Forward-Looking Statements

In addition to historical information, this Form 10-Q report contains forward-looking statements within the meaning of the federal securities laws. The Corporation cautions that there are various factors that could cause actual results to differ materially from the anticipated results or other expectations expressed in the Corporation's forward-looking statements; accordingly, there can be no assurance that such indicated results will be realized.

These factors include asset quality; the adequacy of the allowance for loan losses; technology difficulties or failures; the Corporation's ability to execute its business strategy; the loss of key personnel; competition; changes in regulation and monetary policy; legislative and regulatory initiatives regarding deregulation and restructuring of the banking industry; acquisitions or dispositions of assets or internal restructuring, that may be pursued by the Corporation; changes in or application of environmental and other laws and regulations to which the Corporation is subject; political, legal and local economic conditions and developments; financial market conditions and the results of financing efforts; changes in commodity prices and interest rates; weather, natural disasters and other catastrophic events; and other factors discussed in the Corporation's other filings with the Securities and Exchange Commission.

Readers are cautioned not to place undue reliance on any forward-looking statements made by or on behalf of the Corporation. Any such statement speaks only as of the date the statement was made. The Corporation undertakes no obligation to update or revise any forward-looking statements. Additional information with respect to factors that may cause results to differ materially from those contemplated by such forward-looking statements is included in the Corporation's current and subsequent filings with the Securities and Exchange Commission.

Overview

The Corporation is a full-service community bank holding company headquartered in Moultrie, Georgia. The community of Moultrie has been served by the Corporation and its predecessors since 1928. We provide comprehensive financial services to consumer, business and governmental customers, which, in addition to conventional banking products, include a full range of mortgage banking, trust, investment and insurance services. Our primary market area incorporates Colquitt County, where we are headquartered, and Baker, Thomas, Lowndes, and Worth Counties, each contiguous with Colquitt County. We have four full service banking facilities, six automated teller machines, and one loan production office.

Our strategy is to:
* maintain the diversity of our revenue, including growth in both interest and noninterest income through a broad base of business,
* strengthen our sales and marketing efforts while developing our employees to provide the best possible service to our customers,
* expand our market share where opportunity exists, and
* grow outside of our current geographic footprint, through acquisitions, into areas proximate to our current market area.

We believe that investing in sales and marketing in this challenging market will provide us with a competitive advantage. To that end, we have continued with our plans to expand geographically with a loan production office in Valdosta, Georgia. We have leadership in place and are looking to identify a permanent site for a de novo branch.

The Corporation's profitability, like most financial institutions, is dependent to a large extent upon net interest income, which is the difference between the interest received on earning assets, such as loans, securities and federal funds sold, and the interest paid on interest-bearing liabilities, principally deposits and borrowings. Net interest income is highly sensitive to the fluctuations in interest rates. This quarter the Federal Reserve Bank held short-term rates at 2.00% after dropping the rate by .25% during the second quarter, 2% during the first quarter of 2008 and 1% in the latter part of 2007. After holding the banks overnight borrowing rate at 5.25% for 15 months, the Federal Reserve has decreased the short-term interest rate by 3.25% since September 2007. Also, since September 30, 2008, they have dropped the Federal funds rate another 1% down to 1%. With the rapid change in the Federal funds rate, there was the same movement in our prime-indexed adjustable loan rates. This rapid drop in the prime-indexed loan yields combined with lagging changes in the interest cost of certificates of deposit and other interest-bearing funds makes it a very challenging rate environment in order to maintain our interest rate spread.

Our profitability is impacted as well by operating expenses such as salaries and employee benefits, occupancy and other operating expenses, including income taxes. Our lending activities are significantly influenced by regional and local factors. Some specific factors include changes in population, competition among lenders, interest rate conditions and prevailing market rates on competing uses of funds and investments, customer preferences and levels of personal income and savings in the Corporation's primary market area.

To address interest rate fluctuations out of our control, we manage our balance sheet in an effort to diminish the impact of sudden interest rates changes by broadening our revenue sources to reduce the risk and exposure of our financial results to the impact of changes in interest rates, which is outside of our control. As a result of our strategy to diversify revenue, noninterest income has grown over the last few years, with the exception of this quarter's unusual loss. Sources of noninterest income include our insurance agency and Empire, the Corporation's commercial mortgage banking subsidiary, as well as fees on customer accounts, trust and retail brokerage services.

