*Table
        of Contents*







**UNITED
      STATES**


**SECURITIES
      AND EXCHANGE COMMISSION**


**WASHINGTON,
      DC 20549**





**FORM
      10-Q**





x
            Quarterly
                report under Section 13 or 15(d) of the Securities Exchange Act of
                1934




For
      the
      quarterly period ended  September
      30, 2008





o
            Transition
                report under Section 13 or 15(d) of the Exchange
                Act




For
      the
      transition period from _______________ to ________________




Commission
      File Number: 0-24169





**PEOPLES
      BANCORP, INC.**


(Exact
      name of registrant as specified in its charter)





Maryland
            
            52-2027776(State
                or Other Jurisdiction of
            
            (I.R.S.
                EmployerIncorporation
                or Organization)
            
            Identification
                No.)





P.O.
                Box 210, 100 Spring Avenue, Chestertown, Maryland
            
            21620(Address
                of Principal Executive Offices)
            
            (Zip
                Code)





(410)
      778-3500


Registrant’s
      Telephone Number, Including Area Code





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, or a non-accelerated filer, or a smaller reporting company.
      See definition 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 oNon-accelerated
                filer o
            Smaller
                reporting company x(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**





State
      the
      number of shares outstanding of each of the issuer’s classes of common stock, as
      of the latest practicable date: 779,512 shares of common stock issued and outstanding as of November 1,
      2008












*Table
        of Contents*




**PEOPLES
      BANCORP, INC.**





**FORM
      10-Q**


**INDEX**




PagePart
                I - Financial InformationItem
                1.     Financial StatementsConsolidated
                Balance Sheets at September 30, 2008 (unaudited)
                and December 31, 2007
            3Consolidated
                Statements of Income (unaudited) for three and
                nine months ended September 30, 2008 and 2007
            4Consolidated
                Statements of Changes in Stockholders’ Equity
                (unaudited) for the nine months ended September 30, 2008 and
                2007
            5Consolidated
                Statements of Cash Flows (unaudited) for nine
                months ended September 30, 2008 and 2007
            6Notes
                to Financial Statements
                (unaudited)
            8Item
                2.     Management’s Discussion and Analysis of Financial Condition
                and Results of Operations
            13Item
                3.     Quantitative and Qualitative Disclosures About
                Market
                Risk
            23Item
                4T.   Controls and
                Procedures
            23Part
                II - Other InformationItem
                1.     Legal
                Proceedings
            24Item
                1A.  Risk
                Factors
            24Item
                2.     Unregistered
                Sales of Equity Securities and Use of Proceeds
            25Item
                3.     Defaults Upon
                Senior Securities
            25Item
                4.     Submission of
                Matters to a Vote of Security Holders
            25Item
                5.     Other
                Information
            25Item
                6.     Exhibits
            25Signatures
            26Exhibit
                Index
            27






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          2 -
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          of Contents*




**PART
      I - FINANCIAL INFORMATION**





**Item
              1.**
            **Financial
                Statements.**




**PEOPLES
                    BANCORP, INC. AND SUBSIDIARIES****Consolidated
                    Balance Sheets**
                
                September
                    30,
                
                December
                    31,2008
                
                2007**ASSETS**
                
                (unaudited)Cash
                    and due from banks
                
                $
                3,180,287
                
                $
                5,399,704Federal
                    funds sold
                
                
                3,309,260
                
                
                4,440,438Cash
                    and cash equivalents
                
                
                6,489,547
                
                
                9,840,142Securities
                    available for sale
                
                
                4,036,192
                
                
                5,037,273Securities
                    held to maturity (approximate fairvalue
                    of $12,232,299 and $13,198,704)
                
                
                12,050,953
                
                
                13,026,151Federal
                    Home Loan Bank stock, at cost
                
                
                2,494,000
                
                
                2,897,600Loans,
                    less allowance for loan lossesof
                    $1,527,496 and $2,328,792
                
                
                214,915,760
                
                
                220,425,725Premises
                    and equipment
                
                
                6,681,626
                
                
                5,901,649Goodwill
                    and intangible assets
                
                
                726,681
                
                
                767,932Accrued
                    interest receivable
                
                
                1,611,661
                
                
                1,814,574Deferred
                    income taxes
                
                
                1,124,833
                
                
                1,121,746Foreclosed
                    real estate
                
                
                375,000
                
                
                0Other
                    assets
                
                
                916,178
                
                
                974,970**Total
                    Assets**
                
                $
                251,422,431
                
                $
                261,807,762**LIABILITIES
                    AND STOCKHOLDERS’ EQUITY**DepositsNon-interest-bearing
                
                $
                33,911,380
                
                $
                36,630,744Interest-bearing
                
                
                130,454,693
                
                
                132,421,505164,366,073
                
                
                169,052,249Securities
                    sold under repurchase agreementsand
                    federal funds purchased
                
                
                12,780,520
                
                
                9,041,476Federal
                    Home Loan Bank advances
                
                
                43,000,000
                
                
                53,000,000Other
                    borrowings
                
                
                176,935
                
                
                192,597Accrued
                    interest payable
                
                
                482,092
                
                
                521,219Other
                    liabilities
                
                
                2,106,855
                
                
                1,960,427222,912,475
                
                
                233,767,968Stockholders'
                    equityCommon
                    stock, par value $10 per share, 1,000,000 sharesauthorized;
                    issued and outstanding 779,512 shares atSeptember
                    30, 2008 and 785,512 shares at December 31,2007
                
                
                7,795,120
                
                
                7,855,120Additional
                    paid in capital
                
                
                2,920,866
                
                
                2,920,866Retained
                    earnings
                
                
                18,531,113
                
                
                17,997,28629,247,099
                
                
                28,773,272Accumulated
                    other comprehensive income (loss)Unrealized
                    gain (loss) on available for sales securities
                
                
                29,302
                
                
                32,967Unfunded
                    liability of defined benefit plan
                
                
                (766,445
                )
                
                (766,445
                )28,509,956
                
                
                28,039,794**Total
                    Liabilities and Stockholders’ Equity**
                
                $
                251,422,431
                
                $
                261,807,762


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


-
          3 -
 *Table
          of Contents*


**PEOPLES
                  BANCORP, INC. AND SUBSIDIARIES****Consolidated
                  Statements of Income
                  (unaudited)**
  For
                    the three months ended
                
                For
                    the nine months endedSeptember
                    30,
                
                September
                    30,2008
                
                2007
                
                2008
                
                2007Interest
                    and dividend revenueLoans,
                    including fees
                
                $
                3,692,342
                
                $
                4,127,285
                
                $
                11,212,858
                
                $
                12,139,387U.
                    S. government agencies securities
                
                
                184,146
                
                
                215,022
                
                
                582,196
                
                
                651,940Deposits
                    in other banks
                
                
                1,750
                
                
                1,730
                
                
                14,538
                
                
                8,022Federal
                    funds sold
                
                
                17,291
                
                
                46,840
                
                
                87,672
                
                
                94,161Equity
                    securities
                
                
                37,797
                
                
                42,878
                
                
                124,277
                
                
                120,812Total
                    interest and dividend revenue
                
                
                3,933.326
                
                
                4,433.755
                
                
                12,021,541
                
                
                13,014,322
 Interest
                      expenseDeposits
                  
                  
                  850,687
                  
                  
                  984,257
                  
                  
                  2,678,583
                  
                  
                  2,785,282Borrowed
                      funds
                  
                  
                  575,321
                  
                  
                  734,953
                  
                  
                  1,881,406
                  
                  
                  2,136,048Total
                      interest expense
                  
                  
                  1,426,008
                  
                  
                  1,719,210
                  
                  
                  4,559,989
                  
                  
                  4,921,330Net
                      interest income
                  
                  
                  2,507,318
                  
                  
                  2,714,545
                  
                  
                  7,461,552
                  
                  
                  8,092,992Provision
                      for loan losses
                  
                  
                  440,000
                  
                  
                  10,000
                  
                  
                  1,040,000
                  
                  
                  40,000
 Net
                      interest income afterprovision
                      for loan losses
                  
                  
                  2,067,318
                  
                  
                  2,704,545
                  
                  
                  6,421,552
                  
                  
                  8,052,992Noninterest
                      revenueService
                      charges on deposit accounts
                  
                  
                  255,534
                  
                  
                  264,290
                  
                  
                  747,426
                  
                  
                  737,193Insurance
                      commissions
                  
                  
                  340,621
                  
                  
                  318,988
                  
                  
                  1,000,897
                  
                  
                  956,978Other
                      noninterest revenue
                  
                  
                  71.024
                  
                  
                  68.359
                  
                  
                  241,025
                  
                  
                  233,054Total
                      noninterest revenue
                  
                  
                  667,179
                  
                  
                  651,637
                  
                  
                  1,989,348
                  
                  
                  1,927,225Noninterest
                      expensesSalaries
                      and employee benefits
                  
