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, 2005

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 if the  registrant is a well-known  seasoned  issuer,  as
defined in Rule 405 of the Securities Act. [ ] Yes [ X ] No

Indicate  by  check  mark if the  registrant  is not  required  to file  reports
pursuant to Section 13 or 15(d) of the Exchange Act. [ ] Yes [ X ] No

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 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 a large  accelerated  filed, an
accelerated  filer or a  non-accelerated  filer.  See definition of "accelerated
filer and large  accelerated  filer" in Rule 12b-2 of the Act. Large Accelerated
Filer [ ] Accelerated Filer[ ] Non-accelerated filer [ X ]

Indicate by check mark whether the  registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act. [ ] Yes [ X ] No


<PAGE>


As of June 30, 2005, the aggregate market value of the registrant's common stock
held by  non-affiliates  of the registrant was $ 35,352,099 based on the closing
sale price as  reported on the Over the Counter  Bulletin  Board ("OTC  Bulletin
Board").

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

              Class                               Outstanding at March 6, 2006
              -----                               ----------------------------
   Common Stock, no par value per share                    2,250,266

                       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.

                                       2
<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  ("the
Company") wholly owned  subsidiary,  Sonoma Valley Bank ("the 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("FDIC").  Following the reorganization,  periodic
and current  reports are now filed with the Securities  and Exchange  Commission
("SEC").

     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, 2005.

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.



                                        3
<page>

     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 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,  in March
2004, the Bank is offering  additional  services to the Latino  community in our
market place. The Banco de Sonoma Office is  predominantly  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 Loan 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.


                                       4
<PAGE>


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  89.3% of these  loans are  secured by real  estate in its service
area.  This  concentration  for the year ending  December  31, 2005 is presented
below:
(in thousands of dollars)

<TABLE>
<S>              <C>                                      <C>
         Secured by real estate:
         Construction/land development                $ 23,914
         Farmland                                        6,864
         1-4 family residences                          34,530
         Commercial/multi-family                        87,572
</TABLE>

Employees

As of December 31, 2005, the Company employed 50 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
("FRB").  As such,  it must file with the FRB 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 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 FDIC, 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.


                                       5
<PAGE>


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.

     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 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.


                                       6
<PAGE>


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.

     Sarbanes-Oxley    Act   of   2002.   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.

     Sarbanes-Oxley  also  requires  the chief  executive  officer and the chief
financial  officer to certify to the accuracy of periodic reports filed with 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.


                                       7
<PAGE>


     Section 404 of Sarbanes-Oxley 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,  2007,  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.

     Regulation  W. The FRB on October 31, 2002  approved a final  Regulation  W
that comprehensively implements sections 23A and 23B of the Federal Reserve Act.
Sections 23A and 23B and Regulation W restrict loans by a depository institution
to  its  affiliates,  asset  purchases  by a  depository  institution  from  its
affiliates,  and other  transactions  between a depository  institution  and its
affiliates.   Regulation   W  unifies  in  one  public   document   the  FRB  's
interpretations of sections 23A and 23B.

     Regulatory Capital Treatment of Equity Investments. In December of 2001 and
January of 2002, the Office of the Comptroller of the Currency,  the FRB and the
FDIC adopted final rules  governing the regulatory  capital  treatment of equity
investments in non-financial companies held by banks, bank holding companies and
financial holding companies. The new capital requirements apply symmetrically to
equity  investments  made by banks and their holding  companies in non-financial
companies  under the legal  authorities  specified  in the  final  rules.  Among
others,   these  include  the  merchant   banking   authority   granted  by  the
Gramm-Leach-Bliley  Act and the authority to invest in small business investment
companies ("SBICs") granted by the Small Business Investment Act. Covered equity
investments will be subject to a series of marginal Tier 1 capital charges, with
the size of the charge increasing as the  organization's  level of concentration
in equity  investments  increases.  The highest marginal charge specified in the
final  rules  requires a 25 percent  deduction  from Tier 1 capital  for covered
investments  that  aggregate  more than 25 percent of an  organization's  Tier 1
capital. Equity investments through SBICs will be exempt from the new charges to
the extent such investments,  in the aggregate,  do not exceed 15 percent of the
banking organization's Tier 1 capital.  Grandfathered  investments made by state
banks under section 24(f) of the Federal Deposit Insurance Act also are exempted
from coverage.

     USA Patriot Act. The terrorist  attacks in September,  2001,  have impacted
the financial services industry and led to federal  legislation that attempts to
address certain issues involving  financial  institutions.  On October 26, 2001,
President  Bush  signed  into  law the  Uniting  and  Strengthening  America  by
Providing  Appropriate Tools Required to Intercept and Obstruct Terrorism Act of
2001 (the "USA Patriot Act").

     Part of the USA Patriot Act is the International Money Laundering Abatement
and Financial Anti-Terrorism Act of 2001 ("IMLA"). IMLA authorizes the Secretary
of the Treasury, in consultation with the heads of other government agencies, to
adopt special measures applicable to banks, bank holding companies, and/or other
financial  institutions.  These measures may include enhanced  recordkeeping and
reporting  requirements for certain  financial  transactions that are of primary
money laundering concern, due diligence  requirements  concerning the beneficial
ownership of certain types of accounts,  and  restrictions  or  prohibitions  on
certain types of accounts with foreign financial institutions.

                                       8
<PAGE>



     Among its other  provisions,  IMLA requires each financial  institution to:
(i) establish an anti-money  laundering  program;  (ii)  establish due diligence
policies,  procedures and controls with respect to its private banking  accounts
and correspondent  banking accounts  involving  foreign  individuals and certain
foreign banks;  and (iii) avoid  establishing,  maintaining,  administering,  or
managing  correspondent  accounts  in the United  States for, or on behalf of, a
foreign bank that does not have a physical presence in any country. In addition,
IMLA contains a provision encouraging  cooperation among financial institutions,
regulatory   authorities  and  law  enforcement   authorities  with  respect  to
individuals,  entities and organizations  engaged in, or reasonably suspected of
engaging in,  terrorist acts or money  laundering  activities.  IMLA expands the
circumstances  under which funds in a bank account may be forfeited and requires
covered  financial  institutions  to  respond  under  certain  circumstances  to
requests for information  from federal banking  agencies within 120 hours.  IMLA
also amends the Bank Holding  Company Act and the Bank Merger Act to require the
federal  banking   agencies  to  consider  the   effectiveness  of  a  financial
institution's  anti-money  laundering  activities  when reviewing an application
under these acts.

     Merchant Banking Investments.  The FRB and the Secretary of the Treasury in
January 2001 jointly adopted a final rule governing merchant banking investments
made by financial  holding  companies.  The rule  implements  provisions  of the
Gramm-Leach-Bliley  Act discussed below that permit financial  holding companies
to make  investments as part of a bona fide securities  underwriting or merchant
or investment  banking  activity.  The rule  provides  that a financial  holding
company  may not,  without FRB  approval,  directly  or  indirectly  acquire any
additional shares,  assets or ownership interests or make any additional capital
contribution to any company the shares,  assets or ownership  interests of which
are held by the financial  holding  company subject to the rule if the aggregate
carrying value of all merchant banking investments held by the financial holding
company exceeds:

     |X| 30% of the Tier 1 capital of the financial holding company, or

     |X| after  excluding  interests in private equity funds,  20% of the Tier 1
         capital of the financial holding company.

A separate  final rule will  establish  the capital  charge of merchant  banking
investments for the financial holding company.

     Financial  Services  Modernization  Act of  1999.  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.

     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



                                       9
<PAGE>


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,
2005, 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.

Accounting Pronouncements

Other-Than-Temporary Impairment of Certain Investments

     In June 2004, the Financial  Accounting  Standards Board ("FASB")  ratified
Emerging   Issues   Task   Force   ("EITF")   Issue   03-1,   The   Meaning   of
Other-than-Temporary  Impairment  and Its  Application  to  Certain  Investments
("EITF  03-1").  EITF 03-1  includes  additional  guidance  for  evaluating  and
recording  impairment  losses  on  debt  and  equity  investments,  as  well  as
disclosure  requirements  for  investments  that are  deemed  to be  temporarily
impaired.  The proposed guidance indicates that an investor must have the intent
and ability to hold an investment until a forecasted  recovery of the fair value
up to or  beyond  the cost of the  investment  in order  to  determine  that any
impairment is temporary.  In November  2005,  the FASB rescinded EITF Issue 03-1
and has issued FASB Staff  Position 115-1 that  addresses the  determination  of
when an investment is considered impaired, whether such impairment is other than
temporary and the measurement of an impairment loss. The impairment  disclosures
required by FASB Staff Postion 115-1 are included in Note C.


                                       10
<PAGE>


Share-Based Payments

     In December 2004 the FASB issued  Statement Number 123 (revised 2004) ("FAS
123 (R)"),  Share-Based Payments. FAS 123 (R) requires all entities to recognize
compensation  expense  in an  amount  equal  to the fair  value  of  share-based
payments such as stock options granted to employees.  The Company is required to
apply FAS 123 (R) on a  modified  prospective  method.  Under this  method,  the
Company is required to record compensation  expense (as previous awards continue
to vest) for the  unvested  portion of  previously  granted  awards  that remain
outstanding at the date of adoption. In addition, the Company may elect to adopt
FAS 123 (R) by restating  previously  issued  financial  statements,  basing the
expense on that previously  reported in their pro forma disclosures  required by
FAS 123. FAS 123 (R) is effective for the first reporting period beginning after
June 15,  2005.  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.

Accounting for Certain Loans or Debt Securities Acquired in a Transfer

     In December  2003,  the  Accounting  Standards  Executive  Committee of the
American  Institute of Certified Public Accountants issued Statement of Position
03-03,  Accounting for Certain Loans or Debt  Securities  Acquired in a Transfer
("SOP").  This SOP addresses accounting for differences between contractual cash
flows  and cash  flows  expected  to be  collected  from an  investor's  initial
investment in loans or debt securities  (loans)  acquired in a transfer if those
differences  are  attributable,  at least in part,  to credit  quality.  It also
includes such loans acquired in purchase  business  combinations.  This SOP does
not apply to loans originated by the entity.  This SOP limits the yield that may
be accreted and  requires  that the excess of  contractual  cash flows over cash
flows expected to be collected not be recognized as an adjustment of yield, loss
accrual, or valuation allowance.

     This SOP prohibits  "carrying over" or creation of valuation  allowances in
the initial  accounting  for loans  acquired  in a transfer  that are within its
scope.  The  prohibition  of the valuation  allowance  carryover  applies to the
purchase of an  individual  loan, a pool of loans,  a group of loans,  and loans
acquired in a purchase business combination.

     This SOP is effective for loans  acquired in fiscal years  beginning  after
December 15, 2004. In management's  opinion,  the adoption of this pronouncement
will not have a material impact on the Company's  financial  position or results
of operations.


                                       11
<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                                            31
         B. Analysis of net interest earnings                                 31
         C. Rate/volume analysis                                              32

II.      Investment Portfolio

         A. Book value (Amortized Cost) of investments                        59
         B. Weighted average yield and maturity                31, 36, 43 and 59
         C. Securities of issuer exceeding
                  ten percent of equity                                     None

III.     Loan Portfolio

         A. Types of loans                                             31 and 61
         B. Maturities and sensitivities of loans
                   to change in interest rates                         43 and 62
         C. Risk elements

                  1. Non-accrual, past due,
                           and restructured loans                      37 and 61
                  2. Potential problem loans                                None
                  3. Foreign outstandings                                   None
                  4. Loan concentrations                               36 and 61

         D. Other Interest-Bearing Assets                                   None

IV. Summary of Loan Loss Experience                                    38 and 62

V.  Deposits

         A. Average balances and average rates paid                           31
         B. Other categories of deposits                                    None
         C. Foreign outstandings                                            None
         D. Maturity of time deposits greater than $100,000                   43
         E. Maturity of foreign time deposits greater than $100,000         None

VI. Return on Equity and Assets                                               28

VII. Short-term Borrowings:                                                 None

                                       12
<PAGE>


ITEM 1A. RISK FACTORS.

     An investment in the Company's common stock is subject to risks inherent to
the Company's  business.  The material risks and  uncertainties  that management
believes  affect the Company are  described  below.  Before making an investment
decision,  you should carefully  consider the risks and uncertainties  described
below together with all of the other  information  included or  incorporated  by
reference in this report.  The risks and  uncertainties  described below are not
the only ones  facing  the  Company.  Additional  risks and  uncertainties  that
management  is not aware of or focused  on or that  management  currently  deems
immaterial  may also impair the Company's  business  operations.  This report is
qualified in its entirety by these risk factors.

     If any of the following  risks  actually  occur,  the  Company's  financial
condition and results of operations could be materially and adversely  affected.
If this were to happen,  the value of the  Company's  common stock could decline
significantly, and you could lose all or part of your investment.

Risks Related to the Company's Business

The Company is Subject to Interest Rate Risk

     The Company's  earnings and cash flows are largely  dependent  upon its net
interest income.  Net interest income is the difference  between interest income
earned on  interest-earning  assets such as loans and  securities  and  interest
expense  paid on  interest-bearing  liabilities  such as deposits  and  borrowed
funds.  Interest rates are highly  sensitive to many factors that are beyond the
Company's control, including general economic conditions and policies of various
governmental and regulatory agencies and, in particular,  the Board of Governors
of the Federal Reserve System. Changes in monetary policy,  including changes in
interest rates,  could  influence not only the interest the Company  receives on
loans  and  securities  and the  amount  of  interest  it pays on  deposits  and
borrowings,  but such  changes  could also affect (i) the  Company's  ability to
originate  loans  and  obtain  deposits,  (ii) the fair  value of the  Company's
financial  assets  and  liabilities,  and  (iii)  the  average  duration  of the
Company's  mortgage-backed  securities portfolio.  If the interest rates paid on
deposits and other borrowings  increase at a faster rate than the interest rates
received on loans and other investments,  the Company's net interest income, and
therefore  earnings,  could  be  adversely  affected.  Earnings  could  also  be
adversely affected if the interest rates received on loans and other investments
fall more quickly than the interest rates paid on deposits and other borrowings.

     Although  management  believes  it  has  implemented  effective  asset  and
liability  management  strategies to reduce the potential  effects of changes in
interest  rates  on  the  Company's  results  of  operations,  any  substantial,
unexpected,  prolonged  change in market  interest  rates  could have a material
adverse effect on the Company's  financial  condition and results of operations.
See Management's  Discussion and Analysis of Financial  Condition and Results of
Operations  located elsewhere in this report for further  discussion  related to
the Company's management of interest rate risk.

The Company is Subject to Lending Risk

     There are inherent risks associated with the Company's lending  activities.
These risks include, among other things, the impact of changes in interest rates
and changes in the economic conditions in the markets where the Company operates
as well as those across the State of California and the United States. Increases
in interest rates and/or  weakening  economic  conditions could adversely impact
the  ability  of  borrowers  to  repay  outstanding  loans  or the  value of the
collateral securing these loans. The Company is also subject to various laws and
regulations  that  affect  its  lending  activities.   Failure  to  comply  with
applicable  laws  and  regulations  could  subject  the  Company  to  regulatory
enforcement  action that could result in the  assessment  of  significant  civil
money penalties against the Company.



                                       13

<PAGE>



     As of  December  31,  2005,  approximately  89.3%  of  the  Company's  loan
portfolio  is  directly  or  indirectly  secured by real  property.  Because the
Company's  loan  portfolio   contains  a  significant  number  of  construction,
commercial and residential real estate loans, the  deterioration of one or a few
of these loans could cause a significant  increase in  non-performing  loans. An
increase in  non-performing  loans could  result in a net loss of earnings  from
these  loans,  an  increase in the  provision  for  possible  loan losses and an
increase in loan charge-offs,  all of which could have a material adverse effect
on the Company's financial condition and results of operations. See Management's
Discussion and Analysis of Financial Condition and Results of Operations located
elsewhere  in this  report for  further  discussion  related to  commercial  and
industrial, construction and commercial real estate loans.

