase
in average  interest-bearing  liabilities,  $7.0 million was  borrowings  at the
Federal  Home Loan Bank.  We continue to  experience  stronger  loan growth than
deposit  growth,  so we  determined  it is more cost  effective  to satisfy  its
liquidity needs by borrowing at the Federal Home Loan Bank.

The gain in volume of average  balances was responsible for a $593,000  increase
in interest  expense  while  higher rates paid were  responsible  for a $779,000
increase  in  interest  expense  resulting  in higher  interest  expense of $1.4
million.  The higher  interest  rates we have paid on deposits and borrowings is
the primary cause for the increase in interest expense.

Individual  components of interest  income and interest  expense are provided in
the table-Average Balances, Yields and Rates Paid on page 11.

Provision for Loan Losses

The  provision  for loan losses  charged as of  September  30, 2006 was $320,000
compared to $345,000 for the same period of 2005.  The provision for loan losses
charged to operations is based on our monthly  evaluation of the loan  portfolio
and the  adequacy  of the  allowance  for loan losses in relation to total loans
outstanding.  We have  experienced  strong loan growth during the nine months of
2006 and management  anticipates loan growth will continue,  which could require
additional  provisions  for loan  losses.  Additionally,  there  are  regulatory
concerns  about  concentrations  of  commercial  real  estate  loans  among many
financial institutions.  We have a concentration of commercial real estate loans
and although the loans are adequately collateralized, management determined that
it is prudent to continue making a provision for loan losses.

The economic climate continues to improve and the non-performing assets to total
loans ratio  continues to be below 1% at 0.44% as of September 30, 2006 compared
to 0.67% as of September 30, 2005. Loans  charged-off were $9,559 and recoveries
were $14,109 for the nine months of 2006  compared  with $36,936 in  charge-offs
and  $50,643  in  recoveries  for the same  period  in 2005.  See page 19 for an
analysis in the changes in allowance for loan losses  including  charge offs and
recoveries.

Non-interest Income

Non-interest  income of $1.6 million  increased  7.9% or $115,000  over the $1.4
million  recorded in the comparable  period in 2005. Of the increase,  63.6% was
due to increases  in service  charges on deposit  accounts.  Year to date income
from  service  charges on deposit  accounts has  increased  7.8% or $73,000 from
$937,000 in 2005 to $1.01 million in 2006.

Other fee income has shown an increase at September 30, 2006 of 13.6% or $35,000
from $257,000 as of September  30, 2005 to $292,000 in 2006 and comprised  30.4%
of the total $115,000  increase in non-interest  income.  The higher income is a
result of an increase of $30,000 in income we earned from loan referrals,  which
increased from $13,000 as of September 30, 2005 to $43,000 for the same

                                    Page 14


<page>



period of 2006.  Also  contributing to the increase was an increase of $7,000 or
40.9% in wire transfer income from $19,000 in 2005 to $26,000 in 2006.

Other non-interest income showed a 4.9% increase,  or $12,000,  from $245,000 in
2005 to $257,000 in 2006.  This is largely a result of an increase in the income
generated  by bank owned life  insurance  policies.  Income on the  policies was
$234,000 as of September 30, 2005 compared to $247,000 as of September 30, 2006.
The earnings on these policies should  increase as the balances  increase and if
market  rates  increase,  the income  produced  by these  policies  should  also
increase.

Non-interest Expense

Total  non-interest  expense increased  $323,000 or 5.5% from $5.9 million as of
September 30, 2005 to $6.2 million for the nine months ended September 30, 2006.
Non-interest  expense on an annualized basis  represented 3.22% of average total
assets in 2006 compared with 3.42% in the comparable period in 2005.

Salaries and benefits increased $348,000 or 10.4% from $3.3 million for the nine
months  ended  September  30, 2005 to $3.7  million  for the nine  months  ended
September  30,  2006.  The  increase  is the  result of  accruals  for  employee
incentives  and the  expense  of  restricted  stock  granted  in July  2006.  At
September 30, 2006 and 2005 total full time equivalent  employees were 50 and 49
respectively.  As of September  30, 2006,  assets per employee were $5.4 million
compared with $4.8 million as of September 30, 2005. Management tries to utilize
efficiencies to stabilize the growth in full time equivalent employees.

Expense  related to premises and  equipment  increased  1.2% to $755,000 in 2006
from $746,000 for the same period of 2005.  The increase of $9,000 in expense in
2006 is the result of a 5.4% or $14,000  increase in expenses  related to normal
lease expense  increases from $258,000 in 2005 to $272,000 in 2006.  There was a
22.2% or $12,000 increase in janitorial  service to $64,000.  This is the result
of the addition of janitorial service for the new facility and improvements that
have been made in the  landscaping.  Fixed  asset  expense  showed a decline  of
$11,000 or 3.8% from $308,000 to $297,000 in 2006.

Other  operating  expenses  declined 1.9% in 2006 to $1.758  million from $1.792
million  in 2005,  a  decrease  of  $34,000.  The  decline  is a result of lower
professional  fees, a result of a postponement in the  implementation of Section
404 and pending a resolution  by the SEC regarding the depth of the analysis for
small public companies.

Provision for Income Taxes

The provision  for income taxes  increased to an effective tax rate of 35.7% for
the nine months of 2006  compared  with 34.1% for the nine  months of 2005.  The
higher effective tax rate is a reflection of the increase in taxable income when
compared with income derived from tax exempt investments.  Income taxes reported
in the  financial  statements  include  deferred  taxes  resulting  from  timing
differences  in the  recognition  of  items  for  tax  and  financial  reporting
purposes.


                                    Page 15


<PAGE>


BALANCE SHEET ANALYSIS

Investments

Investment  securities were $39.5 million at September 30, 2006, a 21.6% decline
from the $50.4  million at  December  31,  2005 and a 23.6%  decline  from $51.8
million at  September  30,  2005.  The decline in the  portfolio  is a result of
strong  loan  demand and the need to  utilize  funds  from  maturing  and called
investments to fund loans. We purchase  securities rated A or higher by Standard
and  Poor's  and or  Moody's  Investors  Service.  In the  event a  security  is
downgraded,  we will monitor the investment more closely or sell if appropriate.
Local tax-exempt bonds are occasionally purchased without an A rating.

