PEOPLES FINANCIAL CORPORATION 2007 S U M M A R Y R E P O R T

NET INCOME FROM 2005 . $5,882 OPERATIONS 2006 ... $10,094 EXCLUSIVE OF 2006 INSURANCE SETTLEMENT 2007 .. $11,026 (IN THOUSANDS) On the cover: The 6,000-square-foot Pass Christian branch opened at the end of 2007, completing a year of capital investment. The four-floor, 30,000-square-foot extension of the Main Office extends the architectural design of our existing headquarters around the corner to historic Howard Avenue.

TO OUR SHAREHOLDERS I am pleased to report that we enjoyed a profitable year in 2007, with solid increases in operating earnings, loan volume and non-interest income. Our financial performance enabled your Board of Directors to increase the dividend to stockholders for the eighth consecutive time and to launch a new stock repurchase program. In December, the semi-annual dividend was raised to $.27 per common share, an increase of 8% over the $.25 per share paid for the first half of 2007. The current annualized dividend of $.52 per share is 18% more than dividends paid in 2006 and 37% higher than 2005. In July, the Board authorized the repurchase of 2.5%, or about 136,000, of the outstanding shares of the Company. The Board authorized a similar 2.5% repurchase program in November, 2002 and approved a three-year extension of the plan in November, 2005. That program was completed in July, and the Board decided to launch a new repurchase upon conclusion of the earlier program. This dual move demonstrates our commitment to reward our stockholders today, even as we prepare for increased business and economic growth tomorrow. We were also able to reverse some of the loan loss provision we took in the first few days after Katrina. After two years, our senior management determined that sufficient time had passed for any material losses to become apparent. It made prudent business sense to reverse some of the loss provision, as a number of loans with large specific reserves were actually paid in full. Capital investment program is completed The most significant achievements of 2007 point to the promise we see in the future of our institution and our community. On these pages a year ago, I reported to you that your company and your bank were moving full speed ahead with an ambitious capital program to position our institution for the inevitable growth that lies ahead for our economy. Today, I am gratified to say that 2007 witnessed the completion of that capital program. In the first quarter of the year we opened our new Gautier branch. Three months later, we held a grand opening for our completely renovated Orange Grove branch in Gulfport. Near the end of the year, we moved several administrative departments into our new Biloxi Main Office expansion. The extension includes 30,500 square feet of space on four floors that match our existing historic building in finishes, color and design. The facade of the expansion extends the architectural design of our Main Office around the corner to enhance the streetscape of historic Howard Avenue in downtown Biloxi. The new building connects to the original Main Office by means of a second-level bridge so that our existing drive-up teller lanes are not affected. The second floor of the new extension also includes technologically advanced meeting and training rooms to enhance employee development and continuing education programs.

Just days before New Year’s Eve, we staged a festive grand opening of our new Pass Christian branch. The 6,000 square foot building features architectural elements that recall the Garden District of New Orleans and some of the original buildings that formerly stood in downtown Pass Christian. The design elements include a stucco finish, double-hung windows and shutters and wrought-iron porch elements, with metal roofs covering the drive-through tellers and the front entrance.

The Main Office expansion and the new Pass Christian branch both have been cited by local officials as anchors for the redevelopment of their respective downtowns.

Inside both our new and existing buildings, we also made substantial investments to upgrade our technology. We implemented a new teller capture system that improves the productivity of our front-line tellers in all 16 of our branches. We installed a new telephone system based on Voice Over Internet Protocol (VOIP) that will provide us advanced internal and external communication capabilities while saving operating expenses each month.

Finally, we have launched a merchant deposit capture system that will electronically process checks and money orders directly from the customer’s place of business. Our Merchant Deposit Capture program is like bringing the bank’s teller window to our customers’ businesses, giving them added convenience and eliminating the need for a trip to the branch. Convenience to our customers translates to competitive advantage for our bank.

The Orange Grove branch in
Gulfport was extensively renovated,
including raising the center of the
roof to create a light well that
shines into the lobby area.

Economic crisis offers long-term opportunities

Beyond bricks and mortar, one of the most significant steps we took during 2007 to enhance our long-term prosperity was the establishment of a Mortgage Loan Department. In view of the widespread distress in the housing market, you may well ask yourself why we decided to get into this business just when everyone else is getting out, battered, bruised and bewildered about how the situation could get this bad.