The Company's Allowance for Possible Loan Losses may be Insufficient

     The Company  maintains an allowance  for possible  loan losses,  which is a
reserve  established  through a provision  for possible  loan losses  charged to
expense, that represents management's best estimate of probable losses that have
been incurred  within the existing  portfolio of loans.  The  allowance,  in the
judgment of  management,  is necessary to reserve for estimated  loan losses and
risks  inherent  in the loan  portfolio.  The  level of the  allowance  reflects
management's continuing evaluation of industry  concentrations;  specific credit
risks; loan loss experience;  current loan portfolio quality;  present economic,
political and regulatory  conditions  and  unidentified  losses  inherent in the
current  loan  portfolio.  The  determination  of the  appropriate  level of the
allowance  for  possible  loan  losses  inherently  involves  a high  degree  of
subjectivity and requires the Company to make  significant  estimates of current
credit  risks and future  trends,  all of which may  undergo  material  changes.
Changes in economic conditions  affecting borrowers,  new information  regarding
existing loans,  identification  of additional  problem loans and other factors,
both within and outside of the Company's control, may require an increase in the
allowance  for possible  loan  losses.  In addition,  bank  regulatory  agencies
periodically  review the Company's  allowance for loan losses and may require an
increase in the provision for possible loan losses or the recognition of further
loan  charge-offs,  based on judgments  different than those of  management.  In
addition,  if  charge-offs  in future  periods exceed the allowance for possible
loan  losses;  the Company  will need  additional  provisions  to  increase  the
allowance for possible loan losses.  Any increases in the allowance for possible
loan losses will result in a decrease in net income and, possibly,  capital, and
may have a material  adverse  effect on the  Company's  financial  condition and
results of  operations.  See  Management's  Discussion and Analysis of Financial
Condition and Results of Operations located elsewhere in this report for further
discussion  related to the Company's  process for  determining  the  appropriate
level of the allowance for possible loan losses.

The Company is Subject to  Environmental  Liability Risk Associated with Lending
Activities

     A significant  portion of the Company's  loan  portfolio is secured by real
property.  During the ordinary course of business,  the Company may foreclose on
and take title to properties  securing  certain  loans.  In doing so, there is a
risk that hazardous or toxic substances could be found on these  properties.  If
hazardous  or  toxic  substances  are  found,  the  Company  may be  liable  for
remediation  costs,  as  well  as  for  personal  injury  and  property  damage.
Environmental laws may require the Company to incur substantial expenses and may
materially  reduce the affected  property's value or limit the Company's ability
to use or sell the affected property. In addition, future laws or more stringent
interpretations  or  enforcement  policies  with  respect to  existing  laws may
increase the Company's exposure to environmental liability. Although the Company
has policies and procedures to perform an environmental review before initiating
any foreclosure action on real property,  these reviews may not be sufficient to
detect all potential  environmental hazards. The remediation costs and any other
financial  liabilities  associated  with an  environmental  hazard  could have a
material  adverse  effect on the  Company's  financial  condition and results of
operations.





                                       14
<PAGE>

The Company's  Profitability Depends Significantly on Economic Conditions in the
State of California

     The Company's success depends primarily on the general economic  conditions
of the State of California  and the specific  local markets in which the Company
operates.  Unlike  larger  national  or  other  regional  banks  that  are  more
geographically diversified,  the Company provides banking and financial services
to  customers  primarily  in Sonoma  and its  immediate  surrounding  towns (the
"Sonoma  Valley").   The  local  economic  conditions  in  these  areas  have  a
significant impact on the demand for the Company's products and services as well
as the  ability of the  Company's  customers  to repay  loans,  the value of the
collateral  securing  loans and the stability of the Company's  deposit  funding
sources.  A  significant  decline  in  general  economic  conditions,  caused by
inflation,  recession,  acts of  terrorism,  outbreak  of  hostilities  or other
international  or  domestic  occurrences,  unemployment,  changes in  securities
markets or other factors could impact these local  economic  conditions  and, in
turn, have a material  adverse effect on the Company's  financial  condition and
results of operations.

The Company Operates in a Highly Competitive Industry and Market Area

     The Company faces  substantial  competition  in all areas of its operations
from a variety of different  competitors,  many of which are larger and may have
more financial resources. Such competitors primarily include national, regional,
and  community   banks  within  the  various   markets  the  Company   operates.
Additionally,  various  out-of-state banks have begun to enter or have announced
plans to enter the market  areas in which the Company  currently  operates.  The
Company also faces competition from many other types of financial  institutions,
including,  without  limitation,  savings  and  loans,  credit  unions,  finance
companies,  brokerage firms, insurance companies,  factoring companies and other
financial intermediaries. The financial services industry could become even more
competitive as a result of legislative, regulatory and technological changes and
continued  consolidation.  Banks,  securities firms and insurance  companies can
merge  under  the  umbrella  of a  financial  holding  company,  which can offer
virtually  any  type  of  financial  service,   including  banking,   securities
underwriting,  insurance (both agency and  underwriting)  and merchant  banking.
Also,  technology  has  lowered  barriers  to  entry  and made it  possible  for
non-banks to offer products and services  traditionally  provided by banks, such
as automatic  transfer and  automatic  payment  systems.  Many of the  Company's
competitors  have  fewer   regulatory   constraints  and  may  have  lower  cost
structures.  Additionally,  due to their size,  many  competitors may be able to
achieve  economies  of scale  and,  as a result,  may  offer a broader  range of
products and services as well as better  pricing for those products and services
than the Company can.

     The  Company's  ability  to  compete  successfully  depends  on a number of
factors, including, among other things:

|X|  The  ability  to  develop,  maintain  and  build  upon  long-term  customer
     relationships  based on top quality  service,  high ethical  standards  and
     safe, sound assets.
|X|  The ability to expand the Company's market position.
|X|  The scope,  relevance and pricing of products and services  offered to meet
     customer  needs and demands.
|X|  The rate at which the Company introduces new products and services relative
     to its competitors.
|X|  Customer satisfaction with the Company's level of service.
|X|  Industry and general economic trends.

     Failure to perform in any of these  areas  could  significantly  weaken the
Company's  competitive  position,  which could  adversely  affect the  Company's
growth and  profitability,  which, in turn, could have a material adverse effect
on the Company's financial condition and results of operations.



                                       15
<PAGE>


The Company is Subject to Extensive Government Regulation and Supervision

     The Company,  through its  subsidiary  Sonoma  Valley  Bank,  is subject to
extensive federal and state regulation and supervision.  Banking regulations are
primarily intended to protect depositors' funds, federal deposit insurance funds
and the banking system as a whole, not shareholders.  These  regulations  affect
the  Company's  lending  practices,  capital  structure,  investment  practices,
dividend policy and growth, among other things.  Congress and federal regulatory
agencies continually review banking laws,  regulations and policies for possible
changes.  Changes to statutes,  regulations  or regulatory  policies,  including
changes  in  interpretation  or  implementation  of  statutes,   regulations  or
policies,  could affect the Company in substantial and unpredictable  ways. Such
changes  could  subject  the  Company to  additional  costs,  limit the types of
financial  services  and  products  the Company may offer  and/or  increase  the
ability of non-banks to offer competing  financial services and products,  among
other things.  Failure to comply with laws, regulations or policies could result
in sanctions by regulatory  agencies,  civil money penalties  and/or  reputation
damage,  which could have a material  adverse effect on the Company's  business,
financial  condition and results of  operations.  While the Company has policies
and  procedures  designed  to  prevent  any  such  violations,  there  can be no
assurance  that such  violations  will not occur.  See the  section  captioned "
Supervision and Regulation" in Item 1.

The Company's Controls and Procedures may fail or be Circumvented

     Management  regularly reviews and updates the Company's  internal controls,
disclosure  controls  and  procedures,  and  corporate  governance  policies and
procedures. Any system of controls, however well designed and operated, is based
in part on certain  assumptions and can provide only  reasonable,  not absolute,
assurances   that  the  objectives  of  the  system  are  met.  Any  failure  or
circumvention of the Company's controls and procedures or failure to comply with
regulations  related to controls and  procedures  could have a material  adverse
effect on the Company's business, results of operations and financial condition.

New Lines of Business or new  Products  and  Services may Subject the Company to
Additional Risks

     From time to time, the Company may implement new lines of business or offer
new  products  and  services  within  existing  lines  of  business.  There  are
substantial risks and uncertainties associated with these efforts,  particularly
in  instances  where the  markets are not fully  developed.  In  developing  and
marketing new lines of business and/or new products and services the Company may
invest  significant time and resources.  Initial timetables for the introduction
and development of new lines of business and/or new products or services may not
be achieved and price and profitability targets may not prove feasible. External
factors,  such as compliance with  regulations,  competitive  alternatives,  and
shifting market preferences,  may also impact the successful implementation of a
new line of business or a new product or service.  Furthermore,  any new line of
business  and/or new product or service could have a  significant  impact on the
effectiveness  of  the  Company's  system  of  internal  controls.   Failure  to
successfully  manage these risks in the  development and  implementation  of new
lines of business or new  products  or  services  could have a material  adverse
effect on the Company's business, results of operations and financial condition.


                                       16
<PAGE>


The Company may not be able to Attract and Retain Skilled People

     The Company's success depends, in large part, on its ability to attract and
retain key people. Competition for the best people in most activities engaged in
by the  Company can be intense and the Company may not be able to hire people or
to retain them. The unexpected  loss of services of one or more of the Company's
key personnel  could have a material  adverse  impact on the Company's  business
because of their skills,  knowledge of the Company's  market,  years of industry
experience  and  the  difficulty  of  promptly  finding  qualified   replacement
personnel.

The Company's  Information  Systems may Experience an  Interruption or Breach in
Security

     The Company relies heavily on  communications  and  information  systems to
conduct its business.  Any failure,  interruption or breach in security of these
systems  could  result in  failures or  disruptions  in the  Company's  customer
relationship management,  general ledger, deposit, loan and other systems. While
the Company has policies and procedures  designed to prevent or limit the effect
of the failure,  interruption  or security  breach of its  information  systems,
there can be no  assurance  that any such  failures,  interruptions  or security
breaches  will not  occur or,  if they do  occur,  that they will be  adequately
addressed. The occurrence of any failures, interruptions or security breaches of
the Company's information systems could damage the Company's reputation,  result
in a loss of customer  business,  subject the Company to  additional  regulatory
scrutiny,  or expose the  Company to civil  litigation  and  possible  financial
liability,  any of which could have a material  adverse  effect on the Company's
financial condition and results of operations.

The Company Continually Encounters Technological Change

     The  financial   services   industry  is   continually   undergoing   rapid
technological  change  with  frequent  introductions  of  new  technology-driven
products and services.  The effective use of technology increases efficiency and
enables  financial  institutions  to better serve customers and to reduce costs.
The Company's future success  depends,  in part, upon its ability to address the
needs of its customers by using technology to provide products and services that
will satisfy customer demands,  as well as to create additional  efficiencies in
the Company's  operations.  Many of the Company's competitors have substantially
greater resources to invest in technological  improvements.  The Company may not
be able to effectively implement new technology-driven  products and services or
be successful in marketing these products and services to its customers. Failure
to  successfully  keep pace with  technological  change  affecting the financial
services industry could have a material adverse impact on the Company's business
and, in turn, the Company's financial condition and results of operations.

The  Company  is  Subject  to Claims  and  Litigation  Pertaining  to  Fiduciary
Responsibility

     From time to time,  customers make claims and take legal action  pertaining
to the Company's performance of its fiduciary responsibilities. Whether customer
claims and legal action  related to the Company's  performance  of its fiduciary
responsibilities are founded or unfounded,  if such claims and legal actions are
not resolved in a manner favorable to the Company they may result in significant
financial liability and/or adversely affect the market perception of the Company
and its  products  and  services  as well as impact  customer  demand  for those
products and services. Any financial liability or reputation damage could have a
material adverse effect on the Company's business,  which, in turn, could have a
material  adverse  effect on the  Company's  financial  condition and results of
operations.


                                       17
<PAGE>


Severe Weather,  Natural Disasters,  Acts of War or Terrorism and Other External
Events Could Significantly Impact the Company's Business

     Severe  weather,  natural  disasters,  acts of war or  terrorism  and other
adverse external events could have a significant impact on the Company's ability
to conduct  business.  Such events could affect the  stability of the  Company's
deposit base, impair the ability of borrowers to repay outstanding loans, impair
the value of collateral  securing  loans,  cause  significant  property  damage,
result in loss of revenue and/or cause the Company to incur additional expenses.
Although  management has established  disaster recovery policies and procedures,
the  occurrence  of any such event could have a material  adverse  effect on the
Company's business,  which, in turn, could have a material adverse effect on the
Company's financial condition and results of operations.

Risks Associated with the Company's Common Stock

The Company's Stock Price can be Volatile

     Stock price  volatility  may make it more  difficult for you to resell your
common  stock when you want and at prices  you find  attractive.  The  Company's
stock  price can  fluctuate  significantly  in  response to a variety of factors
including, among other things:

     |X|  Actual or anticipated variations in quarterly results of operations.
     |X|  Recommendations by securities analysts.
     |X|  Operating  and  stock  price   performance  of  other  companies  that
          investors deem comparable to the Company.
     |X|  News  reports  relating to trends,  concerns  and other  issues in the
          financial services industry.
     |X|  Perceptions  in the  marketplace  regarding  the  Company  and/or  its
          competitors.
     |X|  New technology used, or services offered, by competitors.
     |X|  Significant   acquisitions   or   business   combinations,   strategic
          partnerships,  joint  ventures or capital  commitments by or involving
          the Company or its competitors.
     |X|  Failure to integrate acquisitions or realize anticipated benefits from
          acquisitions.
     |X|  Changes in government regulations.
     |X|  Geopolitical  conditions  such as  acts or  threats  of  terrorism  or
          military conflicts.

     General  market  fluctuations,  industry  factors and general  economic and
political  conditions  and events,  such as economic  slowdowns  or  recessions,
interest  rate  changes or credit loss  trends,  could also cause the  Company's
stock price to decrease regardless of operating results.

The  Trading  Volume in the  Company's  Common  Stock is Less than that of Other
Larger Financial Services Companies

     Although  the  Company's  common  stock is listed  for  trading  on the OTC
Bulletin  Board,  the  trading  volume in its common  stock is less than that of
other larger financial  services  companies.  A public trading market having the
desired  characteristics  of depth,  liquidity  and  orderliness  depends on the
presence  in the  marketplace  of willing  buyers and  sellers of the  Company's
common  stock  at any  given  time.  This  presence  depends  on the  individual
decisions of investors and general economic and market conditions over which the
Company has no control.  Given the lower trading volume of the Company's  common
stock,  significant  sales of the Company's  common stock, or the expectation of
these sales, could cause the Company's stock price to fall.


                                       18
<PAGE>


An Investment in the Company's Common Stock is not an Insured Deposit

     The  Company's  common stock is not a bank deposit and,  therefore,  is not
insured  against loss by the FDIC,  any other deposit  insurance  fund or by any
other public or private  entity.  Investment  in the  Company's  common stock is
inherently  risky for the reasons  described in this "Risk Factors"  section and
elsewhere  in this report and is subject to the same  market  forces that affect
the price of  common  stock in any  company.  As a result,  if you  acquire  the
Company's common stock, you may lose some or all of your investment.

Risks Associated with the Company's Industry

The Earnings of  Financial  Services  Companies  are  Significantly  Affected by
General Business and Economic Conditions

     The Company's operations and profitability are impacted by general business
and  economic  conditions  in the United  States and  abroad.  These  conditions
include  short-term  and  long-term  interest  rates,  inflation,  money supply,
political issues, legislative and regulatory changes,  fluctuations in both debt
and equity  capital  markets,  broad  trends in industry  and  finance,  and the
strength  of the U.S.  economy  and the local  economies  in which  the  Company
operates,  all of which are beyond the Company's  control.  A  deterioration  in
economic  conditions  could  result in an  increase  in loan  delinquencies  and
non-performing  assets,  decreases in loan  collateral  values and a decrease in
demand for the Company's products and services, among other things, any of which
could have a material  adverse impact on the Company's  financial  condition and
results of operations.

Financial  Services  Companies  Depend  on  the  Accuracy  and  Completeness  of
Information About Customers and Counterparties

     In deciding whether to extend credit or enter into other transactions,  the
Company  may rely on  information  furnished  by or on behalf of  customers  and
counterparties,   including  financial  statements,  credit  reports  and  other
financial  information.  The Company may also rely on  representations  of those
customers,  counterparties or other third parties, such as independent auditors,
as to the accuracy and completeness of that information.  Reliance on inaccurate
or  misleading   financial   statements,   credit  reports  or  other  financial
information could have a material adverse impact on the Company's  business and,
in turn, the Company's financial condition and results of operations.

Consumers may Decide not to use Banks to Complete Their Financial Transactions

     Technology  and other  changes are allowing  parties to complete  financial
transactions that historically have involved banks through alternative  methods.
For example,  consumers can now maintain funds that would have historically been
held as bank deposits in brokerage accounts or mutual funds.  Consumers can also
complete  transactions such as paying bills and/or  transferring  funds directly
without  the  assistance  of  banks.   The  process  of  eliminating   banks  as
intermediaries,  known as  "disintermediation,"  could result in the loss of fee
income,  as well as the  loss  of  customer  deposits  and  the  related  income
generated from those  deposits.  The loss of these revenue streams and the lower
cost deposits as a source of funds could have a material  adverse  effect on the
Company's financial condition and results of operations.

ITEM 1B. UNRESOLVED STAFF COMMENTS.

None.


                                       19
<PAGE>


ITEM 2.  PROPERTIES

The Company is  headquartered  in Sonoma,  California.  At the present  time the
Company's Bank has three branch offices.

