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

                                    FORM 10-K

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES  EXCHANGE ACT OF
1934

For the fiscal year ended December 31, 2004

Commission File Number: 000-31929
                            -------------------------
                              SONOMA VALLEY BANCORP
               (Name of registrant at as specific in its charter)
       CALIFORNIA                                      68-0454068
  (State of incorporation)                 (I.R.S. Employer Identification No.)
                              202 West Napa Street
                            Sonoma, California 95476
                                 (707) 935-3200
               (Address, including zip code, and telephone number,
              including area code, of principal executive offices)
                            ------------------------
Securities to be registered under section 12(b) of the Exchange Act: None
Securities to be registered under section 12(g) of the Exchange Act:

                                                   Name of each exchange
  Title of each class                              on which registered
  -------------------                              ---------------------
Common Stock, No Par Value                                None

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

Indicate by check mark if disclosure of delinquent  filers  pursuant to Item 405
of Regulation S-K (229.405 of this chapter) is contained herein, and will not be
contained,  to the  best of  registrant's  knowledge,  in  definitive  proxy  or
information  statements  incorporated by reference in Part III of this Form 10-K
or any amendment of this Form 10-K. |_|

Indicate  by check mark  whether  the  registrant  is an  accelerated  filer (as
defined in Rule 12b-2 of the Act) [ ] Yes [ X ] No

Aggregate market value of Common Stock held by  non-affiliates  of Sonoma Valley
Bancorp as of March 4, 2005 based on the current  market  price of the stock:  $
34,415,942

The number of shares of  registrant's  common stock  outstanding  as of March 4,
2005 was 2,151,370.

                       DOCUMENTS INCORPORATE BY REFERENCE

The  information   required  by  Items  10,11,12,13  and  14  of  Part  III  are
incorporated by reference to the  registrant's  proxy  statement,  which will be
filed within 120 days of the registrant's year end.


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

                                     PART I
ITEM 1.  BUSINESS

General

     Sonoma Valley Bancorp  ("Company") was incorporated under California law on
March 9, 2000 at the  direction of Sonoma Valley Bank for the purpose of forming
a single-bank  holding company structure  pursuant to a plan of  reorganization.
The  reorganization  became  effective  November 1, 2000,  after  obtaining  all
required regulatory approvals and permits,  shares of the Company's common stock
were issued to  shareholders  of Sonoma Valley Bank in exchange for their Sonoma
Valley Bank stock. Previously, Sonoma Valley Bank filed its periodic reports and
current  reports  under the  Securities  Exchange  Act of 1934 with the  Federal
Deposit  Insurance  Corporation.  Following  the  reorganization,  periodic  and
current reports are now filed with the Securities and Exchange Commission.

     The business operations of the Company continue to be conducted through its
wholly-owned  subsidiary,  Sonoma Valley Bank ("Bank"),  which began  commercial
lending  operations on June 3, 1988.  In addition to its main branch  located in
Sonoma,  California,  the Bank also operates two additional branch offices,  one
branch  office is located in Glen Ellen,  California.  In March  2004,  the Bank
opened  another branch  office,  Banco de Sonoma,  located in Boyes Hot Springs,
California.  The  following  discussion,  therefore,  although  presented  on  a
consolidated  basis,  analyzes the financial condition and results of operations
of the Bank for the twelve month period ended December 31, 2004.

Primary Services

     The Bank emphasizes the banking needs of small to  medium-sized  commercial
businesses,  professionals  and upper  middle  to high  income  individuals  and
families in its primary  service area of Sonoma,  California  and the  immediate
surrounding area. In recognition of CRA compliance,  the Company offers products
to accommodate special needs of individuals  regardless of their economic status
and more recently the Company has focused on the needs of the Latino community.

     The Bank offers  depository and lending  services keyed to the needs of its
business and professional clientele.  These services include a variety of demand
deposit, savings and time deposit account

                                     Page 2
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alternatives,  all  insured  by the FDIC up to its  applicable  limits.  Special
merchant and business services, such as coin, night depository, courier, on line
cash  management and merchant  teller  services are  available.  The Bank offers
Internet  Banking  for both  commercial  and  consumer  customers,  bank by mail
service,  drive-up ATM  service,  extended  hours  including  Saturday  banking,
drive-up windows and telephone voice response. The Bank's lending activities are
directed  primarily  towards  granting short and medium-term  commercial  loans,
augmented by customized lines of credit, for such purposes as operating capital,
business and professional start-ups,  inventory, equipment, accounts receivable,
credit  cards,  and interim  construction  financing,  personal  loans and loans
secured by residential real estate.

     With the  opening of our third  Branch  office,  Banco de Sonoma  Office in
March, 2004, the bank is offering additional services to the Latino community in
our market place.  The Banco de Sonoma office is staffed by bilingual  officers,
customer service  employees and tellers.  The Bank offers special money transfer
services to facilitate the transfer of funds to Mexico.

     The business of the Bank is not seasonal. The Bank intends to continue with
the  same  basic  commercial  banking  activities  it has  operated  with  since
beginning  operations June 3, 1988. Retail deposit  gathering  activities at the
branches  comprise  the bulk of  sources  for  lending.  The  Bank has  approved
borrowing levels at the Federal Home Bank for temporary funding needs.

Competition

     In general,  the banking  business in  California  and in the market areas,
which the Bank  serves,  is highly  competitive  with  respect to both loans and
deposits,  and is dominated by a relatively  small number of major banks,  which
have many offices  operating over a wide geographic  area. The Bank competes for
loans and deposits with these and other regional banks,  including several which
are much larger than the Bank, as well as savings and loan associations,  thrift
and loan  associations,  finance  companies,  credit  unions,  offerors of money
market funds and other financial institutions.

     The Bank's  primary  service area is currently  served by branches of eight
other banks (including three major banks:  Citigroup,  Bank of America and Wells
Fargo Bank).  In order to compete with the major  financial  institutions in its
primary service area, the Bank uses its flexibility as an independent bank. This
includes emphasis on specialized services and personalized attention.

     In the event  there are  customers  whose  loan  demands  exceed the Bank's
lending limit, the Bank seeks to arrange for such loans on a participation basis
with other financial  institutions and intermediaries.  The Bank also is able to
assist  those  customers  requiring  other  services  not offered by the Bank by
obtaining those services through its correspondent banks.

Concentration of Credit Risk

     The majority of the Bank's loan activity is with  customers  located within
the  county  of  Sonoma.  While  the  Bank  has a  diversified  loan  portfolio,
approximately 87% of these loans are secured by real estate in its service area.
This concentration for the year ending December 31, 2004 is presented below:



   (in thousands of dollars)
    Secured by real estate:
    Construction/land development    $ 24,152
    Farmland                            4,187
    1-4 family residences              25,184
    Commercial/multi-family            79,037


                                     Page 3

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Employees

     As of December  31,  2004,  the Company  employed 55  full-time  equivalent
employees.

Supervision and Regulation

     The Company is a  registered  bank holding  company  under the Bank Holding
Company Act, regulated,  supervised and examined by the Federal Reserve Bank. As
such, it must file with the Federal Reserve Bank an annual report and additional
reports as the Federal Reserve Board may require. The Company is also subject to
periodic examination by the Federal Reserve Board.

     In addition,  both the Company and the Bank are extensively regulated under
both  federal and state laws and  regulations.  These laws and  regulations  are
primarily intended to protect depositors,  not shareholders.  To the extent that
the following  information describes statutory or regulatory  provisions,  it is
qualified  in  its  entirety  by  reference  to  the  particular  statutory  and
regulatory provisions at issue.

     As a California  state-licensed  bank,  the Bank is subject to  regulation,
supervision and periodic  examination by the California  Department of Financial
Institutions. The Bank is also subject to regulation,  supervision, and periodic
examination by the Federal Deposit Insurance  Corporation (the "FDIC"). The Bank
is not a member of the Federal  Reserve System,  but is nevertheless  subject to
certain  regulations of the Board of Governors of the Federal Reserve System. As
a state bank, the Bank's  deposits are insured by the FDIC to the maximum amount
permitted by law, which is currently  $100,000 per depositor in most cases.  For
this protection, the Bank pays a semi-annual assessment.

     The regulations of these state and federal bank regulatory  agencies govern
most aspects of the Company's and the Bank's business and operations,  including
but not limited to, requiring the maintenance of  non-interest-bearing  reserves
on deposits,  limiting the nature and amount of investments  and loans which may
be made,  regulating  the  issuance of  securities,  restricting  the payment of
dividends, regulating bank expansion and bank activities,  including real estate
development activities. The Federal Reserve Board, the Federal Deposit Insurance
Corporation,  and the California Department of Financial Institutions have broad
enforcement powers over depository institutions, including the power to prohibit
a bank from engaging in business  practices which are considered to be unsafe or
unsound, to impose substantial fines and other civil and criminal penalties,  to
terminate  deposit  insurance,  and to appoint a conservator or receiver under a
variety of  circumstances.  The Federal Reserve Board also has broad enforcement
powers over bank holding  companies,  including the power to impose  substantial
fines and other civil and criminal penalties.

Regulation of Bank Holding Companies

As a bank holding  company,  the Company's  activities  are subject to extensive
regulation by the Federal  Reserve Board.  The Bank Holding Company Act requires
us to obtain the prior approval of the Federal Reserve Board before (i) directly
or  indirectly  acquiring  ownership or control of any voting  shares of another
bank or bank holding company if, after such acquisition, we would own or control
more than 5% of the shares of the other bank or bank holding company (unless the
acquiring  company  already  owns or controls a majority of such  shares);  (ii)
acquiring all or substantially all of the assets of another bank or bank holding
company;  or (iii) merging or  consolidating  with another bank holding company.
The  Federal  Reserve  Board  will  not  approve  any  acquisition,   merger  or
consolidation that would have a substantially anticompetitive result, unless the
anticompetitive  effects of the proposed transaction are clearly outweighed by a
greater public interest in meeting the convenience and needs of the community to
be served.  The Federal Reserve Board also considers  capital adequacy and other
financial and managerial factors in its review of acquisitions and mergers.

                                     Page 4
<PAGE>

 With certain  exceptions,  the Bank Holding  Company Act also  prohibits us
from acquiring or retaining direct or indirect ownership or control of more than
5% of the  voting  shares  of any  company  that is not a bank  or bank  holding
company,  or from engaging directly or indirectly in activities other than those
of  banking,  managing or  controlling  banks,  or  providing  services  for its
subsidiaries.  The principal  exceptions to these  prohibitions  involve certain
non-bank  activities  that, by statute or by Federal Reserve Board regulation or
order, have been determined to be activities  closely related to the business of
banking or of managing or controlling banks.

Federal Deposit Insurance

     The FDIC may  terminate  the deposit  insurance  of any insured  depository
institution  if the FDIC  determines  that the  institution  has  engaged  or is
engaging in unsafe or unsound practices, is in an unsafe or unsound condition to
continue operations or has violated any applicable law, regulation, order or any
condition  imposed in writing  by, or pursuant to written  agreement  with,  the
FDIC. The FDIC may also suspend deposit insurance temporarily during the hearing
process for a permanent  termination  of  insurance  if the  institution  has no
tangible capital.

Impact of Economic Conditions and Monetary Policies

     The  earnings  and growth of the Bank are and will be  affected  by general
economic  conditions,  both domestic and international,  and by the monetary and
fiscal policies of the United States  Government and its agencies,  particularly
the Federal Reserve Bank (FRB). One function of the FRB is to regulate the money
supply and the national supply of bank credit in order to mitigate  recessionary
and  inflationary  pressures.  Among the  instruments of monetary policy used to
implement these objects are open market transactions in United States Government
securities,  changes in the discount rate on member bank borrowings, and changes
in reserve requirement held by depository institutions. The monetary policies of
the FRB have had a  significant  effect on the  operating  results of commercial
banks in the past and are expected to continue to do so in the future.  However,
the effect of such  policies  on the future  business  and  earnings of the Bank
cannot be accurately predicted.

Recent and Proposed Legislation

     From  time  to  time,  legislation  is  enacted  which  has the  effect  of
increasing  the  cost of  doing  business,  limiting  or  expanding  permissible
activities,  or  affecting  the  competitive  balance  between  banks  and other
financial  institutions.  Proposals to change the laws and regulations governing
the  operations  and  taxation  of banks and other  financial  institutions  are
frequently made in Congress, in the California legislature,  and by various bank
regulatory agencies. No prediction can be made as to the likelihood of any major
changes or the impact such changes  might have on the Bank.  Certain  changes of
potential  significance  to the Bank which have been enacted  recently or others
which are currently  under  consideration  by Congress or various  regulatory or
professional agencies are discussed below.

     The  Financial  Services  Modernization  Act of  1999  (also  known  as the
"Gramm-Leach-Bliley   Act"  after  its  Congressional   sponsors)  substantially
eliminates most of the separations between banks,  brokerage firms, and insurers
enacted  by the  Glass-Steagall  Act of 1933.  The  reform  legislation  permits
securities  firms and insurers to buy banks,  and banks to underwrite  insurance
and securities.  States retain regulatory authority over insurers.  The Treasury
Department's Office of the Comptroller of the Currency has authority to regulate
bank  subsidiaries  that  underwrite  securities  and the  Federal  Reserve  has
authority over bank affiliates for activities such as insurance underwriting and
real-estate development.

                                     Page 5

<PAGE>


     The U.S. federal bank regulatory  agencies'  risk-based  capital guidelines
are  based  upon the 1988  capital  accord  of the Basel  Committee  on  Banking
Supervision  (the "Basel  Committee").  The Basel  Committee  is a committee  of
central banks and bank supervisors from the major industrialized  countries that
develops  broad policy  guidelines  that each country's  supervisors  can use to
determine  the  supervisory  policies  they apply.  In January  2001,  the Basel
Committee on Banking  Supervision  issued a proposal for a "New Capital Accord".
The New Capital Accord  incorporates a three-part  framework of minimum  capital
requirements,  supervisory  review  of an  institution's  capital  adequacy  and
internal assessment process,  and market discipline through effective disclosure
to encourage  safe and sound banking  practices.  To remain a financial  holding
company,  a company must remain "well  capitalized"  and "well  managed".  "Well
managed"  means  that at their  most  recent  examination  the bank  received  a
satisfactory composite rating and at least a satisfactory rating for management.
The federal banking agencies are required to take "prompt  corrective action" in
respect of depository  institutions and their bank holding companies that do not
meet minimum capital  requirements.  FDIC established five capital tiers:  "well
capitalized",  "adequately  capitalized",   "undercapitalized",   "significantly
undercapitalized" and "critically undercapitalized".  A depository institution's
capital  tier,  or that of its bank  holding  company,  depends  upon  where its
capital levels are in relation to various relevant capital measures, including a
risk-based  capital  measure and a leverage ratio capital  measure,  and certain
other  factors.  As of  December  31,  2004,  the  Company  and Bank  are  "well
capitalized" and "well managed".

     Under the  regulations  adopted by the  federal  banking  agencies,  a bank
holding company is "well  capitalized" if it has (i) a total risk-based  capital
ratio  of 10% or  greater,  (ii) a Tier  1  risk-based  capital  ratio  of 6% or
greater,  (iii) a leverage ratio of 5% or greater and (iv) is not subject to any
written  agreement,  order or directive to meet and maintain a specific  capital
level  for  any  capital  measure.   An  "adequately   capitalized"   depository
institution is defined as one that has (i) a total  risk-based  capital ratio of
8% or greater, (ii) a Tier 1 risk-based capital ratio of 4% or greater and (iii)
a leverage  ratio of 4% or greater (or 3% or greater in the case of a bank rated
a composite 1 under the Uniform  Financial  Institution  Rating System,  "CAMELS
rating", established by the Federal Financial Institution Examinations Council).
A company is considered (i)  "undercapitalized" if it has (A) a total risk-based
capital  ratio of less than 8%, (B) a Tier 1  risk-based  capital  ratio of less
than  4% or (C) a  leverage  ratio  of  less  than  4% (or 3% in the  case of an
institution with a CAMELS rating of 1), (ii) "significantly undercapitalized" if
it has (A) a total  risk-based  capital  ratio of less  than 6%, or (B) a Tier 1
risk-based capital ratio of less than 3% or (C) a leverage ratio of less than 3%
and  (iii)"critically  undercapitalized" if it has a ratio of tangible equity to
total  assets  equal to or less  than 2%.  An  institution  may be deemed by the
regulators to be in a capitalization category that is lower than is indicated by
its  actual   capital   position  if,  among  other   things,   it  receives  an
unsatisfactory examination rating.

     The  USA  Patriot  Act of  2001  ("USA  Patriot  Act")  imposes  additional
obligations on U.S.  financial  institutions,  including banks and broker dealer
subsidiaries,   to  implement  policies,   procedures  and  controls  which  are
reasonably  designed to detect and report  instances of money laundering and the
financing of terrorism.  In addition,  provisions of the USA Patriot Act require
the  federal  financial   institution   regulatory   agencies  to  consider  the
effectiveness of a financial institution's anti-money laundering activities when
reviewing bank mergers and bank holding company acquisitions.

     The  Sarbanes-Oxley  Act of 2002  ("Sarbanes-Oxley")  intended  to  address
corporate and accounting  fraud.  Sarbanes-Oxley  applies to publicly  reporting
companies. In addition to the establishment of a new accounting oversight board,
which will enforce auditing, quality control and independence standards and will
be  funded  by fees  from all  publicly  traded  companies,  the bill  restricts
provision of both  auditing and  consulting  services by  accounting  firms.  To
maintain auditor independence, any non-audit services being provided to an audit
client  requires  pre-approval  by the Company's  audit  committee  members.  In
addition, the audit partners must be rotated.


                                     Page 6
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     Sarbanes-Oxley  also  requires  the chief  executive  officer and the chief
financial  officer to certify to the accuracy of periodic reports filed with the
Securities  Exchange  Commission  (the  "SEC"),  subject  to civil and  criminal
penalties if they knowingly or willfully violate this certification requirement.
In  addition,  under  Sarbanes-Oxley,  legal  counsel will be required to report
evidence of a material violation of the securities laws or a breach of fiduciary
duty by a company to its chief  executive  officer or its chief  legal  officer,
and, if such officer does not appropriately  respond, to report such evidence to
the audit committee or other similar  committee of the board of directors or the
board  itself.  Companies  are  required  to adopt a Code of  Ethics  for  their
Financial Managers and any violators are subject to disciplinary action.

     Longer  prison  terms  and  increased  penalties  will also be  applied  to
corporate  executives  who violate  federal  securities  laws, the period during
which  certain  types of suits can be brought  against a company or its officers
has been extended,  and bonuses issued to top executives prior to restatement of
a  company's  financial  statements  are now  subject  to  disgorgement  if such
restatement was due to corporate misconduct. Executives are also prohibited from
insider trading during retirement plan "blackout" periods,  and loans to company
executives  are  restricted.  Sarbanes-Oxley  accelerates  the  time  frame  for
disclosures by public companies,  as they must immediately disclose any material
changes in their  financial  condition or  operations.  Directors  and executive
officers  must also  provide  information  for most  changes in  ownership  in a
company's securities within two business days of the change.

     Sarbanes-Oxley  also  prohibits any officer or director of a company or any
other person acting under their direction from taking any action to fraudulently
influence,  coerce,  manipulate or mislead any  independent  public or certified
accountant  engaged in the audit of the company's  financial  statements for the
purpose  of  rendering  the  financial  statements  materially  misleading.   In
addition,  Sarbanes-Oxley  requires that each  financial  report  required to be
prepared in accordance with (or reconciled to) accounting  principles  generally
accepted  in the United  States of America  and filed with the SEC  reflect  all
material  correcting  adjustments  that are  identified by a "registered  public
accounting firm" in accordance with accounting  principles generally accepted in
the United States of America and the rules and regulations of the SEC.

     Section 404 of the Sarbanes-Oxley Act of 2002 requires the SEC to prescribe
rules  requiring  the  inclusion  of an internal  control  report in each annual
report. Accordingly, in the annual report for December 31, 2006, management will
be required to include a report on the  effectiveness of the Company's  internal
controls.  The  Company's  independent  auditors  are  required to attest to and
report on management's  assessment of internal control. The Company's management
and staff are working  diligently toward evaluating and documenting the internal
control  systems in order to allow  management  to report on, and the  Company's
independent auditors to attest to, the Company's internal control over financial
reporting.  The Company has retained the services of a consulting firm to assist
management and staff with this process. Even so, there can be no assurances that
the evaluation  required by Sarbanes-Oxley will not result in the identification
of significant control  deficiencies or that the Company's auditors will be able
to  attest  to  the  effectiveness  of  our  internal  controls  over  financial
reporting.

Accounting Pronouncements

     In  December  2004,  the  Financial  Accounting  Standards  Board  issued a
revision  of  Statement  of  Financial  Accounting  Standards  (SFAS)  No.  123,
Accounting for Stock-Based  Compensation  establishing revised standards for the
accounting for transactions in which an entity exchanges its equity  instruments
for goods or services.  This statement no longer allows, as an alternative,  the
use of Accounting Principles Board (APB) Opinion No. 25's intrinsic value method
of accounting  for stock  options,  as had been provided under the original SFAS
No.  123.  Under APB No. 25,  issuing  stock  options  generally  resulted in no
recognition of compensation  expense.  Under revised SFAS No. 123,  entities are
required to  recognize  the cost of services  received in exchange for awards of
equity  instruments  based on the  grant-date  fair value.  This revised SFAS


                                     Page 7
<PAGE>

is effective for the Company beginning in the third quarter of 2005. All options
issued after the effective date of this SFAS, as well as options  granted in the
past for which the requisite services have not been provided as of the effective
date of this SFAS,  are  required to be recorded as  compensation  expense.  The
implementation of this SFAS will have no impact on the Company since the Company
recorded  compensation  expense for stock options  granted after January 1, 2003
and there are no remaining requisite services for stock options granted prior to
January 1, 2003.

                                     Page 8

<PAGE>


Statistical Data

     The following information is required by the Industry Guide 3, "Statistical
Disclosure by Bank Holding  Companies".  The averages shown have been calculated
using the average  daily  balance.

