**UNITED
      STATES**


**SECURITIES
      AND EXCHANGE COMMISSION**


**Washington,
      D.C. 20549**










**FORM
      10-Q**





**x**
            **QUARTERLY
                REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES****EXCHANGE
                ACT OF 1934**





For
      the
      Quarterly Period Ended March 31, 2008





**OR**





**o**
            **TRANSITION
                REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES****EXCHANGE
                ACT OF 1934**





For
      the
      transition period from ________ to ________





Commission
      file number 0-22345





**SHORE
      BANCSHARES, INC.**


(Exact
      name of registrant as specified in its charter)





Maryland
            52-1974638(State
                or Other Jurisdiction of
            (I.R.S.
                EmployerIncorporation
                or Organization)
            Identification
                No.)18
                East Dover Street, Easton, Maryland
            21601(Address
                of Principal Executive Offices)
            (Zip
                Code)





(410)
      822-1400


Registrant’s
      Telephone Number, Including Area Code





N/A


Former
      name, former address and former fiscal year, if changed since last
      report.





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 periods that the registrant was
      required to file such reports), and (2) has been subject to such filing
      requirements for the past 90 days. Yes **x** No o





Indicate
      by check mark whether the registrant is a large accelerated filer, an
      accelerated filer, a non-accelerated filer or a smaller reporting company.
      See
      the definitions of “large accelerated filer”, “accelerated filer” and “smaller
      reporting company” in Rule 12b-2 of the Exchange Act. (Check one):





Large
                accelerated filer o
            Accelerated
                filer **x**Non-accelerated
                filer o
            Smaller
                reporting company o(Do
                not check if a smaller reporting company)





Indicate
      by check mark whether the registrant is a shell company (as defined in Rule
      12b-2 of the Act).Yes o No **x**





**APPLICABLE
      ONLY TO CORPORATE ISSUERS**





Indicate
      the number of shares outstanding of each of the issuer’s classes of common
      stock, as of the latest practicable date: 8,395,450 shares of common stock
      outstanding as of April 25, 2008.








**INDEX**





**Page**Part
                I.Financial Information
            
            
            2Item
                1. Financial Statements
            
            
            2Consolidated
                Balance Sheets - March 31, 2008 (unaudited) and December 31,
                2007
            
            
            2Consolidated
                Statements of Income - For the three-month periods ended March 31,
                2008
                and 2007 (unaudited)
            
            
            3Consolidated
                Statements of Changes in Stockholders’ Equity - For the three months ended
                March 31, 2008 and 2007 (unaudited)
            
            
            4Consolidated
                Statements of Cash Flows - For the three months ended March 31, 2008
                and
                2007 (unaudited)
            
            
            5Notes
                to Consolidated Financial Statements (unaudited)
            
            
            6Item
                2. Management’s Discussion and Analysis of Financial Condition and Results
                of Operations
            
            
            11Item
                3. Quantitative and Qualitative Disclosures about Market
                Risk
            
            
            17Item
                4. Controls and Procedures
            
            
            18Part
                II. Other Information
            
            
            18Item
                1A. Risk Factors
            
            
            18Item
                6. Exhibits
            
            
            18Signatures
            
            
            18Exhibit
                Index
            
            
            19


1





**PART
      I – FINANCIAL INFORMATION**




**Item
      1. Financial Statements.**




SHORE
      BANCSHARES, INC.


CONSOLIDATED
      BALANCE SHEETS


(Dollars
      in thousands, except per share amounts)





**March 31,**
            
            December 31,**2008**
            
            2007(Unaudited)**ASSETS**Cash
                and due from banks
            
            **$**
            **17,236**
            
            $
            17,198Interest
                bearing deposits with other banks
            
            
            **6,928**
            
            
            3,036Federal
                funds sold
            
            
            **28,313**
            
            
            6,646Investment
                securities:Available
                for sale, at fair value
            
            
            **86,056**
            
            
            97,137Held-to-maturity,
                at amortized cost (fair value of $13,156 and $12,924,
                respectively)
            
            
            **13,006**
            
            
            12,896Loans
            
            
            **808,583**
            
            
            776,350Less:
                allowance for credit losses
            
            
            **(7,926**
            **)**
            
            (7,551
            )Loans,
                net
            
            
            **800,657**
            
            
            768,799Insurance
                premiums receivable
            
            
            **1,854**
            
            
            1,083Premises
                and equipment, net
            
            
            **15,408**
            
            
            15,617Accrued
                interest receivable
            
            
            **5,048**
            
            
            5,008Investment
                in unconsolidated subsidiary
            
            
            **937**
            
            
            937Goodwill
            
            
            **15,954**
            
            
            15,954Other
                intangible assets, net
            
            
            **6,307**
            
            
            6,436Deferred
                income taxes
            
            
            **1,688**
            
            
            1,847Other
                real estate owned
            
            
            **-**
            
            
            176Other
                assets
            
            
            **4,444**
            
            
            4,141TOTAL
                ASSETS
            
            **$**
            **1,003,836**
            
            $
            956,911**LIABILITIES**Deposits:Noninterest
                bearing demand
            
            **$**
            **103,328**
            
            $
            104,081Interest
                bearing demand
            
            
            **114,314**
            
            
            115,623Money
                market and savings
            
            
            **184,488**
            
            
            169,896Certificates
                of deposit $100,000 or more
            
            
            **188,605**
            
            
            161,568Other
                time
            
            
            **218,182**
            
            
            214,727Total
                deposits
            
            
            **808,917**
            
            
            765,895Accrued
                interest payable
            
            
            **2,579**
            
            
            2,793Short-term
                borrowings
            
            
            **42,712**
            
            
            47,694Long-term
                debt
            
            
            **15,485**
            
            
            12,485Other
                liabilities
            
            
            **11,444**
            
            
            7,809TOTAL
                LIABILITIES
            
            
            **881,137**
            
            
            836,676**STOCKHOLDERS’
                EQUITY**Common
                stock, par value $.01; shares authorized - 35,000,000; shares issued
                and
                outstanding - 8,395,450 and 8,380,530, respectively
            
            
            **84**
            
            
            84Additional
                paid in capital
            
            
            **29,578**
            
            
            29,539Retained
                earnings
            
            
            **92,076**
            
            
            90,365Accumulated
                other comprehensive income
            
            
            **961**
            
            
            247TOTAL
                STOCKHOLDERS’ EQUITY
            
            
            **122,699**
            
            
            120,235TOTAL
                LIABILITIES & STOCKHOLDERS’ EQUITY
            
            **$**
            **1,003,836**
            
            $
            956,911





See
      accompanying notes to Consolidated Financial Statements.




2




SHORE
      BANCSHARES, INC.


CONSOLIDATED
      STATEMENTS OF INCOME (Unaudited)


(Dollars
      in thousands, except per share amounts)





For The Three Months Ended March 31,**2008**
            
            2007**INTEREST
                INCOME**Interest
                and fees on loans
            
            **$**
            **14,560**
            
            $
            13,624Interest
                and dividends on investment securities:Taxable
            
            
            **1,080**
            
            
            1,284Tax-exempt
            
            
            **123**
            
            
            124Federal
                funds sold
            
            
            **122**
            
            
            520Other
                interest income
            
            
            **38**
            
            
            338Total
                interest income
            
            
            **15,923**
            
            
            15,890**INTEREST
                EXPENSE**Interest
                bearing demand
            
            
            **171**
            
            
            236Money
                market and savings
            
            
            **705**
            
            
            824Certificates
                of deposit $100,000 or more
            
            
            **2,070**
            
            
            1,926Other
                time
            
            
            **2,397**
            
            
            2,382Interest
                on short-term borrowings
            
            
            **366**
            
            
            246Interest
                on long-term debt
            
            
            **184**
            
            
            371Total
                interest expense
            
            
            **5,893**
            
            
            5,985**NET
                INTEREST INCOME**
            
            
            **10,030**
            
            
            9,905**PROVISION
                FOR CREDIT LOSSES**
            
            
            **462**
            
            
            242**NET
                INTEREST INCOME AFTER PROVISION FOR CREDIT LOSSES**
            
            
            **9,568**
            
            
            9,663**NONINTEREST
                INCOME**Service
                charges on deposit accounts
            
            
            **871**
            
            
            689Other
                service charges and fees
            
            
            **736**
            
            
            471Insurance
                agency commissions
            
            
            **3,467**
            
            
            2,039Other
                noninterest income
            
            
            **428**
            
            
            449Total
                noninterest income
            
            
            **5,502**
            
            
            3,648**NONINTEREST
                EXPENSE**Salaries
                and wages
            
            
            **4,607**
            
            
            3,817Employee
                benefits
            
            
            **1,377**
            
            
            1,116Occupancy
                expense
            
            
            **499**
            
            
            510Furniture
                and equipment expense
            
            
            **286**
            
            
            322Data
                processing
            
            
            **470**
            
            
            432Directors’
                fees
            
            
            **165**
            
            
            163Amortization
                of other intangible assets
            
            
            **129**
            
            
            83Other
                noninterest expenses
            
            
            **2,058**
            
            
            1,448Total
                noninterest expense
            
            
            **9,591**
            
            
            7,891**INCOME
                BEFORE INCOME TAXES**
            
            
            **5,479**
            
            
            5,420Income
                tax expense
            
            
            **2,107**
            
            
            2,017**NET
                INCOME**
            
            **$**
            **3,372**
            
            $
            3,403Basic
                earnings per common share
            
            **$**
            **.40**
            
            $
            .41Diluted
                earnings per common share
            
            **$**
            **.40**
            
            $
            .41Dividends
                paid per common share
            
            **$**
            **.16**
            
            $
            .16




See
      accompanying notes to Consolidated Financial Statements.