     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 2005
totaled  $243,337  compared to the $233,978 paid in 2004. 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.

     The Glen Ellen Branch 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 2005 totaled  $14,140  compared to $13,596 in 2004.  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 2005
totaled  $19,704  compared  to $18,630 in 2004.  The lease  provides  for future
annual  rents to be adjusted  for changes in the CPI  effective  February 1st of
each year.

     In July 1995, the Bank entered into a lease for the building located at 463
Second   Street  West  (the   "Operations   Center").   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 and the first option
expired in 2000 and 2005,  respectively.  The lease  provides for an  additional
option to extend for two additional five year terms and one additional four year
term. Lease payments made in 2005 totaled $39,199 compared with the $38,016 paid
in 2004.  The lease  provides for future annual rents to be adjusted for changes
in the 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 had been
renting out the building  premises.  At the present time,  the Bank is currently
evaluating how to utilize the additional space to accommodate  additional growth
or generate  additional  income.  Rental  income in 2005 was $1,519  compared to
$18,051 in 2004.

     In March 2005,  the Bank entered  into a lease for the building  located at
453  Second  Street  West  (the  "Finance   Center").   The  building   contains
approximately  1200  square  feet.  The  facility is leased for a five year term
expiring in February 2010 with the option to renew for two additional  five year
terms.  Lease  payments  paid in 2005 totaled  $16,000.  The lease  provides for
future annual rents to be adjusted for changes in the CPI  effective  March 15th
of each year.


                                       20
<PAGE>


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 SECURITY HOLDERS

     The  Company  did not submit any  matters to  security  holders  during the
fourth quarter of its last fiscal year ended December 31, 2005.

                                       21
<PAGE>


                                     PART II

ITEM 5.  MARKET FOR THE  COMPANY'S  COMMON  STOCK AND  RELATED  SECURITY  HOLDER
MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

     The  Company's  common stock is quoted on the OTC Bulletin  Board 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 the Company's 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

Hill, Thompson, Magid & Co., Inc.
15 Exchange Place, Suite 800
Jersey City, NJ 07302
Lisa Lee
866-291-6316 or 201-369-2908
Fax 201-395-0624
Lisa.lee@hillthompson.com
                                       22

<PAGE>


     The table below  summarizes those trades of the common stock as reported by
OTC Bulletin Board, setting forth the high and low prices for the periods shown.
The stock prices have been adjusted for stock dividends and stock splits.  These
over the counter quotations reflect inter-dealer prices, without retail mark-up,
mark-down or commission and may not necessarily represent actual transactions.
<TABLE>
<S>                              <C>           <C>
Quarter Ended:                  High           Low
                            ----------     ----------

     December 31, 2005      $    23.00     $    20.25
     September 30, 2005          23.20          20.18
     June 30, 2005               22.00          19.15
     March 31, 2005              25.50          21.10

     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
</TABLE>

     As of March 8, 2006 there were 1,052  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  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,  $.25 per share to shareholders of record as of March 1, 2005 with payment
made on March 15, 2005, $.25 per share to shareholders of record as of August 1,
2005 with payment made on August 15, 2005 and $.25 per share to  shareholders of
record as of March 1, 2006 with  payment  made on March 15,  2006.  The Board of
Directors of the Company (the "Board") 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.


                                       23
<PAGE>


     Historically,  the  Company  and the Bank  (prior to the  formation  of the
Holding  Company)  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 five cash  dividends  in  February  2004,
July 2004, February 2005, July 2005 and February 2006 as detailed below:


  Dividends Paid by the Bank
<TABLE>
    <S>                          <C>                        <C>                              <C>
    Date Declared             Record Date                 Date Paid                     Dividend Paid

    May 13, 1992              May 31, 1992                June 15, 1992               5% Stock Dividend
    June 26, 1993             July 15, 1993               July 31, 1993               5% Stock Dividend
    July 20, 1994             August 1, 1994              August 15, 1994             5% Stock Dividend
    January 18, 1995          February 5, 1995            February 20, 1995           5% Stock Dividend
    August 16, 1995           September 11, 1995          September 29, 1995          5% Stock Dividend
    May 22, 1996              June 14, 1996               June 28, 1996               10% Stock Dividend
    June 18, 1997             July 15, 1997               August 1, 1997              10% Stock Dividend
    March 18, 1998            April 15, 1998              April 30, 1998              2 for 1 Stock Split
    July 21, 1999             August 16, 1999             August 31, 1999             5% Stock Dividend
    August 16, 2000           September 8, 2000           September 25, 2000          5% Stock Dividend

  Dividends Paid by the Company

    Date Declared             Record Date                 Date Paid                     Dividend Paid

    July 18, 2001             August 3, 2001              August 17, 2001             5% Stock Dividend
    June 17, 2002             July 2, 2002                July 16, 2002               5% Stock Dividend
    June 18, 2003             July 2, 2003                July 16, 2003               5% Stock Dividend
    February 18, 2004         March 1, 2004               March 15, 2004              $.25 Cash Dividend
    July 21, 2004             August 6, 2004              August 26, 2004             3 for 2 Stock Split &
                                                                                      $.25 Cash Dividend
    February 16, 2005         March 1, 2005               March 15, 2005              $.25 Cash Dividend
    July 20, 2005             August 1, 2005              August 15, 2005             $.25 Cash Dividend
    February 15, 2006         March 1, 2006               March 15, 2006              $.25 Cash Dividend
</TABLE>

                                       24
<PAGE>


     The following  chart  summarizes  the Company  repurchases of the Company's
common stock during the fiscal year ended December 31, 2005.

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

                  (a)                          (b)                     (c)                           (d)
                                                                                                Maximum Number
                                                                                               (or Approximate
                                                                   Total Number of              Dollar Value) of
                                                                   Shares (or Units)           Shares (or Units)
                                                                   Purchased as Part            that May Yet be
              Total Number of                                         of Publicly               Purchased Under
              Shares (or Units)             Average Price paid     Announced Plans or             the Plans or
Period           Purchased                  per Share (or Unit)        Programs                     Programs
-----------------------------------------------------------------------------------------------------------------
 9/1/05- 9/30/05   5,616                    $20.24                 5,616                          $419,832
10/1/05-10/31/05       0                    $ 0.00                     0                          $419,832
11/1/05-11/30/05       0                    $ 0.00                     0                          $419,832
12/1/05-12/31/05       0                    $ 0.00                     0                          $419,832
------------------------------------------------------------------------------------------------------------------
Total              5,616                    $20.24                 5,616
</TABLE>


                                       25

<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>
                                        2005          2004          2003          2002          2001          2000
                                     ----------    ----------    ----------    ----------    ----------    ----------

RESULTS OF OPERATIONS:
       Net interest income           $   11,300    $   10,004    $    8,906    $    8,633    $    8,236    $    7,870
       Provision for loan losses           (360)         (130)          (20)         (393)         (342)         (335)
       Non-interest income                1,968         1,710         1,715         1,641         1,309           893
       Non-interest expense              (7,848)       (7,225)       (6,244)       (5,862)       (5,224)       (5,061)
       Provision for income tax          (1,711)       (1,451)       (1,446)       (1,275)       (1,379)       (1,160)
                                     ----------    ----------    ----------    ----------    ----------    ----------
       Net Income                    $    3,349    $    2,908    $    2,911    $    2,744    $    2,600    $    2,207
                                     ==========    ==========    ==========    ==========    ==========    ==========
SELECTED AVERAGE BALANCES:
       Assets                        $  232,543    $  210,883    $  195,177    $  164,200    $  147,807    $  135,924
       Loans, net of unearned           160,655       139,395       123,044       116,867       100,605        86,547
       Deposits                         203,341       186,496       171,620       143,228       129,534       120,135
       Shareholders' equity              21,935        20,799        20,232        17,964        15,121        12,984
PER SHARE DATA:
       Basic net income              $     1.54    $     1.35    $     1.34    $     1.26    $     1.18    $     1.00
       Fully diluted net income      $     1.45    $     1.25    $     1.23    $     1.16    $     1.10    $      .96
       Period end book value         $    10.63    $     9.65    $     9.89    $     8.81    $     7.64    $     6.52
       Weighted average shares
          outstanding                 2,170,866     2,148,558     2,165,066     2,176,386     2,209,727     2,220,605
FINANCIAL RATIOS:
       Return on average assets            1.44%         1.38%         1.49%         1.67%         1.76%         1.62%
       Return on average
          shareholders' equity            15.27%        13.98%        14.39%        15.27%        17.19%        17.00%
       Net yield on earning
          assets                           5.46%         5.48%         5.24%         6.06%         6.25%         6.49%
       Efficiency ratio                   57.44%        59.52%        56.95%        55.07%        52.72%        55.06%
       Average shareholders'
          equity to average assets         9.43%         9.86%        10.37%        10.94%        10.23%         9.55%
CAPITAL RATIOS:
       Risk-based capital:
       Tier I                             10.68%        10.77%        12.81%        12.31%        11.81%        12.78%
       Total                              11.93%        12.02%        14.07%        13.57%        13.07%        14.04%
       Leverage ratio                      9.61%         9.51%        10.50%        10.62%        10.38%        10.11%
CREDIT QUALITY:
       Net charge-offs to
          average loans                    0.01%         0.24%         0.14%         0.02%         0.05%        -0.04%
       Allowance for possible
          loan losses to period
          end loans                        1.62%         1.59%         2.15%         2.17%         2.25%         2.29%
</TABLE>

                                       26
<PAGE>


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

The Year Ended December 31, 2005 versus December 31, 2004

     The business operations of the Company continue to be conducted through the
Bank, its wholly-owned subsidiary,  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 Sonoma Valley and economically viable technology to enhance customer
service. Expansion of services in the Sonoma 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 on page 54, 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. 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


                                       27
<PAGE>
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 78). 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  reported net income of $3,348,529 for the year ending December
31, 2005 an increase of $440,908 over  $2,907,621  for the year ending  December
31, 2004. The increase in net income in 2005 is a result of loan growth of 11.8%
over  loans at year end of 2004.  Deposits  have  grown  11.4%  over  2004,  but
pressure  to  increase  deposit  rates has  reduced the benefit of the growth in
interest  income.  The Banco de Sonoma Office,  although still showing a year to
date loss of $94,027, is on track to show profitability sooner than anticipated.
On a per share basis,  net income  equaled $1.54 in 2005 compared with $1.35 per
share in 2004.

     Return on average total assets for 2005, 2004 and 2003 was 1.44%, 1.38% and
1.49%, respectively.  Return on average shareholders' equity increased to 15.27%
in 2005 compared to 13.98% in 2004. The increase in the return on average assets
is a result  of the 15.2%  growth  in net  income  compared  to 10.3%  growth in
average  assets.  The higher  return on equity is the result of the  increase in
income  during 2005 offset by the $1.1 million  increase in average  equity from
$20.8 million in 2004 to $21.9 million in 2005.

     While the Company has enjoyed strong earning over the last three years,  in
2005,  the Company's  growth in earnings has exceeded both the growth in average
assets and  average  equity.  Income at year end 2005 is higher than 2004 due to
the increase in loan volume which generated  strong earnings in spite of the two
basis  point  decline  in the  net  interest  margin  (see  the  table-  Average
Balances/Yields  and Rates  Paid on page 31)  supplemented  by the growth in non
interest income.

     The Company continues to experience loan and deposit growth at the Banco de
Sonoma Office from $6.2 million in deposits and $653,462 in loans as of December
31, 2004 to $11.6  million in deposits  and $2.7 million in loans as of December
31,  2005.  It is  anticipated  that for the first three or four years the costs
associated  with  opening  a new  office  will  have a  negative  effect  on the
Company's  Consolidated  Statement  of  Operations.  For the year  2005,  it was
anticipated  that the additional  expense would  approximate  $200,000,  but the
branch  seems to be  progressing  better  than  anticipated,  showing  a loss of
$94,027 as of December 31, 2005. The Banco de Sonoma Office is offering services
to the Latino  community in our market place.  Management  identified  this as a
niche market which was  underserved  and an  opportunity  for  potential  future
growth and profitability.  Most of the employees at the branch are bilingual and
the Bank offers full service  banking.  An  additional  product,  which has been
added, is the ability for customers to effect an immediate  transfer of funds to
Mexico.  Management  anticipates  that the growth in the office will be slow and
steady and profitable within two or three years.

     Total  shareholders'  equity increased by $2.8 million or 13.3% at year end
2005. At December 31, 2005, the Company reported net income of $3.3 million.  In
March the Company paid out $537,842 for cash dividends declared in February 2005
and in August the Company paid out $540,159 for cash dividends  declared in July
2005. In 2004 stock options were granted to senior employees with a fifth of the
options  vesting  each year over a five year  period.  In 2005,  13,500  options
vested which increased  equity by $103,680 at year end. The net income figure of
$3.3  million  also  reflects  an expense  for the stock  options  of  $103,680,

                                       28
<PAGE>
therefore the net effect of the stock option transaction  relative to equity was
zero.  Directors  exercised  68,461  options which added $532,635 to the capital
accounts.  The tax benefit of these options was $132,337,  which also  increased
equity.  In September 2005, the Company  repurchased  5,616 shares which lowered
equity by $113,668.  The net effect of this activity was capital of  $23,439,793
as of December 31, 2005,  compared to capital of  $20,681,160 as of December 31,
2004. See page 51 for detail of changes in shareholders' equity.

     At December 31, 2005,  total assets were $244.1 million,  an 11.8% increase
over the $218.2 million at December 31, 2004. The Company showed loans of $171.2
million in 2005,  compared with $153.2  million at year-end 2004, an increase of
11.8%.  Deposits increased,  growing 11.4%, from $193.7 million at year-end 2004
to $215.8 million at year-end 2005. The loan-to-deposit ratio increased to 79.3%
in 2005 from 79.1% in 2004.  In 2006,  management  anticipates  slower growth in
assets, loans and deposits.

     Section 404 of Sarbanes-Oxley requires the SEC to prescribe rules requiring
the establishment, maintenance and evaluation of an issuer's internal control of
financial  reporting.  Accordingly,  in the annual report for December 31, 2006,
management   was  going  to  be  required  to  include  an   assessment  on  the
effectiveness  of the Company's  internal  controls over financial  reporting in
accordance with standards set by the Public Company Accounting  Oversight Board.
On  September  21,  2005,  the SEC  extended  for another  year the deadline for
non-accelerated  filers to first certify compliance with Section 404. This means
that the Company will not have to certify  compliance  until  December 31, 2007,
unless the  Company's  market cap  exceeds  $75  million at June 30,  2006.  The
Company's external  independent auditors are required to attest to and report on
management's  assessment  of internal  control  over  financial  reporting.  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 and to address
any material  weaknesses and plan  accordingly to maintain  adequate  processes.
Even  so,  there  can  be  no  assurances   that  the  evaluation   required  by
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.


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 $1.3 million to $11.7 million,  up 12.1% from 2004
net interest  income of $10.4  million.  Net interest  income on a fully taxable
equivalent  basis,  as shown on the table - Average  Balances,  Yields and Rates
Paid on page 31,  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 ($395,000 in 2005 and $424,000 in 2004, 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 $2.1  million in  interest  income
offset by a $848,000  increase in interest  expense for a 12.1%  increase in net
interest  income to $1.3 million.  The  effective  interest cost for the Bank is
expected to increase  further and the  increase in market  interest  rates could
have a dramatic effect on the cost of deposits.  The increased rate  competition
for loans and investments combined with the inability to keep deposit 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  decreased 2 basis points from 5.48% in 2004 to
5.46% in 2005.  The  decrease  in the net  interest  margin is the result of the


                                       29

<PAGE>


pressure  torenegotiate  loans from  floating  to fixed and market  pressure  to
increase the rates on deposit accounts, offset by the loan growth in 2005, which
allowed the margin to remain almost flat.

Interest Income

     As previously stated, interest income (stated on a fully taxable equivalent
basis) increased by $2.1 million to $14.1 million in 2005, a 17.7% increase over
the $12.0 million realized in 2004.

     The $2.1  million  increase  was the result of a 12.6%  increase in average
earning  assets to $214.4  million  combined  with a 29 basis point  increase in
average yield for the year. The yield on earning assets was 6.58% as of December
31,  2005  compared to 6.29% for the year end 2004.  The  increase in yield is a
result of putting funds into loans rather than lower yielding investments or fed
funds.

     The gain in volume of average  earning  assets was  responsible  for a $1.6
million  increase in interest  income,  while the increase in yield  contributed
$456,000 for a total increase of $2.1 million.

Interest Expense

     Total interest expense increased $848,000 to $2.4 million. The average rate
paid on all interest-bearing liabilities was 1.51% in 2005, compared to 1.09% in
2004. Average balances increased from $142.4 million to $158.7 million, an 11.5%
gain.