Critical Accounting Policies

In the course of the Corporation's normal business activity, management must select and apply many accounting policies and methodologies that lead to the financial results presented in the consolidated financial statements of the Corporation. Management considers the accounting policy relating to the allowance for loan losses to be a critical accounting policy because of the uncertainty and subjectivity inherent in estimating the levels of allowance needed to cover probable credit losses within the loan portfolio and the material effect that these estimates can have on the Corporation's results of operations. We believe that the allowance for loan losses as of September 30, 2008 is adequate, however, under adversely different conditions or assumptions, future additions to the allowance may be necessary. There have been no significant changes in the methods or assumptions used in our

accounting policies that require material estimates and assumptions. Note 1 to the Consolidated Financial Statements provides a description of our significant accounting policies and contributes to the understanding of how our financial performance is reported.

LIQUIDITY AND CAPITAL RESOURCES

Liquidity management involves the ability to meet the cash flow requirements of customers who may be either depositors wanting to withdraw their funds or borrowers needing assurance that sufficient funds will be available to meet their credit needs. In the ordinary course of business, the Corporation's cash flows are generated from interest and fee income as well as from loan repayments and the maturity or sale of other earning assets. In addition, liquidity is continuously provided through the acquisition of new deposits and borrowings or the rollover of maturing deposits and borrowings. The Corporation strives to maintain an adequate liquidity position by managing the balances and maturities of interest-earning assets and interest-earning liabilities so its short-term investments balance, at any given time, will adequately cover any reasonably anticipated immediate need for funds. Additionally, the Bank maintains relationships with correspondent banks that could provide funds on short notice, if needed.

The liquidity and capital resources of the Corporation are monitored on a periodic basis by state and Federal regulatory authorities. As determined under guidelines established by these regulatory authorities, the Bank's liquidity ratios at September 30, 2008, were considered satisfactory. At that date, the Bank's short-term investments were adequate to cover any reasonably anticipated immediate need for funds. Due to the drop in the short-term rate by the Federal Reserve, as expected we have had a total of $91 million callable securities called in the past nine months. When the investment securities are called by the issuers, we continue to improve our net interest income and profitability by repositioning our callable securities balance. We reinvest these proceeds from called investment securities in new loans, new investment securities, and to repay debt. The Corporation is aware of no events or trends likely to result in a material change in liquidity. During the nine months ended September 30, 2008, total capital decreased $3.631 million to $22.9 million. The majority of this decrease was a result of losses recognized in the third quarter on mortgage banking services and the impairment of equity securities. At September 30, 2008, the Corporation's and the Bank's risk-based capital ratios were considered adequate based on guidelines established by regulatory authorities. Our total risk based capital ratio now stands at 15.93%, which is 59 percent in excess of the regulatory standard for a "well-capitalized" bank. Southwest Georgia Financial Corporation's and Southwest Georgia Bank's risk based capital ratios are shown in the following table.

                    SOUTHWEST GEORGIA FINANCIAL CORPORATION
                           Risk Based Capital Ratios

                             Southwest Georgia
                           Financial Corporation    Regulatory Guidelines
                                                     For Well      Minimum
                                 30-Sep-08          Capitalized   Guidelines
Risk Based Capital Ratios
Tier 1 capital                     14.68%             6.00%       4.00%
Total risk based capital           15.93%            10.00%       8.00%
Tier 1 leverage ratio               8.86%             5.00%       3.00%

                           Southwest Georgia Bank   Regulatory Guidelines
                                                     For Well      Minimum
                                 30-Sep-08          Capitalized   Guidelines
Risk Based Capital Ratios
Tier 1 capital                     14.03%             6.00%       4.00%
Total risk based capital           15.28%            10.00%       8.00%
Tier 1 leverage ratio               8.46%             5.00%       3.00%

Under a share repurchase program adopted by the Board in January 2000, the Corporation repurchased 1,800 shares of its common stock during the first quarter of 2008 at an average price of $17.75 per share. The share repurchase authorization expired in January 2008 and as part of its capital management planning, the Corporation and its Board of Directors elected not to extend the authorization. For the nine-month period of 2007, the Corporation repurchased 73,100 shares of its common stock at an average price of $19.39 per share. Also, the Corporation continues to maintain a healthy level of capital adequacy as measured by its equity-to-asset ratio of 8.6% as of September 30, 2008. The Corporation is not aware of any events or trends likely to result in a material change in capital resources other than the effects of normal operations on the retention of net earnings, and paying dividends to shareholders. Also, the Corporation's management is not aware of any current recommendations by the regulatory authorities which, if they were implemented, would have a material effect on the Corporation's capital resources.