3




SHORE
      BANCSHARES, INC.


CONSOLIDATED
      STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY (Unaudited)


For
      the
      Three-Month Periods Ended March 31, 2008 and 2007


(Dollars
      in thousands, except per share amounts)




AccumulatedAdditional
            
            
            
            other
            
            TotalCommon
            
            Paid
                in
            
            Retained
            
            Comprehensive
            
            Stockholders’Stock
            
            Capital
            
            Earnings
            
            Income (Loss)
            
            EquityBalances,
                January 1, 2008
            
            $
            84
            
            $
            29,539
            
            $
            90,365
            
            $
            247
            
            $
            120,235Adjustment
                to initially apply EITF Issue 06-4
            
            
            -
            
            
            -
            
            
            (318
            )
            
            -
            
            
            (318
            )Comprehensive
                income:Net
                income
            
            
            -
            
            
            -
            
            
            3,372
            
            
            -
            
            
            3,372Unrealized
                gains on available-for-sale securities, net of taxes
            
            
            -
            
            
            -
            
            
            -
            
            
            714
            
            
            714Total
                comprehensive income
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            4,086Shares
                issued for employee stock-based awards
            
            
            -
            
            
            16
            
            
            -
            
            
            -
            
            
            16Stock-based
                compensation expense
            
            
            -
            
            
            23
            
            
            -
            
            
            -
            
            
            23Cash
                dividends paid ($0.16 per share)
            
            
            -
            
            
            -
            
            
            (1,343
            )
            
            -
            
            
            (1,343
            )Balances,
                March 31, 2008
            
            **$**
            **84**
            
            **$**
            **29,578**
            
            **$**
            **92,076**
            
            **$**
            **961**
            
            **$**
            **122,699**Balances,
                January 1, 2007
            
            $
            84
            
            $
            29,687
            
            $
            82,279
            
            $
            (723
            )
            $
            111,327Comprehensive
                income:Net
                income
            
            
            -
            
            
            -
            
            
            3,403
            
            
            -
            
            
            3,403Unrealized
                gains on available-for-sale securities, net of taxes
            
            
            -
            
            
            -
            
            
            -
            
            
            218
            
            
            218Total
                comprehensive income
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            3,621Shares
                issued for employee stock-based awards
            
            
            -
            
            
            24
            
            
            -
            
            
            -
            
            
            24Stock-based
                compensation expense
            
            
            -
            
            
            12
            
            
            -
            
            
            -
            
            
            12Repurchase
                and retirement of 10,000 shares
            
            
            -
            
            
            (261
            )
            
            -
            
            
            -
            
            
            (261
            )Cash
                dividends paid ($0.16 per share)
            
            
            -
            
            
            -
            
            
            (1,341
            )
            
            -
            
            
            (1,341
            )Balances,
                March 31, 2007
            
            $
            84
            
            $
            29,462
            
            $
            84,341
            
            $
            (505
            )
            $
            113,382




See
      accompanying notes to Consolidated Financial Statements.




4




SHORE
      BANCSHARES, INC .


CONSOLIDATED
      STATEMENTS OF CASH FLOWS (Unaudited)


(Dollars
      in thousands)




For the Three Months Ended March 31,**2008**
            
            2007**CASH
                FLOWS FROM OPERATING ACTIVITIES:**Net
                income
            
            **$**
            **3,372**
            
            $
            3,403Adjustments
                to reconcile net income to net cash provided by operating
                activities:Depreciation
                and amortization
            
            
            **433**
            
            
            376Stock-based
                compensation expense
            
            
            **23**
            
            
            12Discount
                accretion on debt securities
            
            
            **(80**
            **)**
            
            (33
            )Provision
                for credit losses
            
            
            **462**
            
            
            242Loss
                on sale of other real estate owned
            
            
            **50**
            
            
            -Net
                changes in:Insurance
                premiums receivable
            
            
            **(771**
            **)**
            
            (265
            )Accrued
                interest receivable
            
            
            **(40**
            **)**
            
            (191
            )Other
                assets
            
            
            **(619**
            **)**
            
            (213
            )Accrued
                interest payable
            
            
            **(214**
            **)**
            
            176Other
                liabilities
            
            
            **3,317**
            
            
            2,003Net
                cash provided by operating activities
            
            
            **5,933**
            
            
            5,510**CASH
                FLOWS FROM INVESTING ACTIVITIES:**Proceeds
                from maturities and principal payments of securities available for
                sale
            
            
            **26,253**
            
            
            6,003Purchases
                of securities available for sale
            
            
            **(13,923**
            **)**
            
            (4,939
            )Proceeds
                from maturities and principal payments of securities held to
                maturity
            
            
            **690**
            
            
            3Purchases
                of securities held to maturity
            
            
            **(802**
            **)**
            
            -Net
                (increase) decrease in loans
            
            
            **(32,458**
            **)**
            
            2,218Purchases
                of premises and equipment
            
            
            **(73**
            **)**
            
            (207
            )Proceeds
                from sales of other real estate owned
            
            
            **264**
            
            
            -Net
                cash (used in) provided by investing activities
            
            
            **(20,049**
            **)**
            
            3,078**CASH
                FLOWS FROM FINANCING ACTIVITIES:**Net
                increase (decrease) in demand, money market and savings
                deposits
            
            
            **12,530**
            
            
            (6,882
            )Net
                increase in certificates of deposit
            
            
            **30,492**
            
            
            11,059Net
                (decrease) increase in short-term borrowings
            
            
            **(4,982**
            **)**
            
            4,291Proceeds
                from issuance of long-term debt
            
            
            **3,000**
            
            
            2,000Proceeds
                from issuance of common stock
            
            
            **16**
            
            
            24Stock
                repurchased and retired
            
            
            **-**
            
            
            (261
            )Dividends
                paid
            
            
            **(1,343**
            **)**
            
            (1,341
            )Net
                cash provided by financing activities
            
            
            **39,713**
            
            
            8,890NET
                INCREASE IN CASH AND CASH EQUIVALENTS
            
            
            **25,597**
            
            
            17,478CASH
                AND CASH EQUIVALENTS AT BEGINNING OF PERIOD
            
            
            **26,880**
            
            
            79,673CASH
                AND CASH EQUIVALENTS AT END OF PERIOD
            
            **$**
            **52,477**
            
            $
            97,151Supplemental
                cash flows information:Interest
                paid
            
            **$**
            **6,107**
            
            $
            5,808Income
                taxes paid
            
            **$**
            **125**
            
            $
            35Transfers
                from loans to other real estate owned
            
            **$**
            **138**
            
            $
            -




See
      accompanying notes to Consolidated Financial Statements.




5




Shore
      Bancshares, Inc.


Notes
      to
      Consolidated Financial Statements


For
      the
      Three Months Ended March 31, 2008 and 2007


(Unaudited)





Note
      1
      - Basis of Presentation





The
      consolidated financial statements include the accounts of Shore Bancshares,
      Inc.
      (the “Company”) and its subsidiaries with all significant intercompany
      transactions eliminated. The
      consolidated financial statements conform to accounting principles generally
      accepted in the United States of America and to prevailing practices within
      the
      banking industry. The accompanying interim financial statements are unaudited;
      however, in the opinion of management all adjustments necessary to present
      fairly the financial position at March 31, 2008, the results of operations
      for
      the three-month periods ended March 31, 2008 and 2007, changes in stockholders’
equity for the three-month periods ended March 31, 2008 and 2007, and cash
      flows
      for the three-month periods ended March 31, 2008 and 2007, have been included.
      All such adjustments are of a normal recurring nature. The amounts as of
      December 31, 2007 were derived from audited financial statements. The results
      of
      operations for the three-month period ended March 31, 2008 are not necessarily
      indicative of the results to be expected for any other interim period or for
      the
      full year. This Quarterly Report on Form 10-Q should be read in conjunction
      with
      the Company’s Annual Report on Form 10-K for the year ended December 31,
      2007.