Securities  are  classified  as held to  maturity  ("HTM"),  if we have both the
intent and the ability to hold these securities to maturity. As of September 30,
2006, the Company had  securities  totaling $15.8 million with a market value of
$16.1 million  categorized as held to maturity.  Decisions to acquire  municipal
securities,  which  are  generally  placed  in this  category,  are based on tax
planning needs, pledge requirements and earnings.

Securities  are  classified  as available  for sale ("AFS") if we intend to hold
these debt  securities for an indefinite  period of time, but not necessarily to
maturity.  Investment  securities  which are  categorized as AFS are acquired as
part of the  overall  asset and  liability  management  function  and serve as a
primary  source of  liquidity.  Decisions  to acquire  or  dispose of  different
investments  are  based on an  assessment  of  various  economic  and  financial
factors,  including,  but not  limited to,  interest  rate risk,  liquidity  and
capital  adequacy.  Securities  held in the AFS  category are recorded at market
value,  which is $23.7 million compared to an amortized cost of $24.0 million as
of September 30, 2006.

There were eighteen  Federal Farm Credit Bank,  Federal Home Loan Bank,  Federal
Home  Loan  Mortgage   Corporation  or  Federal  National  Mortgage  Association
securities with a fair value of $17.3 million and six U.S.  Treasury  securities
of with a fair value of $5.4 million in the AFS portfolio and sixteen  municipal
securities  with a fair market value of $5.0 million in the HTM  portfolio  that
are  temporarily  impaired as of September  30, 2006.  Of the above,  there were
eighteen  Federal  Farm Credit Bank,  Federal Home Loan Bank,  Federal Home Loan
Mortgage Corporation or Federal National Mortgage Association  securities with a
fair value of $17.3 million and six U.S.  Treasury  securities with a fair value
of $5.4 million in the AFS portfolio  and fifteen  municipal  securities  with a
fair value of $4.9 million in the HTM  portfolio  that have been in a continuous
loss position for 12 months or more as of September 30, 2006.  The primary cause
of the impairment of these securities is interest rate volatility  inherent in a
rising  rate  environment  which  causes the  market  value of the  security  to
decline.  Our management  understood  the potential  market risks at the time of
acquisition  and  determined  that the  benefit  of the  higher  interest  rates
received at the time of purchase offset the potential deterioration in value. It
is our intent to carry the  securities  to maturity  date, at which time we will
receive face value for the securities at no loss.

Although the quoted market values fluctuate, investment securities are generally
held to  maturity,  and  accordingly,  gains and  losses are  recognized  in the
accounts upon sale, or at such time as  management  determines  that a permanent
decline  in  value  exists.  In the  opinion  of our  management,  there  was no
investment  in  securities  at September  30, 2006 that  constituted  a material
credit risk to us. The lower market value to amortized costs was a result of the
increase in market interest rates and not an indication of lower credit quality.

                                    Page 16

<page>


Loans

Our loan  portfolio was $209.6  million at September 30, 2006, or 92.0% of total
deposits.  This compares with $171.2  million,  or 79.3% of total  deposits,  at
December 31, 2005 and $162.1 million,  or 79.1% of total deposits,  at September
30, 2005. A  comparative  schedule of average loan  balances is presented in the
table  on page  11;  period-end  and  year-end  balances  are  presented  in the
following table.

<TABLE>
<S>                             <C>             <C>              <C>              <C>             <C>              <C>
                             September 30,    Percentage      December 31,     Percentage     September 30,    Percentage
                                 2006          of Total           2005          of Total          2005          of Total
                             ------------     ----------      ------------     ----------     ------------    ----------

Commercial                   $145,754,691           69.3%     $118,590,731           69.1%    $114,451,600          70.4%
Consumer                       26,105,680           12.4%       21,804,507           12.7%      19,670,435          12.1%
Real estate                    21,961,749           10.5%       18,004,805           10.5%      15,279,749           9.4%
Real estate mortgage           16,342,424            7.8%       13,251,137            7.7%      13,148,765           8.1%
Leases                             40,896            0.0%           25,822            0.0%          31,296           0.0%
                             ------------     ----------      ------------     ----------     ------------    ----------
Gross loans & lease           210,205,440          100.0%      171,677,002          100.0%     162,581,845         100.0%
                                              ==========                       ==========                      =========
Deferred loan fees               (584,843)                        (482,410)                       (450,329)
                             ------------                     ------------                    ------------
Total loans and leases,
net of unearned fees          209,620,597                      171,194,592                     162,131,516
Allowance for loan
 and lease losses              (3,101,057)                      (2,776,507)                     (2,787,279)
                             ------------                     ------------                    ------------

                             $206,519,540                     $168,418,085                    $159,344,237
                             ============                     ============                    ============
</TABLE>

Risk Elements

The  majority  of our loan  activity is with  customers  located  within  Sonoma
County.  Approximately  90.3% of the total  loan  portfolio  is  secured by real
estate located in our service area.  Significant  concentrations  of credit risk
may exist if a number of loan  customers are engaged in similar  activities  and
have similar  economic  characteristics.  We believe it has policies in place to
identify problem loans and to monitor concentrations of credits.

Non Performing Assets

Our management  classifies all loans as non-accrual  loans when they become more
than 90 days past due as to principal or interest, or when the timely collection
of  interest  or  principal  becomes  uncertain,  if  earlier,  unless  they are
adequately secured and in the process of collection.

A loan remains in a  non-accrual  status until both  principal and interest have
been current for six months and meets cash flow or  collateral  criteria or when
the loan is  determined  to be  uncollectible  and is charged  off  against  the
allowance for loan losses,  or, in the case of real estate loans, is transferred
to other real estate owned. A loan is classified as a restructured loan when the
interest  rate is  materially  reduced,  when the term is  extended  beyond  the
original  maturity  date or  other  concessions  are made by us  because  of the
inability  of the  borrower to repay the loan under the  original  terms.  As of
September 30, 2006 there was $71,000 in restructured loans.

