================================================================================

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

                                   ----------

                                   FORM 10-Q/A
                                (Amendment No. 1)

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

                         FOR QUARTER ENDED JUNE 30, 2007

                                       OR

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

               FOR THE TRANSITION PERIOD FROM _________TO ________

                         COMMISSION FILE NUMBER: 0-49892

                              PACIFIC STATE BANCORP
             (Exact Name of Registrant as Specified in its Charter)

                California                                  61-1407606
     (State or other jurisdiction of                     (I.R.S. Employer
     incorporation or organization)                     Identification No.)

                     1899 W. March Lane, Stockton, CA 95207
               (Address of Principal Executive Offices) (Zip Code)
        Registrant's Telephone Number, including Area Code (209) 870-3200

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.

                                Yes [ ]   No [X]

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

Large accelerated filer [ ]   Accelerated filer [ ]   Non -accelerated filer [X]

Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act).

                                Yes [ ]   No [X]

Indicate the number of shares outstanding of each of the registrant issuer's
classes of common stock, as of the latest practicable date:

     TITLE OF CLASS             SHARES OUTSTANDING AS OF AUGUST 6, 2007
     --------------             ---------------------------------------
      Common Stock                             3,696,157
      No Par Value

================================================================================
<PAGE>
                                EXPLANATORY NOTE

This Form 10-Q for Pacific State Bancorp for period ended June 30, 2007 is being
re-filed as Amendment No. 1 because an error occurred during the electronic
filing transmission on August 14, 2007 and the Form 10-Q did not upload to the
SEC website in its entirety.
<PAGE>


                          PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

                      PACIFIC STATE BANCORP AND SUBSIDIARY
                      CONDENSED CONSOLIDATED BALANCE SHEETS

<TABLE>
<CAPTION>
(Unaudited)                                                      June 30,     December 31,
(in thousands, except share amounts)                               2007           2006
------------------------------------------------------------   ------------   ------------
<S>                                                            <C>            <C>
Assets
Cash and due from banks                                        $     14,257   $     18,985
Federal funds sold                                                   31,164         31,630
                                                               ------------   ------------
          Total cash and cash equivalents                            45,421         50,615

Investment securities - available for sale (amortized
cost of $38,216 in 2007 and $23,186 in 2006)                         37,262         23,107
Loans, less allowance for loan losses of $2,699 in 2007
and $2,478 in 2006                                                  296,138        287,318
Premises and equipment, net                                          13,020         11,957
Company owned life insurance                                          6,198          6,079
Accrued interest receivable and other assets                          8,300          7,676
                                                               ------------   ------------
               Total assets                                    $    406,339   $    386,752
                                                               ============   ============

Liabilities and Shareholders' Equity

Deposits:
    Non-interest bearing                                       $     63,077   $     73,197
    Interest bearing                                                289,780        267,799
                                                               ------------   ------------
          Total deposits                                            352,857        340,996
Other borrowings                                                      8,500          4,900
Subordinated debentures                                               8,764          8,764
Accrued interest payable and other liabilities                        4,145          3,033
                                                               ------------   ------------
          Total liabilities                                         374,266        357,693
Shareholders' equity:
    Preferred stock - no par value; 2,000,000 shares
       authorized; none issued or outstanding
   Common stock - no par value; 24,000,000 shares
       authorized; issued and outstanding 3,696,157 in
       2007 and 3,661,477 in 2006                                     9,961          9,651
Retained earnings                                                    22,190         19,455
Accumulated other comprehensive loss, net of tax                        (77)           (47)
                                                               ------------   ------------
               Total shareholders' equity                            32,073         29,059
                                                               ------------   ------------
               Total liabilities and shareholders' equity      $    406,339   $    386,752
                                                               ============   ============
</TABLE>

       See notes to unaudited condensed consolidated financial statements

                                       2
<PAGE>

                              PACIFIC STATE BANCORP
                 CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>
                                                       Three months ended           Six months ended
                                                             June 30,                   June 30,
(Unaudited)                                        -------------------------   -------------------------
(in thousands, except share amounts)                  2007           2006          2007          2006
----------------------------------------------     -----------   -----------   -----------   -----------
<S>                                                <C>           <C>           <C>           <C>
Interest income:
     Interest and fees on loans                    $     7,300   $     5,998   $    14,142   $    11,459
     Interest on Federal funds sold                        348             6           669            17
     Interest on investment securities                     484           317           827           637
                                                   -----------   -----------   -----------   -----------
               Total interest income                     8,132         6,321        15,638        12,113
Interest expense:
     Interest on deposits                                3,239         1,792         6,156         3,276
     Interest on subordinated debentures                   185           180           377           344
     Interest on borrowings                                 55           150           121           221
                                                   -----------   -----------   -----------   -----------
               Total interest expense                    3,479         2,122         6,654         3,841
                                                   -----------   -----------   -----------   -----------
               Net interest income before
                provision for loan losses                4,653         4,199         8,984         8,272
Provision for loan losses                                   55            90           220           180
                                                   -----------   -----------   -----------   -----------
          Net interest income after
           provision for loan losses                     4,598         4,109         8,764         8,092
                                                   -----------   -----------   -----------   -----------
Non-interest income:
     Service charges                                       217           250           438           458
     Other fee income                                      470           230           926           461
     Gain on sale of loans                                  19            20            28           180
                                                   -----------   -----------   -----------   -----------
               Total non-interest income                   706           500         1,392         1,099
                                                   -----------   -----------   -----------   -----------
Non-interest expenses:
     Salaries and employee benefits                      1,506         1,335         2,988         2,685
     Occupancy                                             277           208           563           407
     Furniture and equipment                               200           183           367           361
     Other                                               1,019           726         1,783         1,586
                                                   -----------   -----------   -----------   -----------
               Total non-interest expenses               3,002         2,452         5,701         5,039
                                                   -----------   -----------   -----------   -----------

               Income before provision for
                income taxes                             2,313         2,157         4,455         4,152
Provision for income taxes                                 904           850         1,720         1,638
                                                   -----------   -----------   -----------   -----------
               Net income                          $     1,409   $     1,307   $     2,735   $     2,514
                                                   ===========   ===========   ===========   ===========
Basic earnings per share                           $      0.38   $      0.37   $      0.75   $      0.72
                                                   ===========   ===========   ===========   ===========
Diluted earnings per share                         $      0.35   $      0.34   $      0.68   $      0.65
                                                   ===========   ===========   ===========   ===========
Weighted average common shares outstanding           3,677,935     3,510,801     3,665,558     3,493,964
Weighted average common and common equivalent
shares outstanding                                   4,002,109     3,900,010     3,999,302     3,894,748
</TABLE>

       See notes to unaudited condensed consolidated financial statements

                                       3
<PAGE>

                      PACIFIC STATE BANCORP AND SUBSIDIARY

                 CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS

                      PACIFIC STATE BANCORP AND SUBSIDIARY

                      CONSOLIDATED STATEMENT OF CASH FLOWS

                 FOR THE SIX MONTHS ENDED JUNE 30, 2007 AND 2006
                                 (In thousands)

<TABLE>
<CAPTION>
(Unaudited)                                                        2007           2006
------------------------------------------------------------   ------------   ------------
<S>                                                            <C>            <C>
Cash flows from operating activities:
     Net income                                                $      2,735   $      2,514
     Adjustments to reconcile net income to net
      cash provided by operating activities:
          Provision for loan losses                                     220            180
          Net (increase) decrease in deferred loan
           origination costs                                            (20)            95
          Depreciation and amortization                                  (3)            69
          Gain on sale of loans, net                                    (28)          (180)
          Provision for deferred taxes                                  (29)
          Stock-based compensation expense                              127            124
          Increase in Company owned life insurance,
           net                                                         (119)           (88)
          Increase in accrued interest
           receivable and other assets                                 (608)          (232)
          Increase (decrease) in accrued interest
           payable and other liabilities                              1,113            (50)
                                                               ------------   ------------
               Net cash provided by operating
                activities                                            3,388          2,432
                                                               ------------   ------------

Cash flows from investing activities:

     Purchases of available-for-sale investment
      securities                                                    (24,477)        (4,100)
     Proceeds from matured and called available-
      for-sale investment securities                                  9,070          9,026
     Proceeds from principal repayments from
      available-for-sale government-guaranteed
      mortgage-backed securities                                      1,558            360
     Proceeds from principal repayments from
      held-to-maturity government-guarantee
      mortgage-backed securities                                          1             40
     Net increase in loans                                           (8,992)       (28,646)
     Purchases of premises and equipment                             (1,384)          (266)
                                                               ------------   ------------
          Net cash used in investing activities                     (24,224)       (23,586)
                                                               ------------   ------------
</TABLE>

                                   (Continued)

                                       4
<PAGE>

                      PACIFIC STATE BANCORP AND SUBSIDIARY

                      CONSOLIDATED STATEMENT OF CASH FLOWS

                 FOR THE SIX MONTHS ENDED JUNE 30, 2007 AND 2006
                                 (In thousands)

<TABLE>
<CAPTION>
                                                                   2007           2006
                                                               ------------   ------------
<S>                                                            <C>            <C>
Cash flows from financing activities:
     Net decrease in demand, interest-bearing
      and savings deposits                                     $    (23,253)  $    (17,844)
     Net increase in time deposits                                   35,114         32,080
     Proceeds from exercise of stock options                            181            350
     Proceeds from stock issuance                                                      250
     Net increase in short-term borrowings                            3,600            900
                                                               ------------   ------------
          Net cash provided by financing activities                  15,642         15,736
                                                               ------------   ------------
          Decrease in cash and cash equivalents                      (5,194)        (5,418)

Cash and cash equivalents at beginning of year                       50,615         19,120
                                                               ------------   ------------
Cash and cash equivalents at end of year                       $     45,421   $     13,702
                                                               ============   ============
</TABLE>

                                       5
<PAGE>

                      PACIFIC STATE BANCORP AND SUBSIDIARY
              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                                   (Unaudited)

1. GENERAL

Pacific State  Bancorp is a holding  company with one bank  subsidiary,  Pacific
State Bank,  (the "Bank"),  and two  unconsolidated  subsidiary  grantor trusts,
Pacific State  Statutory  Trusts II and III.  Pacific  State  Bancorp  commenced
operations  on June 24, 2002 after  acquiring all of the  outstanding  shares of
Pacific  State  Bank.  The Bank is a  California  state  chartered  bank  formed
November 2, 1987. The Bank is a member of the Federal Reserve System. The Bank's
primary   source  of  revenue  is  interest  on  loans  to  customers   who  are
predominantly small to middle-market  businesses and middle-income  individuals.
Pacific  State  Statutory  Trusts II and III are  unconsolidated,  wholly  owned
statutory business trusts formed in March, 2004 and June 2007,  respectively for
the exclusive  purpose of issuing and selling  trust  preferred  securities.  In
June2007 the trust preferred  securities held by Pacific State Statutory Trust I
were  redeemed from the proceeds of the issuance of Trust  Preferred  Securities
issued by Pacific State Statutory Trust III. Pacific State Statutory Trust I was
terminated on July 11, 2007.