     The gain in volume of  average  balances  was  responsible  for a  $280,000
increase in interest expense in conjunction with a $568,000  increase related to
higher interest rates paid for a net increase of $848,000. The higher rates paid
on interest-bearing liabilities is a result of market pressures driving interest
rates paid on deposit accounts higher.

     Individual  components of interest income and interest expense are provided
in the table - Average Balances, Yields and Rates Paid on page 31.

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 $360,000 in 2005 and $130,000 in
2004. The increase in the provision is the result of management's evaluation and
assessment  of  the  loan  portfolio  and  the  growth  in the  loan  portfolio.
Management  anticipates  some loan  growth will  continue  in 2006,  which could
necessitate  a further  increase  in the  provision  to the  allowance  for loan
losses.

     The economic  climate  continues to improve and the  non-performing  assets
ratio at December  31, 2005 was .63%  compared to .72% as of year end 2004.  Non
accrual  loans were $994,000 as of December 31, 2005 compared to $1.0 million as
of December 31, 2004, a decline of .2%.  Loans  charged-off,  net of recoveries,
resulted  in losses  totaling  $12,000  in 2005 and  $336,000  in 2004 (one loan
represented  80.3% of this figure).  Refer to page 62, Note D for an analysis of
the changes in the allowance for loan and lease losses.


                                       30
<PAGE>


                              SONOMA VALLEY BANCORP
                     AVERAGE BALANCES/YIELDS AND RATES PAID
                                   Rate/Volume
<TABLE>
<S>                                   <C>         <C>        <C>       <C>        <C>        <C>         <C>          <C>      <C>
                                                  2005                           2004                                2003
                                                  ----                           ----                                ----

    ASSETS                          Average      Income/    Yield/    Average    Income/     Yield/     Average     Income/   Yield/
                                    Balance      Expense     Rate     Balance    Expense      Rate      Balance     Expense    Rate

    Interest-earning assets:

    Loans(2):
      Commercial                  $109,030,040  $8,162,506  7.49%  $ 98,242,840  $6,998,669   7.12% $ 85,965,287  $6,493,303   7.55%
      Consumer                      19,216,697   1,391,167  7.24%    14,223,761     963,223   6.77%   11,632,168     888,980   7.64%
      Real estate construction      19,741,512   1,494,312  7.57%    19,134,305   1,470,918   7.69%   18,780,964   1,529,617   8.14%
      Real estate mortgage          10,502,449     729,886  6.95%     5,178,002     372,145   7.19%    3,819,733     333,064   8.72%
      Tax exempt loans (1)           2,604,858     215,215  8.26%     3,033,269     254,336   8.38%    3,147,333     263,318   8.37%
      Leases                            37,486       3,677  9.81%        36,062       7,610  21.10%       67,689      21,813  32.23%
      Tax exempt leases (1)                  0           0  0.00%           868           0   0.00%       46,496       9,511  20.46%
      Unearned loan fees              (478,473)                        (453,892)                        (416,006)
                                  ------------                     ------------                     ------------
             Total loans           160,654,569  11,996,763  7.47%   139,395,215  10,066,901   7.22%  123,043,664   9,539,606   7.75%
    Investment securities
      Available for sale:
             Taxable                33,559,731   1,049,442  3.13%    23,264,663     780,886   3.36%   11,092,907     352,593   3.18%
      Hold to maturity:
             Taxable                   370,518      10,149  2.74%       390,564      10,094   2.58%      392,092      12,866   3.28%
             Tax exempt (1)         16,604,343     947,633  5.71%    17,187,291     993,470   5.78%   11,269,479     735,545   6.53%
                                  ------------  ----------         ------------  ----------         ------------  ----------
      Total investment securities   50,534,592   2,007,224  3.97%    40,842,518   1,784,450   4.37%   22,754,478   1,101,004   4.84%
    Federal funds sold               2,291,052      59,256  2.59%     9,446,625     106,176   1.12%   30,317,575     318,430   1.05%
    FHLB Stock                         814,701      33,032  4.05%       599,670      20,370   3.40%      288,415      13,269   4.60%
    Total due from banks/
      Interest-bearing                  61,200       1,453  2.37%       154,082       4,463   2.90%      201,833         368   0.18%
      Total interest earning      ------------  ----------         ------------  ----------         ------------  ----------
        assets                     214,356,114  14,097,728  6.58%   190,438,110  11,982,360   6.29%  176,605,965  10,972,677   6.21%
    Noninterest-bearing assets:                 ==========                       ==========                       ==========
      Reserve for loan losses       (2,668,550)                      (2,436,433)                      (2,772,365)
      Cash and due from banks        6,732,111                        9,319,172                        9,090,433
      Premises and equipment         1,282,313                        1,369,737                        1,120,199
      Other assets                  12,841,170                       12,192,172                       11,132,894
                                  ------------                     ------------                     ------------
                   Total assets   $232,543,158                     $210,882,758                     $195,177,126
                                  ============                     ============                     ============

    LIABILITIES AND SHAREHOLDERS'
      EQUITY
    Interest-bearing liabilities:
      Interest-bearing deposits
            Interest-bearing
              transaction           34,027,329     $57,905  0.17%    30,888,051     $51,744   0.17%  $29,818,802    $ 50,454   0.17%
            Savings deposits        73,821,237     826,657  1.12%    67,113,731     434,671   0.65%   59,265,859     466,081   0.79%
            Time deposits over
              $100,000              27,300,404     851,427  3.12%    25,666,190     667,862   2.60%   25,209,478     729,758   2.89%
            Other time deposits     20,600,270     568,772  2.76%    18,739,734     399,813   2.13%   19,794,227     477,061   2.41%
                                  ------------  ----------         ------------  ----------         ------------  ----------
     Total interest-bearing
              Deposits             155,749,240   2,304,761  1.48%   142,407,706   1,554,090   1.09%  134,088,366   1,723,354   1.29%
     Other short term borrowings     2,990,049      97,799  3.27%             0           0   0.00%        2,739          31   1.13%
                                  ------------  ----------         ------------  ----------         ------------  ----------
         Total interest-bearing
           liabilities             158,739,289   2,402,560  1.51%   142,407,706   1,554,090   1.09%  134,091,105   1,723,385   1.29%
                                                ==========                       ==========                       ==========

    Non interest-bearing liabilities:
      Non interest-bearing demand
        deposits                    47,591,442                       44,088,273                       37,531,430
      Other liabilities              4,276,993                        3,587,536                        3,323,000
      Shareholders'equity           21,935,434                       20,799,243                       20,231,591
                                  ------------                     ------------                     ------------
         Total liabilities and
           shareholder' equity    $232,543,158                     $210,882,758                     $195,177,126
                                  ============                     ============                     ============

    Interest rate spread                                    5.07%                             5.20%                            4.93%
    Interest income                            $14,097,728  6.58%               $11,982,360   6.29%              $10,972,677   6.21%
    Interest expense                             2,402,560  1.12%                 1,554,090   0.81%                1,723,385   0.97%
                                               -----------  -----                ----------   -----               ----------   -----
    Net interest income/margin                 $11,695,168  5.46%               $10,428,270   5.48%               $9,249,292   5.24%
                                               ===========                       ==========                       ==========
</TABLE>


(1)  Fully tax equivalent  adjustments are based on a federal income tax rate of
     34% in 2005 2004and 2003
(2)  Non accrual loans have been included in loans for the purposes of the above
     presentation. Loan fees of approximately $367,000, 299,000 and $405,000 for
     the twelve  months ended  December 31, 2005,  2004 and 2003,  respectively,
     were amortized to the appropriate interest income categories.

                                       31
<PAGE>

                              SONOMA VALLEY BANCORP
                              Rate/Volume Analysis
<TABLE>
<S>                             <C>          <C>         <C>          <C>                <C>          <C>        <C>           <C>
                                         2005 over 2004                                          2004 over 2003
                                         --------------                                          --------------
                               Volume        Rate      Vol/Rate      Total             Volume        Rate      Vol/Rate       Total
ASSETS
Interest-earning assets:
Loans:
  Commercial                   768,464      356,256       39,117    1,163,837         927,373     (369,268)     (52,739)    505,366
  Consumer                     338,118       66,487       23,339      427,944         198,061     (101,258)     (22,560)     74,243
  Real estate construction      46,678      (22,568)        (716)      23,394          28,778      (85,862)      (1,615)    (58,699)
  Real estate mortgage         382,670      (12,291)     (12,638)     357,741         118,435      (58,538)     (20,816)     39,081
  Tax exempt loans             (35,922)      (3,725)         526      (39,121)         (9,543)         582          (21)     (8,982)
  Leases                           301       (4,073)        (161)      (3,933)        (10,192)      (7,529)       3,518     (14,203)
  Tax exempt leases                  0            0            0            0          (9,333)      (9,511)       9,333      (9,511)
  Unearned fee income                0            0            0            0               0            0            0           0
                            ----------   ----------   ----------   ----------      ----------   ----------   ----------   ---------
       Total loans           1,500,308      380,086       49,467    1,929,862       1,243,578     (631,383)     (84,900)    527,295
Investment securities:
  Available for sale:
    Taxable                    345,557      (53,380)     (23,622)     268,556         386,885       19,744       21,664     428,293
    Tax-exempt                       0            0            0            0               0            0            0           0
  Held to maturity:
    Taxable                       (518)         604          (31)          55             (50)      (2,733)          11      (2,772)
    Tax-exempt                 (33,696)     (12,567)         426      (45,837)        386,248      (84,140)     (44,183)    257,925
                            ----------   ----------   ----------   ----------      ----------   ----------   ----------   ---------
    Total investment           311,343      (65,343)     (23,226)     222,774         773,083      (67,128)     (22,508)    683,446
      securities
Federal funds sold             (80,426)     138,152     (104,647)     (46,920)       (219,211)      22,326      (15,370)   (212,254)
FHLB Stock                       7,304        3,944        1,414       12,662          14,320       (3,472)      (3,747)      7,101
Due from banks-int bearing      (2,690)        (805)         485       (3,010)            (87)       5,478       (1,296)      4,095
                            ----------   ----------   ----------   ----------      ----------   ----------   ----------   ---------
    Total interest-earning
      Assets                 1,735,840      456,035      (76,507)   2,115,368       1,811,683     (674,179)    (127,821)  1,009,683
                            ==========   ==========   ==========   ==========      ==========   ==========   ==========  ==========

         LIABILITIES
Interest-bearing
liabilities:
Interest-bearing deposits:
  Savings deposits               5,259          819           83        6,161           1,809         (501)         (18)      1,290
  Interest-bearing demand
    Deposits                    43,442      316,875       31,669      391,986          61,718      (82,238)     (10,890)    (31,410)
  Time deposits over 100,000    42,524      132,598        8,443      183,565          13,221      (73,780)      (1,337)    (61,896)
  Other time deposits           39,695      117,590       11,675      168,959         (25,414)     (54,750)       2,917     (77,248)
                            ----------   ----------   ----------   ----------      ----------   ----------   ----------   ---------
   Total interest-bearing
     deposits                  130,920      567,882       51,870      750,671          51,333     (211,269)      (9,328)   (169,264)
Federal funds purchased              0            0            0            0               0            0            0           0
Other borrowings                     0            0       97,799       97,799             (31)         (31)          31         (31)
                            ----------   ----------   ----------   ----------      ----------   ----------   ----------   ---------
   Total interest-bearing
     Liabilities               130,920      567,882      149,669      848,470          51,302     (211,300)      (9,297)   (169,295)

Interest differential        1,604,921     (111,847)    (226,176)   1,266,898       1,760,381     (462,879)    (118,524)  1,178,978
                            ==========   ==========   ==========   ==========      ==========   ==========   ==========  ==========
</TABLE>

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.
                                       32
<PAGE>


Non-interest Income

     Non-interest income of $2.0 million for 2005 increased 15.1% or $259,000 in
comparison with the $1.7 million recorded in 2004. Of the increase 65.5% was due
to increases in service charges on deposit accounts. In 2005 income from service
charges on deposit  accounts  increased  15.6% or $169,000  from $1.1 million in
2004 to $1.3 million in 2005.  This  increase was a result of both  increases in
service charges and growth of new accounts.

     Other  fee  income  showed an  increase  in 2005 of 19.1% or  $58,000  from
$306,000 in 2004 to $364,000 in 2005 and comprised 22.6% of the 2005 increase of
$259,000.  The higher  income is a result of an  increase of 43.1% or $53,000 in
income the bank earns from merchant credit card processing fees from $122,000 in
2004 to $175,000 in 2005.  Also  contributing to the increase was an increase of
$9,000 or 49.3% in wire  transfer  fee income from $19,000 in 2004 to $28,000 in
2005.

     Other  non-interest  income showed a 9.8% increase or $31,000 from $315,000
in 2004 to  $346,000  in 2004.  This is largely a result of an  increase  in the
income  generated by bank owned life insurance  policies in 2005.  Income on the
policies  was  $298,000 in 2004  compared to $326,000 in 2005 or yields of 6.47%
and 6.28%,  respectively.  The earnings on these  policies  will increase as the
balances  increase and if market rates  increase,  the income  produced by these
policies should also increase.

Non-interest Expense

     Total non-interest expense increased 8.6% to $7.8 million in 2005 from $7.2
million in 2004.  Non-interest expense represented 3.38% of average total assets
in 2005 and  3.43% in  2004.  The  expense/asset  ratio is a  standard  industry
measurement of a bank's ability to control its overhead or  non-interest  costs.
During 2006,  the Company will  continue to emphasize  cost  controls,  although
certain costs, such as professional fees associated with the  implementation and
compliance  with  Sarbanes-Oxley,  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 66, for a detailed
description of Non-Interest Income and Other Non-Interest Expense.

Salaries and Benefits

     The most  significant  dollar  increase  was in the  salaries  and benefits
category.  Salary and benefits  increased 6.9% from $4.1 million in 2004 to $4.4
million in 2005.  The increase is a result of  increases in employee  incentives
paid as a result of the strong  earnings in 2005,  an increase of $162,000  from
$328,000 in 2004 to $490,000 in 2005.  Additionally,  accrual  adjustments  were
necessary to the Supplemental  Executive  retirement plan due to a deline in the
discount rate. Other areas of increase were normal merit increases and increases
in the costs of employee benefits. At December 31, 2005 and 2004 total full-time
equivalent  employees  were 50 and 55,  respectively,  a decrease of 5 full time
equivalent  employees.  Year-end  assets per employee  were $4.9 million in 2005
compared with $4.0 million in 2004.

Premises and Equipment

     Expense  relative to premises and equipment  increased 10.9% to $999,000 in
2005 from $900,000 in 2004. The $99,000  increase in expense in 2005 is a result
of  additional  lease  expense for the Finance  Center,  increased  expenses for
maintenance  and repairs  both for  buildings  and fixed  assets,  increases  in
property  tax  accruals,  increases in utility  costs and  increases in software
expense.  The Bank continues to emphasize  security in its computer  operations.
Equipment  and software are  monitored  and  upgraded as  appropriate  to ensure
confidentiality   of  customer  and  Company  data  contributing  to  additional
increases in expense.  The Company  continues to emphasize  the  utilization  of
technology to accommodate customer and market demands.


                                       33
<PAGE>


Other Non-interest Expense

     Other non-interest  expense increased by 10.9% to $2.4 million in 2005 from
$2.2  million in 2004.  The  increase in other  non-interest  expense was due to
increases  in  professional  fees  and data  processing  fees,  advertising  and
marketing,  operational  losses and outages  and staff  related  expenses  which
increased by 18.0%, 15.4%, 75.4% and 8.5%,  respectively.  Professional and data
processing fees were $1.2 million in 2004 and increased to $1.4 million in 2005,
an increase of $218,000.  The categories of  professional  fees which showed the
most significant  increases were in the areas of accounting and taxes,  accruals
for Sarbanes  Oxley  professional  assistance and other  professional  fees. The
growth in professional fees is predominately  the result of additional  accruals
for expenses  associated with the  implementation of  Sarbanes-Oxley,  Rule 404,
regarding   internal   controls   over   financial   reporting.   The  delay  in
implementation  could  mitigate or spread out the ongoing  expenses  relative to
this  process.  Additionally,  with the  growth in the  Company,  time  spent by
outside professionals increased, therefore, the costs increased.

     Advertising  and  marketing  increased  $30,000  from  $195,000  in 2004 to
$225,000 in 2005.  The  increases in this category are a result of the Company's
involvement in the community, both through donations as well as participation in
civic organizations.  Additionally,  shareholder relations showed an increase in
2005 over 2004.

     Staff  related  expenses  grew $16,000 from $186,000 in 2004 to $202,000 in
2005.  These  increases  were a result of director and employee  involvement  in
attending  meetings  and  seminars  and  related  costs.  It is  important  that
directors and employee keep up with the many regulatory  changes in recent years
and the regulators have increased their attention relative to the involvement of
employees and directors in training.

Provision for Income Taxes

     The provision for income taxes  increased to an effective tax rate of 33.8%
in 2005 compared with 33.3% in 2004.