                  
                  1,090,179
                  
                  
                  1,061,669
                  
                  
                  3,326,645
                  
                  
                  3,042,528Occupancy
                  
                  
                  122,453
                  
                  
                  74,025
                  
                  
                  310,972
                  
                  
                  254,745Furniture
                      and equipment
                  
                  
                  69,575
                  
                  
                  63,078
                  
                  
                  208,906
                  
                  
                  179,110Other
                      operating
                  
                  
                  526,540
                  
                  
                  439,126
                  
                  
                  1,427,926
                  
                  
                  1,252,984Total
                      noninterest expenses
                  
                  
                  1,808,747
                  
                  
                  1,637,898
                  
                  
                  5,274,449
                  
                  
                  4,729,367Income
                      before income taxes
                  
                  
                  925,750
                  
                  
                  1,718,284
                  
                  
                  3,136,451
                  
                  
                  5,250,850Income
                      taxes
                  
                  
                  338,820
                  
                  
                  636,832
                  
                  
                  1,156,243
                  
                  
                  1,965,612Net
                      income
                  
                  $
                  586,930
                  
                  $
                  1,081,452
                  
                  $
                  1,980,208
                  
                  $
                  3,285,238Earnings
                      per common share
                  
                  $
                  0.75
                  
                  $
                  1.38
                  
                  $
                  2.53
                  
                  $
                  4.17


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


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          4 -
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          of Contents*





**PEOPLES
                BANCORP, INC. AND SUBSIDIARIES****Consolidated
                Statements of Changes in Stockholders’ Equity
                (unaudited)**




**NINE
              MONTHS ENDED SEPTEMBER 30, 2008 and 2007**
            
            
            
            
            
            
            
            AccumulatedAdditional
            
            
            
            otherpaid-in
            
            Retained
            
            comprehensive
            
            ComprehensiveCommon
                Stock
            
            capital
            
            earnings
            
            income
            
            income**Balance,
                December 31, 2006**
            
            $
            7,890,120
            
            $
            2,920,866
            
            $
            15,632,965
            
            $
            (836,795
            )Net
                income
            
            
            —
            
            
            —
            
            
            3,285,238
            
            
            —
            
            $
            3,285,238Unrealized
                gain on investmentsecurities
                available for sale netof
                income taxes of $18,053
            
            
            —
            
            
            —
            
            
            —
            
            
            28,693
            
            
            28,693Comprehensive
                income
            
            
            
            
            
            
            
            
            
            
            
            
            
            $
            3,313,931Repurchase
                of stock
            
            
            (35,000
            )
            
            —
            
            
            (220,500
            )
            
            —Cash
                dividend, $1.25 per share
            
            
            —
            
            
            —
            
            
            (976,905
            )
            
            —**Balance,
                September 30, 2007**
            
            $
            7,855,120
            
            $
            2,920,866
            
            $
            17,720,798
            
            $
            (808,102
            )**Balance,
                December 31, 2007**
            
            $
            7,855,120
            
            $
            2,920,866
            
            $
            17,997,286
            
            $
            (733,478
            )Net
                income
            
            
            —
            
            
            —
            
            
            1,980,208
            
            
            —
            
            $
            1,980,208Unrealized
                loss on investmentsecurities
                available for sale netof
                income taxes of $2,387
            
            
            —
            
            
            —
            
            
            —
            
            
            (3,665
            )
            
            (3,665
            )Comprehensive
                income
            
            
            
            
            
            
            
            
            
            
            
            
            
            $
            1,976,543Repurchase
                of stock
            
            
            (60,000
            )
            
            —
            
            
            (420,000
            )
            
            —Cash
                dividend, $1.25 per share
            
            
            —
            
            
            —
            
            
            (1,026,381
            )
            
            —**Balance,
                September 30, 2008**
            
            $
            7,795,120
            
            $
            2,920,866
            
            $
            18,531,113
            
            $
            (737,143
            )


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





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          5 -
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          of Contents*





**PEOPLES
                BANCORP, INC. AND SUBSIDIARIES****Consolidated
                Statements of Cash Flows
                (unaudited)**




For
                the nine months endedSeptember
                30,**2008**
            
            **2007****CASH
                FLOWS FROM OPERATING ACTIVITIES**Interest
                received
            
            $
            12,269,892
            
            $
            12,527,507Fees
                and commissions received
            
            
            1,989,348
            
            
            1,768,992Cash
                paid to suppliers and employees
            
            
            (5,380,883
            )
            
            (4,045,713
            )Interest
                paid
            
            
            (4,599,116
            )
            
            (4,855,759
            )Taxes
                paid
            
            
            (967,322
            )
            
            (1,965,612
            )3,311,919
            
            
            3,429,415**CASH
                FLOWS FROM INVESTING ACTIVITIES**Cash
                paid for premises, equipment, and software
            
            
            (990,994
            )
            
            (1,551,845
            )Loans
                made, net of principal collected
            
            
            4,398,189
            
            
            (9,755,873
            )Proceeds
                from maturities and calls of securitiesAvailable
                for sale
            
            
            1,000,000
            
            
            2,000,000Held
                to maturity
            
            
            3,501,036
            
            
            1,002,058Purchase
                of securities Available for Sale
            
            
            0
            
            
            0Purchase
                of securities held to maturity
            
            
            (2,505,170
            )
            
            (2,037,521
            )Purchase
                of FHLB Stock
            
            
            403,600
            
            
            (364,500
            )Acquisition
                of Insurance Agency
            
            
            0
            
            
            (884,634
            )5,806,661
            
            
            (11,592,315
            )**CASH
                FLOWS FROM FINANCING ACTIVITIES**Net
                increase (decrease) inTime
                deposits
            
            
            1,714,446
            
            
            6,211,235Other
                deposits
            
            
            (6,400,622
            )
            
            1,231,912Securities
                sold under repurchase agreements
            
            
            3,739,044
            
            
            (6,386,480
            )Advances
                under (repayments of) notes payable
            
            
            (10,000,000
            )
            
            9,000,000Repayments
                of other borrowings
            
            
            (15,662
            )
            
            (199,180
            )Repurchase
                of Stock
            
            
            (480,000
            )
            
            (255,500
            )Dividends
                paid
            
            
            (1,026,381
            )
            
            (976,905
            )(12,469,175
            )
            
            8,625,082**NET
                INCREASE (DECREASE) IN CASH**
            
            
            (3,350,595
            )
            
            462,182CASH
                AND EQUIVALENTS AT BEGINNING OF PERIOD
            
            
            9,840,142
            
            
            7,465,410CASH
                AND EQUIVALENTS AT END OF PERIOD
            
            $
            6,489,547
            
            $
            7,927,592





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          6 -
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          of Contents*





**PEOPLES
                BANCORP, INC. AND SUBSIDIARIES****Consolidated
                Statements of Cash Flows (unaudited)
                (continued)**




For
                    the nine months endedSeptember
                    30,**RECONCILIATION
                  OF NET INCOME TO NET CASH PROVIDED**
                
                **2008**
                
                **2007****FROM
                    OPERATING ACTIVITIES**Net
                    income
                
                $
                1,980,208
                
                $
                3,285,238**ADJUSTMENTS**Depreciation
                    and amortization
                
                
                211,017
                
                
                163,815Provision
                    for loan losses
                
                
                1,040,000
                
                
                40,000Amortization
                    of intangible assets
                
                
                41,250
                
                
                41,250Security
                    discount accretion, net of premium amortization
                
                
                (26,338
                )
                
                (43,925
                )Decrease
                    (increase) inAccrued
                    interest receivable
                
                
                202,913
                
                
                (423,785
                )Income
                    tax refund receivable
                
                
                188,921
                
                
                0Other
                    assets
                
                
                (505,129
                )
                
                111,062Increase
                    (decrease) inDeferred
                    origination fees and costs, net
                
                
                71,776
                
                
                (19,106
                )Accrued
                    Interest payable and other liabilities
                
                
                107,301
                
                
                274,866$
                3,311,919
                
                $
                3,429,415




Supplemental
                  disclosureFair
                  value of assets acquired
              
              $
              0
              
              $
              686,499Fair
                  value of liabilities assumed
              
              
              0
              
              
              (634,797
              )Purchase
                  price in excess of assets acquired
              
              
              0
              
              
              832,932Net
                  cash paid for acquisition
              
              $
              0
              
              $
              884,634Loans
                  transferred to foreclosed real estate
              
              $
              375,000
              
              $
              0


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


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          7 -
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          of Contents*




**Peoples
      Bancorp, Inc. and Subsidiaries**


**Notes
      to Financial Statements (unaudited)**




1.
            Basis
                of Presentation





The
      accompanying unaudited consolidated financial statements of Peoples Bancorp,
      Inc. (the “Company”) and its subsidiaries, The Peoples Bank, a
      Maryland-chartered bank (the “Bank”), and Fleetwood, Athey, Macbeth &
McCown, Inc., a Maryland insurance agency ( the “Insurance Agency”), have been
      prepared in accordance with accounting principles generally accepted in the
      United States of America for interim financial information and with the
      instructions to Form 10-Q and Regulation S-X of the Securities and Exchange
      Commission. Accordingly, they do not include all the information and notes
      required by generally accepted accounting principles for complete financial
      statements. In the opinion of management, all adjustments (consisting of normal
      recurring entries) considered necessary for a fair presentation have been
      included. Operating results for the three and nine months ended September 30,
      2008 are not necessarily indicative of the results that may be expected for
      the
      year ending December 31, 2008 or any other future interim period. The
      consolidated financial statements contained herein should be read in conjunction
      with the consolidated financial statements and related notes contained in the
      Company’s Annual Report on Form 10-K for the year ended December 31,
      2007.