                                                                 Sequential Page
                                                                      Number

I.  Distribution of Assets,  Liabilities and Share-
    holders'  Equity;  Interest  Rates and Differential

         A. Average balance sheets                                            20
         B. Analysis of net interest earnings                                 20
         C. Rate/volume analysis                                              21

II.      Investment Portfolio

         A. Book value (Amortized Cost) of investments                        45
         B. Weighted average yield and maturity                20, 24, 30 and 46
         C. Securities of issuer exceeding
                  ten percent of equity:                                    None

III.     Loan Portfolio

         A. Types of loans                                             20 and 47
         B. Maturities and sensitivities of loans
                   to change in interest rates                         30 and 48
         C. Risk elements

                  1. Non-accrual, past due,
                           and restructured loans                      25 and 47
                  2. Potential problem loans:                               None
                  3. Foreign outstandings:                                  None
                  4. Loan concentrations                               24 and 47

         D. Other Interest-Bearing Assets:                                  None

IV. Summary of Loan Loss Experience                                    26 and 48

V.  Deposits

         A. Average balances and average rates paid                           20
         B. Other categories of deposits                                    None
         C. Foreign outstandings                                            None
         D. Maturity of time deposits greater than $100,000                   30
         E. Maturity of foreign time deposits greater than 100,000          None

VI. Return on Equity and Assets                                               17

VII. Short-term Borrowings:                                                 None

                                     Page 9
<PAGE>


ITEM 2.  PROPERTIES

     The Company is headquartered in Sonoma, California. At the present time the
Company's Bank has three branch  offices.  In 1995,  the Bank leased  additional
office  space  adjacent  to the  Sonoma  Branch and in  September  1997 the Bank
purchased  property across the street from the Sonoma Branch.  The Sonoma Branch
is located at 202 W. Napa Street,  Sonoma.  The building contains  approximately
6800 square feet and has been  subleased on a long-term  basis (the initial term
expires in 2009, with option to extend for two additional  five-year terms). The
office is considered by  management to be well  maintained  and adequate for the
purpose  intended.  Lease payments made in 2004 totaled $233,978 compared to the
$224,979 paid in 2003. The lease provides for future annual rents to be adjusted
for changes in the Consumer Price Index ("CPI"),  with a minimum annual increase
of 4%, effective each March 1st.

     In July 1995,  the Bank leased a building at 463 Second  Street  West.  The
building contains  approximately  2400 square feet and has been leased on a long
term basis to coincide with the Sonoma Branch lease. The initial term expired in
2000,  with the first option to expire in 2005, with an option to extend for two
additional  five year terms and one  additional  four year term.  Lease payments
made in 2004 totaled  $38,016  compared with the $37,006 paid in 2003. The lease
provides  for future  annual  rents to be adjusted  for changes in the  Consumer
Price Index ("CPI") effective each July 1st.

     In September  1997,  the Bank purchased the building and land at 472 Second
St. West. The building  contains  approximately  1013 square feet. The Bank paid
$246,943 for the property. At present the Bank is utilizing the parking area for
additional parking for Bank employees and until February 2005, the Bank has been
renting out the building  premises.  At the present time, the Bank is evaluating
how to utilize the additional  space to accommodate  additional  growth.  Rental
income in 2004 was $18,051 compared to $17,406 in 2003.

     The Glen Ellen Branch Office is located at 13751 Arnold Drive,  Glen Ellen.
The  facility is 525 square  feet.  The  facility is leased for a five year term
expiring in 2008 with the option to extend for two  additional  five year terms.
Lease  payments made in 2004 totaled  $13,596  compared to $11,789 in 2003.  The
lease  provides  for future  annual rents to be adjusted for changes in the CPI,
with a minimum annual increase of 4% effective April 1st of each year.

     The Banco de Sonoma Branch, which opened in March 2004, is located at 18615
Sonoma Hwy,  Suite 108,  Boyes Hot  Springs,  California.  The  facility is 1200
square feet.  The facility is leased for a five year term  expiring in 2009 with
options to extend for two  additional  five year terms.  Lease  payments in 2004
totaled  $18,630.  The lease provides for future annual rents to be adjusted for
changes in the CPI effective February 1st of each year.

ITEM 3.  LEGAL PROCEEDINGS

     In the normal course of  operations,  the Company and /or its Bank may have
disagreements or disputes with vendors,  borrowers,  or employees,  which may or
may  not  result  in  litigation.  These  disputes  are  seen  by the  Company's
management as a normal part of business.  There are no pending actions  reported
and no  threatened  actions that  management  believes  would have a significant
material impact on the Company's  financial  position,  results of operations or
cash flows.

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

     The  Company  did not submit any  matters to  security  holders  during the
fourth quarter of its last fiscal year ended December 31, 2004.

                                    Page 10
<PAGE>


                                                            PART II

ITEM 5.  MARKET FOR THE  COMPANY'S  COMMON  STOCK AND  RELATED  SECURITY  HOLDER
         MATTERS

     The  Company is trading on the Over the Counter  Bulletin  Board ("OTC BB")
under the symbol  "SBNK".  The  Company is not listed on any  exchange or on the
National   Association  of  Securities   Dealers   Automated   Quotation  System
("NASDAQ").

Several brokers act as facilitators in the trades of Sonoma Valley Bancorp
stock. They are:


A.G.Edwards                                 Monroe Securities
703 2nd Street Suite 100                    343 W. Erie Street Suite 410
Santa Rosa, CA 95409                        Chicago, IL 60610
Denise Gilseth                              Russ Feltes
    (800) 972-4800                              (312) 327-2535
Fax (707) 528-1117                          Fax (312) 327-2540

Baird, Patrick & Company                    UBS Financial Services
20 Exchange Place                           6570 Oakmont Drive
R. J. Dragani                               Santa Rosa, CA 95409
New York, New York 10005                    John Rector
    (800) 421-0123                              (707) 539-1500
Fax (212) 493-6643                          Fax (707) 537-3553

Edward Jones                                Hoefer & Arnett
515 First Street East                       555 Market Street   18th Floor
Sonoma, CA 95476                            San Francisco, CA 94105
Gary Scott                                  Cherie Stokes     (415) 538-5727
    (707) 935-1856                          Dave Bonaccorso   (415) 538-5723
Fax (707) 935-1894                          Switchboard       (800) 346-5544
                                            Fax               (415)398-4875

Wedbush Morgan Securities                   Seidler Companies
1300 S.W. Fifth Avenue Suite 2000           P.O.Box 1688
Joey Warmenhoven  X254                      42605 Moonridge Road
Portland, Oregon 97201-5667                 Troy Norlander
    (503) 224-0480                          Big Bear, CA 92315
Fax (503) 224-7097                              (800) 288-2811
                                            Fax (909) 585-7220
                                            Tnorlander@seidlercos.com
                                    Page 11
<PAGE>


The table below  summarizes  those trades of the common stock as reported by OTC
BB,  setting  forth the high and low prices  for the  periods  shown.  The stock
prices have been adjusted for stock dividends and stock splits.
<TABLE>
<S>      <C>                              <C>                  <C>
         Quarter Ended:                   High                 Low
                                  ---------------       ---------------

         December 31, 2004        $         30.00       $         22.00
         September 30, 2004                 25.00                 20.67
         June 30, 2004                      24.00                 22.33
         March 31, 2004                     24.67                 20.00

         December 31, 2003        $         20.67       $         18.83
         September 30, 2003                 20.00                 18.40
         June 30, 2003                      19.33                 17.78
         March 31, 2003                     19.68                 17.40
</TABLE>


As of March 4, 2005, there were 1,048 registered holders of the Company's common
stock,  in addition to an unknown number of holders whose shares of common stock
are held in street name.

Payment of Dividends

     Under state law, the Board of Directors of a California state-licensed bank
may  declare  a cash  dividend,  subject  to the  restriction  that  the  amount
available  for the  payment of cash  dividends  shall be the lesser of  retained
earnings  of the bank or the bank's net income for its last three  fiscal  years
(less the amount of any distributions to shareholders made during such period).

     However,  under the Financial  Institutions  Supervisory  Act, the FDIC has
broad  authority to prohibit a bank from engaging in banking  practices which it
considers to be unsafe or unsound. It is possible,  depending upon the financial
condition  of the bank in question and other  factors,  that the FDIC may assert
that the  payment of  dividends  or other  payments by a bank is  considered  an
unsafe and unsound banking practice and therefore,  implement  corrective action
to address such a practice.

     The Bank paid cash dividends of $300,000 on December 29, 2000,  $500,000 on
April 18,  2001,  $500,000 on February 26,  2003,  $1,000,000  on June 18, 2003,
$4,000,000  on May 24, 2004 and  $500,000 on February  24, 2005 to the  Company.
Future dividend  payments from the Bank to the Company will depend on the Bank's
future earnings, the Bank's ability to meet certain capital requirements and the
Bank having an adequate allowance for loan losses.

     The  Company  paid cash  dividends  of $0.25 per share to  shareholders  of
record as of March 1, 2004 with payment  made on March 15, 2004,  $.25 per share
to  shareholders  of record as of August 6, 2004 with payment made on August 26,
2004,  and $.25 per  share to  shareholders  of  record as of March 1, 2005 with
payment  made on March  15,  2005.  The Board of  Directors  of the  Company  is
currently reviewing our strategic plan to utilize our capital assets in order to
enhance  shareholder  value.  One  of the  initiatives  includes  review  of the
declaration of future cash dividends. No plan has yet been finalized.

                                    Page 12

<PAGE>


     Historically, the Company and the Bank have declared ten stock dividends of
5% each,  two stock  dividends of 10% in May 1996 and June 1997, a 2 for 1 stock
split in March 1998, a 3 for 2 stock split in July 2004 and three cash dividends
in February 2004, July 2004 and February 2005 as detailed below:


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

               Dividends Paid by the Bank



               Date Declared         Record Date            Date Paid
               -----------------    ------------------     ---------------------

               May 13, 1992         May 31, 1992           June 15, 1992
               June 26, 1993        July 15, 1993          July 31, 1993
               July 20, 1994        August 1, 1994         August 15, 1994
               January 18, 1995     February 5, 1995       February 20, 1995
               August 16, 1995      September 11, 1995     September 29, 1995
               May 22, 1996         June 14, 1996          June 28, 1996
               June 18, 1997        July 15, 1997          August 1, 1997
               March 18, 1998       April 15, 1998         April 30, 1998
               July 21, 1999        August 16, 1999        August 31, 1999
               August 16, 2000      September 8, 2000      September 25, 2000

               Dividends Paid by the Company

               Date Declared         Record Date            Date Paid
               -----------------     --------------        ---------------------

               July 18, 2001         August 3, 2001         August 17, 2001
               June 17, 2002         July 2, 2002           July 16, 2002
               June 18, 2003         July 2, 2003           July 16, 2003
               February 18, 2004     March 1, 2004          March 15, 2004
               July 21, 2004         August 6, 2004         August 26, 2004
               February 16, 2005     March 1, 2005          March 15, 2005

</TABLE>

                                    Page 13

<PAGE>


The following chart  summarizes the Company  repurchases of the Company's common
shares as part of the  Company's  tender  offer  expiring  May 21,  2004 and the
Company's publicly announced repurchase plan.

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

      ------------------------- --------------------- ---------------------- ----------------------- -------------------------

                                       (a)                    (b)                   (c)                        (d)
                                                                                                             Maximum  Number
                                                                                                            (or Approximate
                                                                                                             Dollar Value of
                                                                                  Total Number of            Shares (or units)
                                                                                  Shares (or Units)           that May Yet be
                                                                                  Purchased as Part           Purchased Under
                               Total Number of                                      of Publicly                 the Plans or
                               Shares (or Units)        Average Price paid        Announced Plans or              Programs
             Period              Purchased              per Share (or Unit)           Programs
      ----------------      ---------------------     ----------------------     -----------------------     -----------------


      Month #1:               189                     $29.375                     81,489                     $540,067
      1/1/04 - 1/31/04


      Month #2:               383                     $30.00                      81,872                     $534,515
      2/1/04 - 2/29/04

      Month #3:                 0                          0                      81,872                     $534,515
      3/1/04 - 3/31/04

      Month #4:                 0                          0                      81,872                     $534,515
      4/1/04 - 4/30/04

      Month #5:            126,208(1)                 $35.00                     126,208                            0
      5/1/04 - 5/31/04


      Month #6:                 29                    $35.00                      81,901                     $533,500
      6/1/04 - 6/30/04


      Month #7:                  0                         0                      81,901                     $533,500
      7/1/04 - 7/31/04


      Month #8:                  0                         0                      81,901                     $533,500
      8/1/04 - 8/31/04


      Month #9:                  0                         0                      81,901                     $533,500
      9/1/04 - 9/30/04


      Month #10:                 0                         0                      81,901                     $533,500
      10/1/04 - 10/31/04

                                 0                         0                      81,901                     $533,500
      Month #11:
      11/1/04 - 11/30/04

                                 0                         0                      81,901                     $533,500
      Month #12:
      12/1/04 - 12/31/04

                           126,809                    $34.977                     208,109                     $533,500
      Total


</TABLE>

     (1)The Company  purchased  126,208  shares of common stock at $35 per share
          through a tender offer, which expired on May 21, 2004.


                                    Page 14
<PAGE>


ITEM 6.  SELECTED FINANCIAL DATA



                              SONOMA VALLEY BANCORP
                      Selected Consolidated Financial Data
                       dollars in thousands, except share
                               and per share data

                              For the years ended:
<TABLE>
<S>                                         <C>           <C>            <C>            <C>              <C>            <C>
                                             2004          2003           2002           2001            2000            1999
                                        ---------     ---------      ---------      ---------      ----------      ----------

RESULTS OF OPERATIONS:
       Net interest income              $   10,004     $  8,906      $   8,633     $    8,236      $    7,870     $    6,699
       Provision for loan losses               130           20            393            342             335            240
       Non-interest income                   1,710        1,715          1,641          1,309             893            941
       Non-interest expense                  7,225        6,244          5,862          5,224           5,061          4,614
       Provision for income tax              1,451        1,446          1,275          1,379           1,160            976
                                        ----------     ---------     ---------     ----------      ----------     ----------
       Net Income                       $    2,908     $  2,911      $   2,744     $    2,600      $    2,207     $    1,810
                                        ==========     =========     =========     ==========      ==========     ==========


SELECTED AVERAGE BALANCES:
       Assets                           $  210,883     $195,177      $ 164,200     $  147,807      $  135,924     $  123,202
       Loans, net of unearned              139,395      123,044        116,867        100,605          86,547         73,222
       Deposits                            186,496      171,620        143,228        129,534         120,135        109,801
       Shareholders' equity                 20,799       20,232         17,964         15,121          12,984         11,490
PER SHARE DATA:
       Basic net income                 $     1.35     $   1.34     $     1.26     $     1.18      $     1.00     $      .81
       Fully diluted net income         $     1.25     $   1.23     $     1.16     $     1.10      $      .96     $      .79
       Period end book value            $     9.65     $   9.89     $     8.81     $     7.64      $     6.52     $     5.47
       Weighted average shares
           outstanding                   2,148,558     2,165,066     2,176,386      2,209,727       2,220,605      2,293,407
FINANCIAL RATIOS:
       Return on average assets               1.38%          1.49%        1.67%          1.76%           1.62%          1.47%
       Return on average
          shareholders' equity               13.98%         14.39%       15.27%         17.19%          17.00%         15.75%
       Net yield on earning
          assets                              5.48%          5.24%        6.06%          6.25%           6.49%          6.04%
       Cost control ratio                    59.52%         56.95%       55.07%         52.72%          55.06%         58.52%
       Average shareholders'
          equity to average assets            9.86%         10.37%       10.94%         10.23%           9.55%          9.33%
CAPITAL RATIOS:
       Risk-based capital:
       Tier I                                10.77%         12.81%       12.31%         11.81%          12.78%         12.36%
       Total                                 12.02%         14.07%       13.57%         13.07%          14.04%         13.62%
       Leverage ratio                         9.51%         10.50%       10.62%         10.38%          10.11%          9.54%
CREDIT QUALITY:
       Net charge-offs to
          average loans                       0.24%          0.14%        0.02%          0.05%          -0.04%          0.04%
       Allowance for possible
          loan losses to period
          end loans                           1.59%          2.15%        2.17%          2.25%           2.29%          2.19%
</TABLE>

                                    Page 15

<PAGE>


ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF CONSOLIDATED FINANCIAL CONDITION
        AND RESULTS OF OPERATIONS

The Year Ended December 31, 2004 versus December 31, 2003

          The  business  operations  of the  Company  continue  to be  conducted
     through its  wholly-owned  subsidiary,  Sonoma Valley Bank ("Bank"),  which
     began  commercial  lending  operations  on June 3, 1988.  Accordingly,  the
     following  discussion  and  analysis  of the  financial  condition  and the
     results of  operations  should be read in  conjunction  with the  financial
     statements  and notes included  elsewhere in this annual report.  Per share
     amounts for prior years have been  adjusted for the Company's 3 for 2 stock
     split declared July 2004 and 5% stock dividends declared in June 2003, June
     2002,  July 2001,  August  2000 and July  1999.  The  continued  growth and
     success of the company is dependent  upon a stable  economy,  an increasing
     deposit base in the Valley and  economically  viable  technology to enhance
     customer  service.  Expansion of services in the Valley such as the opening
     of a new branch,  the placement of a remote ATM in the local hospital,  and
     the deployment of wire transfer  services through an international  network
     are some of the strategies  contributing to successful  performance.  It is
     management's  opinion that community  banking will continue to prosper,  by
     providing useful services in niche markets,  in spite of the  consolidation
     taking place in the industry.

Critical Accounting Policies

          The  accounting  and  reporting  policies  of the  Company  conform to
     accounting  principles  generally accepted in the United States and general
     practices  within the  financial  services  industry.  The  preparation  of
     financial  statements  in conformity  with  generally  accepted  accounting
     principles  requires  management  to make  estimates and  assumptions  that
     affect the amounts  reported in the financial  statements and  accompanying
     notes.  Actual results could differ from those estimates.  A summary of the
     Company's most  significant  accounting  policies is contained in Note A to
     the  consolidated  financial  statements.  The Company  considers  its most
     critical accounting policies to consist of the allowance for loan and lease
     losses and the  estimation of fair value,  which are  separately  discussed
     below.

          Allowance for Loan and Lease Losses.  The allowance for loan and lease
     losses  represents  management's  best  estimate of inherent  losses in the
     existing  loan  portfolio.  The  allowance  for loan and  lease  losses  is
     increased  by the  provision  for  losses on loans and  leases  charged  to
     expense and reduced by loans and leases charged off, net of recoveries. The
     provision  for loan and lease losses is  determined  based on  management's
     assessment of several  factors:  reviews and  evaluations of specific loans
     and leases, changes in the nature and volume of the loan portfolio, current
     economic  conditions  and the  related  impact on  specific  borrowers  and
     industry groups,  historical loan and lease loss  experience,  the level of
     classified   and   nonperforming   loans  and  the  results  of  regulatory
     examinations.

          The Company's Audit Committee  engages  experienced  independent  loan
     portfolio review professionals many of whom are former bank examiners.  The
     Audit  Committee  determines  the scope of such  reviews and  provides  the
     report of findings to the Board's Loan Committee  after it has reviewed and
     accepted the report.  These reviews are supplemented  with periodic reviews
     internally by the Company's credit review function, as well as the periodic
     examination  of both selected  credits and the credit review process by the
     applicable regulatory agencies.  The information from these reviews assists
     management in the timely  identification of problems and potential problems
     and provides a basis for deciding whether the credit  represents a probable
     loss or risk that should be recognized.

          Changes  in  the  financial  condition  of  individual  borrowers,  in
     economic conditions, in historical loss experience and in the conditions of
     the  various  markets  in which  collateral  may be sold may all affect the
     required  level  of the  allowance  for  loan  and  lease  losses  and  the
     associated  provision for loan and lease losses.

                                    Page 16
<PAGE>
          Estimation of Fair Value.  Accounting principles generally accepted in
     the United States require that certain assets and liabilities be carried on
     the  Consolidated  Balance  Sheet at fair  value or at the lower of cost or
     fair  value.  Furthermore,  the fair  value  of  financial  instruments  is
     required  to be  disclosed  as a part  of  the  notes  to the  consolidated
     financial  statements  for other assets and  liabilities  (see Note R, page
     64). Fair values are volatile and may be influenced by a number of factors,
     including  market interest rates,  prepayment  speeds,  discount rates, the
     shape of yield curves and the credit worthiness of counterparties.

          Fair  values for the  majority  of the  Company's  available  for sale
     investment securities are based on quoted market prices. In instances where
     quoted market prices are not available, fair values are based on the quoted
     prices of similar  instruments  with adjustment for relevant  distinctions.
     For trading account assets, fair value is estimated giving consideration to
     the contractual interest rates, weighted average maturities and anticipated
     prepayment speeds of the underlying instruments and market interest rates.

Overview

          The Company continues to be profitable,  however,  net income declined
     by  $3,387  from  $2,911,007  for the  year  ending  December  31,  2003 to
     $2,907,621 for the year ending December 31, 2004. The decline in net income
     is a result of the expenses  associated with the opening of the new branch,
     Banco de Sonoma,  during the first quarter of 2004 and the  recognition  of
     expense for stock options  granted  during January 2004.  Additionally  the
     Company has experienced a decrease in income  associated with loan referral
     fees.  The  refinancing  boom has slowed  considerably,  a trend that could
     continue  in the next few years,  and the Bank now  originates  many of the
     mortgage loans previously  outsourced to a vendor. The net effects of these
     items combined to lower net income. On a per share basis,  basic net income
     per share equaled $1.35 in 2004 compared to $1.34 in 2003.

          Return on  average  total  assets  for 2004,  2003 and 2002 was 1.38%,
     1.49% and  1.67%,  respectively.  Return on  average  shareholders'  equity
     declined to 13.98% in 2004  compared to 14.39% in 2003.  The decline in the
     return on average  assets in 2004 is the result of the  increase in average
     assets from  $195.2  million in 2003 to $210.9  million in 2004,  growth of
     8.1% and the lower amount of income generated during the period.  The lower
     return on equity is the result of the decline in income during 2004 and the
     $567,000  increase in average  equity  from $20.2  million in 2003 to $20.8
     million in 2004.

          While the bank has  continued to enjoy strong  earnings  over the last
     three years,  the banks growth in assets has exceeded the earnings  growth.
     Earnings  growth  has been  impacted  by the  decline  in the net  interest
     margin,  which is a combination of increased rate competition for loans and
     the lower market rates for investment  securities.  Income at year end 2004
     is lower than 2003 due to the 53 basis point  decline in the yield on loans
     (see the  table-Average  Balances,  Yields and Rates Paid on page 20),  the
     decline in loan referral income,  the increase in operating  expense due to
     the new Banco de Sonoma Branch  Office and the expensing of stock  options.
     The Company has experienced  pressure to refinance loans for customers that
     were priced at higher yields and now have been negotiated at lower rates.

          The most  significant  event  affecting  the  Company's  growth is the
     opening of the Banco de Sonoma Branch in Boyes Hot Springs. Initially, this
     has had a negative  effect on the Income  Statement by generating a loss of
     $282,000. The branch office is offering services to the Latino community in
     our  market  place.  Management  identified  this is as a niche  which  was
     under-served  and an opportunity for future growth and  profitability.  All
     employees  at the  branch  are  bilingual  and able to offer  full  service
     banking.  An additional product which has been added is the ability for the
     customer to effect an  immediate  transfer  of funds to Mexico.  Management
     anticipates  that the  growth in the  branch  will be slow and  steady  and
     profitable within three or four years.