Note
      2
– Earnings Per Share





Basic
      earnings per share are calculated by dividing net income available to common
      stockholders by the weighted average number of common shares outstanding during
      the period. Diluted earnings per share are calculated by dividing
      net income by the weighted average number of shares outstanding during the
      period, adjusted for the dilutive effect of outstanding stock options and
      awards. The following table provides information relating to the calculation
      of
      earnings per share:





For the Three Months Ended March 31,(In thousands, except per share data)
            
            **2008**
            
            2007Net
                Income
            
            **$**
            **3,372**
            
            $
            3,403Weighted
                Average Shares Outstanding – Basic
            
            
            **8,391**
            
            
            8,382Dilutive
                effect of stock-based awards
            
            
            **9**
            
            
            14Weighted
                Average Shares Outstanding–Diluted
            
            
            **8,400**
            
            
            8,396Earnings
                per common share – Basic
            
            **$**
            **0.40**
            
            $
            0.41Earnings
                per common share – Diluted
            
            **$**
            **0.40**
            
            $
            0.41





There
      were no antidilutive stock-based awards excluded from the calculation of
      earnings per share for the three months ended


March
      31,
      2008 and 2007.





Note
      3
– Significant Accounting Policy





Under
      the
      provisions of Statements of Financial Accounting Standards (SFAS) Nos. 114
      and
      118, "Accounting by Creditors for Impairment of a Loan," a loan is considered
      impaired if it is probable that the Company will not collect all principal
      and
      interest payments according to the loan’s contracted terms. The impairment of a
      loan is measured at the present value of expected future cash flows using the
      loan’s effective interest rate, or at the loan’s observable market price or the
      fair value of the collateral if the loan is collateral dependent. Interest
      income generally is not recognized on specific impaired loans unless the
      likelihood of further loss is remote. Interest payments received on such loans
      are applied as a reduction of the loan’s principal balance. Interest income on
      other nonaccrual loans is recognized only to the extent of interest payments
      received.





6





Information
      with respect to impaired loans and the related valuation allowance is shown
      below:





**March 31,**
            
            December 31,
            
            March 31,(Dollars
                in thousands)
            
            **2008**
            
            2007
            
            2007Impaired
                loans with a valuation allowance
            
            **$**
            **3,387**
            
            $
            3,413
            
            $
            3,797Impaired
                loans with no valuation allowance
            
            
            **51**
            
            
            127
            
            
            177Total
                impaired loans
            
            **$**
            **3,438**
            
            $
            3,540
            
            $
            3,974Allowance
                for credit losses applicable to impaired loans
            
            **$**
            **999**
            
            $
            819
            
            $
            880Allowance
                for credit losses applicable to other than impaired loans
            
            
            **6,927**
            
            
            6,732
            
            
            5,626Total
                allowance for credit losses
            
            **$**
            **7,926**
            
            $
            7,551
            
            $
            6,506Average
                recorded investment in impaired loans
            
            **$**
            **3,489**
            
            $
            3,958
            
            $
            5,172





Gross
      interest income of $68 thousand for the first quarter of 2008, $404 thousand
      for
      fiscal year 2007 and $194 thousand for the first quarter of 2007 would have
      been
      recorded if nonaccrual loans had been current and performing in accordance
      with
      their original terms. Interest actually recorded on such loans was $1 thousand
      for the first quarter of 2008, $142 thousand for fiscal year 2007 and $133
      thousand for the first quarter of 2007.





Impaired
      loans do not include groups of smaller balance homogenous loans such as
      residential mortgage and consumer installment
      loans that are evaluated collectively for impairment. Reserves for probable
      credit losses related to these loans are based
      upon historical loss ratios and are included in the allowance for credit
      losses.





Note
      4
– Commitments





In
      the
      normal course of business, to meet the financial needs of its customers, the
      Company’s bank subsidiaries are parties to financial instruments with
      off-balance sheet risk. These financial instruments include commitments to
      extend credit and standby letters of credit. At March 31, 2008, total
      commitments to extend credit were approximately $242.6 million. Outstanding
      letters of credit were approximately $18.4 million at March 31,
      2008.





Note
      5
      - Stock-Based Compensation





At
      March
      31, 2008, the Company had three equity compensation plans: (i) the Shore
      Bancshares, Inc. 1998 Stock Option Plan; (ii) the Shore Bancshares, Inc.
      Employee Stock Purchase Plan (“ESPP”); and (iii) the Shore Bancshares, Inc. 2006
      Stock and Incentive Compensation Plan (“2006 Equity Plan”). The plans are
      described in detail in Note 13 to the audited financial statements contained
      in
      the Company’s Annual Report on Form 10-K for the year ended December 31, 2007.
      Stock-based awards granted to date are generally time-based, vesting on each
      anniversary of the grant date over a three to five year period of time and,
      in
      the case of stock options, expiring 10 years from the grant date. ESPP awards
      allow employees to purchase shares of common stock at 85% of the fair market
      value on the date of grant. ESPP grants are 100% vested at date of grant and
      have a 27-month term.





During
      the three-month periods ended March 31, 2008 and 2007, the Company recognized
      pre-tax stock-based compensation expense of $23 thousand and $12 thousand,
      respectively. Stock-based compensation expense is recognized ratably over the
      requisite service period for all awards and is based on the grant-date fair
      value. Unrecognized stock-based compensation expense related to nonvested
      share-based compensation arrangements was $368 thousand as of March 31, 2008.
      The weighted-average period over which this unrecognized expense was expected
      to
      be recognized was 4.2 years.




7





The
      Company estimates the fair value of stock options using the Black-Scholes
      valuation model with weighted average assumptions for dividend yield, expected
      volatility, risk-free interest rate and expected lives (in years). The expected
      dividend yield is calculated by dividing the total expected annual dividend
      payout by the average stock price. The expected volatility is based on
      historical volatility of the underlying securities. The risk-free interest
      rate
      is based on the Federal Reserve Bank’s constant maturities daily interest rate
      in effect at grant date. The expected life of the options represents the period
      of time that the Company expects the awards to be outstanding based on
      historical experience with similar awards. Stock-based compensation expense
      recognized in the consolidated statements of income in the first quarter of
      2008
      and 2007 reflects forfeitures as they occurred.





No
      options were granted during the quarters ended March 31, 2008 and
      2007.





The
      following table summarizes stock option activity for the Company under all
      plans
      for the three months ended March 31, 2008:





Weighted
            
            AggregateNumber
            
            Average
            
            Intrinsicof Shares
            
            Exercise Price
            
            ValueOutstanding
                at beginning of year
            
            
            33,797
            
            $
            15.67Granted
            
            
            -
            
            
            -Exercised
            
            
            (1,331
            )
            
            15.48Expired/Cancelled
            
            
            (82
            )
            
            18.47Outstanding
                at end of period
            
            
            32,384
            
            
            15.67
            
            $
            187,051Exercisable
                at end of period
            
            
            32,384
            
            $
            15.67
            
            $
            187,051





The
      following summarizes information about options outstanding at March 31,
      2008:





Options Outstanding and ExercisableOptions Outstanding
            
            
            
            Weighted AverageRemainingExercise Price
            
            Number
            
            Number
            
            Contract Life (in years)$        21.33
            
            
            5,075
            
            
            5,075
            
            
            0.814.00
            
            
            4,005
            
            
            4,005
            
            
            1.813.17
            
            
            16,445
            
            
            16,445
            
            
            4.018.47
            
            
            6,859
            
            
            6,859
            
            
            0.132,384
            
            
            32,384





The
      total
      intrinsic value of stock options exercised during the three-month periods ended
      March 31, 2008 and 2007 was approximately $9 thousand and $15 thousand,
      respectively. Cash received upon exercise of options during the three-month
      periods ended March 31, 2008 and 2007 was approximately $16 thousand and $24
      thousand, respectively.