That is precisely the reason. Your bank is zigging when everyone else is zagging. We have the pleasant position of a strong capital base, solid earnings and a knowledgeable team that knows how to avoid risk in real estate lending while earning a reasonable return.

Just as we were the first financial institution on the Gulf Coast to move aggressively into the gaming industry nearly 20 years ago, now we have made the carefully reasoned decision to be a late mover into the real estate mortgage business.

Although the pace and progress of rebuilding the Mississippi Gulf Coast continues to move more slowly than any of us wants, the recovery is taking place. And as it develops, The Peoples Bank stands ready to satisfy the demand for credit in the residential market.

The sub-prime mortgage catastrophe ended as all bubbles must—with a sudden collapse and implosion. While real estate prices in other markets around the country routinely ratcheted up like numbers on a pinball machine, our own market has been much less frothy, although we have seen a steady increase in the price of construction for labor, materials and insurance.

We completed extensive renovations to the second floor of Biloxi’s landmark Ellzey Building, which became the Gulf Coast headquarters of Dale-Morris Architects, designers of both the Main Office extension and the Pass Christian Branch of The Peoples Bank.

Now we see that the recovery money is starting to flow, our infrastructure is being rebuilt and our residents need new homes. For the most part, recovery grants and insurance settlements are not enough to cover the entire cost, so homeowners will be seeking mortgages to make up the difference. Unlike the sub-prime market, however, residents on the Gulf Coast are more likely to hold significant equity in their properties, earn a stable income and view their residences as homes, not ATMs or investments.

All of these factors give your Board of Directors the confidence that the real estate market is a space we want to occupy in the years ahead. Our combination of abundant capital, convenient reach into virtually every community along the Coast and an experienced team of local lenders makes The Peoples Bank an attractive option for home buyers. More than ever, mortgage borrowers will want to do business with people they know and trust.

The problems faced by large national banks and unregulated mortgage brokers do not intimidate us, because we know that Gulf Coast real estate faces a different set of market forces. Our pricing structure is not the product of speculative greed. Our supply of residential housing is proportional to the numbers of residents here. Our job base is growing, and our people seek quality housing at a reasonable price. In short, we see opportunity.

We will continue to maintain a rigid discipline in our lending and credit underwriting policies. We will lend money to well qualified buyers whom we know and who want to live here on the Mississippi Gulf Coast. This is what we mean by investing in our community by investing in our residents.

...and near-term challenges

As we move into 2008, however, the credit crisis has generated its own set of new challenges for our bank—and every other bank, for that matter. The Federal Reserve’s rapid response in lowering interest rates by as much as 125 basis points in January has placed a burden on our ability to maintain our interest margin objectives. We expect to see additional interest rate cuts well into 2008.

Back in the fourth quarter of 2007, our senior management and credit analysts projected that interest rates were likely to go down during 2008, and we began to structure our balance sheet accordingly. However, when interest rates change so fast and so far in either direction, it is impossible to adjust our assets (loans and securities) and liabilities (deposits) quickly enough to compensate completely. The result is a significant—perhaps painful—squeeze on interest margins.

We cannot predict how long this situation will last. However, I assure you that we are moving as quickly as possible to balance our cost of funds to enable us to generate loans at competitive rates in an uncertain economic environment.

For more than 110 years, we have survived and prospered through economic depressions, savings & loans calamities and a host of other financial downturns. Your bank will weather this crisis as well. After all, we do know something about weathering—we have survived Camille and Katrina.

While our near-term operating results may feel some impact from the current fissures in our macro economic climate, we have enormous faith in the potential of our community and our region. I remain confident that our terrific team of bankers, managers and directors will continue to generate handsome returns on your investment in our institution. I hope you join me in thanking them for their perseverance and dedication through these years of challenge.

Sincerely,

Chevis C. Swetman
Chairman of the Board, President & CEO

Peoples Financial Corporation and Subsidiaries

Quarter Ended, 2007	March 31		June 30		September 30			December 31
Interest income	$	13,795	$	14,280	$	14,336		$	13,560
Net interest income		7,429		7,565		7,860			7,665
Provision for loan losses		49		51		(1,197	)		52
Income before income taxes		4,003		3,196		4,975			3,894
Net income		2,715		1,986		3,395			2,930
Basic and diluted earnings per share		.49		.36		.62			.54

Quarter Ended, 2006	March 31		June 30		September 30		December 31
Interest income	$	10,505	$	11,489	$	13,151	$	13,749
Net interest income		7,507		7,505		7,607		7,490
Provision for loan losses		35		42		48		16
Income before income taxes		3,823		3,976		4,115		7,313
Net income		2,533		2,556		2,685		4,994
Basic and diluted earnings per share		.46		.46		.48		.90

Market Information

The Company’s stock is traded under the symbol PFBX and is quoted in publications under “PplFnMS”. The following table sets forth the high and low sale prices of the Company’s common stock as reported on the NASDAQ Capital Market Exchange.