RESULTS OF OPERATIONS

The Corporation's results of operations are determined by its ability to effectively manage interest income and expense, to minimize loan and investment losses, to generate noninterest income and to control noninterest expense. Since interest rates are determined by market forces and economic conditions beyond the control of the Corporation, the ability to generate net interest income is dependent upon the Bank's ability to obtain an adequate spread between the rate earned on interest-earning assets and the rate paid on interest-bearing liabilities. Thus, the key performance measure for net interest income is the interest margin or net yield, which is taxable- equivalent net interest income divided by average earning assets.

Performance Summary

The Corporation's net loss after taxes for the three-month period ending September 30, 2008, was $2.665 million compared with a net income of $778

thousand for the same period in 2007. This year's third quarter was negatively impacted by a $4.105 million non-cash loss related to the impairment of equity securities. The non-cash loss on the impairment of equity securities was an accounting mark-to-market rule requiring it to be reflected through income. Additionally, we incurred a $1.002 million loss sustained by our commercial mortgage banking subsidiary as a result of covering the shortfall of participant banks related to the sale of commercial property. Excluding these unusual items, net income would have been $418 thousand, or $0.16 per diluted share for the third quarter.

On a per share basis, we had a net loss for the third quarter of $1.05 per diluted share compared with a net income of $.30 per diluted share for the same quarter in 2007. The weighted average common diluted shares outstanding for the quarter were 2.554 million, down 1.2% from the previous comparable quarter. This decrease in average quarterly diluted shares was due to the Corporation's stock repurchase in the fourth quarter of 2007 and the first quarter of 2008.

For the first nine months of 2008, we had a net loss of $1.163 million, or $0.46 per diluted share, compared with a net income of $2.410 million, or $0.93 per diluted share, for the same period in 2007. The quarterly impact of the non-cash loss on the impairment of equity securities and the loss on mortgage banking services was also reflected in net loss for the nine-month period. Excluding these unusual items, net income for the nine month period would have been $1.921 million, or $0.75 earnings per share.

We measure our performance on selected key ratios, which are provided for the previous five quarterly periods ended September 30, 2008.

                                3rd Qtr  2nd Qtr  1st Qtr  4th Qtr 3rd Qtr
                                 2008     2008     2008     2007    2007
Return on average total assets  ( 3.99)%   1.10%   1.03%  ( .99)%   1.09%
Return on average total equity  (42.53)%  11.43%  10.85%  (9.91)%  11.17%
Average shareholders' equity to
  Average total assets            9.37 %   9.60%   9.47%   9.95 %   9.76%
Net interest margin
  (tax equivalent)                4.19 %   3.97%   3.75%   3.36 %   3.71%

Comparison of Statements of Income for the Quarter

Noninterest income for the third quarter was a negative $2.841 million, compared with noninterest income of $1.779 million for the same period in 2007. This loss was due primarily to the $4.105 million non-cash loss on the impairment of Fannie Mae and Freddie Mac preferred stock. In addition, income from mortgage banking services decreased $190 thousand to $417 thousand from last year's third quarter, as the credit crisis has made the mortgage funding environment challenging and has restricted loan opportunities for our commercial mortgage banking subsidiary. Revenue from service charges on deposit accounts decreased 11.9% from the same period a year ago to $400 thousand and insurance services revenue decreased to $240 thousand, a 6.6% decrease compared with the third quarter of 2007. Last year's third quarter benefited from a $248 thousand gain recognized on the sale of the retail credit card portfolio. Offsetting these reductions in noninterest income, trust and brokerage services revenue increased 10.7% from the same period a year ago.

Total interest income decreased $380 thousand, or 9.3%, for the three months ended September 30, 2008 compared with the same period in 2007. This decrease for the three-month period resulted from a 3.25% drop in the prime rate since August 2007, which reduced interest earned on variable and adjustable rate loans. In addition, the Company holds a large, fully-secured loan placed on interest nonaccrual late last year.