There were $849,000 of non-accrual loans and no loans 90 days or more past due
and still accruing at September 30, 2006. There were $1.1 million of non-accrual
loans and no loans 90 days or more past

                                    Page 17

<page>


due and still accruing at September 30, 2005.  The decline in non-accrual  loans
is our management's attempt to recognize and handle problems early.

Allowance for Loan Losses

The allowance for loan losses is  maintained at a level  considered  adequate to
provide  for  losses  that  can be  reasonably  anticipated.  The  allowance  is
increased by provisions charged to operating expense and reduced by charge-offs,
net of recoveries.  The allowance is based on estimates, and ultimate losses may
vary from the current  estimates.  These estimates are reviewed  monthly and, as
adjustments  become  necessary,  they are reported in earnings in the periods in
which they become known.

The  review   process  is  intended  to  identify  loan  customers  who  may  be
experiencing financial difficulties. In these circumstances,  a specific reserve
allocation  or  charge-off  may be  recommended.  Other  factors  considered  by
management in evaluating  the adequacy of the  allowance  include:  loan volume,
historical net loan loss experience,  the condition of industries and geographic
areas  experiencing  or  expected to  experience  economic  adversities,  credit
evaluations and current  economic  conditions.  The allowance for loan losses is
not a precise amount,  but based on the factors above,  represents  management's
best  estimate of losses that may be  ultimately  realized from the current loan
portfolio.

Worsening  conditions in certain  economic  sectors and  geographic  areas could
adversely affect the loan portfolio,  necessitating  larger  provisions for loan
losses than  currently  estimated.  Based on our  management's  risk  management
review and a review of our loan  portfolio,  we believe that our  allowance  for
losses for the quarter ending September 30, 2006, is sufficient to absorb losses
inherent in the loan portfolio. This assessment is based upon the best available
information and does involve  uncertainty and matters of judgment.  Accordingly,
the adequacy of the loan loss reserve  cannot be determined  with  precision and
could be susceptible to significant change in future periods.

At September 30, 2006, the allowance for loan losses was $3.1 million,  or 1.48%
of period-end loans,  compared with $2.8 million,  or 1.62% at December 31, 2005
and $2.8 million, or 1.72% at September 30, 2005.

                                    Page 18

<PAGE>


An  analysis  of the  changes  in  the  allowance  for  loan  losses,  including
charge-offs and recoveries by loan categories, is presented below.

<TABLE>
<S>                                  <C>                <C>                <C>
                                  For the Nine      For the Year    For the Nine
                                  Months Ended         Ended        Months Ended
                                    9/30/06          12/31/05          9/30/05

Balance beginning of year         $ 2,776,507      $ 2,428,572      $ 2,428,572

Charge-offs:
  Commercial                           (6,594)         (53,337)         (20,198)
  Consumer                             (2,965)         (16,976)         (16,738)
                                  -----------      -----------      -----------
              Total charge-offs        (9,559)         (70,313)         (36,936)
Recoveries:

  Commercial                           13,357           55,055           50,543
  Consumer                                752            3,193              100
                                  -----------      -----------      -----------

               Total recoveries        14,109           58,248           50,643

Net (charge-offs) recoveries            4,550          (12,065)          13,707

Provision charged to operations       320,000          360,000          345,000
                                  -----------      -----------      -----------
Balance end of period             $ 3,101,057      $ 2,776,507      $ 2,787,279
                                  ===========      ===========      ===========

Ratio of net charge-offs(annualized)
 to average loans                        0.00%            0.01%           -0.01%

Balance in allowance as a percentage
  of loans outstanding at period end     1.48%            1.62%            1.72%
</TABLE>

Deposits

A comparative schedule of average deposit balances is presented in the table on
page 11; period end and year-end deposit balances are presented in the following
table.

<TABLE>
<S>                             <C>             <C>              <C>              <C>             <C>              <C>
                             September 30,    Percentage      December 31,    Percentage     September 30,     Percentage
                                 2006          of Total          2005          of Total          2005           of Total
                             ------------     ----------      -----------     ----------     ------------      ----------


Interest-bearing
 transaction deposits        $ 29,508,898           13.0%     $ 35,586,113          16.6%    $ 34,139,432            16.7%

Savings deposits               74,083,499           32.5%       74,218,076          34.4%      73,459,066            35.8%
Time deposits, $100,000
and over                       43,738,653           19.2%       32,011,640          14.8%      26,890,840            13.1%

Other time deposits            27,382,790           12.0%       24,482,074          11.3%      21,791,961            10.6%
                             ------------         ------      ---  -------        ------     ------------            ----

Total interest-bearing
 deposits                     174,713,840           76.7%      166,297,903          77.1%     156,281,299            76.2%

Noninterest-bearing            53,221,766           23.3%       49,460,864          22.9%      48,746,030            23.8%
                             ------------         ------      ------------        ------     ------------            ----

Total deposits               $227,935,606          100.0%     $215,758,767         100.0%    $205,027,329           100.0%
                             ============         ======      ============        ======     ============           =====

</TABLE>


                                    Page 19




<page>
Total  deposits  increased by $12.2  million  (5.6%),  during the nine months of
2006, to $227.9  million from $215.8  million at December 31, 2005 and increased
by 11.2% or $22.9 million from $205.0  million as of September 30, 2005.  Demand
deposits,  time deposits greater than $100,000 and other time deposits showed an
increase over year end 2005.  Demand deposits  increased $3.8 million or 7.6% to
$53.2  million  during  the nine  months of 2006.  Time  deposits  greater  than
$100,000  increased by $11.7 million or 36.6% to $43.7  million  during the nine
months of 2006.  Other time  deposits  showed growth of 11.8% or $2.9 million to
$27.4 million, during the nine months of 2006.

Interest  bearing  deposits  showed a decline of $6.1 million (17.1%) from $35.6
million as of  December  31, 2005 to $29.5  million as of  September  30,  2006.
Savings  deposits  were $74.1 million as of September 30, 2006 compared to $74.2
million as of year end 2005, a decline of $135,000 or 0.18%.  The decline  could
be, in part,  investors  moving funds from these  accounts into higher  yielding
time deposits discussed above.