        The Bank conducts a general  commercial  banking business,  primarily in
the  five  county  region  that  comprises  Alameda,   Calaveras,  San  Joaquin,
Stanislaus and Tuolumne  counties,  and offers  commercial  banking  services to
residents  and employers of  businesses  in the Bank's  service area,  including
professional firms and small to medium sized retail and wholesale businesses and
manufacturers.  The Company as of June 30, 2007 had 86  employees,  including 36
officers.  The Bank  does not  engage in any  non-bank  lines of  business.  The
business of the Bank is not to any significant  degree  seasonal in nature.  The
Bank has no operations outside California and has no material amount of loans or
deposits  concentrated among any one or few persons,  groups or industries.  The
Bank operates nine branches with its  Administrative  Office  located at 1899 W.
March Lane, in Stockton, California; additional branches are located in downtown
Stockton and in the communities of Angels Camp, Arnold, Groveland, Lodi, Modesto
and Tracy and a limited  service  branch in Hayward,  California.  Pacific State
Bancorp  common  stock  trades on the NASDAQ  Global  Market under the symbol of
"PSBC".

2. BASIS OF PRESENTATION AND CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

In the opinion of management,  the unaudited  condensed  consolidated  financial
statements  contain  all  adjustments   (consisting  of  only  normal  recurring
adjustments)  necessary to present fairly the consolidated financial position of
Pacific  State  Bancorp (the  "Company") at June 30, 2007 and December 31, 2006,
and the results of its operations for the three and six month periods ended June
30, 2007 and 2006,  and its cash flows for the six month  periods ended June 30,
2007 and 2006 in conformity with the instructions to Form 10-Q and Article 10 of
Regulation S-X of the Securities and Exchange Commission ("SEC").

Certain  disclosures  normally  presented  in  the  notes  to  the  consolidated
financial statements prepared in accordance with accounting principles generally
accepted in the United States of America for annual  financial  statements  have
been omitted. The Company believes that the disclosures in the interim condensed
consolidated  financial  statements  are  adequate to make the  information  not
misleading.  These interim condensed consolidated financial statements should be
read in conjunction with the consolidated financial statements and notes thereto
included in the  Company's  2006 Annual Report to  Shareholders.  The results of
operations  for the three  and six month  periods  ended  June 30,  2007 may not
necessarily be indicative of the operating results for the full year.

                                        6
<PAGE>

In preparing such financial statements, management is required to make estimates
and assumptions that affect the reported amounts of assets and liabilities as of
the date of the balance  sheet and revenues and expenses for the period.  Actual
results could differ significantly from those estimates. Material estimates that
are particularly  susceptible to significant  changes in the near term relate to
the  determination  of the allowance  for loan losses,  the provision for income
taxes and the estimated fair value of available for sale investment securities.

Management  has  determined  that all of the  commercial  banking  products  and
services  offered by the Company are available in each branch of the Bank,  that
all  branches  are  located  within  the  same  economic  environment  and  that
management  does not allocate  resources  based on the  performance of different
lending or transaction activities.  Accordingly,  the Company and its subsidiary
operate as one business  segment.  No customer accounts for more than 10% of the
revenue for the Bank or the Company.

3. LOANS

Outstanding loans are summarized below:

                                             June 30,      December 31,
(In thousands)                                 2007            2006
----------------------------------------   ------------    ------------
Commercial                                 $     64,347    $     57,942
Agriculture                                      15,557          16,873
Real estate - commercial                        134,136         127,545
Real estate - construction                       72,858          75,654
Installment & other                              11,888          11,742
                                           ------------    ------------
                                                298,777         289,756
Deferred loan fees and costs, net                    60              40
Allowance for loan losses                        (2,699)         (2,478)
                                           ------------    ------------
Total net loans                            $    296,138    $    287,318
                                           ------------    ------------

4. COMMITMENTS AND CONTINGENCIES

The  Company is party to claims and legal  proceedings  arising in the  ordinary
course of business.  In the opinion of the  Company's  management,  the ultimate
liability with respect to such  proceedings  will not have a materially  adverse
effect on the  financial  condition or results of operations of the Company as a
whole.

In the normal course of business there are  outstanding  various  commitments to
extend  credit which are not reflected in the  financial  statements,  including
loan  commitments of  approximately  $125,699,000  and $110,937,000 and stand-by
letters of credit of $2,024,000 and $2,971,000 at June 30, 2007 and December 31,
2006, respectively. However, all such commitments will not necessarily culminate
in actual extensions of credit by the Company.

Approximately  $53,329,000 of the loan commitments  outstanding at June 30, 2007
are for real  estate  loans and are  expected  to fund  within  the next  twelve
months. The remaining  commitments primarily relate to revolving lines of credit
or other  commercial  loans,  and many of these are  expected to expire  without
being drawn upon. Therefore,  the total commitments do not necessarily represent
future cash requirements.  Each potential borrower and the necessary  collateral
are evaluated on an individual basis.  Collateral  varies,  but may include real
property, bank deposits, debt or equity securities or business assets.

                                        7
<PAGE>

Stand-by letters of credit are commitments  written to guarantee the performance
of a customer to a third party.  These guarantees are issued primarily  relating
to purchases of inventory by commercial  customers and are typically  short term
in nature. Credit risk is similar to that involved in extending loan commitments
to customers and accordingly,  evaluation and collateral requirements similar to
those  for  loan  commitments  are  used.  Virtually  all such  commitments  are
collateralized. The deferred liability related to the Company's stand-by letters
of credit was not significant at June 30, 2007 and December 31, 2006.

5. EARNINGS PER SHARE COMPUTATION

Basic  earnings  per share are  computed by dividing  net income by the weighted
average common shares  outstanding  for the period.  Diluted  earnings per share
reflect the  potential  dilution that could occur if  outstanding  stock options
were exercised. Diluted earnings per share is computed by dividing net income by
the weighted average common shares  outstanding for the period plus the dilutive
effect of  outstanding  options.  The treasury  stock method has been applied to
determine the dilutive effect of stock options.

6. COMPREHENSIVE INCOME

Comprehensive  income is  reported  in  addition  to net income for all  periods
presented.   Comprehensive   income  is  made  up  of  net  income   plus  other
comprehensive  income or loss. Other comprehensive income or loss, net of taxes,
is comprised of the unrealized gains or losses on available-for-sale  investment
securities.  The following table shows  comprehensive  income and its components
for the periods indicated:

<TABLE>
<CAPTION>
                                               Three Months Ended             Six Months Ended
                                           --------------------------    --------------------------
(in thousands)                              6/30/2007      6/30/2006      6/30/2007      6/30/2006
----------------------------------------   -----------    -----------    -----------    -----------
<S>                                              <C>            <C>            <C>            <C>
Net Income                                       1,409          1,307          2,735          2,514
Other Comprehensive Loss:
     Change in unrealized loss on
      available for sale securities                 (9)           (14)           (30)           (33)
     Reclassification adjustment                     -              -              -              -
                                           -----------    -----------    -----------    -----------
Total Other Comprehensive Loss                      (9)           (14)           (30)           (33)
                                           -----------    -----------    -----------    -----------
Total Comprehensive Income                       1,400          1,293          2,705          2,481
                                           ===========    ===========    ===========    ===========
</TABLE>

7. STOCK -BASED COMPENSATION

Stock Option Plan

At June 30, 2007, the Company has one stock-based compensation plan, the Pacific
State Bancorp 1997 Stock Option Plan (the "Plan"). The Plan requires that the
option price may not be less than the fair market value of the stock at the date
the option is granted, and that the stock must be paid in full at the time the
option is exercised. The options expire on a date determined by the Board of
Directors, but not later than ten years from the date of grant. The vesting
period is determined by the Board of Directors and is generally over five years.
New shares are issued upon the exercise of options. Under the Plan, 56,954
shares of common stock remain reserved for issuance to employees and directors
through incentive and non-statutory agreements.

                                        8
<PAGE>

Stock Option Compensation

There were no stock options granted in the three and six month periods ended
June 30, 2007 and June 30, 2006. For the three month periods ended June 30, 2007
and 2006, the compensation cost recognized for stock option compensation was
$77,000 and $62,000, respectively. For the six month periods ended June 30, 2007
and 2006, the compensation cost recognized for stock option compensation was
$127,000 and $124,000, respectively. The excess tax benefits were not
significant for the Company.

At June 30, 2007, the total compensation cost related to nonvested stock option
awards granted to employees under the Company's stock option plans but not yet
recognized was $355,000. Stock option compensation expense is recognized on a
straight-line basis over the vesting period of the option. This cost is expected
to be recognized over a weighted average remaining period of 1.0 years and will
be adjusted for subsequent changes in estimated forfeitures.

Stock Option Activity

A summary of option activity under the stock option plans as of June 30, 2007
and changes during the period then ended is presented below:

<TABLE>
<CAPTION>
                                                                          Weighted
                                                           Weighted        Average       Aggregate
                                                            Average      Remaining       Intrinsic
                                                            Exercise     Contractual       Value
Options                                       Shares         Price          Term          ($000)
----------------------------------------   -----------    -----------    -----------    -----------
<S>                                            <C>        <C>              <C>          <C>
Outstanding at January 1, 2007                 668,499    $      7.04      6.8 years    $     7,313
     Granted                                         -                             -              -
     Exercised                                 (34,680)   $      5.24              -              -
     Cancelled                                       -                             -              -
                                           -----------
Outstanding at June 30, 2007                   633,819    $      6.90      6.6 years    $     7,023
                                           ===========                   ===========    ===========
Options vested or expected to vest
at June 30, 2007                               402,205    $      6.90      2.9 years    $     4,456
                                           ===========                   ===========    ===========
Exercisable at June  30, 2007                  402,205    $      6.90      2.9 years    $     4,456
                                           ===========                   ===========    ===========
</TABLE>

The intrinsic  value was derived from the market price of the  Company's  common
stock of $17.98 as of June 30, 2007.

8. SUBORDINATED DEBENTURES

On  June  27,  2007,  the  Company  through  its  newly  formed  business  trust
subsidiary,  Pacific State Statutory Trust III issued and sold $5,000,000 of the
Trust's  Floating  Rate Capital  Securities.  The proceeds  from the sale of the
securities  were  combined  with the  proceeds  of the sale by the  Trust to the
Company of the Trust's common  securities and were used by the Trust to purchase
$5,155,000 of Floating Rate Junior  Subordinated  Deferrable Interest Debentures
("2007 Debentures") of the Company.  The interest rate on the 2007 Debentures is
variable,  based on the three-month  LIBOR plus 1.45%, and is payable and resets
quarterly.  The 2007  Debentures  mature in September 2037 but are redeemable at
par after five years.

                                        9
<PAGE>

On June 26, 2007,  the first call date  without  penalty,  the Company  redeemed
$5,155,000  in  principal  amount  of  its  Floating  Rate  Junior  Subordinated
Deferrable  Interest  Debentures  with  interest at six-month  LIBOR plus 3.45%,
issued in June 2002 by Pacific State Statutory Trust I ("2002  Debentures")  and
the proceeds were used to redeem  $5,000,000 in principal amount of its Floating
Rate Capital Securities issued by Trust I in June 2002. As a result, the Company
recognized  $129,000 in  non-interest  expenses  for the  remaining  unamortized
origination  costs on the 2002  Debentures.  Pacific State Statutory Trust I was
terminated on July 11, 2007.