Year	Quarter	High		Low		Dividend per share
2007	1st	$	27.05	$	25.00	$	.23
	2nd		26.36		24.15
	3rd		25.50		18.20		.25
	4th		22.78		19.99
2006	1st	$	19.19	$	16.85	$	.20
	2nd		22.59		18.59
	3rd		26.50		21.70		.21
	4th		28.00		24.90

Peoples Financial Corporation and Subsidiaries

	2007			2006			2005			2004			2003
Balance Sheet Summary
Total assets	$	927,357		$	964,023		$	845,325		$	577,441		$	579,669
Available for sale securities		387,029			397,207			178,394			173,030			207,486
Held to maturity securities		4,630			85,574			134,047			6,588			4,353
Loans, net of unearned discount		450,992			401,194			349,346			334,193			302,155
Deposits		569,130			613,170			592,217			389,192			376,789
Borrowings from FHLB		7,100			7,267			7,352			7,203			17,070
Long term notes payable														110
Shareholders’ equity		106,542			98,233			87,503			85,801			83,504
Summary of Operations
Interest income	$	55,971		$	48,894		$	32,343		$	24,566		$	25,065
Interest expense		25,452			18,785			7,550			5,091			5,838
Net interest income		30,519			30,109			24,793			19,475			19,227
Provision for loan losses		(1,045	)		141			3,614			448			447
Net interest income after provision for loan losses		31,564			29,968			21,179			19,027			18,780
Non-interest income		9,767			12,309			7,237			9,563			9,737
Non-interest expense		(25,263	)		(23,050	)		(20,468	)		(20,765	)		(21,464	)
Income before taxes and extraordinary gain		16,068			19,227			7,948			7,825			7,053
Applicable income taxes		5,042			6,459			2,604			2,031			2,035
Extraordinary gain								538
Net income	$	11,026		$	12,768		$	5,882		$	5,794		$	5,018
Per Share Data
Basic and diluted earnings per share	$	2.01		$	2.30		$	1.06		$	1.04		$	.90
Basic and diluted earnings per share before extraordinary gain		2.01			2.30			.96			1.04			.90
Dividends per share		.52			.44			.38			.32			.29
Book value		19.56			17.71			15.77			15.44			15.03
Weighted average number of shares		5,489,861			5,548,300			5,550,477			5,556,251			5,563,015
Selected Ratios
Return on average assets		1.15	%		1.41	%		.82	%		1.00	%		.88	%
Return on average equity		10.77	%		13.75	%		6.79	%		6.84	%		6.07	%
Primary capital to average assets		12.13	%		11.91	%		13.67	%		15.87	%		15.79	%
Risk-based capital ratios:
Tier 1		18.38	%		19.87	%		20.26	%		23.04	%		23.56	%
Total		19.63	%		21.12	%		21.51	%		24.29	%		24.81	%