With the future of interest rates uncertain, we cannot predict how quickly rates
may change on deposit  accounts  which  could cause the net  interest  margin to
decline,  resulting in lower net income.  In a rising rate  environment  deposit
rates  could  increase  which would  cause the net  interest  margin to decline,
resulting  in lower net income.  We have  already  seen an increase in the yield
paid on deposit  accounts  from 1.40% as of  September  30,  2005 to 2.24% as of
September 30, 2006, an 84 basis point increase.

Although we have  experienced  strong deposit growth this year,  loan demand has
exceeded  expectations,  therefore  we have taken  advantage  of its  ability of
borrow  at the  Federal  Home Loan  Bank.  As of  September  30,  2006,  we were
borrowing $10.0 million at the Federal Home Loan Bank compared to $650,000 as of
September 30, 2005. The Federal Home Loan Bank  borrowings are responsible for a
92 basis point increase in the yield paid on all interest  bearing  liabilities,
from 1.44% in 2005 to 2.36% in 2006. Refer to the table-Average Balance,  Yields
and Rates Paid, on page 11. The decision was made by our management  that it was
more cost effective to borrow instead of paying higher rates of interest on long
term deposits.

Risk-Based Capital

The Federal Deposit Insurance  Corporation (FDIC) has adopted risk-based capital
guidelines  which establish a risk-adjusted  ratio relating capital to different
categories of assets and off-balance sheet exposures.  Under current guidelines,
as of  September  30,  2006,  we were  required to have minimum Tier I and total
risk-based  capital ratios of 4% and 8%,  respectively.  To be well  capitalized
under Prompt  Corrective  Action  Provisions  requires  minimum Tier I and total
risk-based capital ratios of 6% and 10%, respectively.

The FDIC has also adopted new minimum  leverage ratio  guidelines for compliance
by banking organizations.  The guidelines require a minimum leverage ratio of 4%
of Tier 1 capital to total average assets.  Banks experiencing high growth rates
are expected to maintain  capital  positions well above the minimum levels.  The
leverage ratio in conjunction  with the risk-based  capital ratio constitute the
basis for determining the capital adequacy of banking organizations.

The table below presents Tier 1 capital,  total capital and total  risk-weighted
assets at September 30, 2006,  along with the related  risk-based  capital ratio
and leverage ratio.

                                    Page 20

<page>


(dollars in thousands)
<TABLE>
<S>        <C>                 <C>                  <C>              <C>
          Total
       Risked-based           TIER 1                TOTAL          Leverage
          Assets        Capital    Ratio      Capital     Ratio      Ratio
       ------------     --------   -----     --------     -----    --------
       $248,282         $ 24,561    9.89%    $ 27,662     11.14%       9.21%
</TABLE>

Stock Repurchase

In January 2001, we approved a program to repurchase Sonoma Valley Bancorp stock
up to $1.0 million;  in August 2002 we approved the  repurchase of an additional
$1.0 million of Sonoma Valley  Bancorp  stock;  in February 2006 we approved the
repurchase  60,000 shares of Sonoma Valley Bancorp stock; and in October 2006 we
approved the repurchase of an additional  60,000 shares of Sonoma Valley Bancorp
stock.  As of September 30, 2006,  $3,294,246 had been  repurchased and retired.
Refer to page x,  for the  table  of  "Consolidated  Statements  of  Changes  in
Shareholders' Equity."

Off Balance Sheet Commitments

Our off balance sheet  commitments  consist of  commitments  to extend credit of
$53.0 million and standby letters of credit of $348,000.  These  commitments are
extended to customers in the normal course of business. We also have contractual
obligations  consisting of operating leases for various  facilities and payments
to participants  under our supplemental  executive  retirement plan and deferred
compensation plan.

Liquidity Management

Our liquidity is determined by the level of assets (such as cash,  federal funds
sold and available-for-sale  securities) that are readily convertible to cash to
meet customer withdrawal and borrowing needs. Deposit growth also contributes to
our  liquidity.  We review our  liquidity  position on a regular basis to verify
that it is adequate to meet projected  loan funding and potential  withdrawal of
deposits.  We have a  comprehensive  Asset and Liability  Policy which we use to
monitor and determine  adequate levels of liquidity.  At September 30, 2006, our
total  liquidity  ratio  (adjusted  liquid  assets to  deposits  and short  term
liabilities)  was 16.9%  compared  to 24.4% and 25.0% at  December  31, 2005 and
September 30, 2005, respectively.  Management expects that liquidity will remain
adequate throughout 2006, with deposit growth, security maturities and borrowing
capacity  offsetting  the strong loan growth the  Company is  experiencing.  Any
excess funds will be invested in quality  liquid assets,  such as U.S.  Treasury
and Agency securities.

Market Risk Management

Overview.  Market risk is the risk of loss from adverse changes in market prices
and rates.  Our market risk arises primarily from interest rate risk inherent in
our loan, investment and deposit functions. The goal for managing our assets and
liabilities is to maximize  shareholder  value and earnings while  maintaining a
high quality balance sheet without  exposing us to undue interest rate risk. Our
Board of  Directors  has  overall  responsibility  for the  interest  rate  risk
management  policies.

                                    Page 21



<page>

Sonoma Valley Bank has an Asset and Liability  Management  Committee (ALCO) that
establishes  and monitors  guidelines to control the  sensitivity of earnings to
changes in interest rates.

Asset/Liability  Management.  Activities involved in asset/liability  management
include but are not  limited to lending,  accepting  and  placing  deposits  and
investing  in  securities.  Interest  rate  risk  is  the  primary  market  risk
associated with asset/liability management.  Sensitivity of earnings to interest
rate changes  arises when yields on assets change in a different  time period or
in a different  amount from that of interest costs on  liabilities.  To mitigate
interest rate risk,  the structure of the balance sheet is managed with the goal
that  movements of interest rates on assets and  liabilities  are correlated and
contribute to earnings even in periods of volatile interest rates. When interest
rates increase,  the market value of securities held in the investment portfolio
declines.  Generally,  this decline is offset by an increase in  earnings.  When
interest rates decline,  the market value of securities increases while earnings
decrease due to our asset sensitivity caused by the variable rate loans. Usually
we are able to  mitigate  the risk from  changes  in  interest  rates  with this
balance sheet  structure.  At the present time,  the market is  experiencing  an
anomaly from historical  norms.  While  short-term rates have increased over the
past  year as a result of the  Federal  Open  Market  Committee  increasing  the
Federal Funds target rate from 3.75% to 5.25%, a 150 basis point  increase,  the
long term interest rates have only increased about 31 basis points when compared
to September  2005.  The  asset/liability  management  policy sets limits on the
acceptable  amount of variance in net interest margin and market value of equity
under  changing  interest  environments.  We use  simulation  models to forecast
earnings, net interest margin and market value of equity.