9. INCOME TAXES

In July 2006, the Financial  Accounting  Standards Board (FASB) issued Financial
Accounting Standards  Interpretation No. 48 (FIN 48), Accounting for Uncertainty
in Income Taxes--an  Interpretation  of FASB statement No. 109. FIN 48 clarifies
the accounting for  uncertainty  in income taxes  recognized in an  enterprise's
financial  statements in accordance with FASB Statement No. 109,  Accounting for
Income Taxes.  FIN 48 also  prescribes a recognition  threshold and  measurement
standard for the financial  statement  recognition  and measurement of an income
tax position taken or expected to be taken in a tax return. FIN 48 also provides
guidance on derecognition, classification, interest and penalties, accounting in
interim periods,  disclosures and transitions. The Company has adopted FIN 48 as
of January 1, 2007.

The Company  previously  recognized  income tax positions  based on management's
estimate of whether it is reasonably possible that a liability has been incurred
for  unrecognized  income  tax  benefits  by  applying  FASB  Statement  No.  5,
Accounting for Contingencies.

The  provisions  of FIN 48 have been applied to all tax positions of the Company
as of January 1, 2007. There was no cumulative effect of applying the provisions
of FIN 48 and there was no material effect on the Company's provision for income
taxes for the six months ended June 30, 2007.  The Company  recognizes  interest
accrued  related to  unrecognized  tax benefits  and  accruals for  penalties in
income tax expense.

10. NEW ACCOUNTING PRONOUNCEMENTS

Fair Value Option for Financial Assets and Financial Liabilities

In February 2007,  the FASB issued  Statement No. 159 (SFAS 159), The Fair Value
Option for Financial  Assets and Financial  Liabilities - Including an Amendment
of FASB Statement No. 115. This standard  permits an entity to choose to measure
many  financial  instruments  and certain other items at fair value at specified
election dates. The entity will report  unrealized gains and losses on items for
which the fair value  option has been  elected in  earnings  at each  subsequent
reporting  date.  The  fair  value  option:  (a) may be  applied  instrument  by
instrument,  with a few exceptions,  such as investments otherwise accounted for
by the equity method;  (b) is  irrevocable  (unless a new election date occurs);
and  (c)  is  applied  only  to  entire  instruments  and  not  to  portions  of
instruments.  The provisions of SFAS 159 are effective as of the beginning of an
entity's first fiscal year that begins after  November 15, 2007.  Management did
not elect to early adopt SFAS 159 and has not yet  completed  its  evaluation of
the impact that SFAS 159 will have.

Accounting  for Deferred  Compensation  and  Postretirement  Benefit  Aspects of
Collateral Assignment Split-Dollar Life Insurance Arrangements

In March 2007, the Emerging  Issues Task Force (EITF) reached a final  consensus
on Issue No.  06-10 (EITF  06-10),  Accounting  for  Deferred  Compensation  and
Postretirement  Benefit  Aspects  of  Collateral  Assignment  Split-Dollar  Life
Insurance  Arrangements.  EITF 06-10 requires employers to recognize a liability
for the post-retirement  benefit related to collateral  assignment  split-dollar
life insurance  arrangements  in accordance with SFAS No. 106 or APB Opinion No.
12. EITF 06-10 also  requires  employers to recognize and measure an asset based
on the nature and  substance  of the  collateral  assignment  split-

                                       10
<PAGE>

dollar life  insurance  arrangement.  The provisions of EITF 06-10 are effective
for the Company on January 1, 2008, with earlier application permitted,  and are
to  be  applied  as  a  change  in  accounting   principle   either   through  a
cumulative-effect  adjustment to retained earnings or other components of equity
or net assets in the statement of financial  position as of the beginning of the
year of adoption;  or as a change in accounting principle through  retrospective
application to all prior periods.  The Company does not expect  adoption of EITF
06-10  to have a  significant  impact  on its  financial  position,  results  of
operations or cash flows.

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

Certain  matters   discussed  in  this  Quarterly  Report  are   forward-looking
statements that are subject to risks and  uncertainties  that could cause actual
results  to  differ  materially  from  those  projected  in the  forward-looking
statements.  Such risks and uncertainties  include, among others (1) significant
increases in  competitive  pressures in the  financial  services  industry;  (2)
changes in the  interest  rate  environment  resulting in reduced  margins;  (3)
general  economic  conditions,  either  nationally  or  regionally,  may be less
favorable than expected,  resulting in among other things,  a  deterioration  in
credit  quality;  (4)  changes in the  regulatory  environment;  (5) loss of key
personnel;  (6) fluctuations in the real estate market;  (7) changes in business
conditions and  inflation;  (8)  operational  risks  including  data  processing
systems failures and fraud; and (9) changes in the securities market.  Therefore
the information set forth herein should be carefully  considered when evaluating
the business prospects of the Company.

When  the  Company  uses  in  this  Quarterly  Report  the  words  "anticipate",
"estimate",  "expect",  "project",  "intend,  "commit",  "believe"  and  similar
expressions,  the Company intends to identify forward-looking  statements.  Such
statements are not  guarantees of performance  and are subject to certain risks,
uncertainties  and  assumptions,  including  those  described in this  Quarterly
Report.  Should  one  or  more  of  the  uncertainties  materialize,  or  should
underlying assumptions prove incorrect,  actual results may vary materially from
those  anticipated,  estimated,  expected,  projected,  intended,  committed  or
believed.  The future results and  stockholder  values of the Company may differ
materially  from  those  expressed  in these  forward-looking  statements.  Many
factors that will  determine  these  results and values are beyond the Company's
ability to control or predict.  For those  statements,  the  Company  claims the
protection of the safe harbor for  forward-looking  statements  contained in the
Private Securities Litigation Reform Act of 1995.

INTRODUCTION

The following discussion and analysis sets forth certain statistical information
relating to the Company as of June 30,  2007 and  December  31, 2006 and for the
three and six month periods ended June 30, 2007 and 2006. The discussion  should
be read in  conjunction  with the  unaudited  condensed  consolidated  financial
statements  and  related  notes  included  elsewhere  in  this  report  and  the
consolidated  financial  statements and notes thereto  included in Pacific State
Bancorp's Annual Report filed on Form 10-K for the year ended December 31, 2006.

CRITICAL ACCOUNTING POLICIES

There have been no changes to the Company's  critical  accounting  policies from
those discussed in Management's  Discussion and Analysis of Financial  Condition
and Results of Operations in the Company's 2006 Annual Report to Shareholders on
Form 10-K.

                                       11
<PAGE>

OVERVIEW

For the three months ended June 30, 2007:

The Company's net income increased $102 thousand or 7.80% to $1,409 thousand for
the second quarter of 2007 from $1,307 thousand for the same period in 2006. The
primary  contributors  to the  increase in net income for the second  quarter of
2007  were  the (1) $454  thousand  increase  in net  interest  income,  (as the
increase in interest income was greater than the increase in interest  expense),
and a (2) $206 thousand increase in non-interest  income,  primarily other fees,
over the same period in 2006. These increases were partially offset by increases
in non interest expenses of $550 thousand. The increase in non-interest expenses
consisted  primarily of  increases  in salaries  and benefits of $171  thousand,
occupancy and  furniture  and  equipment  expenses of $86 thousand as well as an
increase of $293  thousand in other  expenses.  The increase in other expense is
the result of $129 thousand to recognize the unamortized  origination costs as a
result of the  redemption of the Trust  Preferred  Securities  issued in June of
2002.  These Trust Preferred  Securities were redeemed on the first call date in
June 2007 in order to reissue new Trust preferred Securities at a lower interest
rate. The provision for income taxes increased $54 thousand.  Basic earnings per
share  increased to $0.38 for the second quarter of 2007 up 2.70% from $0.37 for
the same period in 2006.  Diluted  earnings per share increased to $0.35 for the
second quarter of 2007 up 2.94% from the $0.34 for the same period in 2006.

For the six months ended June 30, 2007:

The Company's net income increased $221 thousand or 8.79% to $2,735 thousand for
the six months  ended June 30, 2007 from $2,514  thousand for the same period in
2006. The primary  contributors to the increase in net income for the six months
ended June 30, 2007 were the (1) $712 thousand  increase in net interest income,
(as the  increase in interest  income was greater  than the increase in interest
expense), and (2) $293 thousand increase in non interest income, primarily other
fees  offset by a decline in the gain on sale of loans,  over the same period in
2006.  These  increases  were  partially  offset by  increases  in non  interest
expenses of $662  thousand.  The  increase in non  interest  expenses  consisted
primarily of increases in salaries and benefits of $303 thousand,  occupancy and
furniture and equipment expenses of $162 thousand as well as an increase of $197
thousand in other  expenses.  The increase in salaries,  occupancy and furniture
and equipment  expense are the result of opening the Company's  eighth office in
Lodi,  California  in late 2006.  The increase in other expense is the result of
$129 thousand to recognize the unamortized  origination costs as a result of the
redemption of the Trust Preferred Securities issued in June of 2002. These Trust
Preferred  Securities were redeemed on the first call date in June 2007 in order
to  reissue  new  Trust  preferred  Securities  at a lower  interest  rate.  The
provision  for income taxes  increased $82  thousand.  Basic  earnings per share
increased  to $0.75 for the six months  ended June 30,  2007 up 4.17% from $0.72
for the same period in 2006.  Diluted  earnings per share increased to $0.68 for
the six months  ended June 30,  2007 up 4.62% from the $0.65 for the same period
in 2006.

Total assets at June 30, 2007 were $406  million,  an increase of $20 million or
5.06%,  from the $387  million at December  31,  2006.  The growth in assets was
primarily in the Company's level of Federal funds sold and investments.  Federal
funds sold and investments grew $14 million or 25.01% to $68 million at June 30,
2007 from $55 million at December 31, 2006. Loans grew by $9 million or 3.07% to
$296 million at June 30, 2007 from $287 million at December 31, 2006. The growth
in loans and Federal funds sold and  investments was funded by the net income of
$2.7  million,  growth in  deposits  of $12  million or 3.48% and an increase in
other borrowings of $3.6 million.

                                       12
<PAGE>

The  annualized  return on assets  ("ROA") was 1.43% for the three month  period
ended  June  30,  2007  compared  to  1.65%  for the same  period  in 2006.  The
annualized  return on equity ("ROE") was 18.33% for the three month period ended
June 30, 2007  compared to 22.60% for the same period in 2006.  The  decrease in
ROE is primarily  attributable  to an increase in  shareholders  equity from net
income,  the proceeds from the sale of common stock to a new member of the Board
of Directors and the exercise of stock  options.  The increase in equity totaled
$7.5 million or 30.49% from June 30, 2006.

The annualized return on assets ("ROA") was 1.42% for the six month period ended
June 30,  2007  compared to 1.62% for the same  period in 2006.  The  annualized
return on equity ("ROE") was 18.29% for the six month period ended June 30, 2007
compared to 22.64% for the same period in 2006. The decrease in ROE is primarily
attributable to an increase in shareholders equity from net income, the proceeds
from the sale of common stock to a new member of the Board of Directors  and the
exercise of stock options.

RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED JUNE 30, 2007

Net interest income before provision for loan losses.  Net interest income, on a
non tax equivalent  basis,  was $4.7 million for the three months ended June 30,
2007,  an  increase of $454  thousand  or 10.81% from $4.2  million for the same
period in 2006.  The increase in net interest  income was  primarily a result of
the  increase in the  average  balances  of earning  assets  mainly in loans and
Federal  funds  supported by the overall  increase in the yields  earned.  These
increases were partially offset by the increases in both the level of and mix in
average interest bearing  liabilities,  primarily increases in time deposits and
decreases in  interest-bearing  demand  deposits,  and  increases in the average
rates paid, primarily on time deposits and other borrowings.

Interest  income  increased $1.8 million or 28.65% to $8.1 million for the three
months  ended June 30, 2007 from $6.3  million for the same period in 2006.  The
increase in interest  income was primarily  attributed to increases in levels of
average  loans and Federal  funds sold and the increases in the yields earned on
those earning  assets.  Loan volume  increased due to the overall  growth of the
Company.  The Company's  average loan balances were $295.0 million for the three
months ended June 30, 2007, up $29.7  million or 11.19% from $265.3  million for
the same  period in 2006.  The  Company's  average  loan yield was 9.92% for the
three months  ended June 30,  2007,  up 85 basis points from the 9.07% yield for
the same period in 2006. As a result,  interest income on loans increased $1,302
thousand.  The Company's  average  balances of investment  securities  increased
$10.2 million to $37.3 million for the three months ended June 30, 2007 from the
$27.1  million  for the same  period in 2006.  The  Company's  average  yield on
investments increased 51 basis points to 5.20% from 4.69% for the same period in
2006. As a result of the increase in volume and yield, interest income increased
$167 thousand.  The Company's  average  balances of Federal funds sold increased
$26.6 million to $27.4 million for the three months ended June 30, 2007 from the
$861  thousand  for the same  period in 2006.  The  Company's  average  yield on
Federal  funds sold  increased 229 basis points to 5.09% from 2.80% for the same
period in 2006. As a result, interest income increased $1.8 million. The overall
yield on average earning assets increased 43 basis points to 9.07% for the three
months ended June 30, 2007, from 8.64% for the same period in 2006.

Interest expense increased $1.4 million, or 63.95% to $3.5 million for the three
months ended June 30, 2007,  from $2.1 million for the same period in 2006.  The
increase  is  primarily  attributed  to the  change in mix of  interest  bearing
liabilities,  (as the level of average  time  deposits  increased  significantly
while the  levels of other  interest  bearing  liabilities  decreased),  and the
overall  increases in the rates paid on all interest bearing  liabilities.  Time
deposits  increased  as the  Company  experienced  disintermediation  from lower
yielding transaction accounts into higher yielding time deposits.  Rates paid on
deposits were increased during the period as rates on deposits were increased to
remain  competitive  with other financial  institutions.  The Company's  average
balances of time  deposits  were $196.2  million for the three months ended June
30, 2007, up $80.1 million,

                                       13
<PAGE>

or 69.08% from $116.1 million for the same period in 2006. The average rate paid
on time deposits  also  increased 116 basis points to 5.32% for the three months
ended  June 30,  2007  from  4.16%  for the same  period  in 2006.  As a result,
interest expense on time deposits increased $1.4 million.  The Company's average
balances of interest  bearing  demand  deposits  decreased $4.9 million to $84.5
million for the three months ended June 30, 2007 from $89.4 million for the same
period in 2006.  The average  rate paid  increased 38 basis points to 2.95% from
2.57% for the same  period in 2006.  As a result  interest  expense on  interest
bearing demand deposits  decreased $49 thousand.  The Company's average balances
of other borrowings decreased $6.0 million to $13.6 million for the three months
ended June 30, 2007 from $19.6 million for the same period in 2006 and the rates
paid increased 34 basis points to 7.10% for the three months ended June 30, 2007
from  6.76% for the same  period in 2006.  As a result of the  decreased  volume
offset  by the  increased  rates  paid,  interest  expense  on other  borrowings
decreased  $90  thousand.  The  overall  rates paid on average  interest-bearing
liabilities  increased  98 basis points to 4.66% for the three months ended June
30, 2007, from 3.68% for the same period in 2006.

As a result of the changes  noted above,  the net interest  margin for the three
months ended June 30, 2007  decreased  55 basis points to 5.19%,  from 5.74% for
the same period in 2006.

                                       14
<PAGE>

The  following  table  presents  for  the  three  month  periods  indicated  the
distribution of  consolidated  average  assets,  liabilities  and  shareholders'
equity.  It also  presents  the  amounts of interest  income  from the  interest
earning  assets and the  resultant  yields  expressed  in both  dollars and rate
percentages.  Average balances are based on daily averages. Nonaccrual loans are
included in the calculation of average loans while  nonaccrued  interest thereon
is excluded from the computation of yields earned:

<TABLE>
<CAPTION>
                                                        THREE MONTHS ENDED                 THREE MONTHS ENDED
                                                          JUNE 30, 2007                      JUNE 30, 2006
                                               ----------------------------------   --------------------------------
                                                              Interest                           Interest
                                                               Income     Average                 Income    Average
                                                  Average        or      Yield or     Average      or       Yield or
                                                  Balance      Expense     Cost       Balance     Expense     Cost
                                               ------------   --------   --------   ---------- ----------   --------
<S>                                            <C>            <C>            <C>    <C>          <C>            <C>
ASSETS:
Interest-earning assets:
Loans (1)(2)                                   $    295,030   $  7,300       9.92%  $  265,333   $  5,998       9.07%
Investment securities (1)                            37,310        484       5.20%      27,095        317       4.69%
Federal funds sold                                   27,424        348       5.09%         861          6       2.80%
                                               ------------   --------              ---------- ----------
         Total average earning assets               359,764      8,132       9.07%     293,289      6,321       8.64%

Non-earning assets:
Cash and due from banks                              16,644                             13,498
Other assets                                         20,143                             11,215
                                               ------------                         ----------
         Total average assets                  $    396,551                         $  318,002
                                               ============                         ==========

LIABILITIES AND SHAREHOLDERS' EQUITY:
Interest-bearing liabilities:
Deposits

      Interest-bearing demand                  $     84,522        622       2.95%  $   89,412        573       2.57%
      Savings                                         5,343         13       0.98%       6,298         15       0.96%
      Time deposits                                 196,233      2,604       5.32%     116,062      1,204       4.16%
      Other borrowings (3)                           13,564        240       7.10%      19,592        330       6.76%
                                               ------------   --------              ----------   --------
         Total average interest-bearing
         liabilities                                299,661     3,479        4.66%     231,364      2,122       3.68%
                                                                         ========                           ========
Noninterest-bearing liabilities:
      Demand deposits                                63,893                             62,558
      Other liabilities                               2,157                                881
                                               ------------                         ----------
         Total liabilities                          365,711                            294,803
Shareholders' equity:                                30,839                             23,199
                                               ------------                         ----------
Total average liabilities and shareholders'
equity                                         $    396,551                         $  318,002
                                               ============   --------              ==========   --------
Net interest income                                           $  4,653                           $  4,199
                                                              ========                           ========
Yield on interest-earning assets (4)                                         9.07%                              8.64%
Cost of funding interest-earning assets                                      3.88%                              2.90%
                                                                         --------                           --------
Net interest margin (5)                                                      5.19%                              5.74%
                                                                         ========                           ========
</TABLE>

(1)      Not computed on a tax-equivalent basis.
(2)      Loan fees included in loan interest  income for the three month periods
         ended June 30, 2007 and 2006 amounted to $809  thousand $480  thousand,
         respectively.
(3)      For the  purpose  of this  table the  interest  expense  related to the
         Company's   junior   subordinated   debentures  is  included  in  other
         borrowings.
(4)      Total interest  expense divided by the average balance of total earning
         assets.
(5)      Net interest  income  divided by the average  balance of total  earning
         assets.

                                       15
<PAGE>

The following table sets forth changes in interest income and interest expense,
for the three month periods indicated and the change attributable to variance in
volume, rates and the combination of volume and rates on the relative changes of
volume and rates:

<TABLE>
<CAPTION>
                                                 THREE MONTHS ENDED JUNE 30,
                                       2007 OVER 2006 CHANGE IN NET INTEREST INCOME
                                       --------------------------------------------
                                          NET
(In thousands)                          CHANGE        RATE      VOLUME       MIX
-------------------------------------  --------     --------   --------    --------
<S>                                    <C>          <C>        <C>         <C>
Interest Income:
Loans                                  $  1,302     $    567   $    671    $     63
Investment securities                       167           34        120          13
Federal funds sold                          342            5        185         152
Interest Bearing Deposits in Banks            -            -          -           -
                                       --------     --------   --------    --------
     Total interest income             $  1,811     $    607   $    976    $    228

Interest Expense:
Interest-bearing demand                      49           85        (31)         (5)
Savings                                      (2)           0         (2)         (0)
Time deposits                             1,400          336        832         232
Other borrowing                             (90)          17       (102)         (5)
                                       --------     --------   --------    --------
     Total interest expense            $  1,357     $    438   $    697    $    222
                                       --------     --------   --------    --------
Net interest income                    $    454     $    169   $    279    $      6
                                       ========     ========   ========   =========
</TABLE>

(1)      The  volume  change in net  interest  income  represents  the change in
         average balance multiplied by the previous year's rate.
(2)      The rate change in net interest  income  represents  the change in rate
         multiplied by the previous year's average balance.
(3)      The mix change in net interest income  represents the change in average
         balance multiplied by the change in rate.

Provision  for loan losses.  The Company  recorded $55 thousand in provision for
loan losses for the three month  period  ended June 30,  2007, a decrease of $35
thousand or 38.89% from $90 thousand  for the same period in 2006.  The decrease
in the provision is based on  management's  assessment of the required  level of
reserves.  Management  assesses  loan  quality  monthly to  maintain an adequate
allowance  for  loan  losses.  Based  on the  information  currently  available,
management  believes  that the  allowance  for loan losses is adequate to absorb
probable  losses in the portfolio.  However,  no assurance can be given that the
Company may not sustain  charge-offs which are in excess of the allowance in any
given period. The Company's loan portfolio composition and non-performing assets
are further discussed under the "Financial Condition" section below.

Non-Interest  Income.  During  the  three  months  ended  June 30,  2007,  total
non-interest income increased $206 thousand or 41.20% to $706 thousand,  up from
$500 thousand for the comparable  period in 2006.  The increase in  non-interest
income was  primarily  the result of  increases  in fee income  derived from the
referral of commercial mortgage loans to third parties.  The increase was offset
by a  decrease  in  service  charge  income  of $33  thousand  or 13.20% to $217
thousand  for the quarter  ended June 30, 2007 down from $250  thousand  for the
comparable period in 2006 as a result of a decrease in the volume of transaction
accounts as well as the increase in the number of service  charge free  checking
accounts.