The
      following table summarizes restricted stock award activity for the Company
      under
      the 2006 Equity Plan for the three months ended March 31, 2008:





Number
            
            Weighted Average Grantof Shares
            
            Date Fair ValueNonvested
                at January 1, 2008
            
            
            3,845
            
            $
            25.31Granted
            
            
            13,783
            
            
            21.93Vested
            
            
            -
            
            
            -Cancelled
            
            
            -
            
            
            -Nonvested
                at March 31, 2008
            
            
            17,628
            
            $
            22.67





8





Note
      6
– Segment Reporting





The
      Company operates two primary business segments: Community Banking and Insurance
      Products and Services. Through the Community Banking business, the Company
      provides services to consumers and small businesses on the Eastern Shore of
      Maryland and Delaware through its 17-branch network. Community banking
      activities include small business services, retail brokerage, and consumer
      banking products and services. Loan products available to consumers include
      mortgage, home equity, automobile, marine, and installment loans, credit cards
      and other secured and unsecured personal lines of credit. Small business lending
      includes commercial mortgages, real estate development loans, equipment and
      operating loans, as well as secured and unsecured lines of credit, credit cards,
      accounts receivable financing arrangements, and merchant card services.





Through
      the Insurance Products and Services business, the Company provides a full range
      of insurance products and services to businesses and consumers in the Company’s
      market areas. Products include property and casualty, life, marine, individual
      health and long-term care insurance. Pension and profit sharing plans and
      retirement plans for executives and employees are available to suit the needs
      of
      individual businesses.





Selected
      financial information by line of business for the three months ended March
      31,
      2008 and 2007 is included in the following table:





Community
            
            Insurance products
            
            Parent(Dollars in thousands)
            
            banking
            
            and services
            
            Company
            
            Total**2008**Interest
                income
            
            **$**
            **15,906**
            
            **$**
            **17**
            
            **$**
            **-**
            
            **$**
            **15,923**Interest
                expense
            
            
            **(5,859**
            **)**
            
            **-**
            
            
            **(34**
            **)**
            
            **(5,893**
            **)**Provision
                for credit losses
            
            
            **(462**
            **)**
            
            **-**
            
            
            **-**
            
            
            **(462**
            **)**Noninterest
                income
            
            
            **1,802**
            
            
            **3,700**
            
            
            **-**
            
            
            **5,502**Noninterest
                expense
            
            
            **(5,141**
            **)**
            
            **(3,044**
            **)**
            
            **(1,406**
            **)**
            
            **(9,591**
            **)**Net
                intersegment income (expense)
            
            
            **(1,263**
            **)**
            
            **(90**
            **)**
            
            **1,353**
            
            
            **-**Income
                before taxes
            
            
            **4,983**
            
            
            **583**
            
            
            **(87**
            **)**
            
            **5,479**Income
                tax (expense) benefit
            
            
            **(1,916**
            **)**
            
            **(224**
            **)**
            
            **33**
            
            
            **(2,107**
            **)**Net
                income
            
            **$**
            **3,067**
            
            **$**
            **359**
            
            **$**
            **(54**
            **)**
            **$**
            **3,372**Total
                assets
            
            **$**
            **980,506**
            
            **$**
            **20,818**
            
            **$**
            **2,512**
            
            **$**
            **1,003,836**2007Interest
                income
            
            $
            15,890
            
            $
            -
            
            $
            -
            
            $
            15,890Interest
                expense
            
            
            (5,985
            )
            
            -
            
            
            -
            
            
            (5,985
            )Provision
                for credit losses
            
            
            (242
            )
            
            -
            
            
            -
            
            
            (242
            )Noninterest
                income
            
            
            1,593
            
            
            2,055
            
            
            -
            
            
            3,648Noninterest
                expense
            
            
            (5,185
            )
            
            (1,373
            )
            
            (1,333
            )
            
            (7,891
            )Net
                intersegment income (expense)
            
            
            (
                1,186
            )
            
            (95
            )
            
            1,281
            
            
            -Income
                before taxes
            
            
            4,885
            
            
            587
            
            
            (52
            )
            
            5,420Income
                tax (expense) benefit
            
            
            (1,818
            )
            
            (218
            )
            
            19
            
            
            (2,017
            )Net
                income
            
            $
            3,067
            
            $
            369
            
            $
            (33
            )
            $
            3,403Total
                assets
            
            $
            947,392
            
            $
            9,972
            
            $
            2,986
            
            $
            960,350





Note
      7
– Fair Value Measurements





Effective
      January 1, 2008, the Company adopted Statement of Financial Accounting Standards
      (“SFAS”) No. 157, *“Fair
      Value Measurements.”* SFAS 157
      defines fair value, establishes a framework for measuring fair value in
      generally accepted accounting principles and expands disclosures about fair
      value measurements. SFAS 157 applies whenever other standards require (or
      permit) assets or liabilities to be measured at fair value but does not expand
      the use of fair value in any new circumstances. In this standard, the Financial
      Accounting Standards Board (“FASB”) clarifies the principle that fair value
      should be based on the assumptions market participants would use when pricing
      the asset or liability. In support of this principle, SFAS 157 establishes
      a
      fair value hierarchy that prioritizes the information used to develop those
      assumptions. The fair value hierarchy is as follows:





9





Level
      1
      inputs – Unadjusted quoted prices in active markets for identical assets or
      liabilities that the entity has the ability to access at the measurement
      date.





Level
      2
      inputs – Inputs other than quoted prices included in Level 1 that are observable
      for the asset or liability, either directly or indirectly. These might include
      quoted prices for similar assets or liabilities in active markets, and inputs
      other than quoted prices that are observable for the asset or liability, such
      as
      interest rates and yield curves that are observable at commonly quoted
      intervals.





Level
      3
      inputs – Unobservable inputs for determining the fair values of assets or
      liabilities that reflect an entity’s own assumptions about the assumptions that
      market participants would use in pricing the assets or liabilities.





Available-for-sale
      securities is the only balance sheet category that the Company is required
      by
      generally accepted accounting principles to account for at fair value. The
      following table presents information about the Company’s assets measured at fair
      value on a recurring basis as of March 31, 2008, and indicates the fair value
      hierarchy of the valuation techniques utilized by the Company to determine
      such
      fair value.





SignificantOther
            
            
            
            Total ChangesCarrying
            
            Quoted
            
            Observable
            
            Trading
            
            In Fair ValuesValue
            
            Prices
            
            Inputs
            
            Gains and
            
            Included In(Dollars
                in thousands)
            
            (Fair Value)
            
            (Level 1)
            
            (Level 2)
            
            (Losses)
            
            Period EarningsSecurities
                available for sale
            
            $
            86,056
            
            
            -
            
            $
            86,056
            
            
            -
            
            
            -





Securities
      classified as available-for-sale are reported at fair value utilizing Level
      2
      inputs. For these securities, the Company obtains fair value measurements from
      an independent pricing service. The fair value measurements consider observable
      data that may include dealer quotes, market spreads, cash flows, the U.S.
      Treasury yield curve, live trading levels, trade execution data, market
      consensus prepayment speeds, credit information and the bond’s terms and
      conditions, among other things.





Note
      8
– New Accounting Pronouncements





**Pronouncements
      adopted**


*SFAS No. 158,
      “Employers’ Accounting for Defined Benefit Pension and Other Postretirement
      Plans, an amendment of FASB Statements No. 87, 88 106, and 132(R).”* SFAS 158
      requires an employer to recognize the overfunded or underfunded status of
      post-retirement defined benefit plans as an asset or a liability in its
      statement of financial position. The funded status is measured as the difference
      between plan assets at fair value and the benefit obligation (the projected
      benefit obligation for pension plans or the accumulated benefit obligation
      for
      other post-retirement benefit plans). An employer is also required to measure
      the funded status of a plan as of the date of its year-end statement of
      financial position with changes in the funded status recognized through
      comprehensive income. SFAS 158 also requires certain disclosures regarding
      the effects on net periodic benefit cost for the next fiscal year that arise
      from delayed recognition of gains or losses, prior service costs or credits,
      and
      the transition asset or obligation. The adoption of SFAS
      158’s requirement to recognize the funded status in the financial statements for
      fiscal years ending after December 15, 2006 did not have a significant impact
      on
      the Company’s consolidated financial statements. SFAS 158’s requirement to use
      the fiscal year-end date as the measurement date is effective for fiscal years
      ending after December 15, 2008, and did
      not have a significant impact on the Company’s consolidated financial
      statements.





*SFAS
      No. 159, "The Fair Value Option for Financial Assets and Financial
      Liabilities-Including an amendment of FASB Statement No. 115."* SFAS
      159
      permits entities to choose to measure eligible items at fair value at specified
      election dates. Unrealized gains and losses on items for which the fair value
      option has been elected are reported in earnings at each subsequent reporting
      date. The fair value option (i) may be applied instrument by instrument, with
      certain exceptions, (ii) is irrevocable (unless a new election date occurs)
      and
      (iii) is applied only to entire instruments and not to portions of instruments. The
      objective is to improve financial reporting by providing entities with the
      opportunity to mitigate volatility in reported earnings caused by measuring
      related assets and liabilities differently without having to apply complex
      hedge
      accounting provisions. This Statement is expected to expand the use of fair
      value measurement, which is consistent with the FASB’s long-term measurement
      objectives for accounting for financial instruments. The Company adopted SFAS
      159 on January 1, 2008 and has not elected the fair value option for any
      financial assets or liabilities at March 31, 2008.