Simulation  of earnings is the primary tool used to measure the  sensitivity  of
earnings to interest rate changes. Using  computer-modeling  techniques,  we are
able to estimate the potential impact of changing interest rates on earnings.  A
balance  sheet  forecast is prepared  quarterly  using  inputs of actual  loans,
securities and interest bearing liabilities (i.e. deposits/borrowings) positions
as the beginning  base.  The forecast  balance  sheet is processed  against five
interest rate  scenarios.  The scenarios  include 100 and 200 basis point rising
rate  forecasts,  a flat rate  forecast and 100 and 200 basis point falling rate
forecasts which take place within a one year time frame. The net interest income
is  measured  during  the year  assuming  a  gradual  change  in rates  over the
twelve-month  horizon.  Our 2006-2007 net income, as forecast below, was modeled
utilizing a forecast  balance sheet  projected from September 30, 2006 balances.
The  following  table  summarizes  the effect on net income of +/-100 and +/-200
basis point  changes in interest  rates as measured  against a constant rate (no
change) scenario.

Interest Rate Risk Simulation of Net Income as of September 30, 2006
(In thousands)

Variation from a constant rate scenario            $ Change in Net Income
                  +200bp                             $   (311)
                  +100bp                                 (155)
                  -100bp                                 (135)
                  -200bp                                 (282)

The  simulations of earnings do not incorporate  any management  actions,  which
might moderate the negative consequences of interest rate deviations. Therefore,
they do not reflect likely actual results,  but serve as conservative  estimates
of interest rate risk.


                                    Page 22
<PAGE>




Since the primary tool used by  management  to measure and manage  interest rate
exposure  is a  simulation  model,  use  of the  model  to  perform  simulations
reflecting  changes  in  interest  rates  over a twelve  month  horizon  enables
management to develop and initiate  strategies for managing exposure to interest
rate risks. Our management  believes that both individually and in the aggregate
its modeling  assumptions are  reasonable,  but the complexity of the simulation
modeling process results in a sophisticated  estimate, not an absolutely precise
calculation of exposure.

Interest Rate Sensitivity  Analysis.  Interest rate sensitivity is a function of
the repricing characteristics of the portfolio of assets and liabilities.  These
repricing  characteristics are the time frames within which the interest-bearing
assets  and  liabilities  are  subject  to change in  interest  rates  either at
replacement, repricing or maturity. Interest rate sensitivity management focuses
on the maturity of assets and liabilities and their repricing  during periods of
changes in market interest rates.  Interest rate  sensitivity is measured as the
difference  between  the  volumes  of  assets  and  liabilities  in the  current
portfolio  that  are  subject  to  repricing  at  various  time  horizons.   The
differences are known as interest sensitivity gaps.

A positive  cumulative  gap may be equated to an asset  sensitive  position.  An
asset  sensitive  position in a rising  interest rate  environment  will cause a
bank's interest rate margin to expand. This results as floating or variable rate
loans reprice more rapidly than fixed rate  certificates of deposit that reprice
as they mature over time. Conversely, a declining interest rate environment will
cause the  opposite  effect.  A  negative  cumulative  gap may be  equated  to a
liability  sensitive  position.  A  liability  sensitive  position  in a  rising
interest rate  environment will cause a bank's interest rate margin to contract,
while a declining  interest rate environment will have the opposite effect.  The
table above shows net interest  income  declining  both when rates  increase and
when rates decline.  Although we are usually asset sensitive,  which would cause
the Bank's net interest margin to expand when rates increase,  the simulation is
showing a negative  change in net interest income both in a rising and declining
rate  environment due to the need to rapidly increase deposit rates. The decline
in net income in the rising  rate  environment  is a result of our  conservative
evaluation of the market pressure to increase rates on deposits,  which causes a
decline in the net interest margin.

The following table sets forth the dollar amounts of maturing  and/or  repricing
assets and liabilities for various periods.  This does not include the impact of
prepayments  or other  forms of  convexity  caused by changing  interest  rates.
Historically, this has been immaterial and estimates for them are not included.

We have more liabilities  than assets  repricing  during the next year.  Usually
because our asset rates change more than deposit rates, our interest income will
change more than the cost of funds when rates change.  For the current  quarter,
we are making a more conservative assumption. Historically, we have been able to
raise deposit rates with a lag to loan rate  increases,  however loan rates have
remained flat and market  demands are creating  pressure to raise interest rates
on deposits. Therefore for a period of time we have chosen to use the simulation
to forecast  deposits rates rising quite  rapidly.  This causes the net interest
margin to shrink and net interest income to decline in both a rising and falling
rate  environment.  The table below  indicates  that we are liability  sensitive
throughout  the  next  year.  At the end of the  twelve  month  cycle,  the rate
sensitive  gap shows  $71.5  million  more in  liabilities  than  assets  with a
repricing opportunity.




                                    Page 23


<page>
We control  long-term  interest rate risk by keeping long term fixed rate assets
(longer  than 5 years)  less than its long term  fixed rate  funding,  primarily
demand deposit  accounts and capital.  The following table sets forth cumulative
maturity distributions as of September 30, 2006 for our interest-bearing  assets
and  interest-bearing  liabilities,  and our interest rate  sensitivity gap as a
percentage of total interest-earning assets. Of the $147.1 million in fixed rate
assets repricing in the over 12 months category, shown in the table below, $30.8
million  are long term  assets  over five  years.  This $30.8  million  compares
favorably to the $78.0 million in demand and core deposits and equity.