Total interest expense decreased $544 thousand, or 29.8%, in the third quarter of 2008 compared with the same period in 2007. The bulk of this decrease, $364 thousand, was in interest on deposits resulting from lower interest rates. While interest on federal funds purchased decreased $62 thousand and interest on long-term debt decreased $153 thousand, these decreases were partially offset by an increase of $35 thousand in interest on short-term debt during the period. Looking ahead, the challenge will be to manage funding costs in a declining rate environment. Our focus on cost discipline, retaining and expanding customer relationships, and identifying acquisition opportunities are the core components of our growth strategy.

The primary source of revenue for the Corporation is net interest income, which is the difference between total interest income on earning assets and interest expense on interest-bearing sources of funds. Net interest income for the third quarter of 2008 was $2.429 million compared with $2.265 million for the same period in 2007. This improvement was due to lower cost of deposits and borrowings partially offset by the decline in interest income. Interest income was impacted by the 3.25% drop in the prime rate since September 2007. In addition, the Corporation sold its retail credit card portfolio in the third quarter of 2007 and placed a large, fully secured loan on interest nonaccrual late last year. The Corporation's net interest margin improved to 4.19% for the third quarter of 2008 compared with 3.71% from the same period a year ago, and 3.97% for the second quarter 2008. Total interest expense was $1.284 million for the third quarter, down $544 thousand from the same period a year ago. The decrease in total interest expense was due to a lower interest rate environment. The average rate paid on interest- bearing deposits decreased 80 basis points for the quarter compared with the same period a year ago.

No provision for loan losses was recorded for the third quarters of 2008 and 2007 due to the quality of the loan portfolio and the adequacy of the allowance for loan losses.

Noninterest expense increased to $4.233 million from $2.995 million for the third quarter of last year. The bulk of this increase occurred as a result of the $1.002 million loss related to mortgage banking services, as our commercial mortgage banking subsidiary sustained a loss from the cost of covering the shortfall realized by participant banks on the sale of a foreclosed commercial property. The quarterly increase in salary and employee benefits from a year ago of $285 thousand was due to settlement of a compensation agreement and staffing a new loan production office in Valdosta, GA where the Company plans to expand its operating footprint. The decline in amortization of intangible assets of $69 thousand reflects the completion of the amortization of purchased mortgage servicing intangible assets. Lower data processing expense was mainly attributable to the sale of the Company's retail credit card portfolio in last year's third quarter. The increase in other operating expenses is mainly due to the expenses related to the newly opened loan production office. All other major categories of noninterest expense remained relatively flat for the quarter when compared with the third quarter of 2007.

Comparison of Statements of Income for the Nine-month Period

Total noninterest income was $358 thousand for the first nine months of 2008, down 93.5% from the same period in 2007. The majority of the decline was a result of the $4.105 million non-cash loss on the impairment of Fannie Mae and Freddie Mac preferred stock recognized in the third quarter. Mortgage banking services decreased $730 thousand to $1.715 million from the same period last year, service charges on deposit accounts decreased 6.7% to $1.205 million, and income from insurance services decreased 2.8% to $863 thousand when compared with last year's nine-month period. Partially offsetting these declines, revenue from trust services and retail brokerage services increased 5.4% to $486 thousand when comparing the first nine months of 2008 to the same period last year.

For the first nine months of 2008, total interest income decreased $708 thousand when comparing it with the same period in 2007. The bulk of the decrease was in interest and fees on loans of $784 thousand due to the 3.25% drop in the prime rate since September 2007 and a large fully-secured loan placed on interest nonaccrual late last year. This decrease was partially offset by increases in interest on deposits in banks of $182 thousand and interest on federal funds sold of $90 thousand.

The total interest expense for the nine-month period ended September 30, 2008 decreased $925 thousand, or 17.6%, compared with the same period in 2007. Over this period, the average balances on interest-bearing deposits decreased $676 thousand. However, the decrease in interest expense was primarily related to lower rates paid on interest-bearing deposits. The rate on time deposits decreased 49 basis points comparing the first nine months of 2008 with the same period in 2007. Interest on both short-term and long-term debt decreased $195 thousand, or 20.1%, for the first nine months of 2008 compared with 2007. Also, interest on federal funds purchased decreased $71 thousand for the first nine months of 2008.

Net interest income for the first nine months of 2008 increased 3.1% to $7.113 million compared with the same period in 2007. During the nine-month period ended September 30, 2008, the Corporation's net interest margin was 3.96% compared with 3.70% for the same period in 2007. This improvement in margin was impacted by the lower interest rate environment on interest- bearing deposits along with the growth in loans and higher yield on investment securities.