                                       16
<PAGE>

Non-Interest  Expenses.  Non-interest  expenses  consist of salaries and related
employee benefits,  occupancy,  furniture and equipment  expenses,  professional
fees,  appraisal  fees,  directors'  fees,  postage,   stationary  and  supplies
expenses,   telephone  expenses,  data  processing  expenses,   advertising  and
promotion  expense and other operating  expenses.  Non-interest  expense for the
three months  ended June 30, 2007 was $3.0 million  compared to $2.5 million for
the same period in 2006,  representing  an increase of $550  thousand or 22.43%.
This  increase  reflects  increases in salaries and benefits of $171 thousand or
12.81% which are indicative of the additions to staff for the Lodi office opened
in the 4th quarter of 2006 and of expanded branch  operations in line with their
respective growth. The increase in occupancy and furniture and equipment expense
of $86 thousand is attributable to the opening of the Lodi office.  The increase
in other  expense is the result of $129  thousand to recognize  the  unamortized
origination  costs  as a  result  of  the  redemption  of  the  Trust  Preferred
Securities  issued  in June of  2002.  These  Trust  Preferred  Securities  were
redeemed  on the  first  call date in June  2007 in order to  reissue  new Trust
Preferred  Securities at a lower interest rate. The additional increase in other
expense of $164 thousand was the result of increased  expenses  associated  with
the growth of the Company.

The following table sets forth a summary of  non-interest  expense for the three
month periods ended June 30, 2007 and 2006:

                                Three Months Ended
                               -------------------
                               June 30,   June 30,
(In thousands)                   2007       2006
----------------------------   --------   --------
Non-interest Expense:
Salaries & Benefits            $  1,506   $  1,335
Occupancy                           277        208
Furniture and Equipment             200        183
Other Expense                     1,019        726
                               --------   --------
Total Non-Interest Expenses    $  3,002   $  2,452
                               ========   ========

Income  Taxes.  The Company's  provision for income taxes  includes both federal
income and state  franchise  taxes and reflects the  application  of federal and
state  statutory  rates to the Company's net income before taxes.  The principal
difference  between statutory tax rates and the Company's  effective tax rate is
the benefit  derived from  investing in tax-exempt  securities and Company owned
life  insurance.  Increases  and  decreases in the  provision  for taxes reflect
changes in the Company's net income before tax. The Company's effective tax rate
for the three month period ended June 30, 2007 decreased slightly to 39.08% from
39.4%  for the same  period  in 2006.  The  decrease  was due  primarily  to the
decreased level of income derived from Enterprise Zone loans

The  following  table  reflects  the  Company's  tax  provision  and the related
effective tax rate for the three months periods ended June 30, 2007 and 2006:

                               Three Months Ended
                               -------------------
                               June 30,   June 30,
(In thousands)                   2007       2006
----------------------------   --------   --------
Tax Provision                  $    904   $    850
Effective Tax Rate                39.08%      39.4%

                                       17

<PAGE>

RESULTS OF OPERATIONS FOR THE SIX MONTHS ENDED JUNE 30, 2007

Net interest income before provision for loan losses.  Net interest income, on a
non-tax  equivalent  basis,  was $9.0  million for the six months ended June 30,
2007,  an  increase  of $712  thousand  or 8.61% from $8.3  million for the same
period in 2006.  The increase in net interest  income was  primarily a result of
the  increase in the average  balances  of earning  assets  (mainly in loans and
Federal funds)  supported by the overall  increases in the yields earned.  These
increases were partially offset by the increases in both the level of and mix in
average  interest  bearing  liabilities,  primarily  increases in time deposits,
decreases in interest-bearing  demand deposits and other borrowings,  and by the
increase  in the  average  rates  paid,  primarily  on time  deposits  and other
borrowings.

Interest  income  increased  $3.5 million or 29.10% to $15.6 million for the six
months ended June 30, 2007 from $12.1  million for the same period in 2006.  The
increase in interest  income was primarily  attributed to increases in levels of
average  loans and Federal  funds sold and to the increases in the yields earned
on those earning assets.  Loan volume increased due to the overall growth of the
Company.  The Company's  average loan  balances were $294.0  million for the six
months ended June 30, 2007, up $36.7  million or 14.28% from $257.0  million for
the same period in 2006. The Company's  average loan yield was 9.71% for the six
months ended June 30, 2007, up 72 basis points from the 8.99% yield for the same
period in 2006. As a result,  interest  income on loans  increased $2.7 million.
The Company's average balances of investment  securities  increased $4.5 million
to $31.9  million for the six months ended June 30, 2007 from the $27.4  million
for the same  period  in  2006.  The  Company's  average  yield  on  investments
increased 49 basis points to 5.18% from 4.69% for the same period in 2006.  As a
result of the  increase  in volume and yield,  interest  income  increased  $184
thousand.  The Company's  average balances of Federal funds sold increased $25.5
million to $26.4  million  for the six months  ended June 30, 2007 from the $845
thousand for the same period in 2006.  The  Company's  average  yield on Federal
funds sold increased 105 basis points to 5.11% from 4.06% for the same period in
2006. As a result, interest income increased $652 thousand. The overall yield on
average  earning  assets  increased  39 basis points to 8.95% for the six months
ended June 30, 2007, from 8.56% for the same period in 2006.

Interest expense  increased $2.8 million,  or 73.24% to $6.6 million for the six
months ended June 30, 2007,  from $3.8 million for the same period in 2006.  The
increase  is  primarily  attributed  to the  change in mix of  interest  bearing
liabilities (as the levels of the average time deposits increased  significantly
while the levels of all other interest bearing liabilities decreased) and to the
overall  increases in the rates paid on all interest bearing  liabilities.  Time
deposits  increased  as the  Company  experienced  disintermediation  from lower
yielding transaction accounts into higher yielding time deposits.  Rates paid on
deposits  were  increased  during  the period to remain  competitive  with other
financial  institutions.  The Company's  average  balances of time deposits were
$187.7  million for the six months ended June 30,  2007,  up $80.9  million,  or
75.76% from $106.8 million for the same period in 2006. The average rate paid on
time deposits also  increased 135 basis points to 5.26% for the six months ended
June 30,  2007 from  3.91% for the same  period in 2006.  As a result,  interest
expense on time deposits increased $2.8 million.  The Company's average balances
of interest bearing demand deposits  decreased $9.5 million to $86.2 million for
the six months  ended June 30,  2007 from $95.7  million  for the same period in
2006.  The average  rate paid  increased 39 basis points to 2.88% from 2.49% for
the same period in 2006.  As a result of the  decrease  in volume  offset by the
increase in rates paid,  interest  expense on interest  bearing demand  deposits
increased  $48  thousand.  The Company's  average  balances of other  borrowings
decreased  $4.5 million to $13.7  million for the six months ended June 30, 2007
from $18.2 million for the same period in 2006.  Rates paid on other  borrowings
increased  107 basis points to 7.34% for the six months ended June 30, 2007 from
6.27% for the same period in 2006. As a result of the decreased volume offset by
the

                                       18
<PAGE>

increased rates paid,  interest  expense on other  borrowings  decreased $67
thousand.  The  overall  rates  paid  on  average  interest-bearing  liabilities
increased 117 basis points to 4.58% for the six months ended June 30, 2007, from
3.41% for the same period in 2006.

As a result of the changes  noted  above,  the net  interest  margin for the six
months ended June 30, 2007  decreased  71 basis points to 5.14%,  from 5.85% for
the same period in 2006.

                                       19
<PAGE>

The  following   table  presents  for  the  six  month  periods   indicated  the
distribution of  consolidated  average  assets,  liabilities  and  shareholders'
equity.  It also  presents  the  amounts of interest  income  from the  interest
earning  assets and the  resultant  yields  expressed  in both  dollars and rate
percentages.  Average balances are based on daily averages. Nonaccrual loans are
included in the calculation of average loans while  nonaccrued  interest thereon
is excluded from the computation of yields earned:

<TABLE>
<CAPTION>
                                                       SIX MONTHS ENDED                     SIX MONTHS ENDED
                                                        JUNE 30, 2007                        JUNE 30, 2006
                                              ---------------------------------    ---------------------------------
                                                           Interest    Average                  Interest    Average
                                               Average    Income or    Yield or     Average    Income or   Yield or
                                               Balance     Expense      Cost        Balance     Expense      Cost
                                              ---------   ---------   ---------    ---------   ---------   ---------
<S>                                           <C>         <C>              <C>     <C>         <C>              <C>
ASSETS:
Interest-earning assets:
Loans (1)(2)                                  $ 293,728   $  14,142        9.71%   $ 257,036   $  11,459        8.99%
Investment securities (1)                        31,945         821        5.18%      27,408         637        4.69%
Federal funds sold                               26,393         669        5.11%         845          17        4.06%
Interest bearing deposits in banks                  215           6        5.63%           0           0        0.00%
                                              ---------   ---------                ---------   ---------
          Total average earning assets          352,281      15,638        8.95%     285,289      12,113        8.56%
Non-earning assets:
Cash and due from banks                          16,316                               12,896
Other assets                                     21,007                               14,431
                                              ---------                            ---------
          Total average assets                $ 389,604                            $ 312,616
                                              =========                            =========
LIABILITIES AND SHAREHOLDERS' EQUITY:
Interest-bearing liabilities:
Deposits

     Interest-bearing demand                  $  86,181       1,230        2.88%   $  95,679       1,182        2.49%
     Savings                                      5,468          27        1.00%       6,415          25        0.79%
     Time deposits                              187,687       4,899        5.26%     106,785       2,069        3.91%
     Other borrowings (3)                        13,677         498        7.34%      18,169         565        6.27%
                                              ---------   ---------                ---------   ---------
          Total average interest-bearing
          liabilities                           293,013       6,654        4.58%     227,048       3,841        3.41%
                                                                      =========                            =========
Noninterest-bearing liabilities:
     Demand deposits                             64,609                               61,686
     Other liabilities                            1,826                                1,486
                                              ---------                            ---------
          Total liabilities                     359,448                              290,220
Shareholders' equity:                            30,156                               22,396
                                              ---------                            ---------
Total average liabilities and shareholders'
equity                                        $ 389,604                            $ 312,616
                                              =========                            =========
                                                          ---------                            ---------
Net interest income                                       $   8,984                            $   8,272
                                                          =========                            =========

Yield on interest-earning assets (4)                                       8.95%                                8.56%
Cost of funding interest-earning assets                                    3.81%                                2.72%
                                                                      ---------                            ---------
Net interest margin (5)                                                    5.14%                                5.85%
                                                                      =========                            =========
</TABLE>

(1)  Not computed on a tax-equivalent basis.
(2)  Loan fees included in loan interest  income for the six month periods ended
     June 30,  2007 and 2006  amounted  to $1,196  thousand  and $897  thousand,
     respectively.
(3)  For the purpose of this table the interest expense related to the Company's
     junior subordinated debentures is included in other borrowings.
(4)  Total  interest  expense  divided by the average  balance of total  earning
     assets.
(5)  Net interest income divided by the average balance of total earning assets.