2.
            Cash
                Flows





For
      purposes of reporting cash flows, cash and cash equivalents include cash on
      hand, amounts due from banks and overnight investments in federal funds
      sold.





3.
            Comprehensive
                income





For
      the
      nine months ended September 30, 2008 and 2007, total comprehensive income,
      net
      of taxes, was $1,976,543 and $3,313,931, respectively. Comprehensive income
      is
      the sum of net income and the change in the unrealized gain or loss on
      securities available for sale, net of income taxes





4.
            Commitments





Loan
      commitments are made to accommodate the financial needs of the Company’s
      customers. Letters of credit commit the Company to make payments on behalf
      of
      customers when certain specified future events occur. These obligations are
      not
      recorded in the Company’s financial statements. The credit risks inherent in
      loan commitments and letters of credit are essentially the same as those
      involved in extending loans to customers, and these arrangements are subject
      to
      the Company’s normal credit policies. The Company’s exposure to credit loss in
      the event the customer does not satisfy the terms of these arrangements equals
      the notional amount of the obligation less the value of any collateral. The
      table below represents unfunded obligations at September 30, 2008 and December
      31, 2007.





At
                September 30,
              2008
            
            December
                31,
              2007Revolving
                Home Equity Lines
            
            $
            3,689,826
            
            $
            3,717,9641-4
                Family Residential Construction loans
            
            $
            868,814
            
            $
            991,715Commercial
                Real Estate
            
            $
            5,663,568
            
            $
            5,864,181Other
                Unused Commitments
            
            $
            17,890,334
            
            $
            15,382,454Commercial
                Letters of Credit
            
            $
            4,910,885
            
            $
            4,636,444





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          8 -
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5.
            Earnings
                Per Share





Earnings
      per common share is derived by dividing net income available to holders of
      shares of common stock by the weighted average number of shares of common stock
      outstanding of 779,512 and 784,167 for the three- and nine-month periods ended
      September 30, 2008, respectively. For the three- and nine-month periods ended
      September 30, 2007, the weighted average number of shares of common stock
      outstanding was 785,512 and 788,517, respectively.





6.
            Pension





The
      Bank
      maintains a defined benefit pension plan covering substantially all employees
      of
      the Bank. Benefits are based on years of service and the employee’s highest
      average rate of earnings for five consecutive years during the final ten full
      years before retirement. The Bank’s general funding policy is to contribute
      annually the maximum amount that can be deducted for income tax purposes,
      determined using the projected unit credit cost method. The assets of the plan
      are invested in various time deposits and held in trust as required by
      law.





During
      the nine months ended September 30, 2008 and 2007, the Bank recognized net
      periodic costs for this plan of $213,846 and $212,393, respectively. During
      the
      nine months ended September 30, 2008, the Bank contributed $214,842 to the
      plan.





7.
            Segment
                Reporting





The
      Company operates two primary businesses: Community Banking and Insurance
      Products & Services. Through the Community Banking business, the Company
      provides services to consumers and small businesses on the upper Eastern Shore
      of Maryland through its six branches. Community banking activities include
      serving the deposit needs of small business and individual consumers by
      providing banking products and services to fit their needs. Loan products
      available to consumers include mortgage, home equity, automobile, marine, and
      installment loans 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, 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.





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          9 -
 *Table
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Selected
      financial information by line of business, is included in the following
      table:




**For
                  the nine months ended**
                **September
                  30, 2008**
              
              
              **Community**
                **banking**
              
              
              **Insurance**
                **products**
                **and
                  services**
              
              
              **Intersegment**
                **Transactions**
              
              
              **Consolidated**
                **Total**Net
                  interest income
              
              $
              7,470,387
              
              
              ($8,835
              )
              $
              0
              
              $
              7,461,552Provision
                  for loan losses
              
              
              1,040,000
              
              
              0
              
              
              0
              
              
              1,040,000Net
                  interest income after provision
              
              
              6,430,387
              
              
              (8,835
              )
              
              0
              
              
              6,421,552Noninterest
                  revenue
              
              
              984,816
              
              
              1,004,532
              
              
              0
              
              
              1,989,348Noninterest
                  expense
              
              
              4,470,498
              
              
              803,951
              
              
              0
              
              
              5,274,449Income
                  before income taxes
              
              
              2,944,705
              
              
              191,746
              
              
              0
              
              
              3,136,451Income
                  taxes
              
              
              1,092,627
              
              
              63,616
              
              
              0
              
              
              1,156,243Net
                  income
              
              $
              1,852,078
              
              $
              128,130
              
              $
              0
              
              $
              1,980,208Average
                  assets
              
              $
              254,768,066
              
              $
              1,547,267
              
              
              ($278,919
              )
              $
              256,036,414




**For
                    the nine months ended**
                  **September
                    30, 2007**
              
              **Community**
                  **banking**
              
              **Insurance**
                  **products**
                  **and
                    services**
              
              **Intersegment**
                  **Transactions**
              
              **Consolidated**
                  **Total**Net
                  interest income
              
              $
              8,102,756
              
              
              ($9,764
              )
              $
              0
              
              $
              8,092,992Provision
                  for loan losses
              
              
              40,000
              
              
              0
              
              
              0
              
              
              40,000Net
                  interest income after provision
              
              
              8,062,756
              
              
              (9,764
              )
              
              0
              
              
              8,052,992Noninterest
                  revenue
              
              
              965,716
              
              
              961,509
              
              
              0
              
              
              1,927,225Noninterest
                  expense
              
              
              3,953,766
              
              
              775,601
              
              
              0
              
              
              4,729,367Income
                  before income taxes
              
              
              5,074,706
              
              
              176,144
              
              
              0
              
              
              5,250,850Income
                  taxes
              
              
              1,897,743
              
              
              67,869
              
              
              0
              
              
              1,965,612Net
                  income
              
              $
              3,176,963
              
              $
              108,275
              
              $
              0
              
              $
              3,285,238Average
                  assets
              
              $
              248,929,824
              
              $
              1,051,414
              
              
              ($179,810
              )
              $
              249,801,428


8.
            Insurance
                Agency Acquisition





On
      January 2, 2007, the Company acquired all of the outstanding common stock of
      the
      Insurance Agency for approximately $1,000,000. The Insurance Agency has an
      office located in Chestertown Maryland.





Through
      the acquisition, the Company acquired approximately $805,000 of assets,
      primarily real estate, accounts receivable and cash, and assumed approximately
      $635,000 of liabilities, primarily notes payable and operating payables. The
      acquisition resulted in the recognition of approximately $273,000 of goodwill,
      which will not be amortized, and $550,000 of intangible assets, which will
      be
      amortized on a straight-line basis over 10 years.





During
      the nine months ended September 30. 2008, the Company recorded amortization
      of
      intangible assets of $41,250.




-
          10
          -
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9.
              Fair
                  Value





On
      January 1, 2008, the Company adopted SFAS No. 157, *Fair
      Value Measurements* .
      The
      adoption of SFAS No. 157 had no effect on the Company’s December 31,
      2007 and September 30, 2008 Consolidated Balance Sheets or the Consolidated
      Statement of Income for the nine months ended September 30, 2008.