                                    Page 17
<PAGE>


          Total  shareholders'  equity declined by $790,000 or 3.68% at year end
     2004.  On May 21,  2004,  the Company  closed the tender  offer  purchasing
     126,208  shares  of stock at $35.00  per  share  for a total of  $4,488,126
     including expenses associated with this offer, lowering equity. In addition
     to the tender  offer,  the  Company  repurchased  and retired 601 shares of
     stock for $18,057. In 2004, stock options were granted to senior employees,
     which  increased  equity by  $103,680.  At  December  31,  2004 the Company
     reported net income of $2,907,621  which  included an expense for the stock
     options  of  $103,680,  therefore  the  net  effect  of  the  stock  option
     transaction  relative  to equity  was zero.  In March and  August  2004 the
     company  paid out cash  dividends  for a combined  amount of  $906,732.  An
     additional $7,498 was paid for fractional shares in August 2004 as a result
     of the three for two split of the Company's common stock. The directors and
     officers  exercised  97,494  options which added  $1,168,805 to the capital
     accounts.  The tax benefit on these options  exercised was $617,260,  which
     also  increased  equity.  The net effect of this  activity  in the  capital
     accounts was capital of  $20,681,160  as of December 31, 2004,  compared to
     capital of $21,471,279 as of December 31, 2003.

          At  December  31,  2004,  total  assets were  $218.2  million,  a 6.4%
     increase over the $205.1  million at December 31, 2003.  The Company showed
     loans of $153.2  million in 2004,  compared with $122.5 million at year-end
     2003, an increase of 25.1%.  Deposits increased,  growing 7.5%, from $180.1
     million  at  year-end  2003  to  $193.7   million  at  year-end  2004.  The
     loan-to-deposit  ratio  increased  to 79.1% in 2004 from 68.0% in 2003.  In
     2005, management  anticipates similar growth in assets and deposits, but as
     interest rates increase we anticipate that loan growth will slow.

          The  Company  has   acquired   additional   software  to   accommodate
     maintaining a portfolio of adjustable rate residential loans, which was not
     an option in prior years.  Additionally,  the bank has enhanced its ability
     to engage in mortgage  origination  for the secondary  market,  and will be
     using the increased  liquidity for warehousing  product available for sale.
     This activity is expected to enhance earnings for the Company.

     RESULTS OF OPERATIONS
     Net Interest Income

          Net interest  income is the difference  between total interest  income
     and total  interest  expense.  Net  interest  income,  adjusted  to a fully
     taxable equivalent basis, increased $1.2 million to $10.4 million, up 12.7%
     from 2003 net interest  income of $9.3  million.  Net interest  income on a
     fully taxable  equivalent  basis, as shown on the table - Average Balances,
     Yields and Rates Paid (page 20), is higher than net interest  income on the
     statements  of  operations  because it reflects  adjustments  applicable to
     tax-exempt  income from certain  securities and loans ($424,000 in 2004 and
     $343,000 in 2003, based on a 34% federal income tax rate).

          The  increase  in net  interest  income  (stated  on a  fully  taxable
     equivalent  basis) was the net  effect of an  increase  of $1.0  million in
     interest  income and a $170,000  decrease in interest  expense,  which is a
     result  of loans  growing  at a faster  rate  than  deposits  and a loan to
     deposit ratio of 79.1% in 2004 compared to 68.0% in 2003.  Declining  rates
     influenced  net interest  income in spite of the growth in earning  assets.
     The  decline in interest  expense is  expected to plateau as the  effective
     interest cost for the bank is not expected to decline  further and with the
     increase in market  interest rates could have a dramatic effect on the cost
     of deposits.  This increased  rate  competition  for loans and  investments
     combined with the inability to keep rates down will likely result in a flat
     to declining earnings environment.

          Net  interest  income  (stated on a fully  taxable  equivalent  basis)
     expressed as a percentage of average earning assets,  is referred to as net
     interest  margin.  The  Company's  net interest  margin  increased 24 basis
     points  to  5.48% in 2004  from  5.24% in  2003.  The  increase  in the net
     interest  margin is the result of the 100 basis point increase in the prime
     lending rate,  growth in loan volume and the  transition of assets from Fed
     Funds Sold to loan products.


                                    Page 18
<PAGE>

     Interest Income

          As  previously  stated,  interest  income  (stated on a fully  taxable
     equivalent  basis)  increased by $1.0  million to $12.0  million in 2004, a
     9.2% increase over the $11.0 million realized in 2003.

          The $1.0 million increase was the result of a 7.8% increase in average
     earning assets to $190.4 million combined with an 8 basis point increase in
     average  yield for the year.  The yield on  earning  assets was 6.29% as of
     December  31,  2004  compared  to 6.21%  for the year end  2003.  The small
     increase in yield is a result of loans coming off floors. The 8 basis point
     increase  is  small,  because  higher  yielding  maturing  loans  are being
     replaced  by lower  yielding  fixed  rate  loans  and  existing  loans  are
     refinancing at lower rates.

     Interest Expense

          Total  interest  expense  declined by $170,000  to $1.6  million.  The
     average rate paid on all  interest-bearing  liabilities  was 1.09% in 2004,
     compared to 1.28% in 2003.  Average balances  increased from $134.1 million
     to $142.4 million, a 6.2% gain.

          The gain in volume of average  balances was  responsible for a $52,000
     increase in interest expense offset by a $222,000 decrease related to lower
     interest rates paid for a net decrease of $170,000. The lower rates paid on
     interest-bearing  liabilities is a result of  management's  ability to keep
     interest rates down, in a rising rate environment.

          Individual  components  of interest  income and  interest  expense are
     provided in the table - Average Balances, Yields and Rates Paid on page 20.

     Provision for Loan Losses

          The  provision  for loan losses  charged to operations is based on the
     Company's monthly  evaluation of the loan portfolio and the adequacy of the
     allowance  for loan  losses in relation  to total  loans  outstanding.  The
     provisions to the  allowance  for loan losses  amounted to $130,000 in 2004
     and  $20,000  in 2003.  The  increase  in the  provision  is the  result of
     management's  evaluation and assessment of the loan  portfolio,  the higher
     charge  offs in 2004  and  the  increase  in the  loan  growth.  Management
     anticipates  loan growth will continue in 2005,  which would  necessitate a
     further increase in the provision to the reserve for loan losses.

          The  economic  climate  continues  to improve  and the  non-performing
     assets ratio at December 31, 2004 was .72% compared to 1.26% as of year end
     2003.  Non accrual loans were $1.0 million as of December 31, 2004 compared
     to $1.2  million  as of  December  31,  2003,  a decline  of  17.7%.  Loans
     charged-off,  net of recoveries,  resulted in losses  totaling  $336,000 in
     2004 (one loan  represented  80.3% of this  figure)  and  $167,000 in 2003.
     Refer to page 47 Note D for an analysis of the changes in the allowance for
     loan and lease losses.

                                    Page 19

<PAGE>


                              SONOMA VALLEY BANCORP
                     AVERAGE BALANCES/YIELDS AND RATES PAID
                                   Rate/Volume
<TABLE>
<S>                       <C>        <C>         <C>          <C>        <C>        <C>          <C>          <C>        <C>
                                     2004                                2003                                2002
                                    ------                              ------                              ------

ASSETS                  AVERAGE     INCOME/     YIELD/      AVERAGE     INCOME/     YIELD/      AVERAGE     INCOME/     Yield/
                        BALANCE     EXPENSE      RATE       BALANCE     EXPENSE      RATE       BALANCE     EXPENSE      Rate

                       --------    ---------   -------     --------    --------   -------       --------    --------    -------
Interst-earning
 assets:
Loans(2):
  Commercial           $ 98,243     $  6,999    7.12%      $ 85,965    $  6,493      7.55%      $ 75,696    $  5,978      7.90%
  Consumer               14,224          963    6.77%        11,632         889      7.64%        13,186       1,098      8.33%
  Real Estate
   Construction          19,134        1,471    7.69%        18,781       1,530      8.15%        19,040       1,689      8.87%
  Real Estate
   Mortgage               5,178          372    7.18%         3,820         333      8.72%         5,732         481      8.39%
  Tax Exempt
   loans (1)              3,033          254    8.37%         3,147         263      8.36%         3,367         285      8.46%
  Leases                     36            8   22.22%            67          22     32.84%           164          27     16.46%
  Tax Exempt
   leases (1)                 1            0    0.00%            47          10     21.28%           106          15     14.15%
  Unearned loan
   fees                    (454)                               (416)                                (424)
                       --------                            --------                             --------
    Total loans         139,395       10,067    7.22%       123,043       9,540      7.75%       116,867       9,573      8.19%
Investment
 securities
 Available for
  Sale:
      Taxable            23,265          781    3.36%        11,093         352      3.17%         6,029         365      6.05%
      Tax
       exempt(1)              0            0    0.00%             0           0      0.00%             0           0      0.00%
Hold to maturity
      Taxable               390           10    2.56%           392          13      3.32%           201          13      6.47%
      Tax
       exempt(1)         17,187          993    5.78%        11,270         736      6.53%        10,904         777      7.13%
                       --------     --------               --------   ---------                 --------    --------
 Total investment
    securities           40,842        1,784    4.37%        22,755       1,101      4.84%        17,134       1,155      6.74%
Federal funds
  sold                    9,447          106    1.12%        30,318         318      1.05%        14,053         216      1.54%
FHLB stock                  600           20    3.33%           288          13      4.51%           275          15      5.45%
Total due from
  banks/interest
  bearing                   154            5    3.25%           202           1      0.50%            73           1      1.37%
                       --------     --------               --------    --------                 --------    --------
 Total interest
  earning assets        190,438       11,982    6.29%       176,606      10,973      6.21%       148,402      10,960      7.39%
                                    ========                           ========                             ========
Noninterest-bearing
   assets:
 Reserve for loan
   losses                (2,436)                             (2,772)                              (2,547)
 Cash and due from
   banks                  9,319                               9,090                                7,600
 Premises and
  equipment               1,370                               1,120                                  705
 Other assets            12,192                              11,133                               10,040
                       --------                            --------                             --------
    Total assets       $210,883                            $195,177                             $164,200
                       ========                            ========                             ========
LIABILITIES AND
  SHAREHOLDERS' EQUITY
Interest-bearing
liabilities:
 Interest-bearing
   deposits
 Interest-bearing
   transaction           30,888      $    52    0.17%        29,819    $     51      0.17%        23,794    $     84      0.35%
 Savings deposits        67,114          434    0.65%        59,266         466      0.79%        48,052         656      1.37%
 Time deposits over
   100,000               18,740          400    2.13%        19,794         477      2.41%        18,362         547      2.98%
 Other Time deposits     25,666          668    2.60%        25,209         730      2.90%        20,155         674      3.34%
                       --------     --------               --------    --------                 --------    --------
 Total interest-
   bearing deposits     142,408        1,554    1.09%       134,088       1,724      1.28%       110,363       1,961      1.78%
Federal Funds purhcased       0            0    0.00%             0           0      0.00%             0           0      0.00%
Other short term
  borrowings                  0            0    0.00%             3           0      0.00%             0           0      0.00%
                       --------      -------               --------    --------                 --------    --------
     Total interest
       bearing
       liabilites       142,408        1,554    1.09%       134,091       1,724      1.28%       110,363    $  1,961      1.78%
                                    ========                           ========                             ========
Non interest-bearing
  liabilities
 Non interest-bearing
  demand deposits        44,088                              37,531                              32,865
 Other liabilities        3,588                               3,323                               3,008
 Shareholders' equity    20,799                              20,232                              17,964
                       --------                            --------                             -------
     Total liabilities
      and shareholders'
      equity           $210,833                            $195,177                             $164,200
                       ========                            ========                             ========
Interest rate spread                            5.20%                                4.93%                                5.61%
Interest income                    $  11,982    6.29%                  $ 10,973      6.21%                  $ 10,960      7.39%
Interest expense                       1,554    0.81%                     1,724      0.98%                     1,961      1.32%
                                   ---------    ----                   --------      ----                   --------      ----
Net interest income/
  margin                           $  10,428    5.48%                  $  9,249      5.24%                  $  8,999      6.06%
                                   =========                           ========                             ========
</TABLE>



(1)  Fully tax equivalent  adjustments are based on a federal income tax rate of
     34% in 2004, 2003 and 2002.
(2)  Non accrual loans have been included in loans for the purposes of the above
     presentation.  Loan fees of approximately  $299,000,  $405,000 and $343,000
     for the twelve months ended December 31, 2004, 2003 and 2002, respectively,
     were amortized to the appropriate interest income categories.

                                    Page 20
<PAGE>

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


                              SONOMA VALLEY BANCORP

                              Rate/Volume Analysis

                                             2004 over 2003                            2003 over 2002

                                Volume     Rate     Vol/Rate     Total     Volume     Rate     Vol/Rate     Total
ASSETS
Interest-earning assets:
Loans:
  Commercial                       928     (369)         (53)      506        811     (261)         (35)       515
  Consumer                         198     (101)         (23)       74       (129)     (90)          11       (209)
  Real estate construction          29      (86)          (2)      (59)       (23)    (138)           2       (159)
  Real estate mortgage             118      (59)         (20)       39       (160)      19           (6)      (148)
  Tax exempt loans                 (10)       1            0        (9)       (19)      (4)           0        (22)
  Leases                           (10)      (7)           3       (14)       (16)      27          (16)        (5)
  Tax exemt leases                 (10)     (10)          10       (10)        (8)       8           (4)        (5)
  Unearned fee income                0        0            0         0          0        0            0          0
                               --------   ------       ------    -------    -------   -------     -------     -------
   Total loans                   1,243     (631)         (85)      527        456      (439)        (48)       (33)

Investment securities:
 Available for sale:
  Taxable                          386       20           23       429        307      (174)       (146)       (13)
  Tax-exempt                         0        0            0         0          0         0           0          0
 Held to maturity:
  Taxable                            0       (3)           0        (3)        12        (6)         (6)         0
  Tax-exempt                       386      (84)         (45)      257         26       (65)         (2)       (41)
                               --------   ------       ------    -------    -------   -------     -------     -------
   Total investment
     securities                    772      (67)         (22)      683        345      (245)       (154)       (54)
Federal funds sold                (219)      22          (15)     (212)       250       (69)        (79)       102
FHLB Stock                          14       (3)          (4)        7          1        (3)         (0)        (2)
Due from bank-int bearing           (1)       6           (1)        4          2        (1)         (1)         0
                               --------   ------       ------    -------    -------   -------     -------     -------
Total interest-earning assets    1,809     (673)        (127)    1,009      1,054      (757)       (282)        13
                               ========   ======       ======    =======    =======   =======     =======     =======
LIABILITIES
Interest-bearing liabilities:
Interest-bearing deposits:
 Savings deposits                    2        0            0         2         21       (44)        (11)       (34)
 Interest-bearing demand deposits   62      (83)         (11)      (32)       153      (277)        (65)      (189)
 Time less than $100,000           (25)     (55)           3       (77)        43      (105)         (8)       (70)
 Time $100,000 and over             13      (74)          (1)      (62)       169       (90)        (23)        56
                               --------   ------       ------    -------    -------   -------     -------     -------
   Total interest-bearing
     deposits                       52     (213)          (9)     (170)       386      (516)       (107)      (237)
Federal funds purchased              0        0            0         0          0         0           0          0
Other borrowings                     0        0            0         0          0         0           0          0
   Total interest-bearing
    Liabilities                     52     (213)          (9)     (170)       386      (516)       (107)       (237)
 Interest differential           1,758     (462)        (118)    1,178        668      (241)       (175)        250
                               ========   ======       ======    =======    =======   =======     =======     =======
</TABLE>

                                    Page 21

Volume/Rate variances were allocated in the following manner:
a.  Changes affected by volume (change in volume times old rate)
b.  Changes affected by rates (change in rates times old volume)
c.  Changes affected by rate/volume (change in volume times change in rates)
The total for each category was arrived at by totaling the individual items in
their respective categories.



<PAGE>


Non-interest Income

     Non-interest   income  of  $1.710  million  decreased  .29%  or  $5,000  in
comparison with the $1.715 million recorded in 2003. In 2004 income from service
charges on deposit accounts  increased 5.3% or $55,000 from $1.0 million in 2003
to $1.1  million in 2004.  This  increase  was a result of both an  increase  in
service charges and growth in deposit accounts.

     Other fee income  showed a small  decline  in 2004 of 5.6% or $18,000  from
$324,000  in 2003 to  $306,000  in 2004.  The  lower  income  is a result of the
decline  in loan  referral  income  from  $122,000  in 2003 to $35,000 in 2004 a
decrease of $87,000.  Other categories of other fee income showed strong growth.
Credit card merchant income was $71,000 in 2003 and grew to $129,000 in 2004, an
increase  of  $58,000.  The  remaining  categories  of other fee income  include
miscellaneous fees for Bank services which showed growth in 2004 over 2003.

     Other non-interest  income showed an 11.8% decline or $42,000 from $357,000
in 2003 to $315,000 in 2004. This is largely a result of a decline in the income
generated by bank owned life insurance  policies in 2004. Income on the policies
was $343,000 in 2003 compared to $298,000 in 2004 or a yield of 7.56% and 6.47%,
respectively.  As market rates  increase,  the income produced by these policies
should increase.

Non-interest Expense

     Total  non-interest  expense  increased  15.7% to $7.2 million in 2004 from
$6.2 million in 2003.  Non-interest  expense  represented  3.4% of average total
assets in 2004 and 3.2% in 2003. The expense/asset  ratio is a standard industry
measurement of a bank's ability to control its overhead or  non-interest  costs.
During  2005,  the Company  will  continue to emphasize  cost  controls,  though
certain costs, such as professional fees associated with the  implementation and
compliance with the  Sarbanes-Oxley  Act, costs of company  insurance and salary
and  benefit  expense  including  workers  compensation  insurance  and  medical
benefits are not  controllable  by  management.  Refer to Note I, page 52, for a
detailed description of Non-Interest Income and Other Non-Interest Expense.

Salaries and Benefits

     The most  significant  increase was in the salaries and benefits  category.
Salary and benefits increased 18.2% from $3.5 million in 2003 to $4.1 million in
2004 of which $267,000 reflects the salary and benefits expenses associated with
the  new  Banco  de  Sonoma  Office.  The  remainder  of the  increase  reflects
additional  staffing in Sonoma,  normal merit increases and employee  incentives
paid  as a  result  of the  Company's  earnings  in  2004.  Additionally,  there
continues  to be  significant  increases  in workers  compensation  and employee
medical  benefits.  At  December  31, 2004 and 2003 total  full-time  equivalent
employees were 55 and 49,  respectively,  an increase of 6 full time  equivalent
employees. Year-end assets per employee were $3.97 million in 2004 compared with
$4.2 million in 2003.

Premises and Equipment

     Expenses  related to premises and equipment  increased by 17.2% or $132,000
to $901,000 in 2004 from $769,000 in 2003. Of that  increase,  $67,000  resulted
from additional costs associated with the opening of the Banco de Sonoma Office.
Bank lease expense  increased $29,000 from $289,000 in 2003 to $318,000 in 2004.
Banco de Sonoma was  responsible  for $19,000 of that increase and the remaining
$10,000  represented the increase in lease expenses at the other three locations
and rental  storage.  Lease  income in 2004 was  $18,000  compared to $17,000 in
2003.

                                    Page 22

<page>
     Expenses  on fixed  assets were  $322,000  in 2003  compared to $395,000 in
2004,  with $30,000 of the $73,000  increase  attributable to the opening of the
new office. The remaining increase is the result of equipment upgrades,  as well
as the  amortization  of expenses  from the remodel of the Sonoma and Glen Ellen
offices.

Other Non-interest Expense

     Other non-interest  expense increased by 10.8% to $2.2 million in 2004 from
$2.0  million in 2003.  The  increase in other  non-interest  expense was due to
increases in professional fees, advertising and marketing, stationery and office
supplies and FDIC and other insurance.  Professional  fees were $680,000 in 2003
and  increased  to  $751,000  in 2004,  an  increase  of $71,000  or 10.5%.  The
categories of professional fees which showed the most significant increases were
in the areas of accounting and taxes, other exam fees, and accruals for Director
Retirement  and legal fees.  The increases in accounting  and taxes,  other exam
fees and legal fees are a result of complying  with the  Sarbanes-Oxley  Act and
examinations to audit compliance with many of the new consumer regulations, such
as Customer Privacy, U. S. Patriot Act and Bank Secrecy Act. Additionally,  with
the  growth in the  Company,  time  spent by  outside  professionals  increased,
therefore,  the costs  increased.  The Director  Retirement costs increased as a
result of a lower crediting rate when determining benefit expense.

     Advertising and marketing and stationery and office supplies  increased due
to the costs associated with setting up a new office. An initial outlay to stock
the facility is necessary and then ongoing costs will level out.  Again,  as the
Company grows these costs will show some year over year increase.

     In  2005,  the  Company   anticipates   professional   fees  will  increase
dramatically  due to the costs  associated  with  compliance with Sarbanes Oxley
Rule 404, governing internal control provisions. To assist with compliance,  the
Company has retained the services of a consulting firm.

Provision for Income Taxes

     The provision for income taxes  increased to an effective tax rate of 33.3%
in 2004 compared with 33.2% in 2003.

BALANCE SHEET ANALYSIS

Investment Securities

     Investment  securities  were $37.6  million at December  31,  2004,  a 2.7%
increase  from the $36.7  million at December  31, 2003.  At year end 2004,  the
overall portfolio had a market value of $38.1 million compared with an amortized
cost of $37.9 million.  The Company  purchases  securities  rated A or higher by
Standard and Poor's and/or Moody's Investors Service. In the event a security is
downgraded,  the Company  will  monitor the  investment  more closely or sell if
appropriate.  Local  tax-exempt bonds are  occasionally  purchased  without an A
rating.

     Securities are classified as held to maturity (HTM) if the Company has both
the intent and the ability to hold these securities to maturity. As of December
31, 2004, the Company had securities totaling $17.4 million with a market value
of $17.8 million categorized as held to maturity. Decisions to acquire municipal
securities, which are generally placed in this category, are based on tax
planning needs and pledge requirements.

     Securities  are  classified  as  available  for sale  (AFS) if the  Company
intends to hold these debt securities for an indefinite  period of time, but not
necessarily  to  maturity.  Investment  securities  which are


                                    Page 23
<page>

categorized  as available for sale are acquired as part of the overall asset and
liability  management  function  and  serve as a primary  source  of  liquidity.
Decisions  to  acquire  or  dispose  of  different  investments  are based on an
assessment of various economic and financial factors, including, but not limited
to, interest rate risk,  liquidity and capital adequacy.  Securities held in the
available for sale category are recorded at market value, which is $20.3 million
compared to an amortized cost of $20.5 million as of December 31, 2004.