<TABLE>
<S>                         <C>            <C>         <C>            <C>            <C>           <C>

September 30, 2006        Immediate      Up to 3      4 to 6        7 to 12        Over 12       Totals
                           Reprice       Months       Months         Months        Months
(in thousands)            ---------     ---------    ---------      ---------      --------     ---------

Fed Funds Sold            $       0     $       0     $       0     $       0     $       0     $       0
Securities + IBB                  0         4,848         2,980         5,959        25,817        39,604
Loans                        41,867         7,320        12,543        23,475       121,315       206,520
                          ---------     ---------     ---------     ---------     ---------     ---------
     Total RSA            $  41,867     $  12,168     $  15,523     $  29,434     $ 147,132     $ 246,124


MMDA/NOW/SAV              $ 103,853     $       0     $       0     $       0     $       0     $ 103,853
CDs < $100k                       0         6,019         8,295         8,295         4,775        27,384
CDs > $100k                       0        14,215        19,833         4,958         4,733        43,739
Borrowings                    5,000             0             0             0         5,000        10,000
                          ---------     ---------     ---------     ---------     ---------     ---------
     Total RSL            $ 108,853     $  20,234     $  28,128     $  13,253     $  14,508     $ 184,976

Gap                         (66,986)       (8,066)      (12,605)       16,181       132,624        61,148
Cumulative                  (66,986)      (75,052)      (87,657)      (71,476)       61,148

% of Assets                   -25.0%        -28.0%        -32.7%        -26.6%         22.8%
</TABLE>

Market risk in securities. Market risk in securities shows the amount of gain or
loss  (before  tax)  in  the  securities  portfolio.  Portfolio  volume,  sector
distribution,  duration,  and quality all affect market valuation.  The adjusted
equity  ratio is Tier 1 capital  adjusted  for the market  gain or loss less any
applicable  tax effect  divided by average  total  assets for  leverage  capital
purposes  for the most  recent  quarter.  The ratio is  designed  to show Tier 1
capital  if the  securities  portfolio  had to be  liquidated  and all gains and
losses  recognized.  If the ratio remains  strong after a +2% or +3% rate shock,
market  risk is  reasonable  in  relation  to the level of  capital.  A bank has
flexibility  and strength when the  securities  portfolio can be liquidated  for
liquidity purposes without affecting capital adequacy.

We have only moderate market risk in investments because the average maturity in
the  portfolio  is not very  long,  except  for  municipals,  which  are held to
maturity (see page 16 for a discussion of  investments  ). The portfolio  should
decline in value only about 2.0% or $790,000  for a 1%  increase  in rates.  The
gain in value if rates  fall  would be  somewhat  less,  because  there are some
callable  bonds.  Marking-to-market  available  for sale  securities  when rates
change would add only modest volatility to a strong level of equity. This market
risk acts to offset the  interest  rate risk (i.e.  if rates  decline and NIM is
squeezed, there would be a concurrent gain in the value of securities).

                                    Page 24

<PAGE>


For the Three Month Periods
Ended September 30, 2006 and 2005

Overview

We reported  net income of $1.0 million for the third  quarter of 2006  compared
with $847,551 for the third  quarter of 2005.  On a per share basis,  net income
for the three months ended  September 30, 2006 equaled $0.45 per share  compared
with $0.39 per share during the same period in 2005.

Return on average total assets on an annualized basis for the three months ended
September 30, 2006 was 1.52%  compared to 1.45% for the same period of 2005. The
increase in the return on assets is because  earnings  are  growing  faster than
assets.  Return on average  shareholders'  equity on an annualized basis for the
three  months  ended  September  30,  2006  and  2005  was  15.82%  and  15.33%,
respectively.  The  increase  in the  return on equity is a result of the strong
growth in earnings  experienced  in the third  quarter of 2006 when  compared to
2005.  Net income  showed an increase of 19.4% or $164,356 from $847,551 to $1.0
million.

RESULTS OF OPERATIONS

Net Interest Income

Net interest income,  adjusted to a fully taxable  equivalent  basis,  increased
$431,000 to $3.4  million for the three months ended  September  30, 2006,  from
$3.0 million  during the  comparable  period of 2005.  Net interest  income on a
fully taxable equivalent basis, as shown on the table -Average Balances,  Yields
and Rates Paid on page 27, is higher than net interest  income on the statements
of income because it reflects  adjustments  applicable to tax-exempt income from
certain  securities and loans  ($95,000 in 2006 and $98,000 in 2005,  based on a
34% federal income tax rate).

Net interest income (stated on a fully taxable  equivalent basis) expressed as a
percentage of average earning assets, is referred to as net interest margin. Our
net interest  margin for the third  quarter of 2006 declined to 5.42% from 5.44%
for the comparable period in 2005. The decline in the net interest margin is the
result of the pressure to raise interest  rates.  The yield on interest  bearing
liabilities  increased  116 basis  points from 1.59% for the three  months ended
September  30, 2005 to 2.75% for the three  months  ended  September  30,  2006.
Although the prime lending rate has  increased 150 basis points since  September
30, 2005, the long term lending rates in the  marketplace  have not increased as
quickly and we have had pressure to increase rates paid on liabilities. This has
had some  effect on the net  interest  margin,  but the strong  loan  growth has
offset some of the effect of the increase in interest expense on liabilities.

Interest Income

Interest  income  (stated  on a fully  taxable  equivalent  basis) for the three
months ended  September 30, 2006  increased by $1.1 million to $4.7  million,  a
29.2%  increase over the $3.6 million  realized  during the same period in 2005.
The gain in volume of average  balances was responsible for a $791,000  increase
in  interest  income and a  $260,000  increase  in income  was  related to lower
interest  rates,  resulting  in a total  increase  in  interest  income  of $1.1
million.

                                    Page 25

<PAGE>


Interest Expense

Total interest  expense for the three months ended  September 30, 2006 increased
by $620,000 to $1.3 million  compared  with $639,000 in the same period of 2005.
The average rate paid on all interest-bearing  liabilities for the third quarter
of 2006  increased to 2.75% from 1.59% in the third quarter of 2005, and average
balances for the third quarter of 2006  increased to $181.4  million from $159.2
million in the same period of 2005, a 13.9% gain.