SFAS
      No. 157 defines fair value, establishes a framework for measuring fair
      value and expands disclosures about fair value. SFAS No. 157 also
      establishes a hierarchy for determining fair value measurement. The hierarchy
      includes three levels and is based upon the valuation techniques used to measure
      assets and liabilities. The three levels are as follows:




**•**
              Level
                  1 — Inputs to the valuation methodology are quoted prices
                  (unadjusted) for identical assets or liabilities in active
                  markets;




**•**
              Level
                  2 — Inputs to the valuation methodology include quoted prices for similar
                  assets and liabilities in active markets, and inputs that are observable
                  for the asset or liability, either directly or indirectly, for
                  substantially the full term of the financial instrument;
                  and


**•**
              Level
                  3 — Inputs to the valuation methodology are unobservable and significant
                  to the fair value measurement.


The
      following is a description of the valuation methodologies used for instruments
      measured at fair value, as well as the general classification of such
      instruments pursuant to valuation methodology.




Securities
      available for sale— If quoted prices are available in an active market,
      securities are classified within level 1 of the hierarchy. Level 1 includes
      securities that have quoted prices in an active market for identical assets.
      If
      quoted market prices are not available, then fair values are estimated using
      pricing models, quoted prices of securities with similar characteristics or
      discounted cash flows. The
      Company has
      categorized its securities available for sale as follows:





Total
            
            Level
                1 Inputs
            
            Level
                2 Inputs
            
            Level
                3 InputsSecurities
            
            $
            4,036,192
            
            $
            4,036,192
            
            $
            —
            
            $
            —





Foreclosed
      real estate - The Company’s foreclosed real estate is measured at fair
      value less cost to sell. As of September 30, 2008, the fair value of
      foreclosed real estate was estimated to be $375,000. Fair value was determined
      based on offers and/or appraisals. Cost to sell the real estate was based on
      standard market factors. The Bank has categorized its foreclosed real estate
      as
      level 3. At the time the property was foreclosed the Company recorded a
      $40,000 charge-off to the allowance for loan losses.





10.
            Recent
                Accounting Standards





The
      following are recent accounting pronouncements approved by the Financial
      Accounting Standards Board (FASB). These Statements will not have any material
      impact on the financial statements of the Company.




FASB
      Statement No. 160 (revised 2007), *Noncontrolling
      Interests in Consolidated Financial Statement* amends
      Accounting Research Bulletin 51, *Consolidated
      Financial Statements* ,
      to
      establish accounting


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          11 -
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and
      reporting standards for noncontrolling interest in a subsidiary and for the
      deconsolidation of a subsidiary. It also clarifies that a noncontrolling
      interest in a subsidiary is an ownership interest in the consolidated entity
      that should be reported as equity in the consolidated financial statements.
      Statement No. 160 also changes the way the consolidated income statement is
      presented by requiring consolidated net income to be reported at amounts that
      include the amounts attributable to both the parent and the noncontrolling
      interest. It also requires disclosure, on the face of the consolidated income
      statement of income, of the amounts of consolidated net income attributable
      to
      the parent and to the noncontrolling interest. Statement No. 160 is effective
      at
      the beginning of the Company’s first fiscal year after December 15, 2008.
      Management does not expect that Statement No. 160 will have a material impact
      on
      the Company’s results of operations or financial position.




FASB
      Statement No. 141 (revised 2007), *Business
      Combinations* .
      This
      Statement will significantly change the accounting for business combinations
      in
      a number of areas, including the treatment of contingent consideration,
      contingencies, acquisition costs, in-process research and development costs
      and
      restructuring costs. Additionally, under this Statement, changes in deferred
      tax
      asset valuation allowances and acquired income uncertainties in a business
      combination after the measurement period will impact income tax expense. The
      provisions of this standard are effective beginning January 1, 2009. Management
      does not expect that this Statement will have a material impact on the Company’s
      results of operations or financial position.




FASB
      Statement No. 161, *Disclosures
      about Derivative Instruments and Hedging Activities- an amendment of FASB
      Statement No. 133* requires
      enhanced disclosures about an entity’s derivative and hedging activities and
      thereby improves the transparency of financial reporting. The use and complexity
      of derivative instruments and hedging activities have increased significantly
      over the past several years. Constituents have expressed concerns that the
      existing disclosure requirements in FASB Statement No. 133, *Accounting
      for Derivative Instruments and Hedging Activities,* do
      not
      provide adequate information about how derivative and hedging activities affect
      an entity’s financial position, financial performance, and cash flows. This
      Statement is effective for financial statements issued for fiscal years and
      interim periods beginning after November 15, 2008, with early application
      encouraged. This Statement encourages, but does not require, comparative
      disclosures for earlier periods at initial adoption. Management does not expect
      Statement No. 161 will have a material impact on the Company’s results of
      operations or financial position.





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          12 -
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**Item
              2.**
            **Management’s
                Discussion and Analysis of Financial Condition and Results of
                Operations.**





Peoples
      Bancorp, Inc. is a Maryland corporation and a financial holding company
      registered under the Bank Holding Company Act of 1956, as amended, located
      in
      Chestertown, Kent County, Maryland. The Company was incorporated on December
      10,
      1996 to serve as the holding company of The Peoples Bank (the “Bank”), a
      Maryland commercial bank, which it acquired on March 24, 1997. On January 2,
      2007, the Company acquired Fleetwood, Athey, Macbeth & McCown, Inc. (the
“Insurance Agency”).




The
      Bank
      was incorporated on April 13, 1910 and operates five branches located in Kent
      County, Maryland and one branch located in Queen Annes County, Maryland. The
      Bank offers a variety of services to satisfy the needs of consumers and small-
      to medium-sized businesses and professional enterprises. Most of the Bank’s
      deposit and loan customers are located in and derived from Kent County, northern
      Queen Anne's County, and southern Cecil County, Maryland. This primary service
      area is located between the Chesapeake Bay and the western border of
      Delaware.




The
      Bank
      is building a branch location in Sudlersville, Queen Anne’s County, Maryland.
      The cost is estimated to be $1,300,000 with an anticipated completion date
      of
      November 2008. The branch will have 2584 square feet of office/teller space
      and
      will be staffed initially with four employees. As a result of this expansion,
      noninterest expenses are expected to increase in the fourth quarter of
      2008.




The
      Insurance Agency has roots dating back to the 1920s, when The Fleetwood-Kirby
      Agency was formed. In 1977, that agency was merged with several other
      well-respected insurances agencies to form Fleetwood, Athey, Macbeth &
McCown, Inc. The Insurance Agency operates from one location in Kent County
      and
      provides a full range of insurance products to businesses and consumers. Product
      lines include property, casualty, life, marine, long term care and health
      insurance.




Unless
      the context clearly requires otherwise, the terms “Company”, “we”, “us” and
“our” in this report refer collectively to Peoples Bancorp, Inc. and the
      Subsidiaries.




**Application
      of Critical Accounting Policies**




The
      unaudited consolidated financial statements have been prepared in accordance
      with accounting principles generally accepted in the United States of America
      for interim financial information and in accordance with the instructions to
      Form 10-Q. Application of these principles requires management to make
      estimates, assumptions, and judgments that affect the amounts reported in the
      unaudited consolidated financial statements and accompanying notes. These
      estimates, assumptions, and judgments are based on information available as
      of
      the date of the consolidated financial statements; accordingly, as this
      information changes, the unaudited consolidated financial statements could
      reflect different estimates, assumptions, and judgments. Certain policies
      inherently have a greater reliance on the use of estimates, assumptions, and
      judgments and as such have a greater possibility of producing results that
      could
      be materially different than originally reported. Estimates, assumptions, and
      judgments are necessary when assets and liabilities are required to be recorded
      at fair value, when a decline in the value of an asset not carried on the
      consolidated financial statements at fair value warrants an impairment
      write-down or valuation reserve to be established, or when an asset or liability
      needs to be recorded contingent upon a future event. Carrying assets and
      liabilities at fair value inherently results in more financial statement
      volatility. The fair values and information used to record valuation adjustments
      for certain assets and liabilities are based either on quoted market prices
      or
      are provided by other third-party sources, when available.


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          13 -
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The
      policies, along with the disclosures presented in the other financial statement
      notes and in this financial review, provide information on how significant
      assets and liabilities are valued in the financial statements and how those
      values are determined. Based on the valuation techniques used and the
      sensitivity of financial statement amounts to the methods, assumptions, and
      estimates underlying those amounts, management has identified the determination
      of the allowance for loan losses as the accounting area that requires the most
      subjective or complex judgments, and as such should be most subject to revision
      as new information becomes available.




The
      allowance for loan losses represents management’s estimate of probable loan
      losses inherent in the loan portfolio. Determining the amount of the allowance
      for loan losses is considered a critical accounting estimate because it requires
      significant judgment and the use of estimates related to the amount and timing
      of expected future cash flows on impaired loans, estimated losses on pools
      of
      homogeneous loans based on historical loss experience, and consideration of
      current economic trends and conditions, all of which may be susceptible to
      significant change. In addition, various regulatory agencies, as an integral
      part of their examination processes, periodically review our allowance for
      loan
      losses. Such agencies may require us to make additional provisions for estimated
      loan losses based upon judgments different from those of management. The loan
      portfolio also represents the largest asset type on the balance sheet. Further
      information about the methodology used to determine the allowance for loan
      losses is discussed below under the heading “Loan Quality”.