                                       20
<PAGE>

The following table sets forth changes in interest income and interest expense,
for the six month periods indicated and the change attributable to variance in
volume, rates and the combination of volume and rates on the relative changes of
volume and rates:

<TABLE>
<CAPTION>
                                                          SIX MONTHS ENDED JUNE 30,
                                                2007 OVER 2006 CHANGE IN NET INTEREST INCOME
                                              ------------------------------------------------
                                                 NET
(In thousands)                                  CHANGE        RATE        VOLUME        MIX
-------------------------------------------   ---------    ---------    ---------    ---------
<S>                                           <C>          <C>          <C>          <C>
Interest Income:
Loans                                         $   2,683    $     916    $   1,636    $     131
Investment securities                               184           67          105           11
Federal funds sold                                  652            4          514          134
Interest bearing deposits in banks                    6            -            -            6
                                              ---------    ---------    ---------    ---------
     Total interest income                    $   3,525    $     988    $   2,255    $     282

Interest Expense:
Interest-bearing demand                              48          184         (117)         (18)
Savings                                               2            7           (4)          (1)
Time deposits                                     2,830          718        1,568          544
Other borrowing                                     (67)          97         (140)         (24)
     Total interest expense                   $   2,813    $   1,005    $   1,307    $     501
                                              ---------    ---------    ---------    ---------
Net interest income                           $     712    $     (17)   $     948    $    (220)
                                              =========    =========    =========    =========
</TABLE>

(1)  The volume change in net interest  income  represents the change in average
     balance multiplied by the previous year's rate.
(2)  The rate  change  in net  interest  income  represents  the  change in rate
     multiplied by the previous year's average balance.
(3)  The mix  change in net  interest  income  represents  the change in average
     balance multiplied by the change in rate.

Provision for loan losses.  The Company  recorded $220 thousand in provision for
loan losses for the six month  period  ended June 30,  2007,  an increase of $40
thousand or 22.22% from $180 thousand for the same period in 2006.  The increase
in the provision is based on  management's  assessment of the required  level of
reserves.  Management  assesses  loan  quality  monthly to  maintain an adequate
allowance  for  loan  losses.  Based  on the  information  currently  available,
management  believes  that the  allowance  for loan losses is adequate to absorb
probable  losses in the portfolio.  However,  no assurance can be given that the
Company may not sustain  charge-offs which are in excess of the allowance in any
given period. The Company's loan portfolio composition and non-performing assets
are further discussed under the "Financial Condition" section below.

Non-Interest  Income.   During  the  six  months  ended  June  30,  2007,  total
non-interest  income increased $293 thousand or 26.67% to $1.4 million,  up from
$1.1 million for the  comparable  period in 2006.  The increase in  non-interest
income was  primarily  the result of  increases  in fee income  derived from the
referral of commercial mortgage loans to third parties.  The increase was offset
by a decrease in gain on sale of loans and a decrease in service charge income.

Other fee income  increased  $465  thousand as a result of increases in mortgage
referral  fees due to an  increase  in  Commercial  Real  Estate  loan  referral
activity during the first quarter of 2007 as opposed to the same period in 2006.

The  decrease in gain on sale of loan income is due to the timing of the sale of
the loans as well as the decrease in the number and dollar amount of loans sold.
Income derived from the gain on sale of loans  decreased $152 thousand or 84.44%
to $28 thousand, down from $180 thousand for the comparable period in 2006.

                                       21
<PAGE>

The decrease in service  charge income is the result of a decrease in the volume
of transaction  accounts as well as the increase in the number of service charge
free checking  accounts.  Income derived from the service charges  decreased $20
thousand or 4.37% to $438  thousand,  down from $458 thousand for the comparable
period in 2006.

Non-Interest  Expenses.  Non-interest  expenses  consist of salaries and related
employee benefits,  occupancy,  furniture and equipment  expenses,  professional
fees,  appraisal  fees,  directors'  fees,  postage,   stationary  and  supplies
expenses,   telephone  expenses,  data  processing  expenses,   advertising  and
promotion expense and other operating expenses. Non-interest expense for the six
months  ended June 30, 2007 was $5.7  million  compared to $5.0  million for the
same period in 2006,  representing an increase of $662 thousand or 13.14%.  This
increase reflects  increases in salaries and benefits of $303 thousand or 11.28%
which are indicative of the additions to staff for the Lodi office opened in the
4th  quarter  of 2006 and of  expanded  branch  operations  in line  with  their
respective growth. The increase in occupancy and furniture and equipment expense
of $162  thousand is also  primarily a result of the opening of the Lodi office.
The increase in other  expense is the result of $129  thousand to recognize  the
unamortized  origination  costs  as a  result  of the  redemption  of the  Trust
Preferred  Securities  issued in June of 2002. These Trust Preferred  Securities
were  redeemed on the first call date in June 2007 in order to reissue new Trust
Preferred  Securities at a lower interest rate. The additional increase in other
expense of $68 thousand,  was the result of increased  expenses  associated with
the growth of the Company.

The  following  table sets forth a summary of  non-interest  expense for the six
months periods ended June 30, 2007 and 2006:

                                                 Six Months Ended
                                              ----------------------
                                               June 30,    June 30,
(In thousands)                                   2007        2006
-------------------------------------------   ---------    ---------
Non-interest Expense:
Salaries & Benefits                           $   2,988    $   2,685
Occupancy                                           563          407
Furniture and Equipment                             367          361
Other Expense                                     1,783        1,586
                                              ---------    ---------
Total Non-Interest Expenses                   $   5,701    $   5,039
                                              =========    =========

Income  Taxes.  The Company's  provision for income taxes  includes both federal
income and state  franchise  taxes and reflects the  application  of federal and
state  statutory  rates to the Company's net income before taxes.  The principal
difference  between statutory tax rates and the Company's  effective tax rate is
the benefit  derived from  investing in tax-exempt  securities and Company owned
life  insurance.  Increases  and  decreases in the  provision  for taxes reflect
changes in the Company's net income before tax. The Company's effective tax rate
for the six month  period ended June 30, 2007  decreased  slightly to 38.6% from
39.5%  for the same  period  in 2006.  The  decrease  was  primarily  due to the
increased level of income derived from Enterprise Zone loans.

The  following  table  reflects  the  Company's  tax  provision  and the related
effective tax rate for the six months periods ended June 30, 2007 and 2006:

                                                 Six Months Ended
                                              ----------------------
                                               June 30,     June 30,
(In thousands)                                   2007         2006
-------------------------------------------   ---------    ---------
Tax Provision                                 $   1,720    $   1,638
Effective Tax Rate                                 38.6%        39.5%

                                       22
<PAGE>

FINANCIAL CONDITION

Total assets at June 30, 2007 were $406  million,  an increase of $20 million or
5.06%,  from the $387  million at December  31,  2006.  The growth in assets was
primarily in the Company's level of Federal funds sold and investments.  Federal
funds sold and investments grew $14 million or 25.01% to $68 million at June 30,
2007 from $55 million at December 31, 2006. Loans grew by $9 million or 3.07% to
$296 million at June 30, 2007 from $287 million at December 31, 2006. The growth
in  Federal  funds  sold and  investments  was  funded by the net income of $2.7
million,  growth in deposits  of $12  million or 3.48% and the  increase of $3.6
million in other borrowings.

The change in  deposits  was  comprised  of a decrease in  non-interest  bearing
deposits of $10.1 million or 13.83% to $63.0 million at June 30, 2007 from $73.2
million at December 31, 2006.  This decrease was offset by increases in interest
bearing  deposits of $21.9  million or 8.21% to $289.8  million at June 30, 2007
from $267.8  million at December 31,  2006.  The change in the mix of deposit is
the  result of  disintermediation  in which  depositors  seek  higher  yields on
deposits by placing the deposits in higher yield term accounts.

Loan portfolio  composition.  The Company  concentrates  its lending  activities
primarily  within  Calaveras,  San  Joaquin,  Stanislaus,  Tuolumne  and Alameda
Counties.

The  Company  manages  its  credit  risk  through  diversification  of its  loan
portfolio and the application of underwriting policies and procedures and credit
monitoring practices.  Although the Company has a diversified loan portfolio,  a
significant  portion of its  borrowers'  ability to repay the loans is dependent
upon the professional  services and residential real estate development industry
sectors. Generally, the loans are secured by real estate or other assets and are
expected to be repaid from cash flows of the borrower or proceeds  from the sale
of collateral.

The following  table sets forth the amounts of loans  outstanding by category as
of the dates indicated:

                                                June 30,      December 31,
(In thousands)                                    2007            2006
-------------------------------------------   ------------    ------------
Commercial                                    $     64,347    $     57,942
Agriculture                                         15,557          16,873
Real estate - commercial                           134,136         127,545
Real estate - construction                          72,858          75,654
Installment & other                                 11,888          11,742
                                              ------------    ------------
                                                   298,777         289,756
Deferred loan fees and costs, net                       60              40
Allowance for loan losses                           (2,699)         (2,478)
                                              ------------    ------------
Total net loans                               $    296,138    $    287,318
                                              ------------    ------------

The Company continues to manage the mix in its loan portfolio  consistently with
its identity as a community  bank serving  Northern  California  and the Central
Valley.  Net portfolio  loans have increased by $8.8 million or 3.07%, to $296.1
million at June 30, 2007 from $287.3  million at December 31,  2006.  Commercial
loans  increased  $6.4 million or 11.05% to $64.3  million from $57.9 million at
December  31,  2006.  Agricultural  loans  decreased by $1.3 million or 7.80% to
$15.6 million from $16.9 million at December 31, 2006.  Real estate - commercial
loans increased by $6.6 million or 5.16% to $134.1 million from $127.5 million

                                       23
<PAGE>

at December 31, 2006. Real estate - construction loans decreased $2.3 million or
3.69% to $72.9 million from $75.6 million at December 31, 2006.  Installment and
other loans increased $147 thousand or 1.25% to $11.8 million from $11.7 million
at December 31, 2006. The portfolio mix remained consistent with the prior year,
with commercial and agricultural  loans now  representing  21.54% of total loans
compared  to  22.57% in the  prior  year,  real  estate  construction  loans now
representing 24.39% compared to 22.27% in the prior year, commercial real estate
loans  now  representing  44.89%  compared  to 46.33%  in the  prior  year,  and
installment loans now representing 3.98% compared to 3.93% in the prior year.

Nonperforming  loans.  The Company had one non performing  loan in the amount of
$121  thousand as of June 30,  2007.  As of December 31, 2006 the Company had no
nonperforming loans.

Analysis  of  allowance  for loan  losses.  In  determining  the  amount  of the
Company's   Allowance  for  Loan  Losses   ("ALL"),   management   assesses  the
diversification  of the portfolio.  Each credit is assigned a credit risk rating
factor,  and this factor,  multiplied by the dollars  associated with the credit
risk  rating,  is used to  calculate  one  component  of the ALL.  In  addition,
management  estimates the probable loss on individual credits that are receiving
increased  management  attention due to actual or perceived  increases in credit
risk.

The Company makes  provisions  to the ALL on a regular basis through  charges to
operations  that are  reflected in the  Company's  statements of operations as a
provision for loan losses.  When a loan is deemed  uncollectible,  it is charged
against the  allowance.  Any  recoveries  of  previously  charged-off  loans are
credited  back to the  allowance.  There  is no  precise  method  of  predicting
specific  losses or amounts that  ultimately  may be  charged-off  on particular
categories  of the loan  portfolio.  Similarly,  the adequacy of the ALL and the
level of the related  provision  for  possible  loan losses is  determined  on a
judgment  basis by  management  based on  consideration  of a number of  factors
including (i) economic conditions,  (ii) borrowers'  financial condition,  (iii)
loan  impairment,  (iv)  evaluation of industry  trends,  (v) industry and other
concentrations,  (vi) loans which are contractually  current as to payment terms
but  demonstrate  a higher degree of risk as  identified  by  management,  (vii)
continuing  evaluation of the performing loan  portfolio,  (viii) monthly review
and  evaluation of problem loans  identified  as having a loss  potential,  (ix)
monthly  review by the Board of Directors,  (x) off balance sheet risks and (xi)
assessments by regulators  and other third parties.  Management and the Board of
Directors  evaluate the allowance  and  determine its desired level  considering
objective  and  subjective  measures,   such  as  knowledge  of  the  borrowers'
businesses,  valuation of collateral,  the  determination  of impaired loans and
exposure to potential losses.