The nine-month provision for loan losses of $0 remained unchanged from the comparable period of 2007. Noninterest expense increased $1.028 million for the first nine months of 2008 compared with the same period last year. The bulk of this increase is due to the $1.002 million loss related to mortgage banking services recognized in the third quarter of 2008. The increase in occupancy and other operating expense was mostly related to a new loan production office, while the decrease in data processing expense reflects the sale of our retail credit card portfolio in the 2007 period. Also, decreases occurred in amortization of the purchased mortgage intangible assets of $189 thousand. All other major categories of noninterest expense were relatively flat for the first nine months when compared with the same period last year.

Comparison of Financial Condition Statements

At September 30, 2008, total assets were $266.1 million, a 2.0% decrease from December 31, 2007. During the last nine months our asset mix has changed. Our loans increased $24.5 million which was offset by a decrease in

investment securities of $19.0 million, and a decrease in interest bearing deposits in banks of $10.0 million.

The Corporation's loan portfolio of $143.5 million increased 20.6% from the December 31, 2007, level of $119.0 million. The majority of loan growth was in residential real estate loans. Also, $7.7 million of the increase was from our loan production office in Valdosta, GA. The Corporation continues to be conservative in its lending practices in order to maintain a quality loan portfolio. Loans, a major use of funds, represent 53.9% of total assets.

Investment securities and other short-term investments which include federal funds sold and interest-bearing deposits in banks represent 38.3% of total assets. Investment securities decreased $19.1 million due to $91 million of securities being called or maturing during the past nine months. The proceeds from these securities have been used to purchase other securities, to increase loans, and payoff borrowings. Short-term investments have decreased $10 million since December 31, 2007.

Deposits decreased to $209.1 million at the end of the third quarter of 2008, down $7.1 million from the same period in 2007 and down $7.7 million from the end of last year. This decline was primarily due to normal day to day changes in deposits and general market conditions. Although quarter-end total deposits were down compared to the previous year, quarterly average deposits were flat at $216.6 million. The majority of the deposit decreases occurred in money market accounts. At September 30, 2008, total deposits represented 78.6% of total assets.

The following table shows the major contractual obligations for the Corporation.

                                                      September 30, December 31, September 30,
                                                          2008         2007          2007
Long-term debt consists of the following:

Advance from Federal Home Loan Bank with a
 3.39% fixed rate of interest maturing August 20,
 2018. (convertible to a variable rate at option
 of Federal Home Loan Bank on August 22, 2011).         5,000,000            0            0

Advance from Federal Home Loan Bank with a 2.78%
 fixed rate of interest maturing September 10,
 2018. (convertible to a variable rate at option
 of Federal Home Loan Bank on September 10, 2010).      5,000,000            0            0

Advance from Federal Home Loan Bank with a 3.85%
 fixed rate of interest maturing April 30, 2014,
 (convertible to a variable rate at option of
 Federal Home Loan Bank on April 30, 2009).                     0   10,000,000   10,000,000

Advance from Federal Home Loan Bank with a 5.24%
 fixed rate of interest maturing February 6, 2009.              0    5,000,000    5,000,000

Advance from Federal Home Loan Bank with a 5.21%
 fixed rate of interest due in annual installments
 maturing December 17, 2008.                                    0            0      228,571

Total long-term debt                                  $10,000,000  $15,000,000  $15,228,571

Total short-term debt                                  15,114,000   10,114,000   16,500,000

        Total debt                                    $25,114,000  $25,114,000  $31,728,571

The allowance for loan losses represents a reserve for potential losses in the loan portfolio. The adequacy of the allowance for loan losses is evaluated monthly based on a review of all significant loans, with a particular emphasis on nonaccruing, past due, and other loans that management believes require attention.

Other factors used in determining the adequacy of the reserve are management's judgment about factors affecting loan quality and their assumptions about the local and national economy. The allowance for loan losses was 1.66% of total loans outstanding at September 30, 2008, compared with 2.02% of loans outstanding at December 31, 2007. Non-performing assets as a percentage of total assets were 1.40%, a 53 basis point increase from last year. This level of non-performing assets is due primarily to one large commercial real estate loan. Management considers the allowance for loan losses as of September 30, 2008, adequate to cover potential losses in the loan portfolio.

Off-Balance Sheet Arrangements

In the normal course of business, we are a party to financial instruments with off-balance-sheet risk to meet the financing needs of our customers and reduce risk exposure to fluctuations in interest rates. These financial . . .