Early last year, the Federal Reserve’s abrupt reductions of interest rates threatened our ability to maintain net interest margins. This policy effectively reduced rates to zero later in the year.

In spite of these precipitous reductions, we were actually able to increase our net interest margin slightly for 2008, up to 3.62%, a modest increase of seven basis points over the year before. That was no easy accomplishment in a period punctuated by rapidly declining short term rates but increasing—and increasingly irrational—certificate of deposit rate pricing as the weaker banks scrambled to add deposits at any cost. We refused to participate in a competition without winners.

We let a number of higher cost certificates of deposit leave our bank rather than pay unprofitable rates to keep the money. As a result, our deposit base decreased about 10% to $510 million by the end of the year. This was not unanticipated. We have watched much of the post-Katrina deposit bubble gradually become deployed over the last two years, and the disruptions caused by the current economic conditions have only exacerbated that trend. As we move into 2009, we are seeing a gradual leveling off and eventual decline of deposit pricing.

Despite what you may have read in the headlines about the freeze in the credit markets, our loan volume actually increased by the end of 2008, although not at the rate we had hoped or expected at the beginning of the year. Our local economy is unquestionably feeling the effects of the national economic malaise. But we continue to aggressively seek quality loans. We enjoy a strong team of experienced lenders and credit analysts who are daily evaluating opportunities and deploying our funds in profitable loans.

The addition to our loan loss provision we took in the third quarter of 2008 leaves us in a solid conservative position going into 2009. Our program of carefully evaluating individual loans served us well following Katrina and continues to serve us well in the economic storm we endure today. As a result of our decisive action in the third quarter, our loan reserves remain high, giving us confidence that the worst is behind us.

What our global and national economy needs now to emerge from the current disaster is forceful but coherent leadership. The TARP program is a perfect example of the lack of consistent direction that has frozen capital markets in fear. At first the funds were approved by Congress to sop up the bad loans and complex investment concoctions festering on the books of so many major money center and regional banks. However, before the first funds were disbursed, the direction changed to simply provide handouts for capital cushions to those same banks who created the problem with no firm guidance on what to do with the money, thus rewarding bad behavior. Inevitably, banks did what common prudence would dictate — hoard the money in case the program changed again.

Our Board and senior management team wisely and politely said no thanks to the offer of federal bailout funds for two major reasons: 1) we did not need the money and 2) it came with some very significant restrictions.

First, the cost of issuing preferred shares at 5% is simply too high, when the prime loan rate is at 3.25%. No one can make money borrowing high and lending low.

Accepting federal funds requires participating banks to give up important aspects of their own governance. Participating banks must ask permission from the U.S. Treasury to raise dividends to shareholders. We raised our dividend twice in 2008, most recently in December. That decision

to share our profits with our shareholders will remain securely with our Board of Directors as long as we retain our independence from federal intervention.

Additionally, had we accepted federal assistance, we would have been forced to suspend our stock repurchase program. When the equity markets price our stock lower than its tangible book value, we must retain the flexibility to buy our own shares and sustain a reasonable price for our shareholders. We would also have been required to offer the Treasury options to purchase our common stock, which would be harmfully dilutive to present shareholders.

There may be more consequences lurking in the future. Banks accepting the TARP funds were obligated to agree to other undisclosed requirements that federal regulators may impose at some undetermined time. We concluded quickly that is no way to run a bank.

Experience is a great teacher, especially the lesson that there really is nothing new. The TARP program is actually an updated version of a Great Depression era federal program to purchase preferred shares in banks. The only difference then was that banks were forced to participate. The Peoples Bank reluctantly complied in 1935 but not without a struggle—the FDIC later refused a pre-payment of the funds that our bank did not want to accept in the first place. We eventually repaid the money and recovered our independence as soon as we were allowed. History has a way of repeating itself.

One of our great strengths is the value of an experienced, dedicated team of directors, senior management and staff who have weathered economic storms before. Our bank benefits from their wisdom and courage forged in adversity. That represents an incalculable asset, one that will profit us immensely in the inevitable better days to come.

On behalf of the entire team at The Peoples Bank, we thank you for your trust and support in our efforts to earn a handsome return on your investment in this company in bad times and good.

Sincerely yours,

Chevis C. Swetman

Chairman of the Board

President & Chief Executive Officer

Quarter Ended, 2008	March 31		June 30		September 30			December 31
Interest income	$	12,081	$	10,901	$	10,706		$	9,885
Net interest income		7,201		7,084		7,217			7,108
Provision for loan losses		46		48		2,001			252
Income before income taxes		3,128		3,262		(1,658	)		2,279
Net income		2,089		2,178		(1,053	)		1,820
Basic and diluted earnings per share		.39		.41		(.20	)		.35

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

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 Stock Market.