The gain in volume of average  balances  accounted  for a $299,000  increase  in
interest expense while a $321,000  increase was related to higher interest rates
paid, resulting in a $620,000 increase in interest expense for the third quarter
of 2006.  Individual  components  of interest  income and  interest  expense are
provided in the table - Average Balances, Yields and Rates Paid on page 27.

Provision for Loan Losses

The  provision  for loan  losses was  $30,000  during the third  quarter of 2006
compared  to the  $95,000  provision  for the third  quarter of 2005.  The lower
provision is the result of our  managements'  evaluation  and  assessment of the
loan portfolio.

Non-interest Income

Non-interest  income of $534,000 for the third  quarter of 2006  represented  an
increase of $36,000,  or 7.2%,  from the $498,000 for the  comparable  period in
2005.  Income from service  charges on deposit  accounts,  credit card  merchant
income and increases in wire transfer fees were major contributors to the growth
in income over 2005.

Non-interest Expense

For the third quarter of 2006,  non-interest  expense was $2.2 million  compared
with $2.0  million  for the same  period in 2005,  representing  an  increase of
$263,000,  or 13.4%. The largest increase of non interest expense was salary and
benefits  which  increased  $281,000,  or 25.1%,  compared with the three months
ended  September  30,  2005.  The  increase  in  expense  in 2006 is a result of
accruals for incentives and the expense associated with restricted stock granted
to senior  employees  in July,  2006.  At September  30,  2006,  total full time
equivalent employees were 50 compared to 49 in 2005.

Other non  interest  expense  for the three  months  ended  September  30,  2006
decreased  0.1% or $500 to  $577,500  compared to $578,000 in the same period in
2005. All categories of other operating  expense remained level or declined from
the prior year except for professional fees.

The expenses for premises and fixed assets  declined  6.5% from $269,000 in 2005
to $251,000 in 2006. The $18,000 decrease in 2006 is largely the result of lower
expenses in fixed asset costs in 2006.

Provision for Income Taxes

The  provision  for income taxes  decreased to an effective tax rate of 35.6% in
the third quarter of 2006 compared with 34.8% for the comparable period in 2005.
Income  taxes  reported  in the  financial  statements  include  deferred  taxes
resulting  from  timing  differences  in the  recognition  of items  for tax and
financial reporting purposes.

                                    Page 26

<PAGE>


                              SONOMA VALLEY BANCORP
                     AVERAGE BALANCES/YIELDS AND RATES PAID
             For the three months ended September 30, 2006 and 2005
<TABLE>
<S>                                            <C>             <C>            <C>           <C>            <C>           <C>

                                                                  2006                                         2005
                                                                  ----                                         ----
                                                Average          Income/        Yield/        Average         Income/       Yield/
ASSETS                                          Balance          Expense         Rate         Balance         Expense        Rate
Interest-earning assets:
Loans(2):
  Commercial                                 $ 144,757,963    $ 2,907,583         7.97%   $ 109,771,367     $ 2,083,419       7.53%
  Consumer                                      25,758,064        553,554         8.53%      19,459,206         349,958       7.14%
  Real estate construction                      18,800,582        401,965         8.48%      18,689,755         361,262       7.67%
  Real estate mortgage                          16,206,255        286,262         7.01%      13,227,184         231,628       6.95%
  Tax exempt loans (1)                           2,379,035         49,294         8.22%       2,470,126          51,142       8.21%
  Leases                                            44,680          1,376        12.22%          34,831             920      10.48%
  Tax exempt leases (1)                                  0              0         0.00%               0               0       0.00%
  Unearned loan fees                              (611,470)                                    (475,465)
                                             -------------                                -------------
         Total loans                           207,335,109      4,200,034         8.04%     163,177,004       3,078,329       7.48%
Investment securities
  Available for sale:
         Taxable                                24,221,627        206,996         3.39%      35,032,300         274,973       3.11%
         Tax exempt(1)                                   0              0         0.00%               0               0       0.00%
  Hold to maturity:
         Taxable                                         0              0         0.00%         368,083           2,496       2.69%
         Tax exempt (1)                         15,799,715        230,202         5.78%      16,571,431         236,188       5.65%
                                             -------------    -----------                 -------------     -----------
         Total investment securities            40,021,342        437,198         4.33%      51,971,814         513,657       3.92%
Federal funds sold                                       0              0         0.00%          39,570             332       3.33%
Federal Home Loan Bank stock                     1,117,222         13,734         4.88%         857,852           8,609       3.98%
Total due from banks/Interest bearing              105,304          1,378         5.19%         105,109             392       1.48%
                                             -------------    -----------                 -------------     -----------
  Total interest-earning assets                248,578,977    $ 4,652,344         7.43%     216,151,349     $ 3,601,319       6.61%
                                                              ===========                                   ===========
Noninterest-bearing assets:
  Reserve for loan losses                       (3,084,973)                                  (2,755,188)
  Cash and due from banks                        6,009,598                                    6,419,048
  Premises and equipment                         1,044,823                                    1,274,906
  Other assets                                  14,541,783                                   12,947,311
                                             -------------                                -------------
                           Total assets      $ 267,090,208                                $ 234,037,426
                                             =============                                =============
LIABILITIES AND SHAREHOLDERS' EQUITY
Interest-bearing liabilities:
  Interest-bearing deposits
         Interest-bearing transaction        $  30,007,124    $    12,396         0.16%   $  33,360,612     $    14,183       0.17%
         Savings deposits                       74,650,262        406,518         2.16%      75,362,401         231,020       1.22%
         Time deposits over $100,000            39,108,740        425,347         4.31%      27,346,281         221,459       3.21%
         Other time deposits                    26,870,286        267,484         3.95%      21,009,015         151,829       2.87%
                                             --------------   -----------                 -------------     -----------
           Total interest-bearing deposits     170,636,412      1,111,745         2.58%     157,078,309         618,491       1.56%
  Federal Funds purchased                                0              0         0.00%               0               0       0.00%
  Other borrowings                              10,764,839        146,886         5.41%       2,118,002          20,020       3.75%
                                             -------------    -----------                 -------------     -----------
      Total interest-bearing liabilities       181,401,251    $ 1,258,631         2.75%     159,196,311     $   638,511       1.59%
                                                              ===========                                   ===========
Non interest-bearing liabilities:
  Non interest-bearing demand deposits          54,746,104                                   48,347,004
  Other liabilities                              5,354,200                                    4,375,790
                    Shareholders' equity        25,588,653                                   22,118,321
                                             -------------                                -------------
  Total liabilities and shareholders'equity  $ 267,090,208                                $ 234,037,426
                                             =============                                =============
Interest rate spread                                                              4.68%                                       5.02%
                                                                                 =====                                       =====
Interest income                                               $ 4,652,344         7.43%                     $ 3,601,319       6.61%
Interest expense                                                1,258,631         2.01%                         638,511       1.17%
                                                              -----------        -----                      -----------      -----
Net interest income/margin                                    $ 3,393,713         5.42%                     $ 2,962,808       5.44%
                                                              ===========        =====                      ===========      =====
</TABLE>