The
      Emerging Issues Task Force (“EITF”) of the FASB issued EITF Issue 06-4,
“Accounting for Deferred Compensation and Postretirement Benefit Aspects of
      Endorsement Split-Dollar Life Insurance Arrangements,” which was effective
      January 1, 2008. EITF 06-4 requires the recognition of a liability and related
      compensation costs for endorsement split-dollar life insurance policies that
      provide a benefit to an employee that extends to postretirement periods as
      defined in SFAS No. 106, " Employers' Accounting for Postretirement Benefits
      Other Than Pensions." The EITF reached a consensus that Bank Owned Life
      Insurance policies purchased for this purpose do not effectively settle the
      entity's obligation to the employee in this regard and thus the entity must
      record compensation cost and a related liability. Entities should recognize
      the
      effects of applying this Issue through either, (a) a change in accounting
      principle through a cumulative-effect adjustment to retained earnings or to
      other components of equity or net assets in the balance sheet as of the
      beginning of the year of adoption, or (b) a change in accounting principle
      through retrospective application to all prior periods. This Issue is effective
      for fiscal years beginning after December 15, 2007. The effects of the guidance
      have been applied as a change in accounting principle through a
      cumulative-effect adjustment to retained earnings of $318,000.




10




EITF
      Issue 06-11, “Accounting for Income Tax Benefits of Dividends on Share-Based
      Payment Awards.” EITF 06-11 requires that tax benefits generated by dividends
      paid during the vesting period on certain equity-classified share-based
      compensation awards be classified as additional paid-in capital and included
      in
      a pool of excess tax benefits available to absorb tax deficiencies from
      share-based payment awards. EITF 06-11 is effective for years beginning after
      December 15, 2007. The adoption of EITF 06-11 did not have a significant impact
      on the Company’s consolidated financial position or results of
      operations.




**Pronouncements
      issued but not yet effective**


*SFAS
      No. 141R, “Business Combinations.”* SFAS
      141R’s objective is to improve the relevance, representational faithfulness, and
      comparability of the information that a reporting entity provides in its
      financial reports about a business combination and its effects. SFAS 141R
      applies prospectively to business combinations for which the acquisition date
      is
      on or after December 31, 2008. The Company does not expect the implementation
      of
      SFAS 141R to have a material impact on its consolidated financial
      statements.





*SFAS
      No. 160, “Noncontrolling Interests in Consolidated Financial
      Statements.”* SFAS
      160’s objective is to improve the relevance, comparability, and transparency of
      the financial information that a reporting entity provides in its consolidated
      financial statements by establishing accounting and reporting standards for
      the
      noncontrolling interest in a subsidiary and for the deconsolidation of a
      subsidiary. SFAS 160 shall be effective for fiscal years and interim periods
      within those fiscal years, beginning on or after December 15, 2008. The Company
      does not expect the implementation of SFAS 160 to have a material impact on
      its
      consolidated financial statements.





*SFAS
      No. 161, “Disclosures about Derivative Instruments and Hedging Activities – an
      amendment of FASB Statement No. 133”* .
      SFAS
      161 is intended to enhance the disclosures previously required for derivative
      instruments and hedging activities under SFAS No. 133, “Accounting for
      Derivative Instruments and Hedging Activities”, to include how and why an entity
      uses derivative instruments, how derivative instruments and related hedge items
      are accounted for and their impact on an entity’s financial positions, results
      of operations and cash flows. SFAS 161 is effective for financial statements
      issued for fiscal years and interim periods beginning after November 15, 2008,
      with early application encouraged. The Company does not expect the
      implementation of SFAS 161 to have a material impact on its consolidated
      financial statements.





**Item
      2. Management’s Discussion and Analysis of Financial Condition and Results of
      Operations.**





Unless
      the context clearly suggests otherwise, references to “the Company”, “we”,
“our”, and “us” in this report are to Shore Bancshares, Inc. and its
      consolidated subsidiaries.





**Forward-Looking
      Information**


Portions
      of this Quarterly Report on Form 10-Q contain forward-looking statements within
      the meaning of The Private Securities Litigation
      Reform Act of 1995. Statements that are not historical in nature, including
      statements that include the words “anticipate”, “estimate”, “should”, “expect”,
“believe”, “intend”, and similar expressions, are expressions about our
      confidence, policies, and strategies, the adequacy of capital levels, and
      liquidity and are not guarantees of future performance. Such forward-looking
      statements involve certain risks and uncertainties, including economic
      conditions, competition in the geographic and business areas in which we
      operate, inflation, fluctuations in interest rates, legislation, and
      governmental regulation. These risks and uncertainties are described in detail
      in the section of the periodic reports that Shore Bancshares, Inc. files with
      the Securities and Exchange Commission entitled “Risk Factors” (see Item 1A of
      Part II of this report). Actual results may differ materially from such
      forward-looking statements, and we assume no obligation to update
      forward-looking statements at any time except as required by law.





**Introduction**


The
      following discussion and analysis is intended as a review of significant factors
      affecting the financial condition and results of operations of Shore Bancshares,
      Inc. and its consolidated subsidiaries for the periods indicated. This
      discussion and analysis should be read in conjunction with the unaudited
      consolidated financial statements and related notes presented in this report,
      as
      well as the audited consolidated financial statements and related notes included
      in the Annual Report of Shore Bancshares, Inc. on Form 10-K for the year ended
      December 31, 2007.




11





Shore
      Bancshares, Inc. is the largest independent financial holding company located
      on
      the Eastern Shore of Maryland. It is the parent company of The Talbot Bank
      of
      Easton, Maryland located in Easton, Maryland (“Talbot Bank”), The Centreville
      National Bank of Maryland located in Centreville, Maryland (“Centreville
      National Bank”) and The Felton Bank, located in Felton, Delaware (“Felton Bank”)
      (collectively, the “Banks”). The Banks operate 17 full service branches in Kent,
      Queen Anne’s, Talbot, Caroline and Dorchester Counties in Maryland and Kent
      County, Delaware. The Company engages in the insurance business through three
      insurance producer firms, The Avon-Dixon Agency, LLC, Elliott Wilson Insurance,
      LLC and Jack Martin Associates, Inc.; a wholesale insurance company, TSGIA,
      Inc.; and two insurance premium finance companies, Mubell Finance, LLC and
      ESFS,
      Inc. (all of the foregoing are collectively referred to as the “Insurance
      Subsidiary”) and the mortgage broker business through Wye Mortgage Group, LLC,
      all of which are wholly-owned subsidiaries of Shore Bancshares,
      Inc.





The
      shares of common stock of Shore Bancshares, Inc. are listed on the Nasdaq Global
      Select Market under the symbol “SHBI”.





The
      Company maintains an Internet site at www.shbi.net on which
      it makes available free of charge its Annual Report on Form 10-K, Quarterly
      Reports on Form 10-Q, Current Reports on Form 8-K, and all amendments to the
      foregoing as soon as reasonably practicable after these reports are
      electronically filed with, or furnished to, the Securities and Exchange
      Commission.





**Critical
      Accounting Policies**


Our
      financial statements are prepared in accordance with accounting principles
      generally accepted in the United States of America (GAAP). The financial
      information contained within the financial statements is, to a significant
      extent, financial information contained that is based on measures of the
      financial effects of transactions and events that have already occurred. A
      variety of factors could affect the ultimate value that is obtained either
      when
      earning income, recognizing an expense, recovering an asset or relieving a
      liability.





We
      believe that our most critical accounting policy relates to the allowance for
      credit losses. The allowance for credit losses is an estimate of the losses
      that
      may be sustained in the loan portfolio. The allowance is based on two basic
      principles of accounting: (i) SFAS No. 5, Accounting for Contingencies, which
      requires that losses be accrued when they are probable of occurring and
      estimable, and (ii) SFAS No. 114, Accounting by Creditors for Impairment of
      a
      Loan, which requires that losses be accrued based on the differences between
      the
      loan balance and the value of collateral, present value of future cash flows
      or
      values that are observable in the secondary market. Management uses many
      factors, including economic conditions and trends, the value and adequacy of
      collateral, the volume and mix of the loan portfolio, and our internal loan
      processes in determining the inherent loss that may be present in our loan
      portfolio. Actual losses could differ significantly from Management’s estimates.
      In addition, GAAP itself may change from one previously acceptable method to
      another. Although the economics of transactions would be the same, the timing
      of
      events that would impact the transactions could change.