Year	Quarter	High		Low		Dividend per share
2008	1st	$	25.49	$	19.89	$	.27
	2nd		23.35		20.50
	3rd		23.57		18.00		.29
	4th		22.60		17.80
2007	1st	$	27.05	$	25.00	$	.23
	2nd		26.36		24.15
	3rd		25.50		18.20		.25
	4th		22.78		19.99

	2008			2007			2006			2005			2004
Balance Sheet Summary
Total assets	$	896,408		$	927,357		$	964,023		$	845,325		$	577,441
Available for sale securities		340,642			386,029			396,907			178,394			173,030
Held to maturity securities		3,394			4,630			85,574			134,047			6,588
Loans, net of unearned discount		467,377			450,992			401,194			349,346			334,193
Deposits		510,476			569,130			613,170			592,217			389,192
Borrowings from FHLB		36,938			7,100			7,267			7,352			7,203
Shareholders’ equity		107,000			106,542			98,233			87,503			85,801
Summary of Operations
Interest income	$	43,573		$	55,971		$	48,894		$	32,343		$	24,566
Interest expense		14,963			25,452			18,785			7,550			5,091
Net interest income		28,610			30,519			30,109			24,793			19,475
Provision for loan losses		2,347			(1,045	)		141			3,614			448
Net interest income after
provision for loan losses		26,263			31,564			29,968			21,179			19,027
Non-interest income		7,268			9,767			12,309			7,237			9,563
Non-interest expense		(26,520	)		(25,263	)		(23,050	)		(20,468	)		(20,765	)
Income before taxes and extraordinary gain		7,011			16,068			19,227			7,948			7,825
Applicable income taxes		1,977			5,042			6,459			2,604			2,031
Extraordinary gain											538
Net income	$	5,034		$	11,026		$	12,768		$	5,882		$	5,794
Per Share Data
Basic and diluted earnings per share	$	.94		$	2.01		$	2.30		$	1.06		$	1.04
Basic and diluted earnings per share before extraordinary gain		.94			2.01			2.30			.96			1.04
Dividends per share		.56			.52			.44			.38			.32
Book value		20.27			19.56			17.71			15.77			15.44
Weighted average number of shares		5,342,470			5,489,861			5,548,300			5,550,477			5,556,251
Selected Ratios
Return on average assets		.55%			1.15%			1.41%			.82%			1.00%
Return on average equity		4.73%			10.77%			13.75%			6.79%			6.84%
Primary capital to average assets		12.81%			12.13%			11.91%			13.67%			15.87%
Risk-based capital ratios:
Tier 1		18.03%			18.38%			19.87%			20.26%			23.04%
Total		19.28%			19.63%			21.12%			21.51%			24.29%

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

Asset Management & Trust Services	Long Beach
758 Vieux Marché, Biloxi, MS 39530	298 Jeff Davis Avenue, Long Beach, Mississippi 39560
(228) 435-8208	(228) 897-8712
Bay St. Louis	Ocean Springs
408 Highway 90 East, Bay St. Louis, Mississippi 39520	2015 Bienville Boulevard, Ocean Springs, Mississippi 39564
(228) 467-9296	(228) 435-8204
Cedar Lake	Orange Grove
1740 Popps Ferry Road, Biloxi, Mississippi 39532	12020 Highway 49 North , Gulfport, Mississippi 39503
(228) 435-8688	(228) 897-8718
Diamondhead	Pass Christian
5429 West Aloha Drive, Diamondhead, Mississippi 39525	301 East Second Street, Pass Christian, Mississippi 39571
(228) 255-4450	(228) 897-8719
D’Iberville-St. Martin	Saucier
10491 Lemoyne Boulevard, D’Iberville, Mississippi 39540	17689 Second Street, Saucier, Mississippi 39574
(228) 435-8202	(228) 897-8716
Downtown Gulfport	Waveland
1105 30th Avenue, Gulfport, Mississippi 39501	470 Highway 90, Waveland, Mississippi 39576
(228) 897-8715	(228) 467-7257
Gautier	West Biloxi
2609 Highway 90, Gautier, Mississippi 39553	2560 Pass Road, Biloxi, Mississippi 39531
(228) 497-1766	(228) 435-8203
Handsboro	Wiggins
412 E. Pass Road, Gulfport, Mississippi 39507	1312 S. Magnolia Drive, Wiggins, Mississippi 39577
(228) 897-8717	(601) 928-1761 or (228) 897-8722

CORPORATE OFFICE	Shareholder Information
Mailing Address	For complete information concerning the common
P. O. Box 529	stock of Peoples Financial Corporation,
Biloxi, MS 39533-0529	including dividend reinvestment, or general
Physical Address 152 Lameuse Street Biloxi, MS 39530 (228) 435-8205  Website www.thepeoples.com	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
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.    Howe Barnes Hoefer & Arnett    Knight Equity Markets, L.P.    Morgan Keegan & Company, Inc.    Sterne, Agee & Leach, Inc.    Stifel Nicolaus & Co.	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
J. Patrick Wild, Vice-President

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
J. Patrick Wild, 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