     There were twenty Federal Farm Credit Bank, Federal Home Loan Bank, Federal
Home  Loan  Mortgage   Corporation  or  Federal  National  Mortgage  Association
securities  of $19.8 million and one U.S.  Treasury  security of $496,000 in the
AFS  portfolio  and  nineteen  municipal  securities  of $6.7 million in the HTM
portfolio that are  temporarily  impaired as of December 31, 2004. Of the above,
there were three  Federal Home Loan  Mortgage  Agency and Federal Home Loan Bank
securities of $2.3 million in the AFS portfolio and three  municipal  securities
of $867,000 in the HTM  portfolio  that have been in a continuous  loss position
for 12  months  or more as of  December  31,  2004.  The  primary  cause  of the
impairment of these securities is interest rate volatility  inherent in a rising
rate  environment  which  causes the market  value of the  security  to decline.
Management  understood the potential market risks at the time of acquisition and
determined the benefit to the Company of the higher interest rates received more
than offset the potential  deterioration in value. It is the Company's intent to
carry the  securities  to maturity  date, at which time the Company will receive
face value for the securities at no loss.

     Although the quoted  market values  fluctuate,  investment  securities  are
generally  held to  maturity,  and  accordingly,  gains and losses to the income
statement are  recognized  upon sale,  or at such time as management  determines
that a permanent  decline in value exists.  In the opinion of management,  there
was no investment in securities at December 31, 2004 that constituted a material
credit risk to the Company.  The lower  market  value to  amortized  costs was a
result of the increase in market  interest  rates and not an indication of lower
credit quality.

     The table  below  shows the  components  of the  investment  portfolio  and
average  yields.  For  further   information   concerning  the  Company's  total
securities  portfolio,  including market values and unrealized gains and losses,
refer to Note C of the Notes to Consolidated Financial Statements on page 45.

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

                                  Twelve months ended 12/31/04     Twelve months ended 12/31/03
                                       Average    Average          Average     Average
                                       Balance     Yield           Balance     Yield

U.S. Treasury securities               $    516     2.3%          $     780     1.8%
U.S. federal agency issues               22,198     3.3%              9,263     2.9%
State, county and municipal issues       17,578     5.7%             11,662     6.4%
Corporate securities                        550     6.4%              1,050     6.4%
                                       --------                    --------

Total investment securities            $ 40,842     4.4%           $ 22,755     4.8%
                                       ========                    ========
</TABLE>

Loans

     A  comparative  schedule of average loan balances is presented in the table
on page  20;  year-end  balances  are  presented  in Note D to the  Consolidated
Financial Statements page 47.

     Loan balances,  net of deferred loan fees at December 31, 2004, were $153.2
million, an increase of 25.1% over 2003.  Commercial loans,  comprising 71.2% of
the portfolio,  increased $17.1 million, or 18.6% over 2003 showing the greatest
change in volume of all categories.  Included in commercial loans are loans made
for commercial purposes and secured by real estate.


                                    Page 24


     Real Estate  Mortgage  loans were the  category  which  showed the greatest
growth rate, growing $5.5 million from $2.2 million at December 31, 2003 to $7.7
million as of  December  31,  2004,  a growth  rate of 246.6%.  During  2004 the
Company  expanded  their   conventional  Real  Estate  Loan  portfolio.   It  is
anticipated that the growth rate will be more modest in 2005 due to the increase
in interest rates.

     Consumer  loans and Real Estate  Construction  loans grew $4.5  million and
$3.6  million,  a growth  rate of 38.3%  and  21.9%,  respectively.  Only  lease
financing  receivables  showed a decline of  $32,000  from  $80,000 to  $48,000.
Customer  interest in lease  financing  receivables  has declined in our market,
therefore,  the bank has not been active in generating  these loans.  Management
does not see this lack of interest in lease  financing  receivables  changing in
the foreseeable future.

Risk Elements

     The  majority of the  Company's  loan  activity is with  customers  located
within Sonoma County.  Approximately  87% of the total loan portfolio is secured
by real estate located in the Company's service area. Significant concentrations
of credit  risk may exist if a number of loan  customers  are engaged in similar
activities and have similar  economic  characteristics.  The Company believes it
has policies in place to identify problem loans and to monitor concentrations of
credit  (see  Note  O,  on page  60 of the  Consolidated  Financial  Statements,
Concentration of Credit Risk).

     Based on its risk  management  review  and a review of its loan  portfolio,
management  believes that its  allowance for loan losses for the quarter  ending
December  31,  2004,  is  sufficient  to  absorb  losses  inherent  in the  loan
portfolio. This assessment is based upon the best available information and does
involve  uncertainty and matters of judgment.  Accordingly,  the adequacy of the
loan loss  reserve  cannot be  determined  with  precision,  but is  subject  to
periodic  review,  and  could be  susceptible  to  significant  change in future
periods.

Loan Commitments and Letters of Credit

     Loan commitments are written agreements to lend to customers at agreed upon
terms,  provided  there are no violations of any  condition  established  in the
contract. Commitments generally have fixed expiration dates or other termination
clauses.  Loan  commitments  may have  variable  interest  rates and terms  that
reflect current market conditions at the date of commitment. Because many of the
commitments are expected to expire without being drawn upon, the amount of total
commitments  does not  necessarily  represent the Company's  anticipated  future
funding  requirements.  Unfunded loan commitments were $34.6 million at December
31, 2004 and $35.3 million at December 31, 2003.

     Standby  letters of credit commit the Company to make payments on behalf of
customers when certain  specified  events occur.  Standby  letters of credit are
primarily issued to support customers'  financing  requirements of twelve months
or less and must meet the Company's normal policies and collateral requirements.
Standby  letters of credit  outstanding  were  $360,000 at December 31, 2004 and
$725,000 at December 31, 2003.

Nonperforming Assets

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

     A loan remains in a  non-accrual  status until both  principal and interest
have been current for six months and meets cash flow or collateral criteria,  or
when the loan is determined to be  uncollectible  and is


                                    Page 25

<page>
charged off against the allowance for loan losses, or in the case of real estate
loans,  is  transferred  to other real estate  owned.  A loan is classified as a
restructured  loan when the interest rate is reduced,  when the term is extended
beyond the original maturity date, or other concessions are made by the Company,
because of the  inability  of the  borrower to repay the loan under the original
terms.

     The Company had loans of $1.0 million in non-accrual status at December 31,
2004 and $1.2 million at December 31, 2003.  There were $1.0 million in loans 90
days or more past due at December  31, 2004 and $1.2 million in loans 90 days or
more past due at December  31,  2003.  Occasionally,  the Company will have more
loans in  non-accrual  status than are 90 days past due, if they  determine  the
collection of principal or interest is unlikely.

Allowance for Loan Losses

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

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

     Worsening conditions in certain economic sectors and geographic areas could
adversely affect the loan portfolio,  necessitating  larger  provisions for loan
losses than currently  estimated.  However, as of December 31, 2004, the Company
believes its overall allowance for loan losses is adequate based on its analysis
of conditions at that time.

     At December 31, 2004,  the allowance  for loan losses was $2.4 million,  or
1.6% of year end loans,  compared with $2.6 million or 2.2% of year end loans at
December  31, 2003.  This  reduction in the  allowance  is  consistent  with the
improved quality of the loan portfolio.

     Net  charge-offs  to average loans  increased  when compared with the prior
year.  The Company  recorded net losses of $336,000 or .24% of average  loans in
2004  compared  to  $167,000 or .14% of average  loans in 2003.  The  increased,
although  still  low,  level  of  charge-offs  in 2004  reflects  the  Company's
attention and effort in managing and  collecting  past due loans by  encouraging
the  customer  to  bring  them  to a  current  status  or to pay  them  off  and
management's  desire to quickly  charge off a loan when it is  determined  to be
uncollectible.  The prompt charge-off of loans increases the quality of the loan
portfolio.

Deposits

     A  comparative  schedule of average  deposit  balances is  presented in the
table on page 20; year-end deposit balances are presented in the table below.

     Total deposits  increased  $13.5 million (7.5%) in 2004, to $193.7 million.
Demand  deposits  increased  $6.6 million,  or 17.4% in 2004.  Savings  deposits
increased by $6.6 million,  or 10.3%, and  interest-

                                    Page 26

<page>

bearing checking increased$2.4 million, or 7.5% during 2004. Other time deposits
of less than  $100,000  decreased  $822,000,  or 4.2%,  and time  deposits  over
$100,000 decreased $1.3 million, for a decline of 4.7% over 2003 balances.

The  composition of deposits for the years ending December 31, 2004 and 2003 are
as follows:

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

                                            December 31,    Percentage     December 31,    Percentage
                                                2004         of Total         2003          of Total
                                            ------------    ----------     ------------    ---------



Interest-bearing transaction deposits       $ 34,912,205          18.0%    $ 32,467,678         18.0%

Savings deposits                              70,254,926          36.3%      63,680,697         35.4%

Time deposits, $100,000 and over              25,307,661          13.1%      26,565,347         14.7%

Other time deposits                           18,630,846           9.6%      19,453,317         10.8%
                                            ------------                   ------------

Total interest-bearing deposits              149,105,638          77.0%     142,167,039         78.9%

Non-interest-bearing deposits                 44,557,377          23.0%      37,947,577         21.1%
                                            ------------                   ------------

Total deposits

                                            $193,663,015         100.0%    $180,114,616        100.0%
                                            ============                   ============
</TABLE>

Capital

     The Bank is subject to FDIC regulations  governing  capital  adequacy.  The
FDIC has adopted  risk-based  capital guidelines which establish a risk-adjusted
ratio relating capital to different  categories of assets and off-balance  sheet
exposures.  Under the current guidelines,  as of December 31, 2004, the Bank was
required to have minimum Tier I and total  risk-based  capital  ratios of 4% and
8%,  respectively.  To  be  well  capitalized  under  Prompt  Corrective  Action
Provisions  requires minimum Tier I and total risk-based capital ratios to be 6%
and 10%, respectively.

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

     Based on the FDIC's  guidelines,  the Bank's total risk-based capital ratio
at December  31,  2004 was 11.34% and its Tier 1  risk-based  capital  ratio was
10.09%.  The Bank's leverage ratio was 8.94%.  All the ratios exceed the minimum
guidelines of 8.00%, 4.00% and 4.00%,  respectively.  The ratios for the Company
at December 31, 2003, were 14.07%, 12.81% and 10.49%, respectively.  The capital
ratios for the Company at December  31,  2004,  were  12.02%,  10.77% and 9.51%,
respectively.

     In February  2001,  the  Company  approved a program to  repurchase  Sonoma
Valley Bancorp stock up to $1.0 million and in August 2002 the Company  approved
the repurchase of an additional  $1.0 million of Sonoma Valley Bancorp stock. As
of December 31,  2004,  $1,466,494  had been  repurchased  and  retired,  net of
options which were  exercised  and then  subsequently  repurchased  and retired.
Refer to page 18, for a discussion of the changes in capital and page 37 for the
table of "Changes in Shareholders' Equity."

     Management believes that the Bank's current capital position, which exceeds
guidelines  established  by  industry  regulators,  is  adequate  to support its
business.

                                    Page 27

<PAGE>


Off Balance Sheet Commitments

     The Company's  off balance  sheet  commitments  consist of  commitments  to
extend credit and standby letters of credit.  These  commitments are extended to
customers in the normal  course of business  and are  described on page 25, Loan
Commitments  and Letters of Credit and in Note N to the  Consolidated  Financial
Statements on page 59. The Company also has contractual  obligations  consisting
of operating  leases for various  facilities and payments to participants  under
the Company's  supplemental  executive retirement plan and deferred compensation
plan, which are described in Note H on page 49.

The following table summarizes the Company's contractual obligations as of
December 31, 2004.
<TABLE>
<S>                                             <C>             <C>             <C>            <C>             <C>

                                                                       Payments due by period
                                              ----------     -----------      ---------      ---------      -----------
                                                             Less than 1                                    More than 5
Contractual Obligations                         Total            year         1-3 years      3-5 Years         years
-----------------------                       ----------     -----------      ---------      ---------      -----------
Operating Lease Obligations                   1,321,431        296,229         585,143        143,037          297,022
Executive Officer Supplemental Retirement     1,891,236         13,590          29,750        102,027        1,745,869
Deferred Compensation                         1,129,333         13,540          28,425         39,033        1,048,335

</TABLE>

Liquidity Management

     The Company's liquidity is determined by the level of assets (such as cash,
federal  funds  sold  and   available-for-sale   securities)  that  are  readily
convertible  to cash to meet customer  withdrawal and borrowing  needs.  Deposit
growth also  contributes  to the Company's  liquidity.  The Company's  liquidity
position  is  reviewed  by  management  on a regular  basis to verify that it is
adequate to meet  projected  loan funding and potential  withdrawal of deposits.
The Company has a  comprehensive  Asset and  Liability  Policy  which it uses to
monitor  and  determine  adequate  levels of  liquidity.  At year end 2004,  the
Company's  liquidity  ratio  (adjusted  liquid assets to deposits and short term
liabilities) was 18.47% compared to 29.03% and 20.39% at year end 2003 and 2002,
respectively.  Management expects that liquidity will remain adequate throughout
2005, as loans are not expected to grow  significantly  more than deposits,  and
excess funds will continue to be invested in quality liquid assets, such as U.S.
Treasury and Agency securities.

Market Risk Management

     Overview.  Market risk is the risk of loss from  adverse  changes in market
prices and rates.  The Company's market risk arises primarily from interest rate
risk  inherent  in its loan and deposit  functions.  The goal for  managing  the
assets and  liabilities  of the  Company is to  maximize  shareholder  value and
earnings,  while  maintaining a high quality balance sheet without  exposing the
Company  to undue  interest  rate  risk.  The  Board of  Directors  has  overall
responsibility  for the interest rate risk  management  policies.  Sonoma Valley
Bank has an Asset and Liability Management Committee (ALCO) that establishes and
monitors  guidelines  to  control  the  sensitivity  of  earnings  to changes in
interest rates.

     Asset/Liability   Management.   Activities   involved  in   asset/liability
management  include  but are not  limited  to  lending,  accepting  and  placing
deposits and investing in  securities.  Interest rate risk is the primary market
risk  associated  with  asset/liability  management.  Sensitivity of earnings to
interest rate changes  arises when yields on assets  change in a different  time
period or in a different  amount from that of interest costs on liabilities.  To
mitigate  interest rate risk, the structure of the balance sheet is managed


                                    Page 28


<page>
with the goal that  movements of interest  rates on assets and  liabilities  are
correlated  and  contribute  to earnings  even in periods of  volatile  interest
rates.  The  asset/liability  management  policy sets  limits on the  acceptable
amount of  variance  in net  interest  margin and market  value of equity  under
changing interest  environments.  The Company uses simulation models to forecast
earnings, net interest margin and market value of equity.

     Simulation of earnings is the primary tool used to measure the  sensitivity
of earnings to interest rate changes. Using  computer-modeling  techniques,  the
Company is able to estimate the potential  impact of changing  interest rates on
earnings.  A balance sheet forecast is prepared quarterly using inputs of actual
loans,  securities and interest-bearing  liabilities (i.e.  deposits/borrowings)
positions as the beginning base. The forecast balance sheet is processed against
four interest  rate  scenarios.  The  scenarios  include 100 and 200 basis point
rising rate forecasts, a flat rate forecast, and 100 and 200 basis point falling
rate forecasts  which take place within a one year time frame.  The net interest
income is measured  during the year assuming a gradual  change in rates over the
twelve-month horizon. The Company's 2005 net interest income, as forecast below,
was modeled  utilizing a forecast  balance  sheet  projected  from year-end 2004
balances. The following table summarizes the effect on net interest income (NII)
of a +/-100  and a +/-200  basis  point  change in  interest  rates as  measured
against a constant rate (no change) scenario.

Interest Rate Risk Simulation of Net Interest Income as of December 31, 2004
(In thousands)
<TABLE>
<S>                 <C>                                    <C>

Variation from a constant rate scenario            Change in NII
                  +200bp                                   ($255)
                  +100bp                                   ($133)
                  -100bp                                   ($401)
                  -200bp                                   ($805)

</TABLE>

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

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

     A positive cumulative gap may be equated to an asset sensitive position. An
asset  sensitive  position in a rising  interest rate  environment  will cause a
bank's interest rate margin to expand. This results as floating or variable rate
loans reprice more rapidly than fixed rate  certificates of deposit that reprice
as they mature over time. Conversely, a declining interest rate environment will
cause the  opposite  effect.  A  negative  cumulative  gap may be  equated  to a
liability  sensitive  position.  A  liability  sensitive  position  in a  rising
interest rate  environment will cause a bank's interest rate margin to contract,
while a declining interest rate environment will have the opposite effect.

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


                                    Page 29

<page>

     The Company has more  liabilities  than  assets  repricing  during the next
year. In  evaluating  the repricing  pressures  for  liabilities,  management is
taking  a   conservative   perspective   and  has  already   repriced   deposits
(liabilities)  more quickly than loans  (assets).  There is  significant  market
pressure to keep lending rates low and increase  rates on deposit  accounts.  In
2004, the Company was able to maintain  lower deposit rates,  even in the rising
rate environment. Now there is considerable market pressure to catch up with the
prior  interest rate  increases.  The table below  indicates that the Company is
liability  sensitive  throughout  the next year.  At the end of the twelve month
cycle,  the rate  sensitive  gap shows $59.3  million more in  liabilities  than
assets repricing.

     The Company  controls its long term interest rate risk by keeping long term
fixed  rate  assets  (longer  than 5 years)  less than its long term  fixed rate
funding, primarily demand deposit accounts and capital. The following table sets
forth  cumulative  maturity  distributions  as of  December  31,  2004  for  the
Company's  interest-bearing  assets and  interest-bearing  liabilities,  and the
Company's   interest   rate   sensitivity   gap  as  a   percentage   of   total
interest-earning  assets.  Of the $120.4  million in fixed rate  assets  over 12
months,  shown in the table below,  $47.3 million are long term assets over five
years. This $47.3 million compares  favorably to the $63.9 million in demand and
core  deposits  and equity.  With the 125 basis point  increase in the Fed Funds
rate in 2004, the loans which were at floors were classified from the fixed rate
category to floating rate and are now repricing with greater frequency.

(dollars in thousands)
<TABLE>
<S>                                       <C>         <C>       <C>         <C>         <C>           <C>

                                       Immediate    Up to 3    4 to 6      7 to 12     Over
December 31, 2004                       Reprice     Months     Months      Months    12 Months       Total
                                        --------    -------     --------   --------   ----------   --------
ASSETS:
  Securities + Other                    $      0    $    340    $    477   $    953   $ 35,902     $ 37,672
  Interest-Bearing Balances
  Loans                                   43,866       6,825       5,410     10,185     84,446      150,732
  Fed Funds Sold + Overnight
   Interest-Bearing Balances               9,875                                                      9,875
                                        --------    --------    --------    -------   --------     --------

     Total Rate Sensitive Assets        $ 53,741    $  7,165    $  5,887    $11,138   $120,348     $198,279
                                        ========    ========    ========    =======   ========     ========

  LIABILITIES:
  MMDA/NOW/SAV                          $105,167    $      0    $      0    $     0   $      0     $105,167
  CD's<$100                                    0       4,719       4,451      4,451      5,011       18,632
  CD's>$100                                    0       5,821      10,099      2,525      6,863       25,308
  Borrowings                                   0                                                          0
                                        --------    --------    --------    -------    -------     --------


Total Rate Sensitive Liabilities        $105,167    $ 10,540    $ 14,550    $ 6,976   $ 11,874     $149,107
                                        ========    ========    ========    =======   ========     ========

  Rate Sensitivity Gap               $ (51,426)   $ (3,375)   $ (8,663)   $ 4,162   $108,474     $ 49,172


  Cumulative Rate Sensitivity Gap    $ (51,426)   $(54,801)   $(63,464)   $(59,302) $ 49,172

  Cumulative Position to Total
   Assets                             (23.6%)     (25.1%)     (29.1%)     (27.2%)    22.5%
</TABLE>


Inflation

     Assets and liabilities of a financial  institution are principally monetary
in nature.  Accordingly,  interest rates,  which generally move with the rate of
inflation,  have  potentially the most  significant  effect on the Company's net
interest income.  The Company attempts to limit inflation's  impact on rates and
net income margins by minimizing its effect on these margins through  continuing
asset/liability management programs.

                                    Page 30


<PAGE>


Management's Discussion and Analysis
The Year Ended December 31, 2003 versus December 31, 2002

Summary

     Net income for 2003 was $2.9  million  compared  with $2.7 million in 2002.
Basic earnings per share for 2003 were $1.34 compared with $1.26 in 2002. Return
on average assets was 1.49% in 2003 compared with 1.67% the previous year, while
return on average equity was 14.39% in 2002 and 15.27% for the previous year.

     Total assets  reached  $205.1  million in 2003, a 12.3%  increase  over the
$182.6 million at December 31, 2002.  Loans  decreased  4.4% to $122.5  million,
compared with $128.1 million at year-end 2002. Deposits increased, growing 12.6%
from $160.0  million at year-end 2002 to $180.1  million at year-end  2003.  The
loan-to-deposit ratio declined from 80.0% to 68.0%.

Net Interest Income

     Net interest  income on a fully tax equivalent  basis increased by $250,000
to $9.2 million in 2003, up 2.8% from 2002 net interest  income of $9.0 million.
The net interest  margin for 2003 decreased to 5.24% from 6.06% for the previous
year. Individual components of interest income and interest expense are provided
in the table - Average Balances, Yields and Rates Paid on page 20.

Interest Income

     Interest income  increased by $13,000,  or .12%, to $10.97 million over the
$10.96 million realized in 2002. The volume of earning assets increased by 19.0%
to $176.6  million  from  $148.4  million  in 2002,  while the yield on  average
earning assets declined 117 basis points.

Interest Expense

     Interest  expense  decreased  by $237,000 to $1.7 million in 2003 from $2.0
million  in 2002.  The  average  rate paid on all  interest-bearing  liabilities
decreased from 1.78% in 2002 to 1.28% in 2003 while average  balances  increased
from  $110.4  million to $134.1  million,  a 21.5%  gain over 2002.  The gain in
volume of average  balances was responsible for a $386,000  increase in interest
expense offset by a $623,000  decline related to lower interest rates paid for a
net decline of $237,000.  The lower rates paid on  interest-bearing  liabilities
was the result of a declining rate environment.

     Individual  components of interest income and interest expense are provided
in the table - Average Balances, Yields and Rates Paid on page 20.

Provision for Loan Losses

     The provision for loan losses was $20,000 in 2003 and $393,000 in 2002. The
decrease  in the  provision  was  the  result  of  management's  evaluation  and
assessment of the loan  portfolio and the decline in the loan  portfolio.  Loans
charged off, net of recoveries, resulted in losses totaling $167,000 in 2003 and
$27,000 in 2002. The increase in charge-offs  reflects loan problems  related to
the economic  downturn.  Refer to Note D, page 47 for an analysis of the changes
in the allowance for loan and lease losses.