Unaudited Quarterly Statement of Operations Data


<TABLE>
<S>                                     <C>         <C>         <C>         <C>         <C>         <C>         <C>         <C>
                                                 (Dollars in thousands, except per share data)

                                        Q4          Q3          Q2          Q1          Q4          Q3          Q2          Q1
                                       2005        2005        2005        2005        2004        2004        2004        2004

Net interest income                 $ 2,947     $ 2,865     $ 2,784     $ 2,703     $ 2,705     $ 2,604     $ 2,473     $ 2,223
Provision for loan and
 lease losses                           (15)        (95)       (160)        (90)        (60)        (40)        (30)          0
Other operating income                  525         498         487         459         446         452         391         421
Other operating expenses             (1,964)     (1,967)     (1,944)     (1,973)     (1,819)     (1,867)     (1,823)     (1,716)
                                    -------     -------     -------     -------     -------     -------     -------     -------
Income before income taxes            1,493       1,301       1,167       1,099       1,272       1,149       1,011         928
Provision for income taxes             (494)       (453)       (396)       (368)       (446)       (405)       (319)       (282)
                                    -------     -------     -------     -------     -------     -------     -------     -------
Net Income                              999         848         771         731         826         744         692         646
Per share:
     Basic earnings per share       $   .46     $   .39     $   .36     $   .34     $   .38     $   .35     $   .32     $   .29
     Diluted earnings per share     $   .43     $   .37     $   .34     $   .32     $   .35     $   .32     $   .29     $   .27
</TABLE>





                                       34
<PAGE>


BALANCE SHEET ANALYSIS

Investment Securities

     Investment  securities  were $50.4  million at December  31,  2005, a 33.8%
increase  from the $37.7  million at December  31, 2004.  At year end 2005,  the
overall portfolio had a market value of $50.5 million compared with an amortized
cost of $50.9 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, 2005, the Company had securities  totaling $16.5 million with a market value
of $16.6 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  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 $33.9 million  compared to
an amortized cost of $34.4 million as of December 31, 2005.

     There were twenty nine Federal  Farm Credit  Bank,  Federal Home Loan Bank,
Federal Home Loan Mortgage  Corporation or Federal National Mortgage Association
securities  of $28.5 million and six U.S.  Treasury  security of $5.4 million in
the AFS  portfolio and twenty nine  municipal  securities of $8.2 million in the
HTM  portfolio  that are  temporarily  impaired as of December 31, 2005.  Of the
above,  there were  twenty two  Federal  Farm  Credit  Bank,  Federal  Home Loan
Mortgage  Agency,   Federal  Home  Loan  Bank  and  Federal  National   Mortgage
Association  securities of $21.5  million and five U. S. Treasury  securities of
$4.4 million in the AFS  portfolio  and fourteen  municipal  securities  of $4.8
million in the HTM portfolio that have been in a continuous loss position for 12
months or more as of December 31, 2005.  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, 2005 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 on the  following  page 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 59.


                                       35
<PAGE>
<TABLE>
<S>                                             <C>         <C>                  <C>          <C>
                                          Twelve months ended 12/31/05    Twelve months ended 12/31/04
                                              Average      Average             Average       Average
                                              Balance       Yield              Balance        Yield
                                            -----------    -------           -----------     -------
U.S. Treasury securities                    $ 5,096,319       3.32%          $   516,056        2.25%
U.S. federal agency issues                   28,463,382       3.09%           22,197,995        3.31%
State, county and municipal issues           16,974,891       5.64%           17,577,855        5.71%
Corporate securities                                  0       0.00%              550,612        6.46%
                                            -----------                      -----------
Total investment securities                 $50,534,592       3.97%          $40,842,518        4.37%
                                            ===========                      ===========
</TABLE>


Loans

     A  comparative  schedule of average loan balances is presented in the table
on page  31;  year-end  balances  are  presented  in Note D to the  Consolidated
Financial Statements on page 61.

     Loan balances,  net of deferred loan fees at December 31, 2005, were $171.2
million, an increase of 11.8% over 2004.  Commercial loans,  comprising 69.3% of
the portfolio,  increased  $9.3 million,  or 8.5% over 2004 showing the greatest
change in volume of all categories.  Included in Commercial loans are loans made
for commercial purposes and secured by real estate.

     Consumer loans and Real Estate  Mortgage loans both showed growth over 2004
of 34.2% and 71.4% or $5.6  million and $5.5  million,  respectively.  Growth in
home equity loans has contributed to the increase in Consumer loans in 2005 from
$16.2 million in 2004 to $21.8 million at year end 2005. During 2005 the Company
was able to continue to expand  their  conventional  real estate  mortgage  loan
portfolio, as Real Estate Mortgage loans grew from $7.7 million in 2004 to $13.2
million in 2005. It is  anticipated  that the growth rate will be more modest in
2006 due to the increase in interest rates.

                                       36
<PAGE>



     Real Estate Construction loans and Lease Financing  Receivables both showed
declines over 2004.  Real Estate  Construction  loans show a decline of 11.3% or
$2.3 million from $20.3 million in 2004 to $18.0  million in 2005.  This decline
is not a result of fewer  construction  loans being on the books,  but is due to
seasonality  and  timing  of  advances,  rather  than a drop  in  demand.  Lease
Financing  Receivables  declined  by 45.9% or  $22,000  from  $48,000 in 2004 to
$26,000 in 2005.  Customer interest in lease financing  receivables has declined
in our  market,  therefore,  the  Bank  has not  been  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 89.3% 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  74 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,  2005,  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 $48.6 million at December
31, 2005 and $34.6  million at December 31, 2004.  The increase at 2005 year end
is  partially  a  result  of  the  lag  in  advances  on  existing  Real  Estate
Construction loans as mentioned in the "Loans" section above.

     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  $348,000 at December 31, 2005 and
$360,000 at December 31, 2004.

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 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

                                       37


<PAGE>


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 $994,000  in  non-accrual  status at December  31,
2005 and $1.012  million at December 31, 2004.  There were  $259,189 in loans 90
days or more past due at December  31, 2005 and $1.006  million in loans 90 days
or more past due at December 31, 2004. Occasionally,  the Company will have more
loans in  non-accrual  status than are 90 days past due following the guidelines
in the above  paragraph or if management  determines 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, 2005, the Company
believes its overall allowance for loan losses is adequate based on its analysis
of conditions at that time.

     At December 31, 2005,  the allowance  for loan losses was $2.8 million,  or
1.62% of year end loans,  compared  with $2.4 million or 1.59% of year end loans
at December 31, 2004.  This slight  increase in the allowance is consistent with
the loan growth experienced in 2005 and management's  review and analysis of the
portfolio.

     Net  charge-offs  to average loans  decreased  when compared with the prior
year.  The Company  recorded  net losses of $12,000 or .01% of average  loans in
2005 compared to $336,000 or .24% of average  loans in 2004.  The decline in net
charge offs in 2005 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 has
increased the quality of the loan portfolio.

Deposits

     A  comparative  schedule of average  deposit  balances is  presented in the
table on page 31; year-end deposit balances are presented in the table below.

     Total deposits  increased  $22.1 million (11.4%) in 2005, to $215.8 million
compared  to $193.7  million  in 2004.  All  categories  of  deposits  showed an
increase over 2004.  Demand  deposits  increased $4.9 million,  or 11.0% in 2005
to$49.5 million at year end 2005. Savings deposits increased by $4.0 million, or
5.6% to $74.2


                                       38

<PAGE>

million  at year  end,  while  Interest-bearing  checking  showed  the  smallest
increase from $34.9 million in 2004 to $35.6 million in 2005,  growth of 1.9% or
$674,000.

     The deposits  showing the strongest  growth in 2005 both in growth rate and
volume  were  Other  Time  Deposits  which  grew $5.9  million or 31.4% to $24.5
million at year end 2005,  and Time Deposits  Greater than  $100,000  which grew
$6.7  million or 26.5% from $25.3  million at year end 2004 to $32.0  million in
2005. For both Other Time Deposits and Time Deposits Greater than $100,000,  all
of the 2005 growth can be attributed to special rate  promotions  attracting new
deposits.

     The composition of deposits for the years ending December 31, 2005 and 2004
are as follows:

<TABLE>
<S>                                            <C>           <C>              <C>              <C>
                                           December 31,   Percentage      December 31,    Percentage
                                               2005        of Total          2004          of Total
                                          ------------    ----------      ------------    ----------
Interest-bearing transaction deposits     $ 35,586,113          16.6%     $ 34,912,205          18.0%
Savings deposits                            74,218,076          34.4%       70,254,926          36.3%
Time deposits, $100,000 and over            32,011,640          14.8%       25,307,661          13.1%
Other time deposits                         24,482,074          11.3%       18,630,846           9.6%
                                          ------------    ----------      ------------    ----------
Total interest-bearing deposits            166,297,903          77.1%      149,105,638          77.0%
Non-interest-bearing deposits               49,460,864          22.9%       44,557,377          23.0%
                                          ------------    ----------      ------------    ----------
Total deposits                            $215,758,767         100.0%     $193,663,015         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, 2005, 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,  2005 was 11.39% and its Tier 1  risk-based  capital  ratio was
10.14%.  The Bank's leverage ratio was 9.12%.  All the ratios exceed the minimum
guidelines  of 8.00%,  4.00% and  4.00%,  respectively.  The  total  risk  based
capital,  Tier 1 risk based  capital  and  leverage  ratios  for the  Company at
December 31,  2004,  were 12.02%,  10.77% and 9.51%,  respectively.  The capital
ratios for the Company at December  31,  2005,  were  11.93%,  10.68% and 9.61%,
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 and
in February  2006 the Company  approved the  repurchase  of an  additional  $1.1
million of Sonoma Valley Bancorp stock. As of December 31, 2005,  $1,580,162 had
been  repurchased  and retired,  net of options  which were  exercised  and then
subsequently  repurchased and retired. Refer to page 28, for a discussion of the
changes  in  capital  and page 51 for the  table of  "Changes  in  Shareholders'
Equity."

                                       39


<PAGE>


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

Off Balance Sheet Commitments and Contractual Obligations

     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 37, Loan
Commitments  and Letters of Credit and in Note N to the  Consolidated  Financial
Statements on page 73. 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 63.

     The following table summarizes the Company's contractual  obligations as of
December 31, 2005.



<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                   1,300,734        348,905        720,779         231,050                0
Executive Officer Supplemental Retirement     9,136,010              0         36,377         240,249        8,859,384
Deferred Compensation                         1,285,194          9,964         27,008          55,867        1,192,355
</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 2005,  the
Company's  liquidity  ratio  (adjusted  liquid assets to deposits and short term
liabilities) was 20.09% compared to 18.47% and 29.03% at year end 2004 and 2003,
respectively.  Management expects that liquidity will remain adequate throughout
2006, 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,  investment  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  has  overall
responsibility  for the interest rate risk  management  policies.  Sonoma Valley
Bank has an Asset  and  Liability  Management  Committee  that  establishes  and
monitors  guidelines  to  control  the  sensitivity  of  earnings  to changes in
interest rates.

                                       40
<PAGE>



     Asset/Liability   Management.   Activities   involved  in   asset/liability
management  include  but are not  limited  to  lending,  accepting  and  placing
deposits and investing in  securities.  Interest rate risk is the primary market
risk  associated  with  asset/liability  management.  Sensitivity of earnings to
interest rate changes  arises when yields on assets  change in a different  time
period or in a different  amount from that of interest costs on liabilities.  To
mitigate  interest rate risk, the structure of the balance sheet is managed with
the goal  that  movements  of  interest  rates on  assets  and  liabilities  are
correlated  and  contribute  to earnings  even in periods of  volatile  interest
rates. When interest rates increase,  the market value of securities held in the
investment portfolio declines.  Generally, this decline is offset by an increase
in  earnings.  When  interest  rates  decline,  the market  value of  securities
increases while earnings decrease due to the bank's asset sensitivity  caused by
the variable  rate loans.  Usually the Company is able to mitigate its risk from
changes in interest  rates with this  balance  sheet  structure.  At the present
time, the market is experiencing an anomaly from historical  norms.  While short
term rates have  increased  over the past year as a result of the  Federal  Open
Market Committee increasing the Fed Funds target rate from 2.25% to 4.25%, a 200
basis point increase,  the long term interest rates have only increased about 20
basis points when  compared to December  2004.  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
five interest  rate  scenarios.  The  scenarios  include 100 and 200 basis point
rising rate forecasts, a flat rate forecast, and 100 and 200 basis point falling
rate forecasts  which take place within a one year time frame.  The net interest
income is measured  during the year assuming a gradual  change in rates over the
twelve-month horizon. The Company's 2006 net interest income, as forecast below,
was modeled  utilizing a forecast  balance  sheet  projected  from year-end 2005
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,
2005 (In thousands)

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

Variation from a constant rate scenario            Change in NII
                  +200bp                                   ($689)
                  +100bp                                   ($345)
                  -100bp                                   ($303)
                  -200bp                                   ($576)
</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.

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


                                       41
<PAGE>


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

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

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

     The Company has more  liabilities  than  assets  repricing  during the next
year.  Usually because the Company's asset rates change more than deposit rates,
the Company's interest income will change more than the cost of funds when rates
change.  For the  current  quarter,  the  Company is making a more  conservative
assumption.  Historically, the Company has been able to raise deposit rates with
a lag to loan rate  increases,  however loan rates have remained flat and market
demands are creating pressure to raise interest rates. Therefore for a period of
time the Company has chosen to use the  simulation  to forecast  deposits  rates
rising  quite  rapidly.  This causes the net  interest  margin to shrink and net
interest  income to decline in both a rising and falling rate  environment.  The
table below  indicates  that the Company is liability  sensitive  throughout the
next year.  At the end of the twelve month cycle,  the rate  sensitive gap shows
$87.8 million more in liabilities than assets repricing.


                                       42
<PAGE>


     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,  2005  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 $153.0  million in fixed rate  assets  over 12
months,  shown in the table below,  $36.8 million are long term assets over five
years. This $36.8 million compares  favorably to the $71.9 million in demand and
core deposits and equity. With the 300 basis point increase in the Fed Funds and
prime rate since July 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, 2005                 Reprice           Months          Months          Months      12 Months         Total
                                 ---------        ---------       ---------       ---------     ---------       ---------
ASSETS:
Securities + Other Interest-
 Bearing Balances                $       0        $   6,038       $   2,356       $   4,713     $  37,310       $  50,417
Loans                               35,597            4,769           4,326           8,034       115,692         168,418
Fed Funds Sold + Overnight
 Interest-Bearing Balances           2,089                0               0               0             0           2,089
                                 ---------        ---------       ---------       ---------     ---------       ---------
Total Rate Sensitive Assets      $  37,686        $  10,807       $   6,682       $  12,747     $ 153,002       $ 220,924
                                 =========        =========       =========       =========     =========       =========
LIABILITIES
 MMDA/NOW/SAV                    $ 109,804        $       0       $       0       $       0     $       0       $ 109,804
 CD's<$100                               0            4,524           7,387           7,387         5,184          24,482
 CD's>$100                               0            5,111          17,203           4,301         5,397          32,012
 Borrowings                              0                0               0               0             0               0
                                 ---------        ---------       ---------       ---------     ---------       ---------

  Total Rate Sensitive
   Liabilities                   $ 109,804        $   9,635       $  24,590       $  11,688     $  10,581       $ 166,298
                                 ---------        ---------       ---------       ---------     ---------       ---------

  Rate Sensitivity Gap           $ (72,118)       $   1,172       $ (17,908)      $   1,059     $ 142,421       $  54,626
  Cumulative Rate Sensitivity
   Gap                           $ (72,118)       $ (70,946)      $ (88,854)      $ (87,795)    $  54,626
  Cumulative Position to Total
   Assets                           (29.5%)          (29.1%)         (36.4%)         (36.0%)        22.4%
</TABLE>



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

     The Bank has only moderate  market risk in investments  because the average
maturity in the  portfolio is not very long,  except for  municipals,  which are
held to  maturity.  The  portfolio  should  decline  in value only about 1.8% or
$912,000  for a 1% increase  in rates.  The gain in value if rates fall would be
somewhat  less,  because  there  are  some  callable  bonds.   Marking-to-market
available for sale securities when rates change would add only modest volatility
to a strong level of equity.  This market risk acts to offset the interest  rate
risk (i.e.  if rates  decline and NIM is  squeezed,  there would be a concurrent
gain in the value of securities).


                                       43
<PAGE>


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.

Management's Discussion and Analysis
The Year Ended December 31, 2004 versus December 31, 2003

Summary

     Net income for 2004 was  $2,907,621  compared  with  $2,911,007  million in
2003.  Basic earnings per share for 2004 were $1.35 compared with $1.34 in 2003.
Return on average  assets  was 1.38% in 2004  compared  with 1.49% the  previous
year,  while  return on  average  equity  was  13.98% in 2004 and 14.39% for the
previous year.