Management
      has significant discretion in making the adjustments inherent in the
      determination of the provision and allowance for credit losses, including in
      connection with the valuation of collateral, the borrower’s prospects of
      repayment, and in establishing allowance factors on the formula allowance and
      unallocated allowance components of the allowance. The establishment of
      allowance factors is a continuing exercise, based on Management’s continuing
      assessment of the totality of all factors, including, but not limited to,
      delinquencies, loss history, trends in volume and terms of loans, effects of
      changes in lending policy, the experience and depth of Management, national
      and
      local economic trends, concentrations of credit, the quality of the loan review
      system and the effect of external factors such as competition and regulatory
      requirements, and their impact on the portfolio, and allowance factors may
      change from period to period, resulting in an increase or decrease in the amount
      of the provision or allowance, based upon the same volume and classification
      of
      loans. Changes in allowance factors will have a direct impact on the amount
      of
      the provision, and a corresponding effect on net income. Errors in Management’s
      perception and assessment of these factors and their impact on the portfolio
      could result in the allowance not being adequate to cover losses in the
      portfolio, and may result in additional provisions or charge-offs.





Three
      basic components comprise our allowance for credit losses: (i) a specific
      allowance; (ii) a formula allowance; and (iii) a nonspecific allowance. Each
      component is determined based on estimates that can and do change when the
      actual events occur. The specific allowance is used to individually allocate
      an
      allowance to loans identified as impaired. An impaired loan may show
      deficiencies in the borrower’s overall financial condition, payment history,
      support available from financial guarantors and/or the fair market value of
      collateral. When a loan is identified as impaired, a specific allowance is
      established based on our assessment of the loss
      that
      may be associated with the individual loan. The formula allowance is used to
      estimate the loss on internally risk rated loans, exclusive of those identified
      as impaired. Loans identified as special mention, substandard, doubtful and
      loss, as well as impaired, are segregated from performing loans. Remaining
      loans
      are then grouped by type (commercial, commercial real estate, construction,
      home
      equity or consumer). Each loan type is assigned an allowance factor based on
      Management’s estimate of the risk, complexity and size of individual loans
      within a particular category. Classified loans are assigned higher allowance
      factors than non-rated loans due to Management’s
      concerns regarding collectibility or Management’s knowledge of particular
      elements regarding the borrower. Allowance factors grow with the worsening
      of
      the internal risk rating. The nonspecific formula is used to estimate the loss
      of non-classified loans stemming from more global factors such as delinquencies,
      loss history, trends in volume and terms of loans, effects of changes in lending
      policy, the experience and depth of Management, national and local economic
      trends, concentrations of credit, the quality of the loan review system and
      the
      effect of external factors such as competition and regulatory requirements.
      The
      nonspecific allowance captures losses that have impacted the portfolio but
      have
      yet to be recognized in either the formula or specific allowance.




12





**OVERVIEW**





Net
      income for the first quarter of 2008 was $3.372 million, or diluted earnings
      per
      share of $0.40, compared to $3.403 million, or diluted earnings per share of
      $0.41, for the first quarter of 2007. For the fourth quarter of 2007, net income
      was $3.340 million or $0.40 per diluted share.





Annualized
      return on average assets was 1.38% for the three months ended March 31, 2008,
      compared to 1.43% for the same period in 2007. Annualized return on average
      stockholders’ equity was 10.96% for the three-month period ended March 31, 2008,
      compared to 12.09% for the same period in 2007. For the fourth quarter of 2007,
      return on average assets was 1.40% and return on average equity was 11.78%.





**RESULTS
      OF OPERATIONS**





**Net
      Interest Income**


Net
      interest income for the three-month period ended March 31, 2008 was $10.0
      million, representing an increase of 1.3% when compared to the same period
      last
      year. Increased loan volume was the reason for the increase. The net interest
      margin remained relatively flat at 4.42% for the first quarter of 2008 when
      compared to the first quarter of 2007. Net interest income decreased 3.8% from
      the fourth quarter of 2007 primarily due to decreased rates. The net interest
      margin decreased 28 basis points from 4.70% for the fourth quarter of 2007.
      The
      200 basis-point reduction in interest rates by the Federal Reserve in the first
      quarter of 2008 had a significant and immediate impact on the overall yield
      on
      earning assets.





Interest
      income was $15.9 million for both the first quarters of 2008 and 2007. Average
      earning assets increased 3.1% during the first quarter of 2008 when compared
      to
      the same period in 2007, and yields earned decreased 15 basis points to 7.00%.
      Average loans increased 14.0% while the yield earned on loans decreased 44
      basis
      points. Loans comprised 86.5% and 78.1% of total average earning assets for
      the
      quarters ended March 31, 2008 and 2007, respectively. Interest income decreased
      3.2% when compared to the fourth quarter of 2007.





Interest
      expense decreased 1.5% for the three-month period ended March 31, 2008 when
      compared to the same period last year. Average interest bearing liabilities
      increased 3.0% while rates paid decreased 13 basis points to 3.17%. Declining
      average balances and lower rates paid on money market and savings deposits
      and
      long-term debt were the primary reasons for the decreased expense. Although
      lower rates were paid for certificates of deposit and short-term borrowings,
      interest expense increased for these two categories due to increased average
      balances. The average balance of interest bearing deposits increased by 2.6%
      for
      the three months ended March 31, 2008 when compared to the same period in 2007.
      The overall rate paid for interest bearing deposits decreased 8 basis points
      to
      3.12%. For the three months ended March 31, 2008, the average balance of
      certificates of deposits $100,000 or more increased by 13.5% when compared
      to
      the same period last year, and the average rate paid for those certificates
      of
      deposit decreased 24 basis points to 4.60%. Interest expense decreased 2.2%
      when
      compared to the fourth quarter of 2007.





13




**Analysis
      of Interest Rates and Interest Differentials.**


The
      following table presents the distribution of the average consolidated balance
      sheets, interest income/expense, and annualized yields earned and rates paid
      through March 31, 2008 and 2007:





**March 31, 2008**
            
            March 31, 2007**Average**
            
            **Income(1)/**
            
            **Yield/**
            
            Average
            
            Income(1)/
            
            Yield/(Dollars in thousands)
            
            **Balance**
            
            **Expense**
            
            **Rate**
            
            Balance
            
            Expense
            
            RateEarning
                assetsInvestment
                securitiesTaxable
            
            **$**
            **91,556**
            
            **$**
            **1,080**
            
            
            **4.74**
            **%**
            $
            116,792
            
            $
            1,284
            
            
            4.40
            %Nontaxable
            
            
            **12,676**
            
            
            **190**
            
            
            **6.01**
            
            
            13,215
            
            
            192
            
            
            5.81Loans
                (2), (3)
            
            
            **796,849**
            
            
            **14,601**
            
            
            **7.37**
            
            
            698,735
            
            
            13,641
            
            
            7.81Federal
                funds sold
            
            
            **16,237**
            
            
            **122**
            
            
            **3.03**
            
            
            38,819
            
            
            520
            
            
            5.35Interest
                bearing deposits
            
            
            **4,204**
            
            
            **38**
            
            
            **3.64**
            
            
            26,678
            
            
            338
            
            
            5.07Total
                earning assets
            
            
            **921,522**
            
            
            **16,031**
            
            
            **7.00**
            **%**
            
            894,239
            
            
            15,975
            
            
            7.15
            %Cash
                and due from banks
            
            
            **16,648**
            
            
            
            
            
            
            
            
            17,226Other
                assets
            
            
            **55,013**
            
            
            
            
            
            
            
            
            43,835Allowance
                for credit losses
            
            
            **(7,716**
            **)**
            
            
            
            
            
            
            
            (6,445
            )Total
                assets
            
            **$**
            **985,467**
            
            
            
            
            
            
            
            $
            948,855Interest
                bearing liabilitiesDemand
                deposits
            