The
      following discussion is designed to provide a better understanding of the
      financial position of the Company and should be read in conjunction with the
      interim Consolidated Financial Statements and Notes thereto included elsewhere
      in this report, and in conjunction with the audited Consolidated Financial
      Statements and Notes thereto and Management’s Discussion and Analysis of
      Financial Condition and Results of Operations set forth in the Annual Report
      of
      Peoples Bancorp, Inc. on Form 10-K for the year ended December 31, 2007.





**Forward-Looking
      Information**





This
      Quarterly Report on Form 10-Q may contain forward-looking statements within
      the
      meaning of The Private Securities Litigation Reform Act of 1995. Readers of
      this
      quarterly report should be aware of the speculative nature of “forward-looking
      statements”. Statements that are not historical in nature, including the words
“anticipate”, “estimate”, “should”, “expect”, “believe”, “intend”, and similar
      expressions, are based on current expectations, estimates and projections about
      (among other things) the industry and the markets in which we operate; they
      are
      not guarantees of future performance. Whether actual results will conform to
      expectations and predictions is subject to known and unknown risks and
      uncertainties, including risks and uncertainties discussed in this report,
      general economic, market or business conditions; changes in interest rates,
      deposit flow, the cost of funds, and demand for loan products and financial
      services; changes in our competitive position or competitive actions by other
      companies; changes in the quality or composition of loan and investment
      portfolios; the ability to mange growth; changes in laws or regulations or
      policies of federal and state regulators and agencies; and other circumstances
      beyond our control. These and other risks are discussed in detail in the section
      of the periodic reports that Peoples Bancorp, Inc. files with the Securities
      and
      Exchange Commission (see Item 1A of Part II of this report for further
      information). All of the forward-looking statements made in this report are
      qualified by these cautionary statements, and there can be no assurance that
      the
      actual results anticipated will be realized, or if substantially realized,
      will
      have the expected consequences on our business or operations. Except as required
      by applicable laws, we do not intend to publish updates or revisions of any
      forward-looking statements we make to reflect new information, future events
      or
      otherwise.


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          14 -
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          of Contents*




**RESULTS
      OF OPERATIONS**





**General**





For
      the
      three- and nine-month periods ended September 30, 2008, the Company reported
      net
      income of $586,930, or $0.75 per share, and $1,980,208, or $2.53 per share,
      respectively, compared to $1,081,452, or $1.38 per share, and $3,285,238, or
      $4.17 per share, respectively, for the same periods in 2007. The decreases
      for
      the three months (45.73%) and nine months (39.72%) ended September 30, 2007
      over
      the same period last year resulted primarily from decreased net interest income
      and increased loan loss reserve. The Insurance Agency produced net income of
      $38,760 for the three-month period ended September 30, 2008 and net income
      of
      $128,130 for the nine-month period ended September 30, 2008, compared to $29,648
      and $108,275, respectively, for the corresponding periods last year.





**Net
      Interest Income**





The
      primary source of income for the Company is net interest income, which is the
      difference between revenue on interest-earning assets, such as investment
      securities and loans, and interest incurred on interest-bearing sources of
      funds, such as deposits and borrowings.




The
      key
      performance measure for net interest income is the “net margin on
      interest-earning assets,” or net interest income divided by average
      interest-earning assets. The Company’s net interest margin for the nine-month
      period ended September 30, 2008 was 4.19%, compared to 4.63% for the same period
      in 2007. The net margin may decline if competition increases, loan demand
      decreases, or the cost of funds rises faster than the return on loans and
      securities. The net margin may also be adversely impacted by a number of
      unpredictable factors which cannot be predicted and are beyond our
      control.




Net
      interest income for the three-month period ended September 30, 2008 was
      $2,507,318, which represents a decrease of $207,227 or 7.63% over net interest
      income for the same period in 2007. Net interest income for the nine-month
      period ended September 30, 2008 was $7,461,552, which represents a decrease
      of
      $631,440 or 7.80% over the net interest income for the first nine months of
      2007. The primary contributor to this decrease was lower interest rates on
      loans
      and deposits in other banks. This was a direct result of a 225 basis-point
      reduction in the federal funds rate during the first nine months of 2008, from
      4.25% at December 31, 2007 to 2.00% at September 30, 2008. This reduction had
      a
      significant and immediate impact on the overall yield on earning assets, while
      reductions on the rates we pay on deposit have lagged due to certificate of
      deposit rates that do not re-price until the certificate matures.




Interest
      revenue for the three and nine months ended September 30, 2008 totaled
      $3,933,326 and $12,021,541, respectively, compared to $4,433,755 and
      $13,014,322, respectively, for the same periods last year, representing
      decreases of $500,429 (11.29%) and $992,781 (7.63%), respectively. Although
      our
      average loan balances have increased by $3,666,567 (net of the allowance for
      loan losses) when compared to the first nine months of 2007, we experienced
      a
      $926,529 decrease in interest income earned on loans primarily because of the
      aforementioned rate reductions.


-
            15 -
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            of Contents*




Interest
      expense for the three- and nine-month periods ended September 30, 2008 totaled
      $1,426,008 and $4,559,989, respectively, compared to $1,719,210 and $4,921,330,
      respectively, for the same periods last year, representing decreases of $293,202
      or 17.05% and $361,341 or 7.34%, respectively. Since loan balances have
      decreased slightly during the first nine months of 2008, the Company was able
      to
      decrease its Federal Home Loan Bank (“FHLB”) borrowings from $53,000,000 at
      December 31, 2007 to $43,000,000 at September 30, 2008, resulting in a $254,642
      decrease in borrowed funds interest expense for the first nine months of 2008
      when compared to the same period last year. Advances from the FHLB were
      $52,700,000 at September 30, 2007. The Company assumed approximately $450,000
      of
      debt in connection with the acquisition of the Insurance Agency. This debt
      has
      been reduced to $176,935 at September 30, 2008.





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          16 -
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A
      table
      of the Company’s average balances, interest and yields follows.





**Average
      Balances, Interest, and Yield**




For
                the Nine Months Ended
            
            For
                the Nine Months EndedSeptember
                30, 2008
            
            September
                30, 2007Average
            
            
            
            
            
            AverageBalance
            
            Interest
            
            Yield
            
            Balance
            
            Interest
            
            Yield**Assets**Federal
                funds sold
            
            $
            4,498,846
            
            $
            87,672
            
            
            2.60
            %
            $
            2,334,825
            
            $
            94,161
            
            
            5.39
            %Interest-bearing
                deposits
            
            
            790,825
            
            
            15,242
            
            
            2.57
            %
            
            194,138
            
            
            8,394
            
            
            5.78
            %Investment
                securities:U.
                S. government agency
            
            
            16,985,593
            
            
            610,382
            
            
            4.80
            %
            
            18,719,580
            
            
            683,498
            
            
            4.88
            %Other
            
            
            0
            
            
            0
            
            
            0.00
            %
            
            27,095
            
            
            405
            
            
            2.00
            %FHLB
                of Atlanta Stock
            
            
            2,690,997
            
            
            130,297
            
            
            6.47
            %
            
            2,822,188
            
            
            126,238
            
            
            5.98
            %Total
                investment securities
            
            
            19,676,590
            
            
            740,679
            
            
            5.03
            %
            
            21,568,863
            
            
            810,141
            
            
            5.02
            %Loans:Demand
                and time
            
            
            40,701,755
            
            
            2,071,033
            
            
            6.80
            %
            
            42,573,695
            
            
            2,944,397
            
            
            9.25
            %Mortgage
            
            
            172,906,349
            
            
            8,916,216
            
            
            6.89
            %
            
            166,681,555
            
            
            8,935,825
            
            
            7.17
            %Installment
            
            
            4,526,663
            
            
            280,406
            
            
            8.27
            %
            
            4,798,496
            
            
            309,356
            
            
            8.62
            %Total
                loans
            
            
            218,134,767
            
            
            11,267,655
            
            
            6.90
            %
            
            214,053,746
            
            
            12,189,578
            
            
            7.61
            %Allowance
                for loan losses
            
            
            2,230,762
            
            
            
            
            
            
            