                                    Page 31


<PAGE>


Non-interest Income

     Non-interest income increased by 4.5% to $1.7 million from $1.6 million the
previous year.  The increase was due to increases in service  charges on deposit
accounts and other fee income which  increased by 7.3% and 3.85%, or $70,000 and
$12,000, respectively.

Non-interest Expense

     Total non-interest expense increased 6.5% to $6.2 million in 2003 from $5.9
million in 2002.  Non-interest  expense represented 3.2% of average total assets
in 2003  and 3.6% in  2002.  The  expense/asset  ratio  is a  standard  industry
measurement of a bank's ability to control its overhead or  non-interest  costs.
During 2004, the Company will continue to emphasize cost controls. Certain costs
are not  controllable  by  management.  Refer to Note I, page 52, for a detailed
description of Non-Interest Income and Other Non-Interest Expense.

     Salaries  and  benefits  increased  1.5% from $3.4  million in 2002 to $3.5
million in 2003. The 2003 increase  reflects normal merit increases and employee
incentives  paid as a result of the  Company's  earnings in 2003.  Additionally,
there continues to be significant increases in workers compensation and employee
medical  benefits.  At  December  31, 2003 and 2002 total  full-time  equivalent
employees were 49 and 44,  respectively.  Year-end assets per employee were $4.2
million in 2003 and 2002.

     Expenses  related to premises and equipment  increased by 24.4% to $769,000
in 2003 from $618,000 in 2002.  Building  lease  expense on three  locations and
storage units increased to $289,000 in 2003 from $278,000 in 2002.  Lease income
for 2003  totaled  $17,000  compared  to lease  income of $17,000  in 2002.  The
increase in  premises  and  equipment  expense is the result of  renovation  and
remodeling of the Operations Center and Sonoma Main Office facility.

     Other  non-interest  expense increased by 9.9% to $2.0 million in 2003 from
$1.8  million  in 2002.  The  increase  was the  result of a 22.2%  increase  in
professional   fees.   Professional  fees  is  the  largest  category  of  other
non-interest  expense,  primarily  comprised  of  accounting,  legal  and  other
professional  fees.  These services  increased by $210,000 to $1,153,000 in 2003
from $944,000 in 2002. This increase is the result of the additional  regulatory
requirements as a result of Sarbanes-Oxley  and the U.S. Patriot Act.  Increases
in other  categories  reflect  the  increased  growth and volume of  business in
general.

Provision for Income Taxes

     The provision for income taxes increased to an effective tax rate of 33.19%
in 2003 compared with 31.72% in 2002.

ITEM 7A.          QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

     Information regarding Quantitative and Qualitative Disclosures about Market
Risk  appears on page 28 through 29 under the caption  "Management's  Discussion
and Analysis of  Consolidated  Financial  Condition  and Results of Operations -
Market Risk Management" and is incorporated herein by reference.



                                    Page 32
<PAGE>




ITEM 8.           FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA



Richardson & Company                                550 Howe Avenue, Suite 210
                                                    Sacramento, California 95825

                                                    Telephone: (916) 564-8727
                                                    FAX      : (916) 564-8728





                         REPORT OF RICHARDSON & COMPANY
                              INDEPENDENT AUDITORS


Board of Directors and Shareholders
Sonoma Valley Bancorp and Subsidiary
Sonoma, California


     We have  audited the  accompanying  consolidated  balance  sheets of Sonoma
Valley  Bancorp and Subsidiary as of December 31, 2004 and 2003, and the related
consolidated  statements of operations,  changes in the shareholders' equity and
cash flows for each of the three years in the period  ended  December  31, 2004.
These financial  statements are the responsibility of the Company's  management.
Our responsibility is to express an opinion on these financial  statements based
on our audits.

     We  conducted  our audits in  accordance  with the  standards of the Public
Company Accounting Oversight Board (United States). Those standards require that
we plan and perform the audit to obtain  reasonable  assurance about whether the
financial  statements  are free of  material  misstatement.  An  audit  includes
examining,  on a test basis,  evidence supporting the amounts and disclosures in
the  financial  statements.  An audit also  includes  assessing  the  accounting
principles  used  and  significant  estimates  made  by  management,  as well as
evaluating the overall  financial  statement  presentation.  We believe that our
audits provide a reasonable basis for our opinion.

     In our opinion,  the financial statements referred to above present fairly,
in all material respects,  the consolidated  financial position of Sonoma Valley
Bancorp and  Subsidiary as of December 31, 2004 and 2003,  and the  consolidated
results of their  operations and their  consolidated  cash flows for each of the
three years in the period ended December 31, 2004, in conformity with accounting
principles generally accepted in the United States of America.


                                                         /s/Richardson & Company
January 25, 2005                                         -----------------------




<PAGE>


                      SONOMA VALLEY BANCORP AND SUBSIDIARY

                           CONSOLIDATED BALANCE SHEETS

                           December 31, 2004 and 2003


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

ASSETS                                                                        2004                 2003
                                                                          ------------         ------------
 Cash and due from banks                                                  $  5,471,669         $  9,803,272
 Federal funds sold                                                          9,840,000           25,220,000
 Interest-bearing due from banks                                                35,551              330,930
                                                                          ------------         ------------
                       Total cash and cash equivalents                      15,347,220           35,354,202
 Investment securities available-for-sale, at fair value                    20,253,490           20,119,777
 Investment securities held-to-maturity (fair value
  of $17,842,432 and $17,042,186, respectively)                             17,418,303           16,558,153
 Loans and lease financing receivables, net                                150,732,087          119,833,989
 Premises and equipment, net                                                 1,364,879            1,313,995
 Accrued interest receivable                                                 1,138,607              906,958
 Cash surrender value of life insurance                                      8,913,136            7,730,600
 Other assets                                                                3,079,740            3,288,463
                                                                          ------------         ------------

                       Total assets                                       $218,247,462         $205,106,137
                                                                          ============         ============

LIABILITIES
 Noninterest-bearing demand deposits                                      $ 44,557,377         $ 37,947,577
 Interest-bearing transaction deposits                                      34,912,205           32,467,678
 Savings and money market deposits                                          70,254,926           63,680,697
 Time deposits, $100,000 and over                                           25,307,661           26,565,347
 Other time deposits                                                        18,630,846           19,453,317
                                                                          ------------         ------------
                       Total deposits                                      193,663,015          180,114,616

 Accrued interest payable
   and other liabilities                                                     3,903,287            3,520,242
                                                                          ------------        -------------

                       Total liabilities                                   197,566,302          183,634,858
 Commitments and contingencies ( see accompanying notes )

SHAREHOLDERS' EQUITY
 Common stock, no par value; 10,000,000 shares
   authorized; 2,142,104 shares in 2004 and 1,457,594 in
   2003 issued and outstanding                                              15,528,940           15,061,636
 Retained earnings                                                           5,295,732            6,386,083
 Accumulated other comprehensive (loss) income                                (143,512)              23,560
                                                                          ------------        -------------
                       Total shareholders' equity                           20,681,160           21,471,279
                                                                          ------------        -------------
                       Total liabilities and shareholders' equity         $218,247,462        $ 205,106,137
                                                                          ============        =============
</TABLE>


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

                                    Page 34

<PAGE>


                      SONOMA VALLEY BANCORP AND SUBSIDIARY

                      CONSOLIDATED STATEMENTS OF OPERATIONS

              For the years ended December 31, 2004, 2003 and 2002

<TABLE>
<S>                                                 <C>               <C>              <C>
                                                    2004              2003             2002
                                                 ----------       -----------      -----------
INTEREST INCOME
  Loans and leases                               $9,980,424       $ 9,446,841      $ 9,470,998
  Taxable securities                                790,980           365,459          378,511
  Tax-exempt securities                             655,689           485,460          512,708
  Federal funds sold and other                      110,639           318,798          216,362
  Dividends                                          20,370            13,269           15,227
                                                 -----------      -----------      -----------
                       Total interest income      11,558,102       10,629,827       10,593,806
INTEREST EXPENSE
  Interest-bearing transaction deposits               51,744           50,454           84,241
  Savings and money market deposits                  434,671          466,081          655,841
  Time deposits, $100,000 and over                   667,862          729,758          674,089
  Other time deposits                                399,813          477,061          546,543
  Other                                                                    31
                                                 -----------      -----------      -----------
                      Total interest expense       1,554,090        1,723,385        1,960,714
                                                 -----------      -----------      -----------
                         NET INTEREST INCOME
                                                  10,004,012        8,906,442        8,633,092
  Provision for loan and lease losses                130,000           20,000          393,000
                                                 -----------      -----------      -----------
                   NET INTEREST INCOME AFTER
                      PROVISION FOR LOAN AND
                                LEASE LOSSES
                                                   9,874,012        8,886,442        8,240,092
NON-INTEREST INCOME                                1,709,771        1,715,123        1,641,191

NON-INTEREST EXPENSE
 Salaries and employee benefits                    4,124,120        3,489,007        3,437,390
 Premises and equipment                              900,465          768,789          618,029
 Other                                             2,200,104        1,986,365        1,806,954
                                                 -----------      -----------      -----------
                  Total non-interest expense       7,224,689        6,244,161        5,862,373
                                                 -----------      -----------      -----------
                     Income before provision
                            for income taxes       4,359,094        4,357,404        4,018,910
 Provision for income taxes                        1,451,473        1,446,397        1,274,577
                                                 -----------      -----------      -----------
                                  NET INCOME     $ 2,907,621      $ 2,911,007      $ 2,744,333
                                                 ===========      ===========      ===========
                        NET INCOME PER SHARE     $      1.35      $      1.34      $      1.26
                                                 ===========      ===========      ===========
                        NET INCOME PER SHARE
                           ASSUMING DILUTION     $      1.25      $      1.23      $      1.16
                                                 ===========      ===========      ===========


</TABLE>

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


                                    Page 35



<PAGE>


                      SONOMA VALLEY BANCORP AND SUBSIDIARY

           CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY

              For the years ended December 31, 2004, 2003 and 2002

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

                                                                                                   Accumulated
                                                                                                     Other
                                 Comprehensive          Common Stock              Retained      Comprehensive
                                   Income          Shares         Amount          Earnings          Income           Total
                                 -------------     ------------------------       -----------    --------------   ------------
Balance at
  January 1, 2002                                  1,333,504    $11,025,885       $ 5,483,779     $   161,398     $ 16,671,062

5% stock dividend                                     65,742      1,775,026        (1,775,026)
Fractional shares                                                                     (13,951)                         (13,951)
Redemption and retirement
  of stock                                           (14,596)      (121,257)         (223,345)                        (344,602)
Stock options exercised and
  related tax benefits                                16,496        256,571                                            256,571
Net income for the year          $ 2,744,333                                        2,744,333                        2,744,333
Other comprehensive income,
  net of tax:
  Unrealized holding losses
    on securities available-
    for-sale arising during
    the year, net of taxes
    of $51,125                       (73,103)
                                 -----------
Other comprehensive income,
  net of taxes                       (73,103)                                                         (73,103)         (73,103)
                                 -----------      ----------    -----------       -----------     -----------     ------------
Total comprehensive income       $ 2,671,230
                                 ===========

BALANCE AT
  DECEMBER 31, 2002                                1,401,146     12,936,225         6,215,790          88,295       19,240,310

5% stock dividend                                     68,665      1,997,422        (1,997,422)
Fractional shares                                                                     (14,193)                         (14,193)
Redemption and retirement
  of stock                                           (38,987)      (361,296)         (729,099)                      (1,090,395)
Stock options exercised and
  related tax benefits                                26,770        489,285                                            489,285
Net income for the year          $ 2,911,007                                         2,911,007                       2,911,007
Other comprehensive income,
  net of tax:
  Unrealized holding losses
    on securities available-
    for-sale arising during
    the year, net of taxes
    of $45,274                       (64,735)
Other comprehensive income,      -----------
  net of taxes                       (64,735)                                                         (64,735)         (64,735)
                                 -----------      ----------    -----------       -----------     -----------     ------------
Total comprehensive income       $ 2,846,272
                                 ===========

</TABLE>

                                   (Continued)


                                    Page 36
<PAGE>

                      SONOMA VALLEY BANCORP AND SUBSIDIARY


           CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
                                   (Continued)

              For the years ended December 31, 2004, 2003 and 2002
<TABLE>
<S>                                   <C>                   <C>                      <C>             <C>              <C>

                                                                                                  Accumulated
                                                                                                     Other
                                 Comprehensive          Common Stock               Retained      Comprehensive
                                    Income         Shares          Amount          Earnings          Income          Total
                                 -------------     ------------------------       -----------     -------------   ------------
BALANCE AT
  DECEMBER 31, 2003                                1,457,594    $15,061,636       $ 6,386,083     $    23,560     $ 21,471,279

Redemption and retirement
  of stock                                              (601)        (6,218)         (11,839)                          (18,057)
Stock options exercised and
   related tax benefits                               97,494      1,786,065                                          1,786,065
Redemption of stock
   under tender offer                               (126,208)    (1,416,223)      (3,071,903)                       (4,488,126)
Cash dividends                                                                      (906,732)                         (906,732)
Stock options granted                                               103,680                                            103,680
3 for 2 stock split                                  713,825
Fractional shares                                                                     (7,498)                           (7,498)
Net income for the year          $ 2,907,621                                       2,907,621                         2,907,621
Other comprehensive income,
  net of tax:
  Unrealized holding gains
    on securities available-
    for-sale arising during
    the year, net of taxes
    of $116,844                     (167,072)
                                 -----------
Other comprehensive income,
 net of taxes                       (167,072)                                                        (167,072)        (167,072)
                                 -----------       ---------    -----------       -----------     -----------     ------------

Total comprehensive income       $ 2,740,549
                                 ===========
BALANCE AT
  DECEMBER 31, 2004                                2,142,104    $15,528,940       $ 5,295,732     $  (143,512)    $20,681,160
                                                   =========    ===========       ===========     ===========     ===========

</TABLE>

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


                                    Page 37




<PAGE>


                      SONOMA VALLEY BANCORP AND SUBSIDIARY

                      CONSOLIDATED STATEMENTS OF CASH FLOWS

              For the years ended December 31, 2004, 2003 and 2002

<TABLE>
<S>                                                      <C>               <C>                <C>
                                                         2004              2003              2002
                                                     ------------      ------------      ------------
OPERATING ACTIVITIES
 Net income                                          $  2,907,621      $  2,911,007      $  2,744,333
 Adjustments to reconcile net income
   to net cash provided by operating activities:
      Provision for loan and lease losses                 130,000            20,000           393,000
      Depreciation                                        306,747           224,774           144,659
      Loss on sale of securities                                                                5,098
      Loss on sale of equipment                               206                23
      Amortization and other                              153,510           115,551            43,971
      Stock options granted                               103,680
      Net change in interest receivable                  (231,649)         (107,676)          152,779
      Net change in cash surrender value
       of life insurance                                 (297,536)         (342,888)         (265,181)
      Net change in other assets                          942,827           (47,325)          (63,800)
      Net change in interest payable
       and other liabilities                              383,045           146,078           350,001
                                                     ------------      ------------      ------------
                           NET CASH PROVIDED BY
                           OPERATING ACTIVITIES         4,398,451         2,919,544         3,504,860

INVESTING ACTIVITIES
   Purchases of securities held-to-maturity            (2,519,972)      (10,718,156)
   Purchases of securities available-for-sale          (8,653,217)      (17,216,738)         (540,547)
   Proceeds from maturing securities held-to-
     Maturity                                           1,551,900         4,028,400         1,841,141
   Proceeds from maturing securities available-
     for-sale                                           8,190,000           750,000         7,000,000
   Proceeds from sales of securities available-
     for-sale                                                                                 244,063
   Net (increase) decrease in loans and leases        (31,028,098)        5,415,192       (20,629,972)
   Purchases of premises and equipment                   (361,506)         (663,645)         (399,704)
   Purchases of life insurance                           (885,000)                         (2,092,000)
   Proceeds from disposal of equipment                      3,669               550
                                                      -----------      ------------      ------------
                              NET CASH USED FOR
                           INVESTING ACTIVITIES       (33,702,224)      (18,404,397)      (14,577,019)


</TABLE>

                                                        (Continued)



                                    Page 38



<PAGE>



                      SONOMA VALLEY BANCORP AND SUBSIDIARY

                CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)

              For the years ended December 31, 2004, 2003 and 2002

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


                                                         2004              2003              2002
                                                     ------------      ------------      ------------
FINANCING ACTIVITIES
  Net change in demand, interest-bearing
    transaction and savings deposits                 $ 15,628,556      $ 18,904,842      $ 13,505,460
  Net change in time deposits                          (2,080,157)        1,221,521         8,827,814
  Stock repurchases                                    (4,506,183)       (1,090,395)         (344,602)
  Stock options exercised                               1,168,805           299,681           214,375
  Fractional shares purchased                              (7,498)          (14,193)          (13,951)
  Cash dividends paid                                    (906,732)
                                                     ------------      ------------      ------------
                            NET CASH PROVIDED BY
                            FINANCING ACTIVITIES        9,296,791        19,321,456        22,189,096
                                                     ------------      ------------      ------------
                          NET CHANGE IN CASH AND
                                CASH EQUIVALENTS      (20,006,982)        3,836,603        11,116,937
  Cash and cash equivalents
   at beginning of year                                35,354,202        31,517,599        20,400,662
                                                     ------------      ------------      ------------

                       CASH AND CASH EQUIVALENTS
                                  AT END OF YEAR     $ 15,347,220      $ 35,354,202      $ 31,517,599
                                                     ============      ============      ============
SUPPLEMENTAL DISCLOSURES OF
 CASH FLOW INFORMATION:

Cash paid during the year for:
  Interest expense                                   $  1,550,556      $  1,731,256      $  1,965,215
  Income taxes                                       $    219,200      $  1,375,000      $  1,663,975

SUPPLEMENTAL DISCLOSURES OF
     NONCASH ACTIVITIES:

Stock dividends                                                        $  1,997,422      $  1,775,026

Net change in unrealized gains and losses
  on securities                                      $   (283,916)     $   (110,009)     $   (124,228)
Net change in deferred income taxes on unrealized
  gains and losses on securities                     $    116,844      $     45,274      $     51,125


</TABLE>

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


                                    Page 39



<page>

                      SONOMA VALLEY BANCORP AND SUBSIDIARY

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                        December 31, 2004, 2003 and 2002


NOTE A--SIGNIFICANT ACCOUNTING POLICIES

Business: Sonoma Valley Bancorp (the Company), formed in 2000, is a bank holding
company  whose  principal  activity  is  the  ownership  and  management  of its
wholly-owned subsidiary, Sonoma Valley Bank. Sonoma Valley Bank was organized in
1987 and commenced  operations  on June 3, 1988 as a California  state-chartered
bank. The Bank is subject to regulation,  supervision and regular examination by
the State  Department of Financial  Institutions  and Federal Deposit  Insurance
Corporation. The regulations of these agencies govern most aspects of the Bank's
business.

Principles of Consolidation:  The consolidated  financial statements include the
accounts of the Company and the Bank.  All material  inter-company  accounts and
transactions have been eliminated.

Nature of  Operations:  The Bank  provides  a variety  of  banking  services  to
individuals and businesses in its primary service area of Sonoma, California and
the immediate  surrounding area. The Bank offers depository and lending services
primarily to meet the needs of its business and  professional  clientele.  These
services  include a variety of demand deposit,  savings and time deposit account
alternatives  and special  merchant and business  services.  The Bank's  lending
activities  are  directed  primarily  towards  granting  short  and  medium-term
commercial  loans,  customized  lines of credit,  for such purposes as operating
capital, business and professional start-ups,  inventory, equipment and accounts
receivable and interim construction financing.

Use of Estimates:  The  preparation of financial  statements in conformity  with
generally accepted  accounting  principles requires management to make estimates
and assumptions  that affect the reported  amounts of assets and liabilities and
disclosure of  contingent  assets and  liabilities  at the date of the financial
statements  and the  reported  amounts  of  revenues  and  expenses  during  the
reporting period. Actual results could differ from those estimates.

Cash and Cash  Equivalents:  For the purposes of reporting cash flows,  cash and
cash  equivalents  are defined as those  amounts  included in the balance  sheet
captions "Cash and due from banks" and "Federal funds sold." Generally,  federal
funds are sold or purchased for one-day periods.

Investment  Securities:  Securities  are classified as  held-to-maturity  if the
Company  has both the intent  and  ability  to hold  those  debt  securities  to
maturity regardless of changes in market conditions,  liquidity needs or changes
in general  economic  conditions.  These securities are carried at cost adjusted
for amortization of premium and accretion of discount,  computed by the interest
method over their contractual lives.

Securities are classified as  available-for-sale  if the Company intends to hold
those debt  securities for an indefinite  period of time, but not necessarily to
maturity. Any decision to sell a security classified as available-for-sale would
be based on various factors,  including significant movements in interest rates,
changes in the maturity mix of the Company's assets and  liabilities,  liquidity
needs,  regulatory capital considerations and other similar factors.  Securities
available-for-sale are carried at fair value. Unrealized holding gains or losses
are reported as as increases or decreases in  shareholders'  equity,  net of the
related deferred tax effect.  Realized gains or losses,  determined on the basis
of the cost of specific securities sold, are included in earnings.

                                    Page 40

<PAGE>


                      SONOMA VALLEY BANCORP AND SUBSIDIARY

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                        December 31, 2004, 2003 and 2002


NOTE A--SIGNIFICANT ACCOUNTING POLICIES (Continued)

Loans and Lease Financing Receivables:  Loans are stated at the amount of unpaid
principal,  less the  allowance  for loan  losses  and net  deferred  loan fees.
Interest  on loans is accrued  and  credited  to income  based on the  principal
amount  outstanding.  Loan  origination fees and certain direct loan origination
costs  are  capitalized  and  recognized  as an  adjustment  of the yield on the
related loan.  However,  loan origination  costs in excess of fees collected are
not  deferred  but this  treatment  has an  immaterial  impact on the  financial
statements. Amortization of net deferred loan fees is discontinued when the loan
is placed on nonaccrual status.

All of the Company's leases are classified and accounted for as direct financing
leases.  Under the direct financing  method of accounting for leases,  the total
net rentals  receivable under the lease contracts,  net of unearned income,  are
recorded as a net investment in direct financing leases, and the unearned income
is  recognized  each month as it is earned so as to produce a constant  periodic
rate of return on the unrecovered investment.