            **$**
            **115,215**
            
            
            **171**
            
            
            **0.60**
            **%**
            $
            111,248
            
            
            236
            
            
            0.85
            %Money
                market and savings deposits
            
            
            **175,363**
            
            
            **705**
            
            
            **1.62**
            
            
            185,017
            
            
            824
            
            
            1.78Certificates of deposit $100,000 or more
            
            
            **180,826**
            
            
            **2,070**
            
            
            **4.60**
            
            
            159,281
            
            
            1,926
            
            
            4.84Other
                time deposits
            
            
            **217,123**
            
            
            **2,397**
            
            
            **4.44**
            
            
            215,285
            
            
            2,382
            
            
            4.43Interest
                bearing deposits
            
            
            **688,527**
            
            
            **5,343**
            
            
            **3.12**
            
            
            670,831
            
            
            5,368
            
            
            3.20Short-term
                borrowings
            
            
            **43,354**
            
            
            **366**
            
            
            **3.40**
            
            
            27,180
            
            
            246
            
            
            3.62Long-term
                debt
            
            
            **14,925**
            
            
            **184**
            
            
            **4.95**
            
            
            27,000
            
            
            371
            
            
            5.50Total
                interest bearing liabilities
            
            
            **746,806**
            
            
            **5,893**
            
            
            **3.17**
            **%**
            
            725,011
            
            
            5,985
            
            
            3.30
            %Noninterest
                bearing deposits
            
            
            **100,982**
            
            
            
            
            
            
            
            
            102,915Other
                liabilities
            
            
            **13,940**
            
            
            
            
            
            
            
            
            8,297Stockholders’
                equity
            
            
            **123,739**
            
            
            
            
            
            
            
            
            112,632Total liabilities and stockholders’ equity
            
            **$**
            **985,467**
            
            
            
            
            
            
            
            $
            948,855Net
                interest spread
            
            
            
            
            **$**
            **10,138**
            
            
            **3.83**
            **%**
            
            
            
            $
            9,990
            
            
            3.85
            %Net
                interest margin
            
            
            
            
            
            
            
            
            **4.42**
            **%**
            
            
            
            
            
            
            
            4.47
            %





(1)
      All
      amounts are reported on a tax equivalent basis computed using the statutory
      federal income tax rate of 35% exclusive of the


alternative
      minimum tax rate and nondeductible interest expense.


(2)
      Average loan balances include nonaccrual loans.


(3)
      Interest income on loans includes amortized loan fees, net of costs, for each
      loan category and yield calculations are stated to include all.





**Noninterest
      Income**


Noninterest
      income for the first quarter of 2008 increased $1.9 million when compared to
      the
      first quarter of 2007. The increase was primarily the result of the acquisition
      of two insurance agencies during the fourth quarter of 2007. Service charges
      on
      deposit accounts increased $182 thousand, other service charges and fees
      increased $265 thousand and insurance agency commissions increased $1.4 million
      for the first quarter of 2008 when compared to the first quarter of 2007.
      Noninterest income increased $787 thousand from the fourth quarter of 2007
      primarily due to an increase in insurance agency commissions.





**Noninterest
      Expense**


Noninterest
      expense for the first quarter of 2008 increased $1.7 million when compared
      to
      the first quarter of 2007. The increase was primarily attributable to the
      operating expenses of the two insurance agencies acquired during the fourth
      quarter of 2007. Salaries and benefits increased $1.1 million and other
      noninterest expenses increased $610 thousand for the first quarter of 2008
      when
      compared to the first quarter of 2007. Included in other noninterest expenses
      was $611 thousand in commissions paid to unrelated insurance companies relating
      to wholesale insurance company activities. Noninterest expense increased $289
      thousand from the fourth quarter of 2007 primarily due to an increase in
      salaries and benefits partially offset by a decrease in other noninterest
      expenses.


14





**Income
      Taxes**


The
      effective tax rate was 38.5% for the three months ended March 31, 2008 compared
      to 37.2% for the same period last year. Management believes that there have
      been
      no changes in tax laws or to our tax structure that are likely to have a
      material impact on our future effective tax rate.





**ANALYSIS
      OF FINANCIAL CONDITION**





**Loans**


Loans,
      net of unearned income, totaled $808.6 million at March 31, 2008, an increase
      of
      $32.2 million, or 4.2%, since December 31, 2007. Average loans, net of unearned
      income, were $796.8 million for the three months ended March 31, 2008, an
      increase of $98.1 million, or 14.0%, when compared to the same period last
      of
      year.





**Allowance
      for Credit Losses**


We
      have
      established an allowance for credit losses, which is increased by provisions
      charged against earnings and recoveries of previously charged-off debts. The
      allowance is decreased by current period charge-offs of uncollectible debts.
      Management evaluates the adequacy of the allowance for credit losses on a
      quarterly basis and adjusts the provision for credit losses based upon this
      analysis. The evaluation of the adequacy of the allowance for credit losses
      is
      based on a risk rating system of individual loans, as well as on a collective
      evaluation of smaller balance homogenous loans based on factors such as past
      credit loss experience, local economic trends, nonperforming and problem loans,
      and other factors which may impact collectibility. A loan is placed on
      nonaccrual when it is specifically determined to be impaired and principal
      and
      interest is delinquent for 90 days or more. Please refer to the discussion
      above
      under the caption “Critical Accounting Policies” for an overview of the
      underlying methodology Management employs on a quarterly basis to maintain
      the
      allowance.





The
      provision for credit losses for the three-month periods ended March 31, 2008
      and
      2007 was $462 thousand and $242 thousand, respectively. The provision for credit
      losses for the fourth quarter of 2007 was $465 thousand. The increased provision
      for the first quarter of 2008 when compared to the same period last year
      reflected the overall growth in the loan portfolio and current economic
      conditions. The overall credit quality of the portfolio remains strong as
      evidenced by loan delinquency and charge-off data at March 31, 2008. Management
      believes that we continue to maintain strong underwriting guidelines.





Our
      historical charge-off ratios remain lower than those of similarly sized
      institutions according to the most recent Bank Holding Company Performance
      Report prepared by the Federal Reserve Board. Net charge-offs were $87 thousand
      for the three-month period ended March 31, 2008, compared to $36 thousand for
      the same period last year and $135 thousand for the fourth quarter of 2007.
      The
      allowance for credit losses as a percentage of average loans was 0.99% at March
      31, 2008, compared to 0.93% at March 31, 2007. Loans past due 90 days and still
      accruing at March 31, 2008 were $1.1 million compared to $1.6 million at
      December 31, 2007. Nonperforming assets decreased to $3.4 million at March
      31,
      2008 from $3.7 million at December 31, 2007. Based on Management’s quarterly
      evaluation of the adequacy of the allowance for credit losses, it believes
      that
      the allowance for credit losses and the related provision are adequate at March
      31, 2008.




15





The
      following table presents a summary of the activity in the allowance for credit
      losses:





For the Three Months Ended March 31,(Dollars in thousands)
            
            **2008**
            
            2007Allowance
                balance - beginning of period
            
            **$**
            **7,551**
            
            $
            6,300Charge-offs:Real
                estate
            
            
            **(12**
            **)**
            
            -Consumer
            
            
            **(63**
            **)**
            
            (79
            )Commercial
                and other
            
            
            **(42**
            **)**
            
            (16
            )Totals
            
            
            **(117**
            **)**
            
            (95
            )Recoveries:Real
                estate
            
            
            **8**
            
            
            -Consumer
            
            
            **19**
            
            
            27Commercial
                and other
            
            
            **3**
            
            
            32Totals
            
            
            **30**
            
            
            59Net
                charge-offs
            
            
            **(87**
            **)**
            
            (36
            )Provision
                for credit losses
            
            
            **462**
            
            
            242Allowance
                balance - end of period
            
            **$**
            **7,926**
            
            $
            6,506Average
                loans outstanding during period
            
            **$**
            **796,849**
            
            $
            698,735Net
                        charge-offs (annualized) as a percentage of average loans
                        outstanding
                        during period
            
            
            **0.04**
            **%**
            
            0.02
            %Allowance
                        for credit losses at period end as a percentage of average
                        loans
            
            
            **0.99**
            **%**
            
            0.93
            %





Because
      most of our loans are secured by real estate, weaknesses in the local real
      estate market may have a material adverse effect on the performance of our
      loan
      portfolio and the value of the collateral securing that portfolio. Despite
      the
      weaknesses in the national economy and real estate market, Management believes
      that the local economy and real estate market remain relatively stable. ****





We
      have a
      concentration of commercial real estate loans. Commercial real estate loans,
      excluding construction and land development loans, at March 31, 2008 were
      approximately $266.4 million, or 33.0% of total loans, compared to $249.5
      million, or 32.1% of total loans at December 31, 2007. Construction and land
      development loans at March 31, 2008 were $166.6 million, or 20.6% of total
      loans, compared to $155.5 million, or 20.0% of total loans at December 31,
      2007.
      We do not engage in foreign or subprime lending activities.