            
            1,816,309Total
                loans, net of allowance
            
            
            215,904,005
            
            
            11,267,655
            
            
            6.97
            %
            
            212,237,437
            
            
            12,189,578
            
            
            7.68
            %Total
                interest-earning assets
            
            
            240,870,266
            
            
            12,111,248
            
            
            6.72
            %
            
            236,335,263
            
            
            13,102,274
            
            
            7.41
            %Non-interest-bearing
                cash
            
            
            4,876,536
            
            
            
            
            
            
            
            
            4,606,782Premises
                and equipment
            
            
            6,067,583
            
            
            
            
            
            
            
            
            5,188,392Other
                assets
            
            
            4,222,029
            
            
            
            
            
            
            
            
            3,670,991Total
                assets
            
            $
            256,036,414
            
            
            
            
            
            
            
            $
            249,801,428Liabilities
                and Stockholders’ EquityInterest-bearing
                DepositsSavings
                and NOW deposits
            
            $
            36,053,328
            
            
            78,390
            
            
            0.29
            %
            $
            36,813,087
            
            
            160,488
            
            
            0.58
            %Money
                market and supernow
            
            
            17,274,283
            
            
            132,380
            
            
            1.02
            %
            
            16,744,070
            
            
            203,503
            
            
            1.62
            %Other
                time deposits
            
            
            80,324,358
            
            
            2,467,813
            
            
            4.10
            %
            
            74,525,969
            
            
            2,421,291
            
            
            4.34
            %Total
                interest-bearing deposits
            
            
            133,651,969
            
            
            2,678,583
            
            
            2.68
            %
            
            128,083,126
            
            
            2,785,282
            
            
            2.91
            %Borrowed
                funds
            
            
            58,095,060
            
            
            1,881,406
            
            
            4.33
            %
            
            62,247,941
            
            
            2,136,048
            
            
            4.59
            %Total
                interest-bearing liabilities
            
            
            191,747,029
            
            
            4,559,989
            
            
            3.18
            %
            
            190,331,067
            
            
            4,921,330
            
            
            3.46
            %Noninterest-bearing
                deposits
            
            
            33,748,179
            
            
            
            
            
            
            
            
            30,833,556225,495,208
            
            
            
            
            
            
            
            
            221,164,623Other
                liabilities
            
            
            1,987,756
            
            
            
            
            
            
            
            
            2,405,103Stockholders’
                equity
            
            
            28,553,450
            
            
            
            
            
            
            
            
            26,231,702Total
                liabilities and stockholders’ equity
            
            $
            256,036,414
            
            
            
            
            
            
            
            $
            249,801,428Net
                interest spread
            
            
            
            
            
            
            
            
            3.54
            %
            
            
            
            
            
            
            
            3.95
            %Net
                interest income
            
            
            
            
            $
            7,551,259
            
            
            
            
            
            
            
            $
            8,180,944Net
                margin on interest-earning assets
            
            
            
            
            
            
            
            
            4.19
            %
            
            
            
            
            
            
            
            4.63
            %Interest
                on tax-exempt loans and investments are reported on fully taxable
                equivalent basis (a non GAAP financial
                measure).





-
          17 -
 *Table
          of Contents*


**Provision
      for Loan Losses**




The
      provision for loan losses was $1,040,000 for the first nine months of 2008,
      compared to $40,000 for the same period of 2007. The increase in the provision
      was in response to the increase in net charge-offs, loan growth, and specific
      allocations for impaired loans and an increase in non-accrual loans. Additional
      information regarding risk elements in the loan portfolio, the provision for
      loan losses and management’s assessment of the adequacy of the allowance for
      loan losses are discussed below in the section entitled “Loan
      Quality”.





**Noninterest
      Revenue**





Noninterest
      revenue for the three- and nine-month periods ended September 30, 2008 totaled
      $667,179 and $1,989,348, respectively, which represent increases of 2.39% and
      3.22%, respectively, over the $651,637 and $1,927,225, respectively, that was
      earned in the same periods in 2007. The
      increases resulted primarily from increased commission income of $43,919 (4.59%)
      earned by the Insurance Agency during the first nine months of 2008 when
      compared to the same period in 2007. We expect the
      Insurance Agency to generate lower revenue and net income during the remaining
      three months of 2008.





**Noninterest
      Expense**





The
      Company recorded noninterest expense of $1,808,747 and $5,274,449 for the three-
      and nine-month periods ended September 30, 2008, respectively, compared to
      $1,637,898 and $4,729,367, respectively for the same periods in 2007,
      representing increases of $170,849 or 10.43% and $545,082 or 11.53%,
      respectively. The increases are attributable to increased salaries and employee
      benefits of $284,117 for the first nine months of 2008, which is the result
      of
      opening our Church Hill office in late 2007. In addition to the costs associated
      with rising fuel and energy costs, we are preparing for the opening of a new
      office in Sudlersville, Maryland.





**Income
      Tax Expense**





The
      Company’s effective tax rate for the three- and nine-month periods ended
      September 30, 2008 was 36.6% and 36.9%, respectively, compared to 37.1% and
      37.4% for the same periods in 2007. The Company’s income tax expense was
      $338,820 and $1,156,243 for the three- and nine-months ended September 30,
      2008,
      respectively, compared to $636,832 and $1,965,612, respectively, for the same
      periods in 2007. The decreases of $298,012 (46.80%) and $809,369 (41.18%) for
      the three- and nine-month periods ended September 30, 2008, respectively, when
      compared the same periods in 2007 were comparable to the percentage decreases
      in
      income before income taxes.





**FINANCIAL
      CONDITION**





**Overview**





Total
      assets of the Company at September 30, 2008 were $251,422,431, compared to
      $261,807,762 at December 31, 2007, representing a decrease of $10,385,331 or
      3.97%.





Total
      liabilities at September 30, 2007 were $222,912,475, compared to $233,767,968
      at
      December 31, 2007, representing a decrease of $10,855,493 or 4.64%.




-
          18 -
 *Table
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Stockholders’
      equity was $28,509,956 at September 30, 2008, compared to $28,039,794 at
      December 31, 2007, representing an increase of $470,162. The increase was due
      to
      net income for the period totaling $1,980,208 offset by a $3,665 increase in
      the
      unrealized loss on securities available for sale net of income taxes, by stock
      repurchases of $480,000 and dividends paid to stockholders of
      $1,026,381.





Return
      on
      average equity for the nine months ended September 30, 2008 was 9.26%, compared
      to 16.74% for the same period in 2007. Return on average assets was 1.03% for
      the nine months ended September 30, 2008, compared to 1.76% for the same period
      in 2007.





**Composition
      of Loan Portfolio**





At
      September 30, 2008, loans, net of unearned income, were $214,915,760, a decrease
      of $5,509,965 since December 31, 2007. Because loans are expected to produce
      higher yields than investment securities and other interest-earning assets,
      the
      absolute volume of loans and the volume as a percentage of total earning assets
      is an important determinant of net interest margin. Average loans, net of the
      allowance for loan losses, were $215,904,005 and $212,237,437 during the first
      nine months of 2008 and 2007, respectively, which constituted 89.63% and 89.80%
      of average interest-earning assets for the respective periods. For the nine
      months ended September 30, 2008, our average loan to deposit ratio was 128.97%,
      compared to 133.55% for the nine months ended September 30, 2007. The securities
      sold under repurchase agreements function like deposits, with the securities
      providing collateral in place of the FDIC insurance. Our ratio of average loans
      to deposits plus borrowed funds was 95.75% for the nine months ended September
      30, 2008, compared to 95.96% for the nine months ended September 30, 2007.
      The
      Company extends credit primarily to customers located in and near the Maryland
      counties of Kent County, Queen Anne’s County, and Cecil County. There are no
      industry concentrations in our loan portfolio. A substantial portion of our
      loans are, however, secured by real estate, and the real estate market in the
      region will likely influence the performance of the Company’s portfolio and the
      value of the collateral securing the portfolio.





**Loan
      Quality**




The
      allowance for loan losses represents a reserve for potential losses in the
      loan
      portfolio. The adequacy of the allowance for loan losses is evaluated
      periodically based on a review of all significant loans, with a particular
      emphasis on non-accruing, past due, and other loans that management believes
      require attention. The determination of the reserve level rests upon
      management's judgment about factors affecting loan quality and assumptions
      about
      the economy. Management believes that the allowance as of September 30, 2008
      is
      adequate to cover possible losses in the loan portfolio identified as of that
      date; however, management's judgment is based upon a number of assumptions
      about
      future events, which are believed to be reasonable, but which may not prove
      valid. Thus, there can be no assurance that charge-offs in future periods will
      not exceed the allowance for loan losses or that additional increases in the
      loan loss allowance will not be required. Because of the current economic
      conditions in our market area and a decline in local real estate values,
      management anticipates that it will add additional reserves to the allowance
      in
      the fourth quarter of 2008 to cover potential future losses that may be
      identified in that quarter.