Allowance  for Loan and Lease  Losses:  The  allowance is  maintained at a level
which,  in the opinion of  management,  is adequate  to absorb  probable  losses
inherent  in  the  loan  and  lease   portfolio.   Credit   losses   related  to
off-balance-sheet  instruments  are included in the allowance for loan and lease
losses  except if the loss meets the  criteria  for accrual  under  Statement of
Financial Accounting Standards (SFAS) No. 5, in which case the amount is accrued
and reported  separately as a liability.  Management  determines the adequacy of
the  allowance  based upon reviews of individual  loans and leases,  recent loss
experience, current economic conditions, the risk characteristics of the various
categories  of loans and leases and other  pertinent  factors.  The allowance is
based on  estimates,  and ultimate  losses may vary from the current  estimates.
These estimates are reviewed monthly and, as adjustments become necessary,  they
are  reported in earnings in the periods in which they become  known.  Loans and
leases deemed  uncollectible  are charged to the allowance.  Provisions for loan
and lease losses and recoveries on loans previously charged off are added to the
allowance.

Commercial  loans are  considered  impaired,  based on current  information  and
events,  if it is  probable  that the  Company  will be  unable to  collect  the
scheduled   payments  of  principal  or  interest  when  due  according  to  the
contractual  terms of the loan  agreement.  Allowances  on  impaired  loans  are
established  based on the present value of expected future cash flows discounted
at the loan's historical  effective  interest rate or, for  collateral-dependent
loans, on the fair value of the collateral.  Cash receipts on impaired loans are
used to reduce principal.


                                    Page 41



<page>







                      SONOMA VALLEY BANCORP AND SUBSIDIARY

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

                        December 31, 2004, 2003 and 2002


NOTE A--SIGNIFICANT ACCOUNTING POLICIES (Continued)

Income  Recognition  on Impaired  and  Nonaccrual  Loans and  Leases:  Loans and
leases, including impaired loans, are generally classified as nonaccrual if they
are past due as to maturity or payment of  principal or interest for a period of
more than 90 days,  unless  such loans are  well-secured  and in the  process of
collection.  If a loan or lease or a portion of a loan or lease is classified as
doubtful  or is  partially  charged  off,  the loan or lease  is  classified  as
nonaccrual.  Loans and leases that are on a current  payment  status or past due
less than 90 days may also be  classified  as nonaccrual if repayment in full of
principal and/or interest is in doubt.

Loans and leases  may be  returned  to accrual  status  when all  principal  and
interest amounts contractually due (including arrearages) are reasonably assured
of  repayment  within an  acceptable  period of time,  and there is a  sustained
period  of  repayment  performance  by the  borrower,  in  accordance  with  the
contractual terms of interest and principal.

While a loan or lease is classified as nonaccrual and the future  collectibility
of the recorded  balance is doubtful,  collections of interest and principal are
generally  applied as a  reduction  to  principal  outstanding.  When the future
collectibility  of the  recorded  balance is  expected,  interest  income may be
recognized  on a cash basis.  In the case where a  nonaccrual  loan or lease had
been partially  charged off,  recognition of interest on a cash basis is limited
to that  which  would  have  been  recognized  on the  recorded  balance  at the
contractual  interest rate. Cash interest  receipts in excess of that amount are
recorded as recoveries to the allowance for loan losses until prior  charge-offs
have been fully recovered.

Premises  and  Equipment:  Premises  and  equipment  are  stated  at cost,  less
accumulated depreciation. The provision for depreciation is computed principally
by the  straight-line  method  over the  estimated  useful  lives of the related
assets.

Income Taxes:  Provisions for income taxes are based on amounts  reported in the
statements of operations (after exclusion of non-taxable income such as interest
on state and  municipal  securities)  and include  deferred  taxes on  temporary
differences  in the  recognition  of income and  expense  for tax and  financial
statement  purposes.  Deferred  taxes are computed using the asset and liability
method.  Deferred tax assets and  liabilities  are recognized for the future tax
consequences   attributable  to  differences  between  the  financial  statement
carrying  amounts  of assets and  liabilities  and their  respective  tax bases.
Deferred  tax  assets and  liabilities  are  measured  using  enacted  tax rates
expected  to apply to  taxable  income  in the  years in which  those  temporary
differences are expected to be recovered or settled.  The effect on deferred tax
assets and  liabilities  of a change in tax rates is recognized in income in the
period that includes the enactment date.  Deferred tax assets are recognized for
deductible  temporary  differences  and tax  credit  carryforwards,  and  then a
valuation  allowance is  established  to reduce that deferred tax asset if it is
"more likely than not" that the related tax benefits will not be realized.

Advertising:  Advertising  costs are charged to operations in the year incurred.


                                    Page 42



<PAGE>


                      SONOMA VALLEY BANCORP AND SUBSIDIARY

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

                        December 31, 2004, 2003 and 2002


NOTE A--SIGNIFICANT ACCOUNTING POLICIES (Continued)

Net Income Per Share of Common  Stock:  Net income per share of common  stock is
computed  by dividing  net income by the  weighted  average  number of shares of
common stock outstanding during the year, after giving retroactive effect to the
stock dividends and splits. Net income per share--assuming  dilution is computed
similar to net income per share  except that the  denominator  is  increased  to
include the number of additional  common shares that would have been outstanding
if the  dilutive  potential  common  shares  had been  issued.  Included  in the
denominator is the dilutive effect of stock options  computed under the treasury
method.

Stock Option  Accounting:  At December 31, 2004,  the Company has a  stock-based
employee and director  compensation  plan, which is described more fully in Note
L. Prior to 2003,  the Company  accounted for those plans under the  recognition
and measurement provisions of APB Opinion No. 25, Accounting for Stock Issued to
Employees,  and related  Interpretations.  No stock-based employee  compensation
cost is reflected in 2002 net income,  as all options  granted under those plans
had an exercise price equal to the market value of the  underlying  common stock
on the date of grant.  Effective  January 1, 2003, the Company  adopted the fair
value  recognition  provisions  of SFAS  No.  123,  Accounting  for  Stock-Based
Compensation, prospectively to all employee awards granted, modified, or settled
after  January  1, 2003.  No options  were  granted  in 2003.  Awards  under the
Company's plan vest over five years.  The cost related to  stock-based  employee
compensation  included in the  determination of net income for 2004 is less than
that which would have been  recognized  if the fair value based  method had been
applied to all awards  since the  original  effective  date of SFAS No. 123. The
following  table  illustrates the effect on net income and earnings per share if
the fair value based  method had been  applied to all  outstanding  and unvested
awards in each period.

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

                                                          2004            2003             2002
                                                       -----------     -----------     -----------

Net income, as reported                                $ 2,907,621     $ 2,911,007     $ 2,744,333
Add:  Stock-based employee compensation expense
   included in reported net income, net of related
   tax effects                                              61,011

Deduct: Total stock-based employee compensation
  expense determined under fair value based method
  for all awards, net of related tax effects              (185,012)       (179,899)       (185,919)
                                                       -----------     -----------     -----------

Pro forma net income                                   $ 2,783,620     $ 2,731,108     $ 2,558,414
                                                       ===========     ===========     ===========
</TABLE>

                                    Page 43

<PAGE>


                      SONOMA VALLEY BANCORP AND SUBSIDIARY

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

                        December 31, 2004, 2003 and 2002


NOTE A--SIGNIFICANT ACCOUNTING POLICIES (Continued)
<TABLE>
<S>                              <C>         <C>        <C>

Earnings per share:
   Basic--as reported          $ 1.35     $ 1.34     $ 1.26
   Basic--pro forma              1.30       1.26       1.18
   Diluted--as reported          1.25       1.23       1.16
   Diluted--pro forma            1.20       1.16       1.08
</TABLE>

Off-Balance-Sheet  Financial Instruments: In the ordinary course of business the
Company has entered into  off-balance-sheet  financial instruments consisting of
commitments  to extend  credit and  standby  letters of credit.  Such  financial
instruments are recorded in the financial statements when they become payable.

Operating  Segments:  Reportable  segments are based on products  and  services,
geography,  legal structure,  management structure and any other manner in which
management  desegregates a company for making operating  decisions and assessing
performance.  The Company has  determined  that its  business is  comprised of a
single operating segment.

New  Accounting  Pronouncements:  In December  2004,  the  Financial  Accounting
Standards  Board  (FASB)  issued a  revision  of SFAS No.  123,  Accounting  for
Stock-Based  Compensation  establishing revised standards for the accounting for
transactions  in which an entity  exchanges its equity  instruments for goods or
services.  This Statement no longer allows as an alternative  the use of APB No.
25's  intrinsic  value  method  of  accounting  for stock  options,  as had been
provided  under the  original  SFAS No.  123.  Under APB No. 25,  issuing  stock
options generally resulted in no recognition of compensation expense.  Under the
revised SFAS No. 123,  entities  are required to recognize  the cost of services
received in exchange for awards of equity  instruments  based on the  grant-date
fair value.  This  revised SFAS is  effective  for the Company  beginning in the
third quarter of 2005. All options issued after the effective date of this SFAS,
as well as options granted in the past for which the requisite services have not
been provided as of the effective date of this SFAS, are required to be recorded
as compensation  expense. The implementation of this SFAS will have no impact on
the Company since the Company  recorded  compensation  expense for stock options
granted after January 1, 2003 and there are no remaining  requisite services for
stock options granted prior to January 1, 2003.


NOTE B--RESTRICTIONS ON CASH AND DUE FROM BANKS

Cash and due from banks include amounts the Bank is required to maintain to meet
certain average  reserve and  compensating  balance  requirements of the Federal
Reserve.  The total  requirement  at December 31, 2004 and 2003 was $424,000 and
$3,400,000, respectively.


                                    Page 44




<PAGE>





                      SONOMA VALLEY BANCORP AND SUBSIDIARY

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

                        December 31, 2004, 2003 and 2002


NOTE C--INVESTMENT SECURITIES

The amortized cost and approximate fair value of investment securities are
summarized as follows:
<TABLE>
<S>                                    <C>             <C>             <C>                  <C>

                                   Amortized        Unrealized       Unrealized            Fair
                                     Cost             Gains            Losses              Value
                                   ------------     ------------     ------------      ------------


December 31, 2004:

Securities Available-For-Sale
  U.S. Treasury securities         $    498,959                      $     (2,709)     $    496,250
  U.S. Government agency
    securities                       19,998,410                          (241,170)       19,757,240
                                   ------------                      ------------      ------------
                                   $ 20,497,369                      $   (243,879)     $ 20,253,490
                                   ============                      ============      ============

Securities Held-to-Maturity
    Municipal securities          $  17,418,303     $    485,044     $    (60,915)     $ 17,842,432
                                  =============     ============     ============      ============
December 31, 2003:
Securities Available-For-Sale
  U.S. Treasury securities        $     515,928     $      4,619                       $    520,547
  U.S. Government agency
    Securities                       18,672,992           72,126      $   (57,548)       18,687,570
  Corporate securities                  890,820           20,840                            911,660
                                   ------------     ------------      -----------       -----------
                                   $ 20,079,740     $     97,585      $   (57,548)     $ 20,119,777
                                   ============     ============      ===========      ============

Securities Held-to-Maturity        $ 16,558,153     $    550,533      $   (66,500)     $ 17,042,186
  Municipal securities             ============     ============      ===========      ============

</TABLE>


                                    Page 45
<PAGE>




                      SONOMA VALLEY BANCORP AND SUBSIDIARY

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

                        December 31, 2004, 2003 and 2002


NOTE C--INVESTMENT SECURITIES (Continued)


Contractual maturities of investment securities at December 31, 2004 were as
follows:
<TABLE>
<S>                                    <C>                <C>                   <C>             <C>

                                    Securities Available-For-Sale           Securities Held-To-Maturity
                                    -----------------------------           ---------------------------
                                      Amortized          Fair                 Amortized        Fair
                                        Cost             Value                  Cost           Value
                                    -----------      ------------           ------------      ------------
Due in one year or less             $ 1,004,608      $    996,125           $    773,754      $    780,362
Due after one year through
    five years                       17,493,416        17,266,118              2,721,591         2,749,817
Due after five years through
    ten years                         1,999,345         1,991,247              8,821,463         9,014,402
                                                                               5,101,495         5,297,851
Due after ten years                ------------      ------------            -----------      ------------
                                   $ 20,497,369      $ 20,253,490           $ 17,418,303      $ 17,842,432
                                   ============      ============           ============      ============
</TABLE>


During   2004   and   2003,   the   Company   did  not   sell   any   securities
available-for-sale.  During 2002, the Company sold securities available-for-sale
for total proceeds of approximately $244,062, resulting in gross realized losses
of $5,098 and no gross realized gains.

As of  December  31,  2004,  investment  securities  with a  carrying  amount of
$5,212,119  and an  approximate  fair  value  of  $5,551,269  were  pledged,  in
accordance  with  federal  and state  requirements,  as  collateral  for  public
deposits.  Investment  securities  with a  carrying  amount  and  fair  value of
$4,975,141  at December  31, 2004 were pledged to meet the  requirements  of the
Federal Reserve and the U.S. Department of Justice.

The following  table shows the  investments'  gross  unrealized  losses and fair
value,  aggregated  by  investment  category and length of time that  individual
securities have been in a continuous unrealized loss position, at December 31.
<TABLE>
<S>                                <C>             <C>             <C>           <C>             <C>             <C>

                                                         2004                                            2003
                             --------------------------------------------------------------  -----------------------------
                                   Less Than 12 Months            12 months or Greater           Less Than 12 Months
                             --------------------------------  ----------------------------  -----------------------------
                                   Fair         Unrealized         Fair        Unrealized         Fair        Unrealized
Description of Securities         Value           Losses          Value          Losses          Value          Losses
---------------------------  -------------    -----------      -------------  -------------  ---------------  ------------

U.S. treasury securities     $     496,250    $     2,709
U.S. government agency
     securities                 17,510,048        188,362      $  2,247,192   $    52,808    $   8,736,699    $     57,548
Municipal securities             5,835,964         40,747           867,178        20,168        5,154,805          66,300
                             -------------    -----------      ------------   -----------    -------------    ------------

     Total temporarily
      impaired securities    $  23,842,262    $   231,818      $  3,114,370   $    72,976    $  13,891,504      $  123,848
                             =============    ===========      ============   ===========    =============      ==========
</TABLE>


                                    Page 46



<PAGE>


                      SONOMA VALLEY BANCORP AND SUBSIDIARY

                    NOTES TO FINANCIAL STATEMENTS (Continued)

                        December 31, 2004, 2003 and 2002


NOTE C--INVESTMENT SECURITIES (Continued)

There were no securities as of December 31, 2003 that were in a continuous  loss
position for 12 months or more. There were 20 U.S. government agency securities,
one U.S.  Treasury  Note  and 19  municipal  securities  that  were  temporarily
impaired  as of December  31,  2004.  There were 6  securities  in a  continuous
unrealized  loss position at December  2004 for 12 months or more.  There were 9
Federal Home Loan Bank or Federal Home Loan Mortgage Corporation  securities and
15 municipal  securities that were temporarily impaired as of December 31, 2003.
The  unrealized  losses  on  these  securities  were  caused  by  interest  rate
increases.  The contractual  terms of these investments do not permit the issuer
to settle the  securities at a price less than the par value of the  investment.
Because the Company has the ability and intent to hold these investments until a
recovery of fair value,  which may be  maturity,  the Company  does not consider
these investments to be other-than-temporarily impaired at December 31, 2004 and
2003.


NOTE D--LOANS AND LEASES AND ALLOWANCE FOR LOAN AND LEASE LOSSES

The composition of the loan and lease portfolio was as follows at December 31:
<TABLE>
<S>                                                 <C>           <C>           <C>           <C>

                                                          2004                       2003
                                               -----------------------      ----------------------

    Commercial                                 $ 109,324,569      71.2%     $ 92,197,984      75.0%
    Consumer                                      16,249,913      10.6%       11,750,131       9.6%
    Real estate mortgage                           7,732,177       5.0%        2,231,244       1.8%
    Real estate construction                      20,291,506      13.2%       16,646,907      13.5%
    Lease financing receivables, net of
       unearned income of $8,034 in
       2004 and $9,799 in 2003                        47,717       0.0%           79,884       0.1%
                                               -------------     -----      ------------     -----
                                                 153,645,882     100.0%      122,906,150     100.0%
                                                                 =====                       =====

       Deferred loan fees and costs, net            (485,223)                   (437,536)
       Allowance for loan and lease losses        (2,428,572)                 (2,634,625)
                                               -------------                ------------
                                               $ 150,732,087                $119,833,989
                                               =============                ============
</TABLE>

     At December 31, 2004, the recorded investment in loans for which impairment
has been recognized in accordance with SFAS No. 114 totaled  $1,233,000,  with a
corresponding  valuation  allowance  of  $223,000.  At December  31,  2003,  the
recorded  investment  in loans  for  which  impairment  has been  recognized  in
accordance  with  Statement  No. 114 totaled  $1,145,000,  with a  corresponding
valuation allowance of $424,000. For the years ended December 31, 2004, 2003 and
2002,  the  average  recorded  investment  in impaired  loans was  approximately
$1,263,000,  $843,000 and $143,000,  respectively.  During 2004,  2003 and 2002,
$7,000,  $8,000 and $2,000 of interest was received and  recognized  on impaired
loans, respectively.




                                    Page 47
<PAGE>


                      SONOMA VALLEY BANCORP AND SUBSIDIARY

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

                        December 31, 2004, 2003 and 2002


NOTE D--LOANS AND LEASES AND ALLOWANCE FOR LOAN AND LEASE LOSSES (Continued)

In addition,  at December 31,  2004,  the Company did not have other  nonaccrual
loans for which  impairment had not been  recognized.  At December 31, 2003, the
Company  had  other  nonaccrual  loans  of  approximately  $115,300,  for  which
impairment had not been recognized.

The Company has no  commitments  to loan  additional  funds to the  borrowers of
impaired or nonaccrual loans.

The  maturity  and  repricing  distribution  of the loan and lease  portfolio at
December 31:


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


                                                          2004          2003
                                                    ------------     ------------

        Fixed rate loan maturities
            Three months or less                    $  3,913,861     $ 11,452,282
            Over three months to twelve months        12,329,431       12,843,967
            Over one year to five years               57,186,925       41,884,458
            Over five years                           31,403,430       42,304,207
        Floating rate loans repricing
            Quarterly or more frequently              45,816,022       13,191,129
            Quarterly to annual frequency                381,109
            One to five years frequency                1,603,134
                                                    ------------     ------------
                                                     152,633,912      121,676,043
        Nonaccrual loans                               1,011,970        1,230,107
                                                    ------------     ------------
                                                    $153,645,882     $122,906,150
                                                    ============     ============
</TABLE>

An analysis of the changes in the allowance for loan and lease losses is as
follows for the years ended December 31:

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

                                                    2004             2003            2002
                                                 -----------     -----------     -----------

         Beginning balance                       $ 2,634,625     $ 2,781,962     $ 2,415,555
         Provision for loan and lease losses         130,000          20,000         393,000
         Loans charged off:
           Commercial                               (290,000)       (142,572)        (10,741)
           Consumer                                  (63,007)        (41,161)        (34,872)
                                                 -----------     -----------     -----------
                                                    (353,007)       (183,733)        (45,613)
         Recoveries:
           Commercial                                 15,416           8,320           9,474
           Consumer                                    1,538           8,076           9,546
                                                 -----------     -----------     -----------
                                                      16,954          16,396          19,020
                                                 -----------     -----------     -----------
         Ending balance                          $ 2,428,572     $ 2,634,625     $ 2,781,962
                                                 ===========     ===========     ===========
</TABLE>

                                    Page 48

<PAGE>


                      SONOMA VALLEY BANCORP AND SUBSIDIARY

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

                        December 31, 2004, 2003 and 2002


NOTE E--PREMISES AND EQUIPMENT

Premises and equipment consisted of the following at December 31:
<TABLE>
<S>      <C>                                         <C>              <C>

                                                     2004             2003
                                                -----------     -----------
         Land                                   $   175,000     $   175,000
         Building                                    71,943          71,943
         Leasehold improvements                     768,334         660,272
         Furniture, fixtures and equipment        1,893,372       1,688,809
                                                -----------     -----------
                                                  2,908,649       2,596,024
         Less: Accumulated depreciation          (1,543,770)     (1,282,029)
                                                -----------     -----------
                                                $ 1,364,879     $ 1,313,995
                                                ===========     ===========
</TABLE>


NOTE F--TIME DEPOSITS

The maturities of time deposits at December 31, 2004 are as follows:

         Maturing within one year                  $  32,065,000
         Maturing in one year to two years             7,186,000
         Maturing two years through five years         4,688,000
                                                   -------------
                                                   $  43,939,000
                                                   =============

NOTE G--FEDERAL FUNDS CREDIT LINES

The Company has uncommitted  federal funds lines of credit agreements with other
banks. The maximum borrowings available under these lines totaled $21,500,000 at
December 31, 2004. The Company pledged loans totaling  $96,682,000 as collateral
to secure advances from the Federal Home Loan Bank of up to  $35,199,190.  There
were no  borrowings  outstanding  under the  agreements  at December 31, 2004 or
2003.


NOTE H--EMPLOYEE BENEFIT PLANS

The Company has a 401(k)  Employee  Savings Plan (the Plan) in which the Company
matches a portion of the employee's  contribution each payday. All employees are
eligible  for  participation  following  three  months  of  employment.  Bancorp
contributions  are 100%  vested at all times.  The  Company  made  contributions
totaling $109,628 in 2004, $92,012 in 2003 and $77,913 in 2002.


                                    Page 49

<PAGE>


                      SONOMA VALLEY BANCORP AND SUBSIDIARY

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

                        December 31, 2004, 2003 and 2002


NOTE H--EMPLOYEE BENEFIT PLANS (Continued)

The Company purchased single premium life insurance  policies in connection with
the  implementation  of retirement plans for four key officers and for the Board
of Directors.  The policies  provide  protection  against the adverse  financial
effects  from the death of a key officer and provide  income to offset  expenses
associated with the plans. The officers are insured under the policies,  but the
Company is the owner and  beneficiary.  At December 31, 2004 and 2003,  the cash
surrender   value  of  these  policies   totaled   $8,913,136  and   $7,730,600,
respectively.