**Nonperforming
      Assets**


The
      following table summarizes our past due and nonperforming assets:





**March 31,**
            
            December 31,(Dollars in thousands)
            
            **2008**
            
            2007Nonperforming
                assetsNonaccrual
                loans
            
            **$**
            **3,438**
            
            $
            3,540Other
                real estate owned
            
            
            **-**
            
            
            176Total
                nonperforming assets
            
            
            **3,438**
            
            
            3,716Loans
                90 days past due and still accruing
            
            
            **1,098**
            
            
            1,606Total
                nonperforming assets and past due loans
            
            **$**
            **4,536**
            
            $
            5,322





**Investment
      Securities**


Investment
      securities totaled $99.1 million at March 31, 2008, compared to $110.0 million
      at December 31, 2007. The decreased balance reflects that a portion of maturing
      securities were used to fund loan growth. The average balance of investment
      securities was $104.2 million for the three months ended March 31, 2008,
      compared to $130.0 million for the same period in 2007. The tax equivalent
      yields on investment securities were 4.90% and 4.54% for the three-month periods
      ended March 31, 2008 and 2007, respectively.





**Deposits**


Total
      deposits at March 31, 2008 were $808.9 million, compared to $765.9 million
      at
      December 31, 2007. Certificates of deposit of $100,000 or more increased $27.0
      million, or 16.7%, due primarily to increased deposits of a large municipal
      customer, and money market and savings deposits increased $14.6 million, or
      8.6%, since the end of 2007. Growth in other time and demand deposits have
      remained relatively flat since December 31, 2007.


16


**Short-term
      borrowings**


Short-term
      borrowings at March 31, 2008 and December 31, 2007 were $42.7 million and $47.7
      million, respectively. Short-term borrowings
      consisted of securities sold under agreements to repurchase, overnight
      borrowings from correspondent banks and short-term advances from the Federal
      Home Loan Bank. Short-term advances are defined as those with original
      maturities of one year or less.




**Long-Term
      Debt**


At
      March
      31, 2008 and December 31, 2007, the Company had the following long-term
      debt:





**March 31,**
            
            December 31,(Dollars in thousands)
            
            **2008**
            
            2007Federal Home
                Loan Bank (FHLB) 5.69% Advance due June 2008
            
            **$**
            **7,000**
            
            $
            7,000FHLB
                4.17% Advance due November 2009
            
            
            **3,000**
            
            
            3,000FHLB
                3.09% Advance due January 2010
            
            
            **3,000**
            
            
            **-**Acquisition related debt, 4.08% interest, equal annual installments for five years
            
            
            **2,485**
            
            
            2,485**$**
            **15,485**
            
            $
            12,485





**Liquidity
      and Capital Resources**


We
      derive
      liquidity through increased customer deposits, maturities in the investment
      portfolio, loan repayments and income from earning assets. To the extent that
      deposits are not adequate to fund customer loan demand, liquidity needs can
      be
      met in the short-term funds markets through arrangements with correspondent
      banks. Talbot Bank and Centreville National Bank are also members of the Federal
      Home Loan Bank of Atlanta and Felton Bank is a member of the Federal Home Loan
      Bank of Pittsburgh to which they have pledged collateral sufficient to permit
      additional borrowings of up to approximately $74.3 million in the aggregate
      at
      March 31, 2008. Management is not aware of any trends or demands, commitments,
      events or uncertainties that are likely to materially affect our future ability
      to maintain liquidity at satisfactory levels.





Total
      stockholders’ equity was $122.7 million at March 31, 2008, an increase of 2.0%
      since December 31, 2007. Accumulated other comprehensive income, which consists
      solely of net unrealized gains or losses on investment securities available
      for
      sale, increased by $714 thousand since the end of 2007, resulting in accumulated
      other comprehensive income of $961 thousand at March 31, 2008.





Bank
      regulatory agencies have adopted various capital standards for financial
      institutions, including risk-based capital standards. The primary objectives
      of
      the risk-based capital framework are to provide a more consistent system for
      comparing capital positions of financial institutions and to take into account
      the different risks among financial institutions’ assets and off-balance sheet
      items.





Risk-based
      capital standards have been supplemented with requirements for a minimum Tier
      1
      capital to average assets ratio (leverage ratio). In addition, regulatory
      agencies consider the published capital levels as minimum levels and may require
      a financial institution to maintain capital at higher levels.





A
      comparison of our capital ratios as of March 31, 2008 to the minimum regulatory
      requirements is presented below:





MinimumActual
            
            RequirementsTier
                1 risk-based capital
            
            
            11.88
            %
            
            4.00
            %Total
                risk-based capital
            
            
            12.88
            %
            
            8.00
            %Leverage
                ratio
            
            
            10.32
            %
            
            4.00
            %





**Item
      3. Quantitative and Qualitative Disclosures about Market
      Risk.**





Our
      primary market risk is to interest rate fluctuation and Management has
      procedures in place to evaluate and mitigate this risk. This risk and these
      procedures are discussed in Item 7 of Part II of the Annual Report of Shore
      Bancshares, Inc. on Form 10-K for the year ended December 31, 2007 under the
      caption “Market Risk Management”. Management believes that there have been no
      material changes in our market risks, the procedures used to evaluate and
      mitigate these risks, or our actual and simulated sensitivity positions since
      December 31, 2007.


17





**Item
      4. Controls and Procedures.**





We
      maintain disclosure controls and procedures that are designed to ensure that
      information required to be disclosed in our reports filed under the Securities
      Exchange Act of 1934 with the SEC, such as this Quarterly Report, is recorded,
      processed, summarized and reported within the time periods specified in those
      rules and forms, and that such information is accumulated and communicated
      to
      Management, including the Chief Executive Officer (“CEO”) and the Principal
      Accounting Officer (“PAO”), as appropriate, to allow for timely decisions
      regarding required disclosure. A control system, no matter how well conceived
      and operated, can provide only reasonable, not absolute, assurance that the
      objectives of the control system are met. Further, the design of a control
      system must reflect the fact that there are resource constraints, and the
      benefits of controls must be considered relative to their costs. These inherent
      limitations include the realities that judgments in decision-making can be
      faulty, and that breakdowns can occur because of simple error
      or
      mistake. Additionally, controls can be circumvented by the individual acts
      of
      some persons, by collusion of two or more people, or by management override
      of
      the control. The design of any system of controls also is based in part upon
      certain assumptions about the likelihood of future events, and there can be
      no
      assurance that any design will succeed in achieving its stated goals under
      all
      potential future conditions; over time, control may become inadequate because
      of
      changes in conditions, or the degree of compliance with the policies or
      procedures may deteriorate.





An
      evaluation of the effectiveness of these disclosure controls as of March 31,
      2008 was carried out under the supervision and with the participation of
      Management, including the CEO and the PAO. Based on that evaluation, the
      Company’s management, including the CEO and the PAO, has concluded that our
      disclosure controls and procedures are, in fact, effective at the reasonable
      assurance level.





During
      the first quarter of 2008, there was no change in our internal control over
      financial reporting that has materially affected, or is reasonably likely to
      materially affect, our internal control over financial reporting.





**PART
      II – OTHER INFORMATION**





**Item
      1A. Risk Factors.**





The
      risks
      and uncertainties to which our financial condition and operations are subject
      are discussed in detail in Item 1A of Part I of the Annual Report of Shore
      Bancshares, Inc. on Form 10-K for the year ended December 31, 2007. Management
      does not believe that any material changes in our risk factors have occurred
      since they were last disclosed.





**Item
      6.**  **Exhibits.**





The
      exhibits filed or furnished with this quarterly report are shown on the Exhibit
      List that follows the signatures to this report, which list is incorporated
      herein by reference.





**SIGNATURES**





Pursuant
      to the requirements of the Securities Exchange Act of 1934, the registrant
      has
      duly caused this report to be signed on its behalf by the undersigned thereunto
      duly authorized.





SHORE
                BANCSHARES, INC.Date:
                May 8, 2008
            By:
            /s/
                W. Moorhead VermilyeW.
                Moorhead VermilyePresident/Chief
                Executive OfficerDate:
                May 8, 2008
            By:
            /s/
                Susan E. LeavertonSusan
                E. Leaverton, CPATreasurer/Principal
                Accounting Officer


18


**EXHIBIT
      INDEX**





ExhibitNumber
            
            Description31.1
            
            Certifications
                of the CEO pursuant to Section 302 of the Sarbanes-Oxley Act (filed
                herewith).31.2
            
            Certifications
                of the PAO pursuant to Section 302 of the Sarbanes-Oxley Act (filed
                herewith).32.1
            
            Certification
                of the CEO pursuant toSection
                906 of the Sarbanes-Oxley Act(furnished
                herewith).32.2
            
            Certification
                of the PAO pursuant toSection
                906 of the Sarbanes-Oxley Act(furnished
                herewith).




19