For
      significant problem loans, management's review consists of evaluation of the
      financial strengths of the borrowers and guarantors, the related collateral,
      and
      the effects of economic conditions. The overall evaluation of the adequacy
      of
      the total allowance for loan losses is based on an analysis of historical loan
      loss ratios, loan charge-offs, delinquency trends, and previous collection
      experience, along with an assessment of the effects of external economic
      conditions. The allowance may be increased to accommodate reserves for specific
      loans identified as substandard during management's loan review. Net recoveries
      and/or decreases in loans may cause


-
          19 -
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the
      allowance as a percentage of gross loans to exceed our target. Historically,
      our
      regulators have discouraged negative provisions, however, management would
      consider a negative provision if warranted.





The
      provision for loan losses is a charge to earnings in the current period to
      replenish the allowance and maintain it at a level management has determined
      to
      be adequate.





The
      allowance for loan losses decreased to $1,527,496 at September 30, 2008,
      compared to $2,328,792 at December 31, 2007. The provision for loan losses
      was
      $1,040,000 for the first nine months of 2008, compared to $40,000 for the same
      period of 2007. The decrease in the provision for loan losses in the first
      nine
      months of 2008 compared to the same period of 2007 was in response to the
      increase in net charge-offs, loan growth, the results of our quarterly review
      of
      the adequacy of the factors discussed previously, and specific allocations
      for
      impaired loans. As of September 30, 2008 and December 31, 2007, the allowance
      for loan losses compared to gross loans was 0.71% and 1.05%, respectively.
      As
      part of our loan review process, management has noted an increase in
      foreclosures and bankruptcies in the geographic areas where we operate.
      Additionally, the current economic environment has caused a decline in real
      estate sales. Consequently, we have closely reviewed and applied sensitivity
      analysis to collateral values to more adequately measure potential future
      losses. Where necessary, we have obtained new appraisals on collateral. Specific
      allocations of the allowance have been provided in these instances where losses
      may occur.





The
      following table sets forth activity in the Company’s allowance for loan losses
      for the periods indicated:





**Allowance
      for Loan Losses**




Nine
                  months ended
              
              Nine
                  months ended
              
              Year
                  endedSeptember
                  30,
              
              September
                  30,
              
              December
                  31,2008
              
              2007
              
              2007Balance
                  at beginning of year
              
              $
              2,328,792
              
              $
              1,860,283
              
              $
              1,860,283Loan
                  losses:Commercial
              
              
              1,331,712
              
              
              81,189
              
              
              82,881Mortgages
              
              
              490,000
              
              
              0
              
              
              0Consumer
              
              
              26,259
              
              
              18,314
              
              
              31,882Total
                  loan losses
              
              
              1,847,971
              
              
              99,503
              
              
              114,763Recoveries
                  on loans previously charged offCommercial
              
              
              3,868
              
              
              0
              
              
              0Mortgages
              
              
              0
              
              
              2,271
              
              
              2,271Consumer
              
              
              2,807
              
              
              912
              
              
              1,001Total
                  loan recoveries
              
              
              6,675
              
              
              3,183
              
              
              3,272Net
                  loan losses (recoveries)
              
              
              1,841,296
              
              
              96,320
              
              
              111,491Provision
                  for loan losses charged to expense
              
              
              1,040,000
              
              
              40,000
              
              
              580,000Balance
                  at end of year
              
              $
              1,527,496
              
              $
              1,803,963
              
              $
              2,328,792Allowance
                  for loan losses to loans outstandingat
                  end of period
              
              
              0.71
              %
              
              0.83
              %
              
              1.05
              %
  Management
        believes it has identified and charged off all significant losses in the
        loan
        portfolio. The ratio of the allowance for loan losses to loans outstanding
        has
        decreased due to this effort to charge off the losses. Although management
        believes it has identified all significant losses in the portfolio, there
        can be
        no assurance that additional losses will not occur in future
        periods.


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          20 -
 *Table
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As
      a
      result of management's ongoing review of the loan portfolio, loans are
      classified as nonaccrual when it is not reasonable to expect collection of
      interest under the original terms. These loans are classified as nonaccrual
      even
      though the presence of collateral or the borrower's financial strength may
      be
      sufficient to provide for ultimate repayment. Interest on nonaccrual loans
      is
      recognized only when received. A loan is generally placed in nonaccrual status
      when it becomes 90 days or more past due. When a loan is placed in nonaccrual
      status, all interest that had been accrued on the loan but remains unpaid is
      reversed and deducted from earnings as a reduction of reported interest income.
      No additional interest is accrued on the loan balance until the collection
      of
      both principal and interest becomes reasonably certain.





The
      Company had loans past due 90 days or more including nonaccrual loans of
      $4,452,250 and $5,449,838 at September 30, 2008 and December 31, 2007,
      respectively. These loans are detailed below:




**Risk
      Elements of Loan Portfolio**




Nonaccrual
      Loans


**September
                30, 2008**
            
            
            **December
                31, 2007**Commercial
            
            $
            906,539
            
            $
            2,462,002Mortgage
            
            
            1,638,386
            
            
            415,000Consumer
            
            
            0
            
            
            02,544,925
            
            
            2,877,002




Accruing
      Loans Past Due 90 Days or More


Commercial
            
            
            22,442
            
            
            396,003Mortgage
            
            
            1,782,436
            
            
            2,162,828Consumer
            
            
            102,447
            
            
            14,0051,907,325
            
            
            2,572,836$
            4,452,250
            
            $
            5,449,838




Gross
      interest income of $181,683 for the first nine months of 2008, $59,586 for
      fiscal year 2007 and $646 for the first nine months 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 $9,683 for
      the first nine months of 2008, $663 for fiscal year 2007 and $620 for the first
      nine months of 2007.




Loans
      are
      classified as impaired when the collection of contractual obligations, including
      principal and interest, is doubtful. Management has identified all significant
      impaired loans as of September 30, 2008 and has made the appropriate change
      to
      the bank’s loan loss reserve.





**Deposits
      and Other Interest-Bearing Liabilities**




Average
      interest-bearing deposits increased $5,568,842 or 4.35% to $133,651,969 for
      the
      nine months ended September 30, 2008, from $128,083,126 for the same period
      in
      2007. Average noninterest-bearing deposits increased $2,914,623 or 9.45% to
      $33,748,179 for the nine months ended September 30, 2008, from $30,833,556
      for
      the same period in 2007. Average total deposits increased 5.34% or $8,483,466
      to
      $167,400,148 for the nine months ended September 30, 2008 from $158,916,682
      for
      the same period in 2007. Borrowings at September 30, 2008, from the Federal
      Home
      Loan Bank of Atlanta, decreased to $43,000,000 from $53,000,000 at December
      31,
      2007, a decrease of 18.87%.


-
          21 -
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          of Contents*


Deposits,
      particularly core deposits, and borrowed funds have been our primary source
      of
      funding and have enabled us to meet both our short-term and long-term liquidity
      needs. Management anticipates that such deposits will continue to grow and
      continue to be our primary source of funding for the foreseeable future. It
      should be noted, however, that investor confidence in alternatives to deposit
      accounts, which may pay yields that are higher than those paid on deposits,
      typically increases when the economy and stock markets perform well. Increased
      investor confidence in nondeposit investment products in future periods would
      likely have an adverse impact on our deposit growth. In addition, changes in
      governmental monetary policy, especially interest rates, may impact our ability
      to attract and retain deposits.




**Short-term
      Borrowings**




The
      following table sets forth the our position with respect to short-term
      borrowings for September 30, 2008 and December 31, 2007.




**September
                  30, 2008**
              
              **December
                  31, 2007****Amount**
              
              **Rate**
              
              **Amount**
              
              **Rate**Federal
                  Home Loan Bank (daily re-price)
              
              $
              0
              
              
              —
              %
              $
              0
              
              
              —
              %Retail
                  Repurchase Agreements
              
              
              8,880,520
              
              
              2.04
              %
              
              9,041,476
              
              
              2.85
              %Federal
                  Funds Borrowed
              
              
              3,900,000
              
              
              2.38
              %
              
              0
              
              
              —
              %Total
              
              $
              12,780,520
              
              
              
              
              $
              9,041,476


We
      may
      borrow up to approximately 30% of total assets from the Federal Home Loan Bank
      (FHLB) through any combination of notes or line of credit advances. Both the
      notes payable and the line of credit are secured by a floating lien on all
      of
      our real estate mortgage loans. The Company was required to purchase shares
      of
      capital stock in the FHLB as a condition to obtaining the line of
      credit.




We
      provide collateral of 105% of the repurchase agreement balances by pledging
      U.S.
      Government Agency securities.