The  retirement  plans are  unfunded  and  provide  for the  Company  to pay the
officers and directors  specified amounts for specified periods after retirement
and allows them to defer a portion of current  compensation  in exchange for the
Company's  commitment to pay a deferred  benefit at retirement.  If death occurs
prior to or during retirement, the Company will pay the officer's beneficiary or
estate the benefits set forth in the plans.  Deferred  compensation is vested as
to the amounts  deferred.  Liabilities  are recorded for the  estimated  present
value of future salary continuation benefits and for the amounts deferred by the
officers and directors.  At December 31, 2004 and 2003,  the liability  recorded
for the executive officer  supplemental  retirement plan totaled  $1,494,540 and
$1,439,970, respectively. The amount of pension expense related to this plan for
2004 and 2003 was $54,570 and $216,400,  respectively.  At December 31, 2004 and
2003,  the  liability  recorded for the director  supplemental  retirement  plan
totaled  $396,696  and  $293,653,  respectively.  The amount of pension  expense
related to this plan for 2004 and 2003 was $103,043  and $85,027,  respectively.
At  December  31,  2004  and  2003,  the  liability  recorded  for the  deferred
compensation plan totaled $1,129,334 and $989,788,  respectively.  The amount of
expense  related  to this  plan  for 2004 and  2003  was  $84,785  and  $82,542,
respectively.  The  following  are the  components  of the  accumulated  benefit
obligation related to the executive officer and director supplemental retirement
plans as of December 31:

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


                                               Directors                      Officers
                                       -------------------------     ---------------------------
                                          2004           2003           2004            2003
                                       ----------     ----------     -----------     -----------
    Projected benefit obligation       $  396,696     $  293,653     $ 1,405,912     $ 1,235,077
    Unamortized net transition
      obligation                                                          88,628         204,893
                                       ----------     ----------     -----------     -----------

       Benefit obligation included
         in other liabilities          $  396,696     $  293,653     $ 1,494,540     $ 1,439,970
                                       ==========     ==========     ===========     ===========
</TABLE>


The  weighted-average  discount rate used in determining  the actuarial  present
value of the projected benefit obligation was 6.75% and 7.00% for 2004 and 2003,
respectively.  No compensation  increases were assumed.  The entire  accumulated
benefit obligation was fully vested at December 31, 2004 and 2003.



                                    Page 50




<PAGE>


                      SONOMA VALLEY BANCORP AND SUBSIDIARY

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

                        December 31, 2004, 2003 and 2002


NOTE H--EMPLOYEE BENEFIT PLANS (Continued)

The following is a reconciliation of the beginning and ending balances of the
benefit obligation for the years ended December 31:

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

                                                    Directors                      Officers
                                            -------------------------      -------------------------
                                               2004              2003         2004           2003
                                            ----------     ----------      ----------     ----------

Benefit obligation at beginning of year     $  293,653     $  208,626      $1,439,970     $1,223,570
Net periodic pension cost:
  Service cost                                  39,201         71,387          34,454        319,856
  Interest cost on projected benefit
    obligation                                  36,975         13,640          10,630        122,265
Amortization of unrecognized
    liability at transition                    (36,201)                         8,486        (56,811)
Amendments                                      63,068                                      (168,910)
                                            ----------     ----------      ----------     ----------
Net periodic pension cost recognized           103,043         85,027          54,570        216,400
                                            ----------     ----------      ----------     ----------
    Benefit obligation at end of year       $  396,696     $  293,653      $1,494,540     $1,439,970
                                            ==========     ==========      ==========     ==========

</TABLE>

The following benefit payments, which reflect expected future service, as
appropriate, are expected to be paid:
<TABLE>
<S>    <C>                       <C>                <C>

                               Directors          Officers
                               ---------        ----------
       2005                    $ 13,590
       2006                      13,861
       2007                      15,889
       2008                      21,457         $  27,592
       2009                      25,386            27,592
       2010 to 2014             269,090         1,378,504
</TABLE>





                                    Page 51










<PAGE>


                      SONOMA VALLEY BANCORP AND SUBSIDIARY

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

                        December 31, 2004, 2003 and 2002


NOTE I--NON-INTEREST INCOME AND OTHER NON-INTEREST EXPENSE

Non-interest income is comprised of the following for the years ended December
31:
<TABLE>
<S>                                                  <C>               <C>            <C>

                                                    2004              2003           2002
                                                 -----------      -----------     -----------


     Service charges on deposit accounts         $ 1,089,315      $ 1,033,990     $   964,198
     Other fee income                                305,847          323,780         312,121
     Life insurance earnings                         297,536          342,888         357,181
     Investment securities gains (losses)                                              (5,098)
     Other ( none exceeding 1% of revenues )          17,073           14,465          12,789
                                                 -----------      -----------     -----------
                                                 $ 1,709,771      $ 1,715,123     $ 1,641,191
                                                 ============     ===========     ===========
</TABLE>


Other non-interest expense is comprised of the following for the years ended
December 31:
<TABLE>
<S>                                                   <C>              <C>             <C>
                                                      2004           2003           2002
                                                 -----------     -----------     -----------

     Professional and consulting fees            $   750,846     $   679,460     $   477,830
     Data processing                                 462,709         473,932         465,946
     Stationary and supplies                         168,496         160,992         159,909
     Staff related                                   167,026         175,801         158,707
     Advertising and business development            201,409         165,142         200,848
     Postage and telephone                           112,276         123,269         122,408
     Assessments and insurance                       152,172          30,948          83,633
     Other ( none exceeding 1% of revenues)          185,170         176,821         137,673
                                                 -----------     -----------     -----------
                                                 $ 2,200,104     $ 1,986,365     $ 1,806,954
                                                 ===========     ===========     ===========
</TABLE>

                                    Page 52

<PAGE>


                      SONOMA VALLEY BANCORP AND SUBSIDIARY

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

                        December 31, 2004, 2003 and 2002


NOTE J--INCOME TAXES

The provision for income taxes is comprised of the following:
<TABLE>
<S>                                      <C>              <C>           <C>
                                         2004             2003          2002
   Current                           ----------      ----------     ----------
        Federal                      $  368,556      $  779,365     $1,073,157
        State                           263,372         384,330        426,600
                                      ---------      ----------     ----------
                                        631,928       1,163,695      1,499,757
   Deferred
       Federal                          627,938         228,634       (195,491)
       State                            191,607          54,068        (29,689)
                                      ---------      ----------     ----------
                                        819,545         282,702       (225,180)
                                      ---------      ----------     ----------
                                     $1,451,473      $1,446,397     $1,274,577
                                     ==========      ==========     ==========

</TABLE>

  The following is a reconciliation of income taxes computed at the Federal
  statutory income tax rate of 34% to the effective income tax rate used for the
  provision for income taxes:
<TABLE>
<S>                                                   <C>            <C>              <C>
                                                      2004           2003             2002
                                                  -----------     -----------     -----------
     Income tax at Federal statutory rate         $ 1,482,092     $ 1,481,517     $ 1,366,429
        State franchise tax, less Federal
            income tax benefit                        311,867         311,746         287,529
     Interest on municipal obligations exempt
            from Federal tax                         (269,872)       (217,541)       (259,885)
        Life insurance earnings                      (122,449)       (141,113)       (146,996)
        Incentive stock option expense                 42,669
        Meals and entertainment                         7,050           8,175           7,412
        Other differences                                 116           3,613          20,088
                                                  -----------     -----------     -----------
     Provision for income taxes                   $ 1,451,473     $ 1,446,397     $ 1,274,577
                                                  ===========     ===========     ===========
</TABLE>


                                    Page 53








<PAGE>


                      SONOMA VALLEY BANCORP AND SUBSIDIARY

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

                        December 31, 2004, 2003 and 2002


NOTE J--INCOME TAXES (Continued)

The tax effects of temporary differences that give rise to the components of the
net deferred tax asset recorded as an other asset as of December 31 were as
follows:
<TABLE>
<S>                                                       <C>              <C>             <C>
                                                          2004             2003            2002
    Deferred tax assets:                             -----------     -----------     -----------
        Nonqualified benefit plans                   $ 1,244,196     $ 1,125,765     $   884,446
        Allowance for loan losses                        841,058         959,890       1,015,774
        Unrealized securities holding losses             100,367
        Accrued liabilities                               50,184          80,611         233,575
        State franchise taxes                             89,546         130,672         145,316
        Other                                             21,038          13,773          45,119
                                                     -----------     -----------     -----------
                       Total deferred tax assets       2,346,389       2,310,711       2,324,230

    Deferred tax liabilities:
        Depreciation                                     204,042          74,347          36,366
        Unrealized securities holding gains                               16,477          61,750
        Other                                             83,884          40,956          35,565
                                                     -----------     -----------     -----------
                  Total deferred tax liabilities         287,926         131,780         133,681
                                                     -----------     -----------     -----------
                          Net deferred tax asset     $ 2,058,463     $ 2,178,931     $ 2,190,549
                                                     ===========     ===========     ===========
</TABLE>

Amounts  presented for the tax effects of temporary  differences  are based upon
estimates and  assumptions and could vary from amounts  ultimately  reflected on
the Company's tax returns.  Accordingly, the variances from amounts reported for
prior  years are  primarily  the  result of  adjustments  to  conform to the tax
returns as filed.

Income tax payable was  $14,784 at December  31, 2004 and income tax  receivable
was  $397,144  at  December  31,  2003.  The income tax  benefit  related to net
investment  losses was $2,098 during 2002. There were no net investment gains or
losses in 2004 or 2003.


                                    Page 54











<PAGE>


                      SONOMA VALLEY BANCORP AND SUBSIDIARY

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

                        December 31, 2004, 2003 and 2002


NOTE K--EARNINGS PER SHARE

The following is the computation of basic and diluted earnings per share for the
years ended December 31:
<TABLE>
<S>                                                           <C>              <C>             <C>
                                                             2004             2003             2002
                                                          -----------     -----------     -----------
  Basic:
  Net income                                              $ 2,907,621     $ 2,911,007     $ 2,744,333
                                                          ===========     ===========     ===========
  Weighted-average common shares outstanding                2,148,558       2,165,066       2,176,386
                                                          ===========     ===========     ===========
  Earnings per share                                      $      1.35     $      1.34     $      1.26
  Diluted:                                                ===========     ===========     ===========
  Net income                                              $ 2,907,621     $ 2,911,007     $ 2,744,333
                                                          ===========     ===========     ===========
  Weighted-average common shares outstanding                2,148,558       2,165,066       2,176,386

Net effect of dilutive stock options - based on the
     treasury stock method using average market
     price                                                    179,825         199,367         196,822
                                                          -----------     -----------     -----------
  Weighted-average common shares outstanding
      and common stock equivalents                          2,328,383       2,364,433       2,373,208
                                                          ===========     ===========     ===========
  Earnings per share- assuming dilution                   $      1.25     $      1.23     $      1.16
                                                          ===========     ===========     ===========
</TABLE>


NOTE L--STOCK OPTION PLAN

The Company has a stock  option  plan (the Plan),  effective  March 31, 1996 and
terminated  on May 14,  2004,  under  which  incentive  and  nonstatutory  stock
options, as defined under the Internal Revenue Code, were granted.  The Plan was
administered by a Committee  appointed by the Board.  No additional  options are
available for granting under this plan. The options granted under this plan have
an exercise  period of no more than 10 years and a portion of which were subject
to a graded vesting schedule of 20% per year.

                                    Page 55
<PAGE>


                      SONOMA VALLEY BANCORP AND SUBSIDIARY

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

                        December 31, 2004, 2003 and 2002


NOTE L--STOCK OPTION PLAN (Continued)

The Company approved an equity incentive plan (the Plan), effective May 14, 2002
and terminating May 14, 2012, under which stock options, restricted stock, stock
appreciation  rights and stock bonuses may be granted.  The Plan is administered
by a Committee appointed by the Board.  Options  representing  123,555 shares of
the Company's authorized and unissued common stock may be granted under the Plan
by the  Committee  to  directors  and  employees of the Company at a price to be
determined  by the  Committee but shall not be less than 100% of the fair market
value of the  shares on the date the  incentive  stock  option is  granted.  The
options may have an  exercise  period of no more than 10 years and vesting is at
the discretion of the Committee.  The number of options  granted in January 2004
were 67,500. No options were granted in 2003.

The fair value of options  granted is  estimated  on the date of grant using the
Black-Scholes   option   pricing  model  with  the  following   weighted-average
assumptions used for grants in 2004: dividend yield of zero; expected volatility
of 37.76 percent;  risk-free  interest rate of 4.39 percent and expected life of
10 years. The following assumptions were used for grants in 2002: dividend yield
of zero; expected  volatility of 33.36 percent;  risk-free interest rate of 5.44
percent and expected life of 10 years.

A summary of stock option  activity,  adjusted to give effect to stock dividends
and stock splits follows for the years ended December 31:
<TABLE>
<S>                                      <C>           <C>            <C>             <C>           <C>               <C>
                                                             Incentive Stock Options
                                  -----------------------------------------------------------------------------------------
                                          2004                          2003                          2002
                                  ------------------------------------------------------------------------------------------
                                      Weighted-                     Weighted-                     Weighted-
                                      Average                       Average                        Average
                                   Exercise Price     Shares      Exercise Price     Shares     Exercise Price      Shares
                                  ------------------  -------   ------------------   -------   -----------------    -------

Shares under option at
   beginning of year              $           8.27    147,269   $           8.24     170,435   $          8.18       198,749

Options granted                              20.71     67,500                                            14.51         1,655

Options exercised                             8.29    (35,039)              8.07     (23,166)             8.20       (26,140)

Options cancelled                                                                                         7.97        (3,829)
                                                      -------                        -------                         -------
Shares under option at
  end of year                                12.94    179,730               8.27     147,269              8.24       170,435
                                                      =======                        =======                         =======
Options exercisable at
  end of year                                         125,730                        142,635                         142,025

Weighted-average fair value
  of options granted during
  the year                        $           7.68                                             $          6.19

</TABLE>



                                    Page 56
<PAGE>


                      SONOMA VALLEY BANCORP AND SUBSIDIARY

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

                        December 31, 2004, 2003 and 2002


NOTE L--STOCK OPTION PLAN (Continued)
<TABLE>
<S>                                     <C>                            <C>                               <C>            <C>

                                                                      Nonstatutory Stock Options
                                 -------------------------------------------------------------------------------------------
                                        2004                            2003                            2002
                                 --------------------------------------------------------------------------------------------
                                    Weighted-                       Weighted-                        Weighted-
                                     Average                         Average                          Average
                                 Exercise Price      Shares      Exercise Price       Shares      Exercise Price      Shares
                                 --------------     -------      --------------      -------      --------------     -------
 Shares under option at
      beginning of year          $       8.00       319,670      $       7.89        338,145      $       7.89       338,145

 Options exercised                       7.90      (111,205)             6.09        (18,475)
                                                    --------                         --------                        -------


 Shares under option at
      end of year                        8.05       208,465              8.00        319,670              7.89       338,145
                                                    =======                          =======                         =======


 Options exercisable at
      end of year                                                                    273,341                         245,544
                                                    208,465
</TABLE>


The following table summarizes information about fixed stock options outstanding
at December 31, 2004:
<TABLE>
<S>     <C>                              <C>               <C>                      <C>

                                                       Options Outstanding
                                    ---------------------------------------------------------------
                                                       Weighted-Average
      Range of                         Number            Remaining              Weighted-Average
   Exercise Prices                  Outstanding       Contractual Life           Exercise Price
   ------------------               -----------       ----------------          ----------------
   $ 5.46  to   $6.53                    15,157          2.38 years                  $ 6.20
   $ 7.83  to   $7.97                   271,953          4.29 years                    7.96
   $ 9.73  to  $10.77                    31,930          3.18 years                   10.17
   $14.51  to  $20.71                    69,155          9.04 years                   20.03
                                    ----------
   $5.46 to $20.71                      388,195          5.84 years                   10.31
                                    ===========
</TABLE>

                                    Page 57

<PAGE>


                      SONOMA VALLEY BANCORP AND SUBSIDIARY

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

                        December 31, 2004, 2003 and 2002


NOTE L--STOCK OPTION PLAN (Continued)
<TABLE>
<S>     <C>                                                   <C>                      <C>

                                                                     Options Exercisable
                                                           --------------------------------------
      Range of                                               Number              Weighted-Average
   Exercise Prices                                         Exercisable            Exercise Price
   ------------------                                      -----------           ----------------
   $ 5.46  to  $ 6.53                                           15,158                $  6.20
   $ 7.83  to  $ 7.97                                          271,952                   7.96
   $ 9.73  to  $10.77                                           31,930                  10.17
   $14.51                                                        1,655                  14.51
   $20.71                                                       13,500                  20.71
                                                           -----------
   $ 5.46  to  $20.71                                          334,195                   8.63
                                                           ===========
</TABLE>


NOTE M--RELATED PARTY TRANSACTIONS

The Company has entered into transactions with its directors, executive officers
and their  affiliates  (related  parties).  Such  transactions  were made in the
ordinary  course of business  on  substantially  the same terms and  conditions,
including  interest rates and collateral,  as those  prevailing at the same time
for comparable transactions with other customers, and did not, in the opinion of
management,  involve more than normal credit risk or present  other  unfavorable
features. The following is a summary of the aggregate activity involving related
party borrowers at December 31, 2004 and 2003:

<TABLE>
<S>                                                     <C>               <C>
                                                        2004              2003
                                                     -----------      ------------

          Loans outstanding at beginning of year     $ 3,095,000      $  4,607,000
          Loans disbursements                          1,040,000           690,000
          Loan repayments                               (661,000)       (2,202,000)
                                                     -----------      ------------

          Loans outstanding at end of year           $ 3,474,000      $  3,095,000
                                                     ===========      ============
</TABLE>

At December 31, 2004, commitments to related parties of approximately $1,322,000
were  undisbursed.   Deposits  received  from  directors  and  officers  totaled
$6,841,000 and $6,471,000 at December 31, 2004 and 2003, respectively.

The Company  leases its Glen Ellen office from a director of the Company under a
noncancellable  operating lease.  Lease expense for the years ended December 31,
2004 and  2003 was  $13,596  and  $11,789,  respectively.  The  remaining  lease
commitment is approximately $47,999 through March 2008 including a


                                    Page 58


<PAGE>


                      SONOMA VALLEY BANCORP AND SUBSIDIARY

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

                        December 31, 2004, 2003 and 2002


NOTE M--RELATED PARTY TRANSACTIONS (Continued)

minimum inflationary increase of 4% per year. The monthly lease payments will be
increased  annually  based upon the Consumer  Price Index,  but not less than 4%
annually.  The term of the lease is 5 years  with an option to extend  the lease
term for an additional 5 years at the same Consumer Price Index limitations.


NOTE N--COMMITMENTS AND CONTINGENT LIABILITIES

Lease  Commitments:  The Company leases its two Sonoma  offices,  the Glen Ellen
office and the Banco de Sonoma office under noncancelable  operating leases with
remaining  terms of  approximately  five  years,  one year,  four years and four
years, respectively.  All of the leases require adjustments to the base rent for
changing price indices and two have a minimum  annual  increase of four percent.
The  Sonoma  main  office  lease  has an  option  to renew  for two  consecutive
five-year  terms  and the  Sonoma  annex  office  has an option to renew for two
five-year periods and one four-year period.  The Glen Ellen office and the Banco
de Sonoma office lease each have an option to renew for two additional five-year
terms.  The following  table  summarizes  future minimum  commitments  under the
noncancelable operating leases.
<TABLE>
<S>          <C>                                   <C>

         Year ended December 31:
            2005                            $    296,229
            2006                                 287,216
            2007                                 297,927
            2008                                 297,022
            2009                                 143,037
                                            ------------

                                            $  1,321,431
                                            ============
</TABLE>

Rental expense was $318,000 in 2004, $289,000 in 2003 and $278,000 in 2002.

Financial  Instruments  with  Off-Balance-Sheet  Risk:  The Company's  financial
statements do not reflect various  commitments and contingent  liabilities which
arise in the normal  course of  business  and which  involve  elements of credit
risk,  interest rate risk and liquidity risk.  These  commitments and contingent
liabilities are  commitments to extend credit and standby  letters of credit.  A
summary of the Company's commitments and contingent  liabilities at December 31,
is as follows:
<TABLE>
<S>                                                   <C>                   <C>

                                                       Contractual Amounts
                                                      2004                 2003
                                                ----------------     ---------------

          Commitments to extend credit          $     34,574,000     $    35,309,000
          Standby letters of credit                      360,000             725,000

</TABLE>



                                    Page 59


<PAGE>


                      SONOMA VALLEY BANCORP AND SUBSIDIARY

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

                        December 31, 2004, 2003 and 2002


NOTE N--COMMITMENTS AND CONTINGENT LIABILITIES (Continued)

Commitments to extend credit and standby  letters of credit include  exposure to
some credit loss in the event of nonperformance  of the customer.  The Company's
credit policies and procedures for credit  commitments and financial  guarantees
are the same as those for  extensions of credit that are recorded on the balance
sheet.  Because these instruments have fixed maturity dates, and because many of
them  expire  without  being  drawn  upon,  they do not  generally  present  any
significant liquidity risk to the Company.

Commitments  to extend  credit are  agreements  to lend to a customer as long as
there is no violation of any condition established in the contract.  Commitments
generally  have fixed  expiration  dates or other  termination  clauses  and may
require  payment  of  a  fee.  The  Company  evaluates  each  customer's  credit
worthiness on a case-by-case basis. The amount of collateral obtained, if deemed
necessary by the Company  upon  extension  of credit,  is based on  management's
credit  evaluation  of the  customer.  Collateral  held  varies but may  include
accounts receivable,  inventory, property, plant, and equipment, certificates of
deposits and income-producing commercial properties.

Standby letters of credit are conditional  commitments  issued by the Company to
guarantee the performance of a customer to a third party.  Those  guarantees are
primarily  issued to support  public and  private  borrowing  arrangements.  The
credit risk  involved in issuing  letters of credit is  essentially  the same as
that involved in extending facilities to customers.

The Company has not  incurred  any losses on its  commitments  in 2004,  2003 or
2002.

As  a  guarantor  of  its  customer's  credit  card  accounts,  the  Company  is
contingently  liable  for  credit  card  receivable  balances  held  by  another
financial  institution should the customers default. The total amount guaranteed
as of December 31, 2004 and 2003 was $210,500 and $153,500, respectively.


NOTE O--CONCENTRATIONS OF CREDIT RISK

Most of the Company's  business  activity is with  customers  located within the
State of California,  primarily in Sonoma  County.  The economy of the Company's
primary service area is heavily  dependent on the area's major  industries which
are tourism and agriculture,  especially wineries, dairies, cheese producers and
turkey breeders.  General economic conditions or natural disasters affecting the
primary  service  area or its major  industries  could  affect  the  ability  of
customers  to repay  loans and the value of real  property  used as  collateral.
While the Company has a diversified loan portfolio,  approximately  87% of these
loans are secured by real estate in its service area.

The  concentrations  of  credit  by type of loan  are set  forth  in Note D. The
distribution of commitments to extend credit  approximates  the  distribution of
loans  outstanding.  In  addition,  the  Company  has  loan  commitments  in the
wine/agricultural   industry,   tourism   industry   and   construction   loans,
representing  6%,  15% and 20%,  of  outstanding  loans,  respectively.  Standby
letters of credit were granted primarily to


                                    Page 60

<PAGE>


                      SONOMA VALLEY BANCORP AND SUBSIDIARY

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

                        December 31, 2004, 2003 and 2002


NOTE O--CONCENTRATIONS OF CREDIT RISK (Continued)

commercial borrowers. The Company, as a matter of policy, does not extend credit
to any single  borrower  or group of  related  borrowers  on a secured  basis in
excess of 25% of its unimpaired capital (shareholders' equity plus the allowance
for credit losses) and on an unsecured  basis in excess of 15% of its unimpaired
capital.