     Total  assets  reached  $218.2  million in 2004, 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.

Net Interest Income

     Net  interest  income on a fully tax  equivalent  basis  increased  by $1.2
million to $10.4 million in 2004, up 12.7% from 2003 net interest income of $9.2
million.  The net interest margin for 2004 increased to 5.48% in 2004 from 5.24%
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 31.

Interest Income

     Interest income  increased by $1.0 million,  or 9.2%, to $12.0 million over
the $11.0 million  realized in 2003. The volume of earning  assets  increased by
7.8% to $190.4 million from $176.6  million in 2003,  while the yield on average
earning assets increased 8 basis points.

Interest Expense

     Interest  expense  decreased  by $169,000 to $1.6 million in 2004 from $1.7
million  in 2003.  The  average  rate paid on all  interest-bearing  liabilities
decreased from 1.29% in 2003 to 1.09% in 2004 while average  balances  increased
from $134.1 million to $142.4 million, a 6.2% gain over 2003. The gain in volume
of average  balances was responsible for a $42,000  increase in interest expense
offset by a  $211,000  decline  related to lower  interest  rates paid for a net
decline of $169,000.  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 31.


                                       44
<PAGE>


Provision for Loan Losses

     The provision for loan losses was $130,000 in 2004 and $20,000 in 2003. The
increase  in the  provision  was  the  result  of  management's  evaluation  and
assessment of the loan portfolio. Loans charged off, net of recoveries, resulted
in losses  totaling  $336,000  in 2004 and  $167,000  in 2003.  The  increase in
charge-offs  reflects loan problems related to the economic  downturn.  Refer to
Note D, page 62 for an  analysis of the  changes in the  allowance  for loan and
lease losses.

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 5.4% or $56,000 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.

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.
Refer to Note I, page 66, for a detailed  description of Non-Interest Income and
Other Non-Interest Expense.

     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 $4.0 million in 2004 compared with
$4.2 million in 2003.

     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.


                                       45
<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 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  Sarbanes-Oxley  and
examinations to audit compliance with many of the new consumer regulations, such
as Customer Privacy,  USA 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.

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.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

     Information regarding Quantitative and Qualitative Disclosures about Market
Risk appears on pages 40 through 43 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.

                                       46
<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 REGISTERED PUBLIC
                                 ACCOUNTING FIRM


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,  2005 and 2004,  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, 2005.
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, 2005 and 2004,  and the  consolidated
results of their  operations and their  consolidated  cash flows for each of the
three years in the period ended December 31, 2005, in conformity with accounting
principles generally accepted in the United States of America.

                                                              [GRAPHIC OMITTED]

January 24, 2006


                                       47
<PAGE>


                      SONOMA VALLEY BANCORP AND SUBSIDIARY

                           CONSOLIDATED BALANCE SHEETS

                           December 31, 2005 and 2004

<TABLE>
<S>                                                                      <C>                <C>
ASSETS                                                                  2005               2004
                                                                  --------------     --------------
   Cash and due from banks                                        $    6,988,820     $    5,471,669
   Federal funds sold                                                  2,050,000          9,840,000
   Interest-bearing due from banks                                        39,521             35,551
                                                                  --------------     --------------
                            Total cash and cash equivalents            9,078,341         15,347,220
   Investment securities available-for-sale, at fair value            33,917,094         20,253,490
   Investment securities held-to-maturity (fair value
       of $16,634,519 and $17,842,432, respectively)                  16,499,865         17,418,303
   Loans and lease financing receivables, net                        168,418,085        150,732,087
   Premises and equipment, net                                         1,178,666          1,364,879
   Accrued interest receivable                                         1,400,255          1,138,607
   Cash surrender value of life insurance                              9,239,439          8,913,136
   Other assets                                                        4,331,172          3,079,740
                                                                  --------------     --------------
                                               Total assets       $  244,062,917     $  218,247,462
                                                                  ==============     ==============
LIABILITIES
   Noninterest-bearing demand deposits                            $   49,460,864     $   44,557,377
   Interest-bearing transaction deposits                              35,586,113         34,912,205
   Savings and money market deposits                                  74,218,076         70,254,926
   Time deposits, $100,000 and over                                   32,011,640         25,307,661
   Other time deposits                                                24,482,074         18,630,846
                                                                  --------------     --------------
                                             Total deposits          215,758,767        193,663,015
   Accrued interest payable
   And other liabilities                                               4,864,357          3,903,287
                                                                  --------------     --------------

                                          Total liabilities          220,623,124        197,566,302
   Commitments and contingencies ( see accompanying notes )

SHAREHOLDERS' EQUITY
   Common stock, no par value; 10,000,000 shares
       authorized; 2,204,949 shares in 2005 and 2,142,104 in
       2004 issued and outstanding                                    16,256,427         15,528,940
   Retained earnings                                                   7,493,757          5,295,732
   Accumulated other comprehensive loss                                 (310,391)          (143,512)
                                                                  --------------     --------------
                                 Total shareholders' equity           23,439,793         20,681,160
                                                                  --------------     --------------

                 Total liabilities and shareholders' equity       $  244,062,917     $  218,247,462
                                                                  ==============     ==============
</TABLE>

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



                                       48
<PAGE>


                      SONOMA VALLEY BANCORP AND SUBSIDIARY

                      CONSOLIDATED STATEMENTS OF OPERATIONS

              For the years ended December 31, 2005, 2004 and 2003


<TABLE>
<S>                                                 <C>                 <C>                   <C>
                                                   2005                 2004                 2003
                                               -----------          -----------          -----------
INTEREST INCOME
 Loans and leases                              $11,923,589          $ 9,980,424          $ 9,446,841
 Taxable securities                              1,059,592              790,980              365,459
 Tax-exempt securities                             625,438              655,689              485,460
 Federal funds sold and other                       60,710              110,639              318,798
 Dividends                                          33,031               20,370               13,269
                                               -----------          -----------          -----------
             Total interest income              13,702,360           11,558,102           10,629,827

INTEREST EXPENSE
 Interest-bearing transaction deposits              57,905               51,744               50,454
 Savings and money market deposits                 826,657              434,671              466,081
 Time deposits, $100,000 and over                  851,427              667,862              729,758
 Other time deposits                               568,772              399,813              477,061
 Other                                              97,799                                        31
                                               -----------          -----------          -----------
            Total interest expense               2,402,560            1,554,090            1,723,385
                                               -----------          -----------          -----------
               NET INTEREST INCOME              11,299,800           10,004,012            8,906,442
 Provision for loan and lease losses               360,000              130,000               20,000
                                               -----------          -----------          -----------

         NET INTEREST INCOME AFTER
            PROVISION FOR LOAN AND
                      LEASE LOSSES              10,939,800            9,874,012            8,886,442

NON-INTEREST INCOME                              1,968,394            1,709,771            1,715,123
NON-INTEREST EXPENSE
 Salaries and employee benefits                  4,410,604            4,124,120            3,489,007
 Premises and equipment                            999,019              900,465              768,789
 Other                                           2,438,886            2,200,104            1,986,365
                                               -----------          -----------          -----------
        Total non-interest expense               7,848,509            7,224,689            6,244,161
                                               -----------          -----------          -----------

 Income before provision for income taxes        5,059,685            4,359,094            4,357,404
  Provision for income taxes                     1,711,156            1,451,473            1,446,397
                                               -----------          -----------          -----------
                        NET INCOME             $ 3,348,529          $ 2,907,621          $ 2,911,007
                                               ===========          ===========          ===========
              NET INCOME PER SHARE             $      1.54          $      1.35          $      1.34
              NET INCOME PER SHARE             ===========          ===========          ===========
                 ASSUMING DILUTION             $      1.45          $      1.25          $      1.23
                                               ===========          ===========          ===========
</TABLE>



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


                                       49
<PAGE>


                      SONOMA VALLEY BANCORP AND SUBSIDIARY

           CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY

              For the years ended December 31, 2005, 2004 and 2003
<TABLE>
<S>                                    <C>               <C>         <C>                <C>             <C>              <C>

                                                                                                     Accumulated
                                                                                                        Other
                                   Comprehensive             Common Stock             Retained       Comprehensive
                                      Income            Shares       Amount           Earnings          Income           Total
BALANCE AT                         -------------      ---------    ------------     ------------     -------------    ------------
 JANUARY 1, 2003                                      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
                                   ===========
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 losses
  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>

                                  (Continued)
                                       50
<PAGE>


                      SONOMA VALLEY BANCORP AND SUBSIDIARY

           CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
                                   (Continued)

              For the years ended December 31, 2005, 2004 and 2003

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

                                                                                                     Accumulated
                                                                                                        Other
                                   Comprehensive             Common Stock             Retained       Comprehensive
                                      Income            Shares       Amount           Earnings          Income           Total
                                   -------------      ---------    ------------     ------------     -------------    ------------
Redemption and retirement
 of stock                                                (5,616)   $    (41,165)    $    (72,503)                     $   (113,668)
Stock options exercised and
 related tax benefits                                    68,461         664,972                                            664,972
Cash dividends                                                                        (1,078,001)                       (1,078,001)
Stock options granted                                                   103,680                                            103,680
Net income for the year            $   3,348,529                                       3,348,529                         3,348,529
Other comprehensive income,
 net of tax:
 Unrealized holding losses
  on securities available-
  for-sale arising during
  the year, net of taxes
  of $116,709                           (166,879)
                                   -------------
Other comprehensive income,
 net of taxes                           (166,879)                                                    $    (166,879)       (166,879)
                                   -------------      ---------    ------------     ------------     -------------    ------------
Total comprehensive income         $   3,181,650
                                   =============
BALANCE AT
 DECEMBER 31, 2005                                    2,204,949    $ 16,256,427     $  7,493,757     $    (310,391)   $ 23,439,793
                                                      =========    ============     ============     =============    ============
</TABLE>




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




                                       51
<PAGE>


                      SONOMA VALLEY BANCORP AND SUBSIDIARY

                      CONSOLIDATED STATEMENTS OF CASH FLOWS

              For the years ended December 31, 2005, 2004 and 2003

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

                                                        2005               2004               2003
OPERATING ACTIVITIES                                ------------       ------------       ------------
 Net income                                         $  3,348,529       $  2,907,621       $  2,911,007
 Adjustments to reconcile net income
  to net cash provided by operating activities:
   Provision for loan and lease losses                   360,000            130,000             20,000
   Depreciation                                          307,202            306,747            224,774
   Loss on sale of equipment                                 306                206                 23
   Amortization and other                                166,269            153,510            115,551
   Stock options granted                                 103,680            103,680
   Net change in interest receivable                    (261,648)          (231,649)          (107,676)
   Net change in cash surrender value
    of life insurance                                   (326,303)          (297,536)          (342,888)
   Net change in other assets                         (1,002,386)           942,827            (47,325)
   Net change in interest payable
    and other liabilities                                961,070            383,045            146,078
                                                    ------------       ------------       ------------
                           NET CASH PROVIDED BY
                           OPERATING ACTIVITIES        3,656,719          4,398,451          2,919,544
INVESTING ACTIVITIES
 Purchases of securities held-to-maturity               (399,570)        (2,519,972)       (10,718,156)
 Purchases of securities available-for-sale          (15,014,859)        (8,653,217)       (17,216,738)
 Proceeds from maturing securities held-to
  maturity                                             1,219,406          1,551,900          4,028,400
 Proceeds from maturing securities available-
  for-sale                                             1,000,000          8,190,000            750,000
 Proceeds from sales of securities available-
  for-sale
 Net (increase) decrease in loans and leases         (18,045,998)       (31,028,098)         5,415,192
 Purchases of premises and equipment                    (122,095)          (361,506)          (663,645)
 Purchases of life insurance                                               (885,000)
 Proceeds from disposal of equipment                         800              3,669                550
                                                    ------------       ------------       ------------
                              NET CASH USED FOR
                           INVESTING ACTIVITIES      (31,362,316)       (33,702,224)       (18,404,397)
</TABLE>




                                   (Continued)

                                       52
<PAGE>



                      SONOMA VALLEY BANCORP AND SUBSIDIARY

                CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)

              For the years ended December 31, 2005, 2004 and 2003
<TABLE>
<S>                                                      <C>                <C>                <C>
                                                         2005               2004               2003
                                                    ------------       ------------       ------------
FINANCING ACTIVITIES
 Net change in demand, interest-bearing
  transaction and savings deposits                  $  9,540,545       $ 15,628,556       $ 18,904,842
 Net change in time deposits                          12,555,207         (2,080,157)         1,221,521
 Stock repurchases                                      (113,668)        (4,506,183)        (1,090,395)
 Stock options exercised                                 532,635          1,168,805            299,681
 Fractional shares purchased                                                 (7,498)           (14,193)
 Cash dividends paid                                  (1,078,001)          (906,732)
                                                    ------------       ------------       ------------
                          NET CASH PROVIDED BY
                          FINANCING ACTIVITIES        21,436,718          9,296,791         19,321,456
                                                    ------------       ------------       ------------
                        NET CHANGE IN CASH AND
                              CASH EQUIVALENTS        (6,268,879)       (20,006,982)         3,836,603
 Cash and cash equivalents
  at beginning of year                                15,347,220         35,354,202         31,517,599

                     CASH AND CASH EQUIVALENTS
                                AT END OF YEAR      $  9,078,341       $ 15,347,220       $ 35,354,202
                                                    ============       ============       ============

SUPPLEMENTAL DISCLOSURES OF
 CASH FLOW INFORMATION:

 Cash paid during the year for:
  Interest expense                                  $  2,367,482       $  1,550,556       $  1,731,256
  Income taxes                                      $  2,340,000       $    219,200       $  1,375,000

SUPPLEMENTAL DISCLOSURES OF
 NONCASH ACTIVITIES:

 Stock dividends                                                                          $  1,997,422
 Net change in unrealized gains and losses
  on securities                                     $   (283,588)      $   (283,916)      $   (110,009)
 Net change in deferred income taxes on unrealized
  gains and losses on securities                    $    116,709       $    116,844       $     45,274
</TABLE>

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




                                       53
<PAGE>


                      SONOMA VALLEY BANCORP AND SUBSIDIARY

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                        December 31, 2005, 2004 and 2003


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 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.


                                       54
<PAGE>


                      SONOMA VALLEY BANCORP AND SUBSIDIARY

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

                        December 31, 2005, 2004 and 2003


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.




                                       55
<PAGE>


                      SONOMA VALLEY BANCORP AND SUBSIDIARY

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

                        December 31, 2005, 2004 and 2003


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.  Leasehold  improvements  are amortized over the shorter of their useful
life or the lease term.

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.




                                       56
<PAGE>


                      SONOMA VALLEY BANCORP AND SUBSIDIARY

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

                        December 31, 2005, 2004 and 2003


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, 2005,  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.  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 and
2005.  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 2003 and 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>
                                                                2005                 2004                  2003
                                                           ---------------     -----------------     ----------------
Net income, as reported                                    $     3,348,529     $       2,907,621     $      2,911,007
Add:  Stock-based employee compensation expense
   included in reported net income, net of related tax
   effects                                                          61,011                61,011
Deduct:  Total stock based employee compensation
   expense determined under fair value based method
   for all awards, net of related tax effects                      (61,011)             (185,012)            (179,899)
                                                           ---------------     -----------------     ----------------
Pro forma net income                                       $     3,348,529     $       2,783,620     $      2,731,108
                                                           ===============     =================     ================
</TABLE>






                                       57
<PAGE>


                      SONOMA VALLEY BANCORP AND SUBSIDIARY

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

                        December 31, 2005, 2004 and 2003


NOTE A--SIGNIFICANT ACCOUNTING POLICIES (Continued)

<TABLE>
<S>                               <C>                    <C>                    <C>
                                  2005                   2004                   2003
                            ------------------    -------------------     -------------------

Earnings per share:
   Basic--as reported       $             1.54    $              1.35     $              1.34
   Basic--pro forma                       1.54                   1.30                    1.26
   Diluted--as reported                   1.45                   1.25                    1.23
   Diluted--pro forma                     1.45                   1.20                    1.16
</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 2006.
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, 2004 and there are no remaining  requisite services for stock options
granted prior to January 1, 2004.


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, 2005 and 2004 was $586,000 and
$424,000, respectively.