The
      Bank
      had lines of credit of $16,500,000 in unsecured overnight federal funds and
      $5,000,000 in secured overnight federal funds with correspondent banks at
      September 30, 2008.




**Liquidity
      and Capital Resources**





Liquidity
      describes our ability to meet financial obligations that arise out of the
      ordinary course of business. Liquidity is needed primarily to fund loans, meet
      depositor withdrawal requirements, and fund current and planned expenditures.
      The Company derives 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 lines of credit
      totaling $16,500,000 from correspondent banks, namely, Community Bankers Bank
      and M & T Bank. The Bank is also a member of the Federal Home Loan Bank of
      Atlanta, which provides another source of liquidity through a secured line
      of
      credit in the amount of $43,879,123 of which $43,000,000 has been advanced
      as of
      September 30, 2008. We also have the ability to borrow secured funds through
      the
      Federal Reserve’s Discount window as necessary.






-
          22 -
 *Table
          of Contents*


Bank
      regulatory agencies have adopted various capital standards, including risk-based
      capital standards, that apply to financial institutions like the Company. 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 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
      the
      Company’s capital ratios as of September 30, 2008 to the minimum ratios required
      by federal banking regulators is presented below.




Minimum
              
              To
                  be wellActual
              
              Requirements
              
              capitalizedTier
                  1 risk-based capital
              
              
              13.03
              %
              
              4.00
              %
              
              6.00
              %Total
                  risk-based capital
              
              
              13.75
              %
              
              8.00
              %
              
              10.00
              %Leverage
                  ratio
              
              
              11.02
              %
              
              4.00
              %
              
              5.00
              %


**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, both of which are
      discussed in Item 7 of Part II of the Annual Report of Peoples Bancorp, 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 or the procedures used to evaluate and mitigate these risks since
      December 31, 2007. The simulation models that we use to quantify the effect
      a
      hypothetical immediate plus or minus 200 basis point change in rates would
      have
      on net interest income and the fair value of capital produced the following
      results as of September 30, 2008 and December 31, 2007:




**Immediate
      Change in Rates**




**Immediate
                  Change in Rates****+200**
              
              **+100**
              
              **-100**
              
              **-200**
              
              **Policy****Basis
                  Points**
              
              **Basis
                  Points**
              
              **Basis
                  Points**
              
              **Basis
                  Points**
              
              **Limit****September
                  30, 2008**%
                  Change in Net Interest Income
              
              
              5.01
              %
              
              2.49
              %
              
              -3.01
              %
              
              -6.81
              %
              
              +10
              %%
                  Change in Fair Value of Capital
              
              
              7.67
              %
              
              3.73
              %
              
              -3.60
              %
              
              -7.26
              %
              
              +20
              %**December
                  31, 2007**%
                  Change in Net Interest Income
              
              
              4.12
              %
              
              2.07
              %
              
              -2.55
              %
              
              -5.62
              %
              
              +10
              %%
                  Change in Fair Value of Capital
              
              
              5.89
              %
              
              2.88
              %
              
              -3.26
              %
              
              -6.50
              %
              
              +20
              %




**Item
              4T.**
            **Controls
                and Procedures.**





We
      maintain disclosure controls and procedures that are designed to ensure that
      information required to be disclosed in the reports that Peoples Bancorp, Inc.
      files under the Securities and Exchange Act of 1934 with the Securities and
      Exchange Commission, 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 President and Chief Executive Officer (the “CEO”), who also serves
      as the Chief Financial Officer (the “CFO”), to allow for timely decisions
      regarding required disclosure. A control system, no matter how well conceived
      and operated, can provide only reasonable, not absolute,


-
          23 -
 *Table
          of Contents*


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 was carried out
      as
      of September 30, 2008 under the supervision and with the participation of the
      Company’s management, including the CEO. Based on that evaluation, the Company’s
      management, including the CEO, has concluded that our disclosure controls and
      procedures are, in fact, effective at the reasonable assurance
      level.




During
      the third 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
              1.**
            **Legal
                Proceedings.**




On
      or
      about June 26, 2008, Edwin and Rosalie Kuechler filed a complaint against the
      Bank in the Circuit Court for Kent County, Maryland. This suit relates to a
      commercial loan made by the Bank that was guaranteed by the plaintiffs, which
      guaranty is secured by an indemnity deed of trust on the plaintiffs’ personal
      residence. The commercial loan is in default and the Bank is attempting to
      seek
      recourse against the plaintiffs, as guarantors. The plaintiffs allege, among
      other things, various violations by the Bank of the federal Truth-in-Lending
      Act
      and that the plaintiffs are entitled to rescission of the guaranty, and to
      recover for illegal banking practices arising from the Bank’s demands for
      payment, intentional infliction of emotional distress arising from the Bank’s
      demands for payment, and professional negligence and intentional and negligent
      misrepresentation relating to alleged oral and written representations made
      to
      the plaintiffs by the Bank outside the written transaction documents. In
      addition to rescission, the plaintiff s are
      requesting compensatory and punitive damages in the amount of $950,000. The
      Bank
      removed this case to the United States District Court for the District of
      Maryland on or about July 3, 2008. Because this loan was a commercial loan,
      the
      Bank believes that (i) the federal Truth-in-Lending Act does not apply to the
      commercial loan or the guaranty or afford the plaintiffs any rights with respect
      thereto, (ii) the commercial loan documents, including the guaranty, permit
      the
      Bank to demand payment from the plaintiffs, and (iii) Maryland’s statute of
      frauds bars the plaintiffs’ claims relating to any oral or written
      representations not contained in the transaction documents.  The
      Bank
      believes strongly that this suit is frivolous and was instituted in bad faith
      and it is vigorously defending these claims, although there can be no guaranty
      as to its outcome or its impact on the Bank.





**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 Peoples
      Bancorp, Inc. on Form 10-K for the year ended December 31, 2007. The following
      discussion updates a risk factor that was contained in the Annual Report on
      Form
      10-K to reflect recent changes in economic conditions.


-
          24 -
 *Table
          of Contents*




**T** **he
      majority of our business is concentrated in Maryland; a significant amount
      of
      our business is concentrated in real estate lending.**





Because
      most of our loans are made to customers who reside on Maryland’s upper Eastern
      Shore, a decline in local economic conditions may have a greater effect on
      our
      earnings and capital than on the earnings and capital of larger financial
      institutions whose loan portfolios are geographically diverse. Further, we
      make
      many real estate secured loans, including construction and land development
      loans, all of which are in greater demand when interest rates are low and
      economic conditions are good. The
      national and local economies have significantly weakened during the past two
      years in part due to the widely-reported problems in the sub-prime mortgage
      loan
      market. As a result, real estate values across the country, including in our
      market areas, have decreased and the general availability of credit, especially
      credit to be secured by real estate, has also decreased. These conditions have
      made it more difficult for real estate owners and owners of loans secured by
      real estate to sell their assets at the times and at the prices they desire.
      In
      addition, these conditions have increased the risk that the market values of
      the
      real estate securing our loans may deteriorate, which could cause us to lose
      money in the event a borrower fails to repay a loan and we are forced to
      foreclose on the property. There can be no guarantee as to when or whether
      economic conditions will improve.




Additionally,
      the Board of Governors of the Federal Reserve Board (the “FRB”) and the FDIC,
      along with the other federal banking regulators, issued final guidance on
      December 6, 2006 entitled “Concentrations in Commercial Real Estate Lending,
      Sound Risk Management Practices” directed at institutions that have particularly
      high concentrations of commercial real estate loans within their lending
      portfolios. This guidance suggests that institutions whose commercial real
      estate loans exceed certain percentages of capital should implement heightened
      risk management practices appropriate to their concentration risk and may be
      required to maintain higher capital ratios than institutions with lower
      concentrations in commercial real estate lending. Based on our commercial real
      estate concentration as of September 30, 2008, we may be subject to further
      supervisory analysis during future examinations. We cannot guarantee that any
      risk management practices we implement will be effective to prevent losses
      relating to our commercial real estate portfolio. Management cannot predict
      the
      extent to which this guidance will impact our operations or capital
      requirements.




Other
      than as discussed above, management does not believe that any material changes
      in our risk factors have occurred since December 31, 2007.





**Item
              2.**
            **Unregistered
                Sales of Equity Securities and Use of
                Proceeds.**





None.




**Item
              3.**
            **Defaults
                Upon Senior Securities.**




Not
      applicable.





**Item
              4.**
            **Submission
                of Matters to a Vote of Security
                Holders.**




None.





**Item
              5.**
            **Other
                Information.**




None.




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





The
      exhibits filed or furnished with this report are listed in the Exhibit Index
      that immediately follows the signatures, which Index is incorporated herein
      by
      reference.






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**SIGNATURES**