Main Office 152 Lameuse Street, Biloxi, Mississippi 39530 (228) 435-5511

Asset Management & Trust Services

758 Vieux Marché, Biloxi, MS 39530

(228) 435-8208

Bay St. Louis

408 Highway 90 East, Bay St. Louis, Mississippi 39520

(228) 897-8710

Cedar Lake

1740 Popps Ferry Road, Biloxi, Mississippi 39532

(228) 435-8688

Diamondhead

5429 West Aloha Drive, Diamondhead, Mississippi 39525

(228) 897-8714

D’Iberville-St. Martin

10491 Lemoyne Boulevard, D’Iberville, Mississippi 39540

(228) 435-8202

Downtown Gulfport

1105 30th Avenue, Gulfport, Mississippi 39501

(228) 897-8715

Gautier

2609 Highway 90, Gautier, Mississippi 39553

(228) 435-8694

Handsboro

412 E. Pass Road, Gulfport, Mississippi 39507

(228) 897-8717

Long Beach

298 Jeff Davis Avenue, Long Beach, Mississippi 39560

(228) 897-8712

Ocean Springs

2015 Bienville Boulevard, Ocean Springs, Mississippi 39564

(228) 435-8204

Orange Grove

12020 Highway 49 North, Gulfport, Mississippi 39503

(228) 897-8718

Pass Christian

301 East Second Street, Pass Christian, Mississippi 39571

(228) 897-8719

Saucier

17689 Second Street, Saucier, Mississippi 39574

(228) 897-8716

Waveland

470 Highway 90, Waveland, Mississippi 39576

(228) 467-7257

West Biloxi

2560 Pass Road, Biloxi, Mississippi 39531

(228) 435-8203

Wiggins

1312 S. Magnolia Drive, Wiggins, Mississippi 39577

(601) 928-1761 or (228) 897-8722

Peoples Financial Corporation and Subsidiaries

Corporate Office
Mailing Address
P. O. Box 529
Biloxi, MS 39533-0529

Physical Address
152 Lameuse Street
Biloxi, MS 39530
(228) 435-8205

Website
www.thepeoples.com

Corporate Stock

The common stock of Peoples Financial Corporation is traded on the NASDAQ Capital Market under the symbol: PFBX. The current market makers are:

FIG Partners
FTN Midwest Research Secs.
Knight Equity Markets, L.P.
Morgan Keegan & Company, Inc.
Sterne, Agee & Leach, Inc.
Stifel Nicolaus & Co.

Shareholder Information

For complete information concerning the common stock of Peoples Financial Corporation, including dividend reinvestment, or general information about the Company, direct inquiries to transfer agent/investor relations:

Asset Management & Trust Services Department
The Peoples Bank, Biloxi, Mississippi
P. O. Box 1416, Biloxi, Mississippi 39533-1416
(228) 435-8208, e-mail: investorrelations@thepeoples.com

Independent Auditors
Porter Keadle Moore, LLP
Atlanta, Georgia

S.E.C. Form 10-K Requests

A copy of the Annual Report on Form 10-K, as filed with the Securities and Exchange Commission, may be obtained without charge by directing a written request to:

Lauri A. Wood, Chief Financial Officer and Controller
Peoples Financial Corporation
P. O. Drawer 529, Biloxi, Mississippi 39533-0529
(228) 435-8412, e-mail: lwood@thepeoples.com

B O A R D  O F  D I R E C T O R S

Peoples Financial Corporation
Chevis C. Swetman, Chairman of the Board
Dan Magruder, Vice-Chairman; President, Rex Distributing Co., Inc.
Drew Allen, President, Allen Beverages, Inc.
Rex E. Kelly, Business Executive (retired)
Lyle M. Page, Partner, Page, Mannino, Peresich & McDermott, PLLC

O F F I C E R S

Peoples Financial Corporation
Chevis C. Swetman, President and CEO
A. Wes Fulmer, Executive Vice-President
Thomas J. Sliman, First Vice-President
Jeannette E. Romero, Second Vice-President
Robert M. Tucei, Vice-President
Lauri A. Wood, Chief Financial Officer and Controller
Ann F. Guice, Vice-President and Secretary

B O A R D  O F  D I R E C T O R S

The Peoples Bank, Biloxi, Mississippi
Chevis C. Swetman, Chairman of the Board
Tyrone J. Gollott, Vice-Chairman; President, G & W Enterprises, Inc.
Drew Allen, President, Allen Beverages, Inc.
Liz Corso Joachim, President, Frank P. Corso, Inc.
Rex E. Kelly, Business Executive (Retired)
Dan Magruder, President, Rex Distributing Co., Inc.
Jeffrey H. O’Keefe, President, Bradford-O’Keefe Funeral Homes, Inc.
Lyle M. Page, Partner, Page, Mannino, Peresich & McDermott, PLLC

S E N I O R  M A N A G E M E N T

The Peoples Bank, Biloxi, Mississippi
Chevis C. Swetman, President and CEO
A. Wes Fulmer, Executive Vice-President
Thomas J. Sliman, Senior Vice-President
Jeannette E. Romero, Senior Vice-President
Robert M. Tucei, Senior Vice-President
Lauri A. Wood, Senior Vice-President and Cashier
Ann F. Guice, Senior Vice-President

Seated from left: Lyle M. Page*, Liz Corso Joachim, Tyrone J. Gollott
Standing from left: Rex E. Kelly, Jeffrey H. O’Keefe, Chevis C. Swetman*, Drew Allen*, Dan Magruder*

* Member of both boards