While management uses available information to recognize losses on loans, future
additions  to the  allowance  may be  necessary  based on  changes  in  economic
conditions  and other  qualitative  factors.  In  addition,  various  regulatory
agencies, as an integral part of their examination process,  periodically review
the Company's ALL. Such agencies may require the Company to provide additions to
the allowance  based on their judgment of  information  available to them at the
time of their  examination.  There is  uncertainty  concerning  future  economic
trends.  Accordingly  it is not possible to predict the effect  future  economic
trends may have on the level of the provision for loan losses in future periods.

The adequacy of the ALL is calculated upon three components. First is the credit
risk rating of the loan portfolio,  including all outstanding  loans and leases.
Every  extension  of  credit  has  been  assigned  a risk  rating  based  upon a
comprehensive definition intended to measure the inherent risk of lending money.
Each  rating has an  assigned  risk factor  expressed  as a reserve  percentage.
Central  to this  assigned  risk  factor is the  historical  loss  record of the
Company.  Secondly,  established  specific reserves are available for individual
loans currently on management's  watch and high-grade loan lists.  These are the
estimated  potential  losses  associated with specific  borrowers based upon the
collateral  and  event(s)  causing  the risk  ratings.  The third  component  is
unallocated.  This  reserve  is for  qualitative  factors  that may  effect  the
portfolio as a whole, such as those factors described above.

                                       24
<PAGE>

Management  believes the assigned  risk grades and our methods for managing risk
are satisfactory.

The  provision  for loan losses  increased  to $220,000 for the six months ended
June 30, 2007 compared to $180,000 for the same period in 2006.  The increase in
the amount of the provision is a direct result of the Company's  analysis of the
loan  portfolio  and the loan loss history of the Company.  Management  does not
believe  that  there  were any  adverse  trends  indicated  by the detail of the
aggregate charge-offs for any of the periods discussed.

The  following  table  summarizes  the  activity  in the  ALL  for  the  periods
indicated:

<TABLE>
<CAPTION>
                                                Three Months Ended         Six Months Ended
                                                     June 30,                  June 30,
                                              ----------------------    ----------------------
(In thousands)                                   2007         2006         2007         2006
-------------------------------------------   ---------    ---------    ---------    ---------
<S>                                           <C>          <C>          <C>          <C>
Beginning Balance:                            $   2,646    $   2,442    $   2,478    $   2,356
Provision for loan losses                            55           90          220          180
Charge-offs:
           Commercial                                 2           16            2           15
           Real Estate                                -            -            -            -
           Other                                      -            -            -            5
                                              ---------    ---------    ---------    ---------
Total Charge-offs                                     2           16            2           20
                                              ---------    ---------    ---------    ---------
Recoveries:
           Commercial                                 -            -            0            0
           Other                                      -            -            3            -
                                              ---------    ---------    ---------    ---------
Total Recoveries                                      -            -            3            0
                                              ---------    ---------    ---------    ---------
Ending Balance                                $   2,699    $   2,516    $   2,699    $   2,516
                                              =========    =========    =========    =========
ALL to total loans                                 0.91%        0.93%        0.91%        0.93%
Net Charge-offs to average loans-annualized        0.00%                     0.00%        0.00%
</TABLE>

Investment  securities.  Investment  securities increased $14.2 million to $37.3
million at June 30, 2007, from $23.1 million at December 31, 2006. Federal funds
sold decreased slightly by $466 thousand to $31.2 million at June 30, 2007, from
$31.6 million at December 31, 2006.

The Company's  investment in U.S. Treasury securities  increased to 58.6% of the
investment  portfolio  at June 30, 2007  compared to 47.2% at December 31, 2006.
Obligations of U.S. Agencies  decreased to 24.2% of the investment  portfolio at
June 30, 2007 compared to 29.2% at December 31, 2006.  The Company's  investment
in corporate  bonds  decreased to 9.4% of the  investment  portfolio at June 30,
2007  compared to 10.9% at December 31, 2006.  Tax-exempt  municipal  obligation
bonds decreased to 7.8% of the investment portfolio at June 30, 2007 compared to
12.7% at December 31, 2006. Fed Funds sold  decreased  $466 thousand,  or 1.47%.
The overall  increase was primarily the result of the increase in U. S. Treasury
securities used to pledge as collateral for public deposits.

Deposits.  Total deposits were $352.9 million as of June 30, 2007 an increase of
$11.9 million or 3.48% from the December 31, 2006 balance of $341.0 million. The
Company continues to manage the mix of its deposits consistent with its identity
as a community bank serving the financial  needs of its customers.  Non-interest
bearing demand  deposits and interest  bearing  checking  deposits  decreased to
23.32% of total deposits down from 27.0% at December 31, 2006.  Money market and
savings accounts decreased to 17.6% of total deposits from 21.9% at December 31,
2006. Time deposits  decreased to 59.1% of total deposits from 51.1% at December
31, 2006.

                                       25
<PAGE>

SUBORDINATED DEBENTURES

On  June  27,  2007,  the  Company  through  its  newly  formed  business  trust
subsidiary,  Pacific State Statutory Trust III issued and sold $5,000,000 of the
Trust's  Floating  Rate Capital  Securities.  The proceeds  from the sale of the
securities  were  combined  with the  proceeds  of the sale by the  Trust to the
Company of the Trust's common  securities and were used by the Trust to purchase
$5,155,000 of Floating Rate Junior  Subordinated  Deferrable Interest Debentures
("2007 Debentures") of the Company.  The interest rate on the 2007 Debentures is
variable,  based on the three-month  LIBOR plus 1.45%, and is payable and resets
quarterly.  The 2007  Debentures  mature in September 2037 but are redeemable at
par after five years.

On June 26, 2007,  the first call date  without  penalty,  the Company  redeemed
$5,155,000  in  principal  amount  of  its  Floating  Rate  Junior  Subordinated
Deferrable   Interest   Debentures   with  interest  at  six-month   LIBOR  plus
3.45%,("2002 Debentures") issued in June 2002 by Pacific State Statutory Trust I
("Trust I") and the proceeds were used to redeem  $5,000,000 in principal amount
of its Floating  Rate Capital  Securities  issued by Trust I in June 2002.  As a
result,  the  Company  recognized  $129,000  in  non-interest  expenses  for the
remaining unamortized  origination costs on the 2002 Debentures,  but expects to
significantly  reduce the interest costs on these subordinated  debentures going
forward.  The Company anticipates reduced interest expense of approximately $100
thousand  annually,  on a pre-tax  basis.  Pacific State  Statutory  Trust I was
terminated on July 11, 2007.

CAPITAL RESOURCES

Capital  adequacy is a measure of the amount of capital  needed to sustain asset
growth and act as a cushion  for losses.  Capital  protects  depositors  and the
deposit  insurance fund from  potential  losses and is a source of funds for the
investments the Company needs to remain competitive.  Historically,  capital has
been generated principally from the retention of earnings.

Overall  capital  adequacy is monitored on a day-to-day  basis by the  Company's
management  and  reported to the  Company's  Board of  Directors  on a quarterly
basis.  The Bank's  regulators  measure  capital  adequacy by using a risk-based
capital  framework  and by monitoring  compliance  with minimum  leverage  ratio
guidelines.  Under the  risk-based  capital  standard,  assets  reported  on the
Company's balance sheet and certain off-balance sheet items are assigned to risk
categories, each of which is assigned a risk weight.

This standard  characterizes an institution's  capital as being "Tier 1" capital
(defined  as  principally  comprising  shareholders'  equity and the  qualifying
portion of subordinated debentures) and "Tier 2" capital (defined as principally
comprising Tier 1 capital and the remaining  qualifying  portion of subordinated
debentures and the qualifying portion of the ALL).

The minimum ratio of total risk-based capital to risk-adjusted assets, including
certain  off-balance  sheet items,  is 8%. At least  one-half  (4%) of the total
risk-based capital is to be comprised of Tier 1 capital; the balance may consist
of debt securities and a limited portion of the ALL.

                                       26
<PAGE>

As of June  30,  2007  the  most  recent  notification  by the  Federal  Deposit
Insurance  Corporation  ("FDIC")  categorized the Bank as well capitalized under
the regulatory framework for prompt corrective action. To be categorized as well
capitalized the Bank

must meet the minimum  ratios as set forth  below.  There are no  conditions  or
events since that notification that management  believes have changed the Bank's
category.  Management  believes that the Company met all of its capital adequacy
requirements. The leverage ratio consists of Tier I capital divided by quarterly
average   assets.   The  minimum   leverage  ratio  is  3  percent  for  banking
organizations   that  do  not  anticipate   significant  growth  and  that  have
well-diversified  risk,  excellent asset quality and in general,  are considered
top-rated banks. For all other institutions the minimum rate is 4%.

The Company's and the Bank's risk-based capital ratios are presented below.

<TABLE>
<CAPTION>
                                                                                          TO BE WELL CAPITALIZED
                                                                     FOR CAPITAL          UNDER PROMPT CORRECTIVE
                                            ACTUAL                ADEQUACY PURPOSES          ACTION PROVISIONS
                                    -----------------------    -----------------------    -----------------------
                                                                 MINIMUM     MINIMUM        MINIMUM     MINIMUM
                                      AMOUNT       RATIO         AMOUNT       RATIO         AMOUNT       RATIO
                                    ----------   ----------    ----------   ----------    ----------   ----------
<S>                                 <C>               <C>      <C>                <C>     <C>               <C>
COMPANY
As of June 30, 2007:
  Total capital
    (to risk weighted assets)       $   42,713        12.69%   $   26,928         8.00%          N/A          N/A
  Tier I capital
    (to risk weighted assets)       $   39,327        11.68%   $   13,464         4.00%          N/A          N/A
  Tier I capital
    (to average assets)             $   39,327         9.94%   $   15,862         4.00%          N/A          N/A

BANK
As of June 30, 2007:
  Total capital
    (to risk weighted assets)       $   40,586        12.06%   $   26,928         8.00%   $   33,660        10.00%
  Tier I capital
    (to risk weighted assets)       $   37,682        11.19%   $   13,464         4.00%   $   20,196         6.00%
  Tier I capital
    (to average assets)             $   37,682         9.52%   $   15,862         4.00%   $   19,828         5.00%
</TABLE>

<TABLE>
<CAPTION>
                                                                                          TO BE WELL CAPITALIZED
                                                                     FOR CAPITAL          UNDER PROMPT CORRECTIVE
                                            ACTUAL                ADEQUACY PURPOSES          ACTION PROVISIONS
                                    -----------------------    -----------------------    -----------------------
                                                                 MINIMUM      MINIMUM       MINIMUM      MINIMUM
                                      AMOUNT       RATIO         AMOUNT        RATIO         AMOUNT       RATIO
                                    ----------   ----------    ----------   ----------    ----------   ----------
<S>                                 <C>               <C>      <C>                <C>     <C>               <C>
COMPANY
As of December 31, 2006:
  Total capital
    (to risk weighted assets)       $   39,427        11.83%   $   26,654         8.00%          N/A          N/A
  Tier I capital
    (to risk weighted assets)       $   35,499        10.65%   $   13,327         4.00%          N/A          N/A
  Tier I capital
    (to average assets)             $   35,499        10.17%   $   13,961         4.00%          N/A          N/A

BANK
As of December 31, 2006:
  Total capital
    (to risk weighted assets)       $   37,141         11.2%   $   27,922         8.00%   $   33,317        10.00%
  Tier I capital
    (to risk weighted assets)       $   34,141         10.3%   $   13,327         4.00%   $   19,990         6.00%
  Tier I capital
    (to average assets)             $   34,141          9.7%   $   13,961         4.00%   $   17,541         5.00%
</TABLE>

                                       27
<PAGE>

LIQUIDITY

The  purpose of  liquidity  management  is to ensure  efficient  and  economical
funding  of the  Company's  assets  consistent  with the needs of the  Company's
depositors,  borrowers  and, to a lesser extent,  shareholders.  This process is
managed not by formally monitoring the cash flows from operations, investing and
financing  activities as described in the Company's statement of cash flows, but
through an  understanding  principally of depositor and borrower  needs. As loan
demand increases,  the Company can use asset liquidity from maturing investments
along with deposit growth to fund the new loans.