(1)  Fully tax equivalent  adjustments are based on a federal income tax rate of
     34% in 2006 and 2005
(2)  Non-accrual loans have been included in loans for the purposes of the above
     presentation.  Loan fees of $111,622 and $93,883 for the three months ended
     September 30, 2006 and September 30, 2005, respectively,  were amortized to
     the appropriate interest income categories.

                                    Page 27
<PAGE>





Item 3.  QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK

Information regarding Quantitative and Qualitative Disclosures about Market Risk
appears on pages 21 through 24 under the caption  "Management's  Discussion  and
Analysis of Consolidated  Financial Condition and Results of Operations - Market
Risk Management" and is incorporated herein by reference.

Item 4.  CONTROLS AND PROCEDURES

Our management,  with the  participation  and under the supervision of our Chief
Executive  Officer and Chief  Financial  Officer,  reviewed  and  evaluated  the
effectiveness  of the  design  and  operation  of our  disclosure  controls  and
procedures (as defined by Securities  Exchange Act Rule 13a-15(e) or 15d-15(e)),
as of the end of the fiscal  quarter  covered by this  report,  as  required  by
Securities  Exchange Act Rule 13a-15, and concluded that our disclosure controls
and procedures are effective to ensure that information required to be disclosed
in our reports filed with the Securities and Exchange Commission pursuant to the
Securities  Exchange  Act  of  1934  is  accumulated  and  communicated  to  our
management,  including our Chief Executive Officer and Chief Financial  Officer.
Based on this  evaluation,  our Chief  Executive  Officer  and  Chief  Financial
Officer  have  concluded  that  as of the  end of such  period,  our  disclosure
controls  and  procedures  are  effective  to ensure  that we  record,  process,
summarize  and report  information  required to be  disclosed  in the reports we
filed  under  the  Securities  Exchange  Act of 1934  within  the  time  periods
specified by the Securities and Exchange Commission's rules and regulations.

During the quarter ended September 30, 2006, there have been no changes in our
internal control over financial reporting, or to our knowledge, in other
factors, that have materially affected or, are reasonably likely to materially
affect our internal controls over financial reporting.

                            Part II OTHER INFORMATION

Item 1.  LEGAL PROCEEDINGS

From time to time we may be a party to legal proceedings arising in the ordinary
course  of  business.  We  are  not  currently  a  party  to,  nor is any of its
properties the subject of, any material pending legal proceedings.

Item 1A.  RISK FACTORS

None

                                    Page 28

<PAGE>






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

The following chart summarizes our repurchases of our common shares as part of
our publicly announced repurchase plan.
<TABLE>
<S>               <C>                 <C>                    <C>                    <C>                   <C>
                                      (a)                   (b)                     (c)                  (d)
                                                                                                         Maximum
                                                                                                        Number (or
                                                                                 Total Number of       Approximate
                                                                                Shares (or Units     Dollar Value) of
                                                                                Purchased as Part   Shares (or Units)
                                   Total Number                                   of Publicly        that May Yet be
                                  Shares (or Units)    Average Price paid      Announced Plans or    Purchased Under
                 Period             Purchased          per Share (or Unit)         Programs           the Plans or
                                                                                                        Programs
           ----------------       ------------         -------------------     ------------------ ---------------------
           Month #7:               4,952               $    26.41                4,952              $753,134
           7/1/06 - 7/31/06

           Month #8:               6,320               $    26.57                6,320              $585,194
           8/1/06 - 8/31/06

           Month #9:               8,111               $    27.31                8,111              $363,720
           9/1/06 - 9/30/06

           Total                  19,383               $    26.84               19,383

</TABLE>
               (1) On January 17, 2001 a  repurchase  program was approved up to
          $1,000,000.  On August 21, 2002 an additional $1,000,000 was approved.
          No  expiration.  On February  15, 2006 an  additional  $1,100,000  was
          approved to repurchase  Company stock.  No expiration.  On October 18,
          2006, an additional 60,000 shares was approved. No expiration.

Item 3.     DEFAULTS UPON SENIOR SECURITIES

None

Item 4.     SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

None

Item 5.     OTHER INFORMATION

None

Item 6.     EXHIBITS

     31.1 Certification of CEO pursuant to Section 302 of the Sarbanes-Oxley Act

     31.2 Certification of CFO pursuant to Section 302 of the Sarbanes-Oxley Act

     32   Certification   of  CEO  and  CFO  pursuant  to  Section  906  of  the
          Sarbanes-Oxley Act


                                    Page 29
<PAGE>


                                   SIGNATURES

Under the  requirements  of the  Securities  Exchange Act of 1934,  we have duly
caused this report to be signed on its behalf by the undersigned  thereunto duly
authorized.


                              SONOMA VALLEY BANCORP



    Date:  November 8, 2006         /s/ Mel Switzer, Jr.
         -------------------        -------------------------------------------
                                    Mel Switzer, Jr.
                                    President and Chief Executive Officer
                                    (Principal Executive Officer)




    Date:   November 8, 2006        /s/ Mary Dieter Smith
         -------------------        -------------------------------------------
                                    Mary Dieter Smith
                                    Executive Vice President and
                                    Chief Operating Officer and
                                    Chief Financial Officer
                                    (Principal Financial Officer and
                                    Principal Accounting Officer)

                                    Page 30