                                       58
<PAGE>







                      SONOMA VALLEY BANCORP AND SUBSIDIARY

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

                        December 31, 2005, 2004 and 2003


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
                                                       Cost                   Gain                   Losses          Fair Value
December 31, 2005:                                  ------------          ------------          ------------       ------------

Securities Available-For-Sale
 U.S. Treasury securities                           $  5,462,455                                $    (89,799)      $  5,372,656
 U.S. Government agency
  securities                                          28,982,106                                    (437,668)        28,544,438
                                                    ------------                                ------------       ------------
                                                    $ 34,444,561                                $   (527,467)     $  33,917,094
Securities Held-to-Maturity                         ============                                ============      =============
 Municipal securities                               $ 16,499,865          $    295,863          $   (161,209)     $  16,634,519
                                                    ============          ============          ============      =============
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
                                                   =============          ============          ============      =============
</TABLE>

Contractual maturities of investment securities at December 31, 2005 were as
follows:
<TABLE>
<S>                                                    <C>               <C>                      <C>               <C>
                                                     Securities Available-For-Sale              Securities Held-To-Maturity
                                                     -----------------------------              ---------------------------
                                                     Amortized                                  Amortized
                                                       Cost            Fair Value                 Cost          Fair Value
                                                     -----------------------------              --------------------------
Due in one year or less                              $11,219,100       $11,120,036              $   987,354    $   982,077
Due after one year through
 five years                                           22,225,461        21,798,029                3,337,364      3,332,080
Due after five years through
 ten years                                             1,000,000           999,029                8,554,139      8,579,084
Due after ten years                                                                               3,621,008      3,741,278

                                                     $34,444,561       $33,917,094              $16,498,865    $16,634,519
                                                     ===========       ===========              ===========    ===========
</TABLE>



                                       59

<PAGE>






                      SONOMA VALLEY BANCORP AND SUBSIDIARY
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

                        December 31, 2005, 2004 and 2003


NOTE C--INVESTMENT SECURITIES (Continued)

During  2005,   2004  and  2003,   the  Company  did  not  sell  any  securities
available-for-sale.

As of  December  31,  2005,  investment  securities  with a  carrying  amount of
$7,675,665  and an  approximate  fair  value  of  $7,854,363  were  pledged,  in
accordance  with  federal  and state  requirements,  as  collateral  for  public
deposits.  Investment  securities  with a  carrying  amount  and  fair  value of
$5,284,008  at December  31, 2005 were pledged to meet the  requirements  of the
Federal  Reserve and the U.S.  Department  of Justice.  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>
                                                                                   2005
                                                   -------------------------------------------------------------------
                                                          Less Than 12 Months                12 Months or Greater
                                                   -------------------------------     -------------------------------
                                                        Fair           Unrealized           Fair           Unrealized
Description of Securities                               Value            Losses             Value            Losses
-------------------------                          -------------     -------------     -------------     -------------

U.S. Treasury securities                           $     982,969     $      12,614     $   4,389,687     $      77,185
U.S. Government agency securities                      7,018,348            46,292        21,526,090           391,376
Municipal securities                                   3,380,940            37,025         4,771,878           124,184
                                                   -------------     -------------     -------------     -------------
Total temporarily impaired securities              $  11,382,257     $      95,931     $  30,687,655     $     592,745
                                                   =============     =============     =============     =============

                                                                                   2004
                                                   -------------------------------------------------------------------
                                                          Less Than 12 Months                12 Months or Greater
                                                   -------------------------------     -------------------------------
                                                        Fair           Unrealized           Fair           Unrealized
Description of Securities                               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
Municipal securities                                   5,835,964            40,747           867,178            20,168
                                                   -------------     -------------     -------------    --------------
Total temporarily impaired securities              $  23,842,262     $     231,818     $   3,114,370    $       72,976
                                                   =============     =============     =============    ==============
</TABLE>



                                       60
<PAGE>


                      SONOMA VALLEY BANCORP AND SUBSIDIARY

                    NOTES TO FINANCIAL STATEMENTS (Continued)

                        December 31, 2005, 2004 and 2003


NOTE C--INVESTMENT SECURITIES (Continued)

There were 22 U.S.  government agency  securities,  5 U.S. Treasury Notes and 14
municipal  securities in a continuous  unrealized  loss position at December 31,
2005 for 12 months or more. There were 20 U.S. government agency securities, one
U.S. Treasury Note and 15 municipal securities that were temporarily impaired as
of December 31, 2004. 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, 2005 and 2004.


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>
                                                    2005                      2004
                                        -----------------------      ------------------------

Commercial                              $ 118,590,731      69.1%     $ 109,324,569      71.2%
Consumer                                   21,804,507      12.7%        16,249,913      10.6%
Real estate mortgage                       13,251,137       7.7%         7,732,177       5.0%
Real estate construction                   18,004,805      10.5%        20,291,506      13.2%
Lease financing receivables, net of
   unearned income of $4,357 in
   2005 and $8,034 in 2004                     25,822       0.0%            47,717       0.0%
                                        -------------     -----      -------------     -----
                                          171,677,002     100.0%       153,645,882     100.0%
                                                          =====                        =====
Deferred loan fees and costs,  net           (482,410)                    (485,223)
Allowance for loan and lease
losses                                     (2,776,507)                  (2,428,572)
                                        -------------                -------------
                                        $ 168,418,085                $ 150,732,087
                                        =============                =============
</TABLE>


At December 31, 2005, the recorded  investment in loans for which impairment has
been  recognized  in  accordance  with SFAS No. 114 totaled  $1,137,000,  with a
corresponding  valuation  allowance  of  $250,000.  At December  31,  2004,  the
recorded  investment  in loans  for  which  impairment  has been  recognized  in
accordance  with  Statement  No. 114 totaled  $1,233,000,  with a  corresponding
valuation allowance of $223,000. For the years ended December 31, 2005, 2004 and
2003,  the  average  recorded  investment  in impaired  loans was  approximately
$1,060,000,  $1,263,000 and $843,000, respectively.  During 2005, 2004 and 2003,
$8,000,  $7,000 and $8,000 of interest was received and  recognized  on impaired
loans, respectively.




                                       61
<PAGE>


                      SONOMA VALLEY BANCORP AND SUBSIDIARY

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

                        December 31, 2005, 2004 and 2003


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

In  addition,  at  December  31,  2005 and 2004,  the Company did not have other
nonaccrual loans 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>
                                                     2005                2004
Fixed rate loan maturities                      -------------      -------------
  Three months or less                          $  10,168,260      $   3,913,861
  Over three months to twelve months               12,279,697         12,329,431
  Over one year to five years                      90,625,410         57,186,925
  Over five years                                  23,608,069         31,403,430
Floating rate loans repricing
  Quarterly or more frequently                     30,197,653         45,816,022
  Quarterly to annual frequency                        79,850            381,109
  One to five years frequency                       3,724,175          1,603,134
                                                -------------      -------------
                                                  170,683,145        152,633,912
Nonaccrual loans                                      993,888          1,011,970
                                                -------------      -------------
                                                $ 171,677,002      $ 153,645,882
                                                =============      =============
</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>
                                               2005           2004           2003
                                            ----------     ----------     ----------

Beginning balance                           $2,428,572     $2,634,625     $2,781,962
Provision for loan and lease losses            360,000        130,000         20,000
Loans charged off:
   Commercial                                  (53,337)      (290,000)      (142,572)
   Consumer                                    (16,976)       (63,007)       (41,161)
                                            ----------     ----------     ----------
                                               (70,313)      (353,007)      (183,733)
Recoveries:
   Commercial                                   55,055         15,416          8,320
   Consumer                                      3,193          1,538          8,076
                                            ----------     ----------     ----------
                                                58,248         16,954         16,396
                                            ----------     ----------     ----------
Ending balances                             $2,776,507     $2,428,572     $2,634,625
                                            ==========     ===========    ==========
</TABLE>



                                       62
<PAGE>


                      SONOMA VALLEY BANCORP AND SUBSIDIARY

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

                        December 31, 2005, 2004 and 2003


NOTE E--PREMISES AND EQUIPMENT

Premises and equipment consisted of the following at December 31:
<TABLE>
<S>                                                   <C>                    <C>
                                                      2005                   2004
                                                -----------------     ------------------

      Land                                      $         175,000     $          175,000
      Building                                             71,943                 71,943
      Leasehold improvements                              797,191                768,334
      Furniture, fixtures and equipment                 1,961,130              1,893,372
                                                -----------------     ------------------
                                                        3,005,264              2,908,649
      Less: Accumulated depreciation                   (1,826,598)            (1,543,770)
                                                -----------------     ------------------

                                                $       1,178,666     $        1,364,879
                                                =================     ==================
</TABLE>


NOTE F--TIME DEPOSITS

The maturities of time deposits at December 31, 2005 are as follows:
<TABLE>
<S>                                                <C>

      Maturing within one year                  $45,913,000
      Maturing in one year to two years           6,673,000
      Maturing two years through five years       3,908,000
                                                -----------
                                                $56,494,000
                                                ===========
</TABLE>



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 $22,000,000 at
December 31, 2005. The Company pledged loans totaling $108,872,000 as collateral
to secure advances from the Federal Home Loan Bank of up to  $44,678,580.  There
were no  borrowings  outstanding  under the  agreements at December 31, 2005 and
2004.


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 $131,549 in 2005, $109,628 in 2004 and $92,012 in 2003.





                                       63
<PAGE>


                      SONOMA VALLEY BANCORP AND SUBSIDIARY

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

                        December 31, 2005, 2004 and 2003


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, 2005 and 2004,  the cash
surrender   value  of  these  policies   totaled   $9,239,439  and   $8,913,136,
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 allow 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, 2005 and 2004,  the liability  recorded
for the executive officer  supplemental  retirement plan totaled  $1,701,811 and
$1,494,540, respectively. The amount of pension expense related to this plan for
2005 and 2004 was $207,271 and $54,570,  respectively.  At December 31, 2005 and
2004,  the  liability  recorded for the director  supplemental  retirement  plan
totaled  $476,001  and  $396,696,  respectively.  The amount of pension  expense
related to this plan for 2005 and 2004 was $79,305 and  $103,043,  respectively.
At  December  31,  2005  and  2004,  the  liability  recorded  for the  deferred
compensation plan totaled $1,285,194 and $1,129,334, respectively. The amount of
expense  related  to this  plan  for 2005 and  2004  was  $86,103  and  $84,785,
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
                                                   ----------------------------        ------------------------------
                                                      2005              2004              2005              2004
                                                   ----------        ----------        -----------        -----------

Projected benefit obligation                       $  567,281        $  500,810        $ 1,630,908        $ 1,405,912
Unamortized net transition obligation                 (91,280)         (104,114)            70,903             88,628
                                                   ----------        ----------        -----------        -----------

Benefit obligation included in other               $  476,001        $  396,696        $ 1,701,811        $ 1,494,540
    Liabilities                                    ==========        ==========        ===========        ===========
</TABLE>



The  weighted-average  discount rate used in determining  the actuarial  present
value of the projected  benefit  obligation was 6.75% for both 2005 and 2004. No
compensation  increases were assumed.  The entire accumulated benefit obligation
was fully vested at December 31, 2005 and 2004.



                                       64
<PAGE>


                      SONOMA VALLEY BANCORP AND SUBSIDIARY

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

                        December 31, 2005, 2004 and 2003


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>             <C>          <C>
                                                             Directors                                     Officers
                                             ----------------------------------------   ------------------------------------------
                                                2005           2004           2003           2005          2004           2003
                                             ------------   -----------   -----------   ------------   ------------   ------------



Benefit obligation at beginning of year      $    396,696   $   293,653   $   208,626   $  1,494,540   $  1,439,970   $  1,223,570
Net periodic pension cost:

   Service cost                                    30,469        39,201        71,387        134,943         35,454        319,856
   Interest cost on projected benefit
      Obligation                                   35,679        36,975        13,640         90,054         10,630        122,265
   Amortization of unrecognized
      liability at transition                       7,990        36,201                      (17,726)         8,486        (56,811)
   Amendments                                       5,167        (9,334)                                                  (168,910)
                                             -------------  -----------   -----------   ------------   ------------   ------------
   Net periodic pension cost recognized            79,305       103,043        85,027        207,271         54,570        216,400
                                             -------------  -----------   -----------   ------------   ------------   ------------
Benefit obligation at end of year            $    476,001   $   396,696   $   293,653   $  1,701,811   $  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>
                                       Directors         Officers
                                      ----------        ---------

      2007                            $    1,750
      2008                                 7,035       $   27,592
      2009                                10,676           27,592
      2010                                24,389          177,592
      2011 to 2015                       341,981        1,501,140
</TABLE>





                                       65
<PAGE>


                      SONOMA VALLEY BANCORP AND SUBSIDIARY

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

                        December 31, 2005, 2004 and 2003


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>
                                                                      2005                2004                 2003
                                                                 ----------------    ----------------    ----------------

Service charges on deposit accounts                              $      1,258,728    $      1,089,315    $      1,033,990
Other fee income                                                          364,157             305,847             323,780
Life insurance earnings                                                   326,303             297,536             342,888
Investment securities gains (losses)                                        5,094                   -                   -
Other (none exceeding 1% of revenues)                                      14,112              17,073              14,465
                                                                 ----------------    ----------------    ----------------
                                                                 $      1,968,394     $     1,709,771     $     1,715,123
                                                                 ================    ================    ================

Other non-interest expense is comprised of the following for the years ended
December 31:

                                                                      2005                2004                2003
                                                                 ---------------    ----------------    ----------------

Professional and consulting fees                                 $       952,681     $       750,846     $       679,460
Data processing                                                          478,991             462,709             473,932
Stationary and supplies                                                  122,578             168,496             160,992
Staff related                                                            173,777             167,026             175,801
Advertising and business development                                     245,063             201,409             165,142
Postage and telephone                                                    111,429             112,276             123,269
Assessments and insurance                                                150,049             152,172              30,948
Other (none exceeding 1% of revenues)                                    204,318             185,170             176,821
                                                                 ---------------    ----------------    ----------------
                                                                 $     2,438,886     $     2,200,104         $ 1,986,365
                                                                 ===============    ================    ================

</TABLE>





                                       66
<PAGE>


                      SONOMA VALLEY BANCORP AND SUBSIDIARY

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

                        December 31, 2005, 2004 and 2003


NOTE J--INCOME TAXES

The provision for income taxes is comprised of the following:
<TABLE>
<S>                             <C>                  <C>                  <C>
                                2005                 2004                 2003
                          -----------------     ----------------    -----------------

Current
     Federal              $       1,589,736     $        475,585    $         779,365
     State                          594,732              283,965              384,330
                          -----------------     ----------------    -----------------
                                  2,184,468              759,550            1,163,695
Deferred
     Federal                       (382,682)             520,909              228,634
     State                          (90,630)             171,014               54,068
                          -----------------     ----------------    -----------------
                                   (473,312)             691,923              282,702
                          -----------------     ----------------    -----------------
Provision for income      $       1,711,156     $      1,451,473    $       1,446,397
 taxes                    =================     ================    =================
</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>
                                                  2005                2004                  2003
                                            -----------------    -----------------     -----------------

 Income tax at Federal statutory rate       $       1,720,293    $       1,482,092     $       1,481,517

      State franchise tax, less Federal
            income tax benefit                        361,990              311,867               311,746
      Interest on municipal obligations exempt                                                                             )
            from Federal tax                         (247,467)            (269,872)             (217,541)
      Life insurance earnings                        (134,288)            (122,449)             (141,113)
      Incentive stock option expense                   42,669               42,669
      Meals and entertainment                           5,452                7,050                 8,175
      Other differences                               (37,493)                 116                 3,613
                                            -----------------    -----------------     -----------------
 Provision for income taxes                 $       1,711,156    $       1,451,473     $       1,446,397
                                            =================    =================     =================
</TABLE>








                                       67
<PAGE>


                      SONOMA VALLEY BANCORP AND SUBSIDIARY

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

                        December 31, 2005, 2004 and 2003


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>
                                                                          2005                 2004                 2003
                                                                    -----------------     ----------------    -----------------

     Deferred tax assets:
         Nonqualified benefit plans                                 $       1,427,237     $      1,244,196    $       1,125,765
         Allowance for loan losses                                            979,526              840,827              959,890
         Unrealized securities holding losses                                 217,076              100,407
         Accrued liabilities                                                  210,374              111,035               80,611
         State franchise taxes                                                202,481               96,810              130,672
         Other                                                                 64,389               21,038               13,773
                                                                    -----------------     ----------------    -----------------
                                      Total deferred tax assets             3,101,083            2,414,313            2,310,711

     Deferred tax liabilities:
         Depreciation                                                         128,231              143,513               74,347
         Unrealized securities holding gains                                                                             16,477
         Other                                                                 62,809               49,269               40,956
                                                                    -----------------     ----------------    -----------------
                                 Total deferred tax liabilities               191,040              192,782              131,780
                                                                    -----------------     ----------------    -----------------
                                        Net deferred tax assets     $       2,910,043     $      2,221,531    $       2,178,931
                                                                    =================     ================    =================
</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  receivable  was $219,573 at December 31, 2005 and income tax payable
was $4,006 at December 31, 2004.