With  respect  to  assets,  liquidity  is  provided  by cash  and  money  market
investments  such  as  interest-bearing   time  deposits,   federal-funds  sold,
available-for-sale investment securities, and principal and interest payments on
loans.  With respect to  liabilities,  liquidity  is provided by core  deposits,
shareholders'  equity  and the  ability of the  Company  to borrow  funds and to
generate deposits.

Because  estimates  of the  liquidity  needs of the Company may vary from actual
needs,  the Company  maintains a  substantial  amount of liquid assets to absorb
short-term  increases  in  loans  or  reductions  in  deposits.  As loan  demand
decreases or loans are paid off, investment assets can absorb these excess funds
or deposit rates can be decreased to run off excess liquidity.  Therefore, there
is some correlation  between financing  activities  associated with deposits and
investing activities  associated with lending. The Company's liquid assets (cash
and due  from  banks,  federal  funds  sold  and  available-for-sale  investment
securities)  totaled  $82.6  million or 20.3% of total  assets at June 30,  2007
compared to $73.6  million or 19.0% of total assets at December  31,  2006.  The
Company  expects that its primary  source of  liquidity  will be earnings of the
Company, acquisition of core deposits, and wholesale borrowing arrangements.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Market risk is the risk of loss in a financial  instrument  arising from adverse
changes in market  rates such as  interest  rates,  commodity  prices and equity
prices. As a financial  institution,  the Company's market risk arises primarily
from interest rate risk exposure.  Fluctuation in interest rates will ultimately
impact both the level of income and expense  recorded on a large  portion of the
Company's assets and  liabilities,  and the market value of all interest earning
assets and interest bearing  liabilities,  other than those that possess a short
term to maturity.  Based upon the nature of its  operations,  the Company is not
subject to  fluctuations  in foreign  currency  exchange or  commodity  pricing.
However,  the  Company's  commercial  real estate loan  portfolio,  concentrated
primarily in Northern California,  is subject to risks associated with the local
economies.

The  fundamental  objective  of  the  Company's  management  of its  assets  and
liabilities is to maximize the economic  value of the Company while  maintaining
adequate  liquidity  and  managing  exposure  to  interest  rate risk  deemed by
management  to be  acceptable.  Management  believes  an  acceptable  degree  of
exposure to interest rate risk results from management of assets and liabilities
through using floating rate loans and deposits,  maturities,  pricing and mix to
attempt to neutralize the potential  impact of changes in market interest rates.
The Company's profitability is dependent to a large extent upon its net interest
income which is the difference  between its interest income on interest  earning
assets,  such as loans and securities,  and interest expense on interest bearing
liabilities,  such as deposits; trust preferred securities and other borrowings.
The Company, like other financial institutions, is subject to interest rate risk
to the degree that its interest  earning  assets  reprice  differently  than its
interest  bearing  liabilities.  The  Company  manages  its  mix of  assets  and
liabilities with the goal of limiting  exposure to interest rate risk,  ensuring
adequate liquidity, and coordinating its sources and uses of funds.

                                       28
<PAGE>

The Company  seeks to control its interest  rate risk  exposure in a manner that
will allow for adequate  levels of earnings and capital over a range of possible
interest  rate  environments.  The  Company  has  adopted  formal  policies  and
practices to monitor and manage  interest  rate risk  exposure.  As part of this
effort, the Company measures interest rate risk utilizing both an internal asset
liability  measurement  system as well as  independent  third  party  reviews to
confirm the  reasonableness  of the  assumptions  used to measure and report the
Company's  interest  rate  risk,  enabling  management  to make any  adjustments
necessary.

Interest  rate  risk is  managed  by the  Company's  Asset  Liability  Committee
("ALCO"), which includes members of senior management and several members of the
Board of  Directors.  The ALCO  monitors  interest  rate risk by  analyzing  the
potential impact on interest income from potential changes in interest rates and
considers  the impact of  alternative  strategies  or  changes in balance  sheet
structure.  The ALCO manages the Company's balance sheet in part to maintain the
potential impact on net interest income within acceptable ranges despite changes
in interest rates.  The Company's  exposure to interest rate risk is reviewed on
at least a quarterly basis by the ALCO.

In  management's  opinion there has not been a material  change in the Company's
market risk or interest rate risk profile for the six months ended June 30, 2007
compared to December  31, 2006 as  discussed  under the caption  "Liquidity  and
Market Risk" and "Net Interest  Income  Simulation" in the Company's 2006 Annual
Report to Shareholders filed as an exhibit with the Company's 2006 Annual Report
on Form 10-K, which is incorporated here by reference.

The  following  table  reflects the  company's  projected  net  interest  income
sensitivity analysis based on year-end data:

                                       June 30, 2007
                             ----------------------------------
                               Adjusted Net      Percent change
Change in Rates              Interest Income       from base
--------------------------   ---------------    ---------------
                             (in thousands)
Up 200 basis points          $        21,254               9.46%
Up 150 basis points          $        20,798               7.11%
Up 100 basis points          $        20,340               4.75%
Base Scenario                $        19,417               0.00%
Down 100 basis points        $       (18,571)             -4.36%
Down 150 basis points        $       (18,149)             -6.53%
Down 200 basis points        $       (17,723)             -8.72%

                                       29
<PAGE>

ITEM 4. CONTROLS AND PROCEDURES

The Company's Chief  Executive  Officer and Chief  Financial  Officer,  based on
their  evaluation  as of the end of the  period  covered  by this  report of the
Company's  disclosure  controls and  procedures (as defined in Exchange Act Rule
13a--15(e)),   have  concluded  that  the  Company's   disclosure  controls  and
procedures are designed to ensure that  information  required to be disclosed by
the Company in its  periodic  SEC filings is  recorded,  processed  and reported
within the time periods specified in the SEC's rules and forms.  Based upon that
evaluation,  the Chief Executive  Officer and Chief Financial  Officer concluded
that the Company's  disclosure  controls and  procedures are effective in timely
alerting them to material  information  relating to the Company  (including  its
consolidated  and  unconsolidated  subsidiaries)  required to be included in the
Company's  periodic  SEC  filings.   There  are  inherent   limitations  to  the
effectiveness  of any system of disclosure  controls and  procedures,  including
cost limitations,  judgments used in decision making,  assumptions regarding the
likelihood  of  future  events,  soundness  of  internal  controls,  fraud,  the
possibility of human error and the  circumvention  or overriding of the controls
and procedures.  Accordingly,  even effective disclosure controls and procedures
can provide only  reasonable,  and not  absolute,  assurance of achieving  their
control objectives.

There were no significant changes in the Company's internal controls or in other
factors during the period covered by this report that have  materially  affected
or could significantly affect internal control over financial reporting.

                                       30
<PAGE>

                           PART II - OTHER INFORMATION

ITEM 1A RISK FACTORS

In  addition  to the other  information  set forth in this  report,  you  should
carefully  consider the factors  discussed in Part I, "Item 1A. Risk Factors" in
our Annual Report on Form 10-K for the year ended December 31, 2006, which could
materially  affect our  business,  financial  condition or future  results.  The
Company  is not aware of any  material  changes  to the risks  described  in our
Annual Report.

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

The Bank held its annual shareholders meeting ("Meeting") on May 10, 2007 at the
Bank's office at 6 So El Dorado St., Stockton, CA. 94501.

According  to the  certified  list of  stockholders  which was  presented at the
Meeting,  there were 3,676,718 shares of Common Stock of the Company outstanding
and  entitled to vote at the  Meeting.  There were  present at the  Meeting,  in
person or by proxy,  the  holders  of  3,073,204  shares of Common  Stock of the
Company,   representing   83.58%  of  the  total  votes  eligible  to  be  cast,
constituting  a  majority  and more  than a  quorum  of the  outstanding  shares
entitled to vote.

The Shareholders approved the following:

PROPOSAL 1 - Election of Directors

                                FOR          WITHHELD
                            ------------   ------------
Michael L. Dalton              3,071,524          1,680
Maxwell M. Freeman             3,066,724          6,480
Harold Hand                    3,071,524          1,680
Patricia Ann Hatton            3,071,524          1,680
Steven J. Kikuchi              3,071,524          1,680
Yosh Mataga                    3,071,524          1,680
Russell G. Munson              3,071,524          1,680
Steven A. Rosso                3,065,226          7,978
Gary A. Stewart                3,071,524          1,680
Kathleen Verner                3,071,524          1,680

                                       31
<PAGE>

ITEM 6. EXHIBITS

31.1    Certification   of  Chief   Executive   Officer   (section  302  of  the
        Sarbanes-Oxley Act).

31.2    Certification   of  Chief   Financial   Officer   (section  302  of  the
        Sarbanes-Oxley Act).

32.1    Certification of Chief Executive  Officer pursuant to section 906 of the
        Sarbanes- Oxley Act.

32.2    Certification of Chief Financial  Officer pursuant to section 906 of the
        Sarbanes-Oxley Act

                                   SIGNATURES

Pursuant  to the  requirements  of the  Securities  Exchange  Act of  1934,  the
registrant  has duly  caused  this  report  to be  signed  on its  behalf by the
undersigned thereunto duly authorized.

                                             Pacific State Bancorp


Date: August 14, 2007                        By: /s/ Steven A. Rosso
                                                 -------------------------------
                                                 Steven A. Rosso
                                                 President and Chief Executive
                                                 Officer

                                             Pacific State Bancorp


Date: August 14, 2007                        By: /s/ JoAnne Roberts
                                                 -------------------------------
                                                 JoAnne Roberts
                                                 Senior Vice President and Chief
                                                 Financial Officer

                                       32