The  concentrations  of investments  are set forth in Note C. The Company places
its investments primarily in financial instruments backed by the U.S. Government
and its agencies or by high quality  financial  institutions,  municipalities or
corporations.   The  Company  has   significant   funds   deposited   with  four
correspondent  banks. At December 31, 2004 the Company had on deposit $8,000,000
in federal funds sold to one of these institutions, which represented 39% of the
Company's net worth. In addition,  deposits with two correspondent banks were in
excess of the federally  insured limit by $1,077,570 at December 31, 2004. While
management  recognizes the inherent risks involved in such concentrations,  this
concentration provides the Company with an effective and cost efficient means of
managing its liquidity  position and item processing needs.  Management  closely
monitors the financial  condition of their  correspondent  banks on a continuous
basis.  The  Company  also  maintains  additional  deposit  accounts  with other
correspondent   banks  should   management   determine  that  a  change  in  its
correspondent banking relationship would be appropriate.

At  December  31,  2004,  the  Company  had life  insurance  policies  with cash
surrender values of $2,320,102,  $1,914,261, $1,730,049 and $1,714,520 with four
insurance companies, which represented 11%, 9%, 8% and 8%, respectively,  of the
Company's net worth.  Management  closely  monitors the financial  condition and
rating of these insurance companies on a regular basis.


NOTE P--REGULATORY MATTERS

Banking  regulations limit the amount of cash dividends that may be paid without
prior approval of the Bank's  regulatory  agency.  Cash dividends are limited to
the lesser of retained earnings, if any, or net income for the last three years,
net of the amount of any other  distributions  made to shareholders  during such
periods.  As of December 31, 2004,  $3,444,756  was  available for cash dividend
distribution without prior approval.

The Bank is subject to various regulatory capital  requirements  administered by
its primary federal regulator, the Federal Deposit Insurance Corporation (FDIC).
Failure   to  meet   minimum   capital   requirements   can   initiate   certain
mandatory---and possibly additional  discretionary---actions by regulators that,
if  undertaken,  could have a direct  material  effect on the  Bank's  financial
statements.  Under capital adequacy guidelines and the regulatory  framework for
prompt corrective  action,  the Bank must meet specific capital  guidelines that
involve  quantitative  measures of the Bank's assets,  liabilities,  and certain
off-balance-sheet items as calculated under regulatory accounting practices. The
Bank's  capital  amounts  and  classification  are also  subject to  qualitative
judgments  by the  regulators  about  components,  risk  weightings,  and  other
factors.



                                    Page 61



<PAGE>


                      SONOMA VALLEY BANCORP AND SUBSIDIARY

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

                        December 31, 2004, 2003 and 2002


NOTE P--REGULATORY MATTERS (Continued)

Quantitative  measures  established  by  regulation to ensure  capital  adequacy
require the Bank to maintain  minimum amounts and ratios (set forth in the table
below)  of  total  and  Tier  I  capital  (as  defined  in the  regulations)  to
risk-weighted assets (as defined), and of Tier I capital (as defined) to average
assets (as defined). Management believes, as of December 31, 2004, that the Bank
meets all capital adequacy requirements to which it is subject.

As of December 31, 2004, the most recent  notification from the FDIC categorized
the  Bank  as  well  capitalized  under  the  regulatory  framework  for  prompt
corrective  action. To be categorized as well capitalized the Bank must maintain
minimum total  risk-based,  Tier I risk-based and Tier I leverage  ratios as set
forth in the table.  There are no conditions  or events since that  notification
that management  believes have changed the  institution's  category.  The Bank's
actual capital amounts and ratios are also presented in the table.
<TABLE>
<S>                                           <C>         <C>       <C>       <C>           <C>

                                                                                          To Be Well
                                                                                       Capitalized Under
                                                                    For Capital        Prompt Corrective
                                                   Actual         Adequacy Purposes    Action Provisions
                                            ------------------------------------------------------------
                                            Amount        Ratio    Amount     Ratio      Amount   Ratio
                                            --------      ------  --------    -----      ------   -----
                                                                     (in thousands)
As of December 31, 2004:
   Total Capital
      (to Risk Weighted Assets)             $ 21,934      11.3% >$ 15,468    >8.0%    >$ 19,335  >10.0%
                                                                -            -        -          -
   Tier I Capital
      (to Risk Weighted Assets)             $ 19,517      10.1% >$  7,734    >4.0%    >$ 11,601  > 6.0%
                                                                -            -        -          -
   Tier I Capital
      (to Average Assets)                   $ 19,517       8.9% >$  8,732    >4.0%    >$ 10,915  > 5.0%
                                                                -            -        -          -

As of December 31, 2003:
   Total Capital
        (to Risk Weighted Assets)           $ 22,493      13.4% >$ 13,393    >8.0%    >$ 16,742  >10.0%
                                                                -            -        -          -
   Tier I Capital
        (to Risk Weighted Assets)           $ 20,394      12.2% >$  6,697    >4.0%    >$ 10,044  > 6.0%
                                                                 -           -        -          -
   Tier I Capital
        (to Average Assets)                 $ 20,394      10.0% >$  8,165    >4.0%    >$ 10,206  > 5.0%
                                                                 -           -        -          -
</TABLE>


                                    Page 62






<PAGE>


                      SONOMA VALLEY BANCORP AND SUBSIDIARY

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

                        December 31, 2004, 2003 and 2002


NOTE Q--CONDENSED FINANCIAL INFORMATION OF THE PARENT COMPANY

A  condensed  balance  sheet as of  December  31,  2004 and 2003 and the related
condensed  statement of operations  and cash flows for the years ended  December
31, 2004,  2003,  and 2002 for Sonoma Valley Bancorp  (parent  company only) are
presented as follows:

                            Condensed Balance Sheets
                           December 31, 2004 and 2003
<TABLE>
<S>                                                  <C>                <C>
                                                     2004              2003
                                                 -----------        ------------
Assets
    Cash                                         $   662,310        $    869,931
    Other assets                                     706,597             258,863
    Investment in common stock of subsidiary      19,373,503          20,417,945
                                                 -----------        ------------
                                                 $20,742,410        $ 21,546,739
                                                 ===========        ============
Liabilities
    Accrued expenses                             $    61,250         $    75,460

Shareholders' equity
    Common stock                                  15,528,940          15,061,636
    Retained earnings                              5,152,220           6,409,643
                                                 -----------         -----------

                                                 $20,742,410         $21,546,739
                                                 ===========         ===========
</TABLE>

                       Condensed Statements of Operations
              For the years ended December 31, 2004, 2003 and 2002
<TABLE>
<S>                                                      <C>             <C>             <C>

                                                         2004           2003            2002
                                                     -----------     -----------     -----------
Dividend from subsidiary                             $ 4,000,000     $ 1,500,000
Expenses                                                 303,690         145,553     $   125,091
                                                     -----------     -----------     -----------
Income (loss) before income taxes and equity in
    undistributed income of subsidiary                 3,696,310       1,354,447        (125,091)
Equity in undistributed net income of subsidiary        (877,370)      1,497,186       2,824,941
Income tax benefit                                        88,681          59,374          44,483
                                                     -----------     -----------     -----------

Net income                                           $ 2,907,621     $ 2,911,007     $ 2,744,333
                                                     ===========     ===========     ===========
</TABLE>



                                    Page 63


<PAGE>


                      SONOMA VALLEY BANCORP AND SUBSIDIARY

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

                        December 31, 2004, 2003 and 2002

NOTE Q--CONDENSED FINANCIAL INFORMATION OF THE PARENT COMPANY (Continued)

                          Condensed Statements of Cash
                     Flows For the years ended December 31,
                               2004, 2003 and 2002

<TABLE>
<S>                                                                        <C>            <C>             <C>
                                                                           2004           2003            2002
                                                                      -------------   -----------     -----------
Operating activities:
  Net income                                                          $ 2,907,621     $ 2,911,007     $ 2,744,333
  Adjustments to reconcile net income to net cash
    Provided by operating activities:
    Equity in undistributed net income of subsidiary                      877,370      (1,497,186)     (2,824,941)
    Stock options granted                                                 103,680
    Net change in other assets                                            169,526          20,292          40,345
    Net change in accrued expenses                                        (14,210)         (8,707)         84,167
                                                                      -----------     -----------     -----------
                       Net cash provided by operating activities        4,043,987       1,425,406          43,904
                                                                      -----------     -----------     -----------
Financing activities:
  Stock repurchases                                                    (4,506,183)     (1,090,395)       (344,602)
  Stock options exercised                                               1,168,805         299,681         214,375
  Cash dividends paid                                                    (906,732)
  Fractional shares purchased                                              (7,498)        (14,193)        (13,951)
                                                                      -----------     -----------     -----------
                           Net cash used by financing activities       (4,251,608)       (804,907)       (144,178)
                                                                      -----------     -----------     ------------
                         Net change in cash and cash equivalents         (207,621)        620,499        (100,274)

                  Cash and cash equivalents at beginning of year          869,931         249,432         349,706
                                                                      -----------     -----------     -----------


                        Cash and cash equivalents at end of year      $   662,310     $   869,931     $   249,432
                                                                      ===========     ===========     ===========

Supplemental Disclosures of Noncash Activities:
    Stock Dividends                                                                   $ 1,997,422     $ 1,775,026
</TABLE>



NOTE R--FAIR VALUES OF FINANCIAL INSTRUMENTS

Statement of Financial  Accounting  Standards  No. 107,  Disclosures  about Fair
Value of Financial  Instruments,  requires  disclosure of fair value information
about financial instruments,  whether or not recognized in the balance sheet. In
cases where quoted  market  prices are not  available,  fair values are based on
estimates using present value or other valuation  techniques.  Those  techniques
are significantly  affected by the assumptions used, including the discount rate
and  estimates  of future cash flows.  In that  regard,  the derived  fair value
estimates cannot be  substantiated by comparison to independent  markets and, in
many cases could not be


                                    Page 64


<PAGE>


                      SONOMA VALLEY BANCORP AND SUBSIDIARY

                    NOTES TO FINANCIAL STATEMENTS (Continued)

                        December 31, 2004, 2003 and 2002


NOTE R--FAIR VALUES OF FINANCIAL INSTRUMENTS (Continued)

realized in immediate settlement of the instruments.  Statement No. 107 excludes
certain  financial  instruments  and  all  nonfinancial   instruments  from  its
disclosure requirements. Accordingly, the aggregate fair value amounts presented
do not represent the underlying value of the Company as a whole.

The estimated fair values of the Company and Subsidiary's financial instruments
are as follows at December 31:
<TABLE>
<S>                                               <C>                              <C>
                                                  2004                             2003
                                      -----------------------------     -----------------------------
                                                         Estimated                          Estimated
                                        Carrying           Fair            Carrying            Fair
                                         Amount            Value            Amount             Value
Financial assets:                     ------------     ------------     ------------     ------------
  Cash and due from banks             $  5,471,669     $  5,471,669     $  9,803,272     $  9,803,272
  Federal funds sold                     9,840,000        9,840,000       25,220,000       25,220,000
  Interest-bearing due from banks           35,551           35,551          330,930          330,930
  Investment securities
    available- for-sale                 20,253,490       20,253,490       20,119,777       20,119,777
  Investment securities held-
    to-maturity                         17,418,303       17,842,432       16,558,153       17,042,186
  Loans and lease financing
    receivables, net                   150,732,087      151,518,077      119,833,989      120,308,741
  Accrued interest receivable            1,138,607        1,138,607          906,958          906,958
  Cash surrender value of life
    Insurance                            8,913,136        8,913,136        7,730,600        7,730,600
Financial liabilities:
  Deposits                             193,663,015      193,893,122      180,114,616      180,913,343
  Accrued interest payable                  55,586           55,586           52,052           52,052

</TABLE>


The carrying  amounts in the  preceding  table are included in the balance sheet
under the applicable captions.

The following methods and assumptions were used by the Company in estimating its
fair value disclosures for financial instruments:

          Cash, due from banks and federal funds sold: The carrying  amount is a
     reasonable estimate of fair value.

          Investment securities: Fair values for investment securities are based
     on quoted market prices,  where available.  If quoted market prices are not
     available,  fair  values are based on quoted  market  prices of  comparable
     instruments.   The   carrying   amount  of  accrued   interest   receivable
     approximates its fair value.


                                    Page 65


<PAGE>



                      SONOMA VALLEY BANCORP AND SUBSIDIARY

                    NOTES TO FINANCIAL STATEMENTS (Continued)

                        December 31, 2004, 2003 and 2002


NOTE R--FAIR VALUES OF FINANCIAL INSTRUMENTS (Continued)

Loans and lease financing  receivables,  net: For variable-rate loans and leases
that reprice  frequently and fixed rate loans and leases that mature in the near
future,  with no  significant  change in credit  risk,  fair values are based on
carrying  amounts.  The fair  values  for other  fixed rate loans and leases are
estimated using discounted cash flow analysis, based on interest rates currently
being  offered for loans or leases with  similar  terms to  borrowers of similar
credit quality.  Loan and lease fair value estimates include judgments regarding
future  expected loss experience and risk  characteristics  and are adjusted for
the allowance for loan and lease losses. The carrying amount of accrued interest
receivable approximates its fair value.

Cash surrender value of life insurance:  The carrying  amount  approximates  its
fair value.

Deposits:   The  fair  values   disclosed  for  demand  deposits  (for  example,
interest-bearing  checking  accounts and passbook  accounts) are, by definition,
equal to the amount  payable  on demand at the  reporting  date (that is,  their
carrying  amounts).  The fair values for  certificates  of deposit are estimated
using a discounted cash flow  calculation  that applies interest rates currently
being offered on certificates to a schedule of aggregated contractual maturities
on  such  time  deposits.  The  carrying  amount  of  accrued  interest  payable
approximates fair value.

Off-balance  sheet  instruments:   Off-balance  sheet  commitments   consist  of
commitments  to extend  credit and standby  letters of credit.  The  contract or
notional amounts of the Company's financial  instruments with  off-balance-sheet
risk are  disclosed  in Note N.  Estimating  the fair  value of these  financial
instruments  is not  considered  practicable  due to  the  immateriality  of the
amounts of fees  collected,  which are used as a basis for  calculating the fair
value, on such instruments.


NOTE S--SUBSEQUENT EVENTS

On February 16, 2005,  the Board of Directors  declared a cash dividend of $0.25
per share to  shareholders  of record on March 1, 2005 and  payable on March 15,
2005.



                                    Page 66





<page>



ITEM 9. CHANGES ON AND DISAGREEMENT WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
     DISCLOSURE

None

ITEM 9A. CONTROLS AND PROCEDURES.

     The Company  carried out an evaluation,  under the supervision and with the
participation of management, including the Chief Executive Officer and the Chief
Financial Officer, about the effectiveness of disclosure controls and procedures
pursuant to Exchange Act Rule 13a-15(e).  Based upon that evaluation,  the Chief
Executive  Officer and the Chief Financial Officer concluded that the disclosure
controls and procedures,  as of the end of the period covered by this Form 10-K,
are effective in alerting them to material  information  required to be included
in this Form 10-K.

ITEM 9B. OTHER.

None
                                    PART III

ITEM  10.  DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.

     The  information  called  for in  Item 10 of Part  III is  incorporated  by
reference  from the definitive  proxy  statement of the Company to be filed with
the Securities and Exchange Commission within 120 days from fiscal year end.

ITEM. 11. EXECUTIVE COMPENSATION.

     The  information  called  for in  Item 11 of Part  III is  incorporated  by
reference  from the definitive  proxy  statement of the Company to be filed with
the Securities and Exchange Commission within 120 days from fiscal year end.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.

     The  information  called  for in  Item 12 of Part  III is  incorporated  by
reference  from the definitive  proxy  statement of the Company to be filed with
the Securities and Exchange Commission within 120 days from fiscal year end.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.

     The  information  called  for in  Item 13 of Part  III is  incorporated  by
reference  from the definitive  proxy  statement of the Company to be filed with
the Securities and Exchange Commission within 120 days from fiscal year end.

ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES.

     The  information  called  for in  Item 14 of Part  III is  incorporated  by
reference  from the definitive  proxy  statement of the Company to be filed with
the Securities and Exchange Commission within 120 days from fiscal year end.


                                    Page 67


<page>
                                     PART IV

ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.

Financial Statements

     The following financial statements of the Company are filed as part of this
Annual Report:

     Number                                                                 Page

     1.  Independent Auditor's Report ........................................33


     2.  Consolidated Balance Sheets as of December 31, 2004 and 2003 ........34

     3.  Consolidated Statements of Operations for the three years ended
         December 31, 2004, 2003 and 2002.................................... 35

     4.  Consolidated Statements of Changes in Shareholders' Equity
         for the three years ended December 31, 2004, 2003 and 2002....36 and 37

     5.  Consolidated Statements of Cash Flows for the three years ended
         December 31, 2004, 2003 and 2002..............................38 and 39

     6.  Notes to Consolidated Financial Statements ..........................40

Financial Statement Schedules

     All other schedules have been omitted since the required information is not
present or is not present in  sufficient  amounts to require  submission  of the
schedules or because the information is included in the financial  statements or
the notes thereto.


                                    Page 68
<PAGE>



Exhibits

     The following Exhibits are attached or incorporated herein by reference:

3.1  Sonoma Valley Bancorp  Articles of  Incorporation,  filed as Exhibit 3.1 to
     the Registrant's Registration Statement on Form S-8 filed on June 5, 2001.

3.3  Sonoma Valley  Bancorp  By-laws,  filed as Exhibit 3.2 to the  Registrant's
     Registration Statement on Form S-8 filed on June 5, 2001.

4.2  Agreement  for the sale of Sonoma  Valley  Bank Stock dated  September  23,
     1992,  filed as  Exhibit  4.2  (formerly  A-1) to the Form F-2 for the year
     ended December 31, 1992.

10.1 Lease for Sonoma branch office, filed as Exhibit 10.1 (formerly 7.1) to the
     Registrant's Registration Statement on Form F-1 filed on May 1, 1989.

10.2 Sonoma  Valley  Bank Chief  Executive  Officer  Severance  Agreement  dated
     January 4,  1995,  filed as  Exhibit  10.2 to the Form  10-KSB for the year
     ended December 31, 1997.

10.3 Sonoma Valley Bank  Supplemental  Executive  Retirement Plan, as amended on
     March 20, 1996, filed as Exhibit 10.3 to the Form 10-KSB for the year ended
     December 31, 1997.

10.4 Sonoma Valley Bank Deferred Compensation Plan, filed as Exhibit 10.4 to the
     Form 10-KSB for the year ended December 31, 1997.

10.5 Sonoma Valley Bank Master Trust  Agreement for  Executive  Deferral  Plans,
     filed as Exhibit  10.5 to the Form 10-KSB for the year ended  December  31,
     1997.

10.6 Sonoma  Valley Bank 1996 Stock  Option  Plan,  filed as Exhibit 10.6 to the
     Form 10-KSB for the year ended December 31, 1997.

10.7 Sonoma Valley Bank Severance Agreement with Mel Switzer,  Jr. dated October
     21,  1998,  filed as  Exhibit  10.7 to the From  10-KSB  for the year ended
     December 31, 1998.

10.8 Sonoma Valley Bank  Severance  Agreement with Mary Dieter dated October 21,
     1998,  filed as Exhibit 10.8 to the From 10-KSB for the year ended December
     31, 1998.

10.10Sonoma Valley Bancorp  Assumption of Severance  Agreement  [Form of], filed
     as Exhibit 10.1 to the Form 10-KSB for the year ended December 31, 2001.

10.11Sonoma Valley  Bancorp 2002 Equity  Incentive  Plan,  filed as Exhibit A to
     the Company's Proxy Statement for the Annual Meeting held on May 14, 2002.

10.12Sonoma Valley Bank  Severance  Agreement with Sean Cuttings dated March 18,
     2004,  filed as Exhibit 10.12 to the Form 10-K for the year ended  December
     31, 2003.

23.1 Consent of Richardson and Co., Independent Auditors.

31.1 Certification  of Chief  Executive  Officer  pursuant to Section 302 of the
     Sarbanes-Oxley Act

31.2 Certification  of Chief  Financial  Officer  pursuant to Section 302 of the
     Sarbanes-Oxley Act

32   Certification  of Chief  Executive  Officer  and  Chief  Financial  Officer
     pursuant to Section 906 of the Sarbanes-Oxley Act



<PAGE>



                                   SIGNATURES

     Pursuant to the  requirements  of Section 13 or 15(d) of the Securities Act
of 1934,  the  registrant has duly caused this report to be signed on its behalf
by the undersigned, thereunto duly authorized.

SONOMA VALLEY BANCORP,
A California corporation


/s/ Mel Switzer, Jr.                                 March 23, 2005
------------------------------------
Mel Switzer, Jr.
President and
Chief Executive Officer
(Principal Executive Officer)



/s/ Mary Dieter Smith                                March 23, 2005
------------------------------------
Mary Dieter Smith
Executive Vice President and
Chief Operating Officer
(Principal Finance and Accounting Officer)

     In  accordance  with the Exchange Act, this report has been signed below by
the following  persons on behalf of the  registrant and in the capacities and on
the dates indicated.



/s/ Suzanne Brangham                                March 23, 2005
-----------------------------------
Suzanne Brangham, Secretary
of the Board and Director



/s/ Dale T. Downing                                 March 23, 2005
------------------------------------
Dale T. Downing, Director



/s/ Frederick H. Harland                            March 23, 2005
------------------------------------
Frederick H. Harland, Director



/s/ Robert B. Hitchcock                             March 23, 2005
------------------------------------
Robert B. Hitchcock, Director





<PAGE>


/s/ Gerald J. Marino                                March 23, 2005
------------------------------------
Gerald J. Marino, Director



/s/ Gary D. Nelson                                  March 23, 2005
------------------------------------
Gary D. Nelson, Director



/s/ Robert J. Nicholas                              March 23, 2005
------------------------------------
Robert J. Nicholas, Chairman
of the Board and Director



/s/ Angelo C. Sangiacomo                            March 23, 2005
------------------------------------
Angelo C. Sangiacomo, Director



/s/ Jesse R. Stone                                  March 23, 2005
------------------------------------
Jesse R. Stone, Director



/s/ Mel Switzer, Jr.                                March 23, 2005
------------------------------------
Mel Switzer, Jr., President, Chief
Executive Officer and Director
(Principal Executive Officer)



/s/ Harry Weise                                     March 23, 2005
------------------------------------
Harry Weise, Director




/s/ Mary Dieter Smith                               March 23, 2005
------------------------------------
Mary Dieter Smith, Executive Vice
President, Chief Operating Officer and
Chief Financial Officer (Principal
Finance and Accounting Officer)