                                       68
<PAGE>


                      SONOMA VALLEY BANCORP AND SUBSIDIARY

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

                        December 31, 2005, 2004 and 2003


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>
                                                      2005                 2004              2003
                                                  -----------           -----------        -----------
Basic:

Net income                                        $ 3,348,529           $ 2,907,621        $ 2,911,007
                                                  ===========           ===========        ===========
Weighted-average common shares outstanding          2,170,866             2,148,558          2,165,066
                                                  ===========           ===========        ===========
Earnings per share                                $      1.54           $      1.35        $      1.34
                                                  ===========           ===========        ===========

Diluted:

Net income                                        $ 3,348,529           $ 2,907,621        $ 2,911,007
                                                  ===========           ===========        ===========
Weighted-average common shares outstanding          2,170,866             2,148,558          2,165,066

Net effect of dilutive stock options - based
  on the treasury stock method using average
  market price                                        132,773               179,825            199,367
                                                  -----------           -----------        -----------

Weighted-average common shares outstanding
  and common stock equivalents                      2,303,639             2,328,383          2,364,433
                                                  ===========           ===========        ===========
Earnings per share - assuming dilution            $      1.45           $      1.25        $      1.23
                                                  ===========           ===========        ===========
</TABLE>


NOTE L--STOCK OPTION PLAN

The Company has a stock  option  plan (the Plan),  effective  March 31, 1996 and
terminated on May 14, 2002 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 may
have an exercise period of no more than 10 years, a portion of which are subject
to a graded vesting schedule of 20% per year.






                                       69
<PAGE>


                      SONOMA VALLEY BANCORP AND SUBSIDIARY

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

                        December 31, 2005, 2004 and 2003


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
was 67,500. No options were granted in 2005 and 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.

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
                            --------------------------------------------------------------------------------------------------
                                          2005                              2004                            2003
                            ------------------------------    ------------------------------    ------------------------------
                               Weighted-         Shares          Weighted-        Shares          Weighted-         Shares
                                Average                           Average                          Average
                            Exercise Price                    Exercise Price                    Exercise Price
                            ---------------    -----------    ---------------   ------------    --------------    ------------

Shares under option at
   beginning of year        $         12.94        179,730    $          8.27        147,269    $         8.24         170,435

Options granted                                                         20.71         67,500

Options exercised                      7.70        (45,295)              8.29        (35,039)             8.07         (23,166)

Options cancelled                     20.71         (1,350)
                                               -----------                      ------------                      ------------

Shares under option at
   end of year                        14.64        133,085              12.94        179,730              8.27         147,269
                                               ===========                      ============                      ============
Options exercisable at
   end of year                                      93,935                           125,730                           142,635

Weighted-average fair
 value of options
 granted during the
 year                                                                    7.68
</TABLE>




                                       70
<PAGE>


                      SONOMA VALLEY BANCORP AND SUBSIDIARY

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

                        December 31, 2005, 2004 and 2003


NOTE L--STOCK OPTION PLAN (Continued)
<TABLE>
<S>                                   <C>             <C>            <C>              <C>              <C>              <C>
                                                                 Nonstatutory Stock Options
                                  ------------------------------------------------------------------------------------------
                                                2005                           2004                              2003
                                  --------------------------      --------------------------      --------------------------
                                    Weighted-                       Weighted-                       Weighted-
                                     Average                         Average                         Average
                                  Exercise Price     Shares       Exercise Price     Shares       Exercise Price      Shares
                                  --------------    --------      --------------    --------      --------------     --------

Shares under option at
 beginning of year                $         8.05     208,465      $         8.00     319,670      $         7.89      338,145
Options exercised                           7.94     (23,165)               7.90    (111,205)               6.09      (18,475)
                                                    --------                        --------                         --------
Shares under option at
 end of year                                8.07     185,300                8.05     208,465                8.00      319,670
                                                    ========                        ========                         ========

Options exercisable at
 end of year                                         185,300                         208,465                          273,341
</TABLE>


The following table summarizes information about fixed stock options outstanding
at December 31, 2005:
<TABLE>
<S>                              <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                 6,735             1.27 years    $            5.79
$ 7.83  to  $ 7.97               211,916             3.29 years                 7.96
$ 9.73  to  $10.77                31,930             2.18 years                10.17
$14.51  to  $20.71                67,804             8.02 years                20.56
                          --------------
                                 318,385             5.08 years                10.81
$ 5.46  to  $20.71        ==============
</TABLE>






                                       71
<PAGE>


                      SONOMA VALLEY BANCORP AND SUBSIDIARY

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

                        December 31, 2005, 2004 and 2003


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

                              Options Exercisable
                      -----------------------------------
    Range of               Number        Weighted-Average
 Exercise Prices         Outstanding      Exercise Price
------------------    --------------   ------------------
$ 5.46  to  $ 6.53             6,735   $            5.79
$ 7.83  to  $ 7.97           211,916                7.96
$ 9.73  to  $10.77            31,930               10.17
$14.51  to   20.71            28,654               20.35
                      --------------

$5.46 to $20.71              279,235                9.43
                      ==============
</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, 2005 and 2004:
<TABLE>
<S>                                             <C>                  <C>
                                                2005                 2004
                                          ----------------    ------------------
Loans outstanding at beginning of year    $      3,474,000    $        3,095,000
Loans disbursements                              1,730,000             1,040,000
Loan repayments                                 (2,547,000)             (661,000)
                                          ----------------    ------------------
      Loans outstanding at end of year    $      2,657,000    $        3,474,000
                                          ================    ==================
</TABLE>


At December 31, 2005, commitments to related parties of approximately $2,220,000
were  undisbursed.   Deposits  received  from  directors  and  officers  totaled
$8,351,000 and $6,841,000 at December 31, 2005 and 2004, 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,
2005 and  2004 was  $14,140  and  $13,596,  respectively.  The  remaining  lease
commitment is approximately $33,860 through March 2008 including a




                                       72
<PAGE>


                      SONOMA VALLEY BANCORP AND SUBSIDIARY

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

                        December 31, 2005, 2004 and 2003


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  two  additional  5  year  terms  at the  same  Consumer  Price  Index
limitations.


NOTE N--COMMITMENTS AND CONTINGENT LIABILITIES

Lease Commitments:  The Company leases its three Sonoma offices,  the Glen Ellen
office and the Banco de Sonoma office under noncancelable  operating leases with
remaining terms of approximately four years, five years, five years, three years
and three 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 and the Sonoma  Finance Center lease have
the option to renew for two  consecutive  five-year  terms and the Sonoma  annex
office has an option to renew for one five-year period 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:
                    2006           $   348,905
                    2007               360,842
                    2008               359,937
                    2009               205,687
                    2010                25,363
                                   -----------
                                   $ 1,300,734
                                   ===========
</TABLE>


Rental expense was $347,000 in 2005, $318,000 in 2004 and $289,000 in 2003.

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
                                             2005               2004
                                         -------------     -------------

          Commitments to extend credit   $  48,643,000     $  34,574,000
          Standby letters of credit            348,000           360,000
</TABLE>




                                       73
<PAGE>


                      SONOMA VALLEY BANCORP AND SUBSIDIARY

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

                        December 31, 2005, 2004 and 2003


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 2005,  2004 or
2003.

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, 2005 and 2004 was $207,000 and $210,500, 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 and cheese producers.
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 89% 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%,  13% and 18%,  of  outstanding  loans,  respectively.  Standby
letters of credit were granted primarily to commercial



                                       74
<PAGE>


                      SONOMA VALLEY BANCORP AND SUBSIDIARY

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

                        December 31, 2005, 2004 and 2003


NOTE O--CONCENTRATIONS OF CREDIT RISK (Continued)

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. In addition,  deposits with two correspondent banks were in
excess of the federally  insured limit by $1,804,027 at December 31, 2005. 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,  2005,  the  Company  had life  insurance  policies  with cash
surrender values of $2,404,926,  $1,979,911, $1,796,550 and $1,782,142 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, 2005,  $3,872,811  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.







                                       75
<PAGE>


                      SONOMA VALLEY BANCORP AND SUBSIDIARY

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

                        December 31, 2005, 2004 and 2003


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, 2005, that the Bank
meets all capital adequacy requirements to which it is subject.

As of December 31, 2005, 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>           <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, 2005:
   Total Capital
      (to Risk Weighted Assets)         $ 24,514     11.4%     >$ 17,211     >8.0%     >$ 21,513     > 10.0%
                                                               -             -         -             -
   Tier I Capital
      (to Risk Weighted Assets)         $ 21,824     10.1%     >$  8,605     >4.0%     >$ 12,908     >  6.0%
                                                               -             -         -             -
   Tier I Capital
      (to Average Assets)               $ 21,824      9.1%     >$  9,576     >4.0%     >$ 11,970     >  5.0%
                                                               -             -         -             -

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%
                                                               -             -         -             -
</TABLE>








                                       76
<PAGE>


                      SONOMA VALLEY BANCORP AND SUBSIDIARY

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

                        December 31, 2005, 2004 and 2003


NOTE Q--CONDENSED FINANCIAL INFORMATION OF THE PARENT COMPANY

A  condensed  balance  sheet as of  December  31,  2005 and 2004 and the related
condensed  statement of operations  and cash flows for the years ended  December
31, 2005,  2004 and 2003 for Sonoma  Valley  Bancorp  (parent  company only) are
presented as follows:

                            Condensed Balance Sheets
                           December 31, 2005 and 2004
<TABLE>
<S>                                                          <C>              <C>
                                                             2005             2004
                                                          -----------     -----------
Assets
     Cash                                                 $   911,439     $   662,310
     Other assets                                             289,877         706,597
     Investment in common stock of subsidiary              22,459,620      19,373,503
                                                          -----------     -----------
                                     Total assets         $23,660,936     $20,742,410
                                                          ===========     ===========
Liabilities
     Accrued expenses                                     $   221,143     $    61,250

Shareholders' equity
     Common stock                                          16,256,427      15,528,940
     Retained earnings and other equity                     7,183,366       5,152,220
                                                          -----------     -----------
        Total liabilities and shareholders' equity        $23,660,936     $20,742,410
                                                          ===========     ===========
</TABLE>



                       Condensed Statements of Operations
              For the years ended December 31, 2005, 2004 and 2003

<TABLE>
<S>                                                     <C>           <C>            <C>
                                                        2005          2004           2003
                                                     ----------    ----------     ----------
Dividend from subsidiary                             $  500,000    $4,000,000     $1,500,000
Expenses                                                601,886       303,690        145,553
                                                     ----------    ----------     ----------
Income (loss) before income taxes and equity           (101,886)    3,696,310      1,354,447
     in undistributed income of subsidiary
Equity in undistributed net income of subsidiary      3,252,996      (877,370)     1,497,186
Income tax benefit                                      197,419        88,681         59,374
                                                     ----------    ----------     ----------
Net income                                           $3,348,529    $2,907,621     $2,911,007
                                                     ==========    ==========     ==========
</TABLE>





                                       77
<PAGE>


                      SONOMA VALLEY BANCORP AND SUBSIDIARY

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

                        December 31, 2005, 2004 and 2003


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

                          Condensed Statements of Cash
                  Flows For the years ended December 31, 2005,
                                  2004 and 2003
<TABLE>
<S>                                                          <C>             <C>              <C>
                                                             2005            2004             2003
                                                          -----------     -----------     -----------
Operating activities:
    Net income                                            $ 3,348,529     $ 2,907,621     $ 2,911,007
    Adjustments to reconcile net income to net cash
       Provided by operating activities:
       Equity in undistributed net income of                                                                          )
          subsidiary                                       (3,252,996)        877,370      (1,497,186)
       Stock options granted                                  103,680         103,680
       Net change in other assets                             549,057         169,526          20,292
       Net change in accrued expenses                         159,893         (14,210)         (8,707)
                                                          -----------     -----------     -----------
             Net cash provided by operating activities        908,163       4,043,987       1,425,406
                                                          -----------     -----------     -----------
Financing activities:
    Stock repurchases                                        (113,668)     (4,506,183)     (1,090,395)
    Stock options exercised                                   532,635       1,168,805         299,681
    Cash dividends paid                                    (1,078,001)       (906,732)
    Fractional shares purchased                                                (7,498)        (14,193)
                                                          -----------     -----------     -----------
                 Net cash used by financing activities       (659,034)     (4,251,608)       (804,907)
                                                          -----------     -----------     -----------
               Net change in cash and cash equivalents        249,129        (207,621)        620,499

        Cash and cash equivalents at beginning of year        662,310         869,931         249,432
                                                          -----------     -----------     -----------
              Cash and cash equivalents at end of year    $   911,439     $   662,310     $   869,931
                                                          ===========     ===========     ===========
Supplemental Disclosures of Noncash Activities:
    Stock Dividends                                                                       $ 1,997,422
</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

                                       78
<PAGE>


                      SONOMA VALLEY BANCORP AND SUBSIDIARY

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

                        December 31, 2005, 2004 and 2003


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>                  <C>               <C>
                                                           2005                                   2004
                                             ---------------------------------     ----------------------------------
                                             Carrying Amount    Estimated Fair     Carrying Amount     Estimated Fair
                                                                    Value                                  Value
                                             ---------------    -------------      ---------------     --------------
Financial assets:
     Cash and due from banks                 $  6,988,820       $  6,988,820       $  5,471,669        $  5,471,669
     Federal funds sold                         2,050,000          2,050,000          9,840,000           9,840,000
     Interest-bearing due from  banks              39,521             39,521             35,551              35,551
     Investment securities
         available-for-sale                    33,917,094         33,917,094         20,253,490          20,253,490
     Investment securities held-
         to-maturity                           16,499,865         16,634,518         17,418,303          17,842,432
     Loans and lease financing
      receivable, net                         168,418,085        168,520,446        150,732,087         151,518,077
     Accrued interest receivable                1,400,255          1,400,255          1,138,607           1,138,607
     Cash surrender value of life
      insurance                                 9,239,439          9,239,439          8,913,136           8,913,136

Financial liabilities:
     Deposits                                 215,758,767        216,317,041        193,663,015         193,663,015
     Accrued interest payable                      90,664             90,664             55,586              55,586

</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.



                                       79
<PAGE>


                      SONOMA VALLEY BANCORP AND SUBSIDIARY

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

                        December 31, 2005, 2004 and 2003


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 15, 2006,  the Board of Directors  declared a cash dividend of $0.25
per share to  shareholders  of record on March 1, 2006 and  payable on March 15,
2006.





                                       80

<PAGE>


ITEM  9.  CHANGES  IN AND  DISAGREEMENTS  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 INFORMATION.

         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 AND
RELATED STOCKHOLDER MATTERS.

     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.



                                       81

<PAGE>


                                     PART IV

ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES.

Financial Statements

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

                                                                           Page
                                                                          Number
     1.  Independent Auditor's Report ........................................47


     2.  Consolidated Balance Sheets as of December 31, 2005 and 2004 ........48

     3.  Consolidated Statements of Operations for the three years ended
         December 31, 2005, 2004 and 2003.....................................49

     4.  Consolidated Statements of Changes in Shareholders' Equity
         for the three years ended December 31, 2005, 2004 and 2003....50 and 51

     5.  Consolidated Statements of Cash Flows for the three years ended
         December 31, 2005, 2004 and 2003..............................52 and 53

     6.  Notes to Consolidated Financial Statements ..........................54

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.


                                       82
<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



                                       83

<PAGE>


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


                                       84
<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 15, 2006
---------------------------------------------
Mel Switzer, Jr.
President and
Chief Executive Officer
(Principal Executive Officer)



/s/ Mary Dieter Smith                                             March 15, 2006
---------------------------------------------
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 15, 2006
---------------------------------------------
Suzanne Brangham, Secretary
of the Board and Director



/s/ Dale T. Downing                                               March 15, 2006
---------------------------------------------
Dale T. Downing, Director



/s/ Frederick H. Harland                                          March 15, 2006
---------------------------------------------
Frederick H. Harland, Director



/s/ Robert B. Hitchcock                                           March 15, 2006
---------------------------------------------
Robert B. Hitchcock, Director



                                       85
<PAGE>


/s/ Gerald J. Marino                                              March 15, 2006
---------------------------------------------
Gerald J. Marino, Director



/s/ Gary D. Nelson                                                March 15, 2006
---------------------------------------------
Gary D. Nelson, Director



/s/ Robert J. Nicholas                                            March 15, 2006
---------------------------------------------
Robert J. Nicholas, Chairman
of the Board and Director



/s/ Angelo C. Sangiacomo                                          March 15, 2006
---------------------------------------------
Angelo C. Sangiacomo, Director



/s/ Jesse R. Stone                                                March 15, 2006
---------------------------------------------
Jesse R. Stone, Director



/s/ Mel Switzer, Jr.                                              March 15, 2006
---------------------------------------------
Mel Switzer, Jr., President, Chief
Executive Officer and Director
(Principal Executive Officer)



/s/ Harry Weise                                                   March 15, 2006
---------------------------------------------
Harry Weise, Director




/s/ Mary Dieter Smith                                             March 15, 2006
---------------------------------------------
Mary Dieter Smith, Executive Vice
President, Chief Operating Officer and
Chief Financial Officer (Principal
Finance and Accounting Officer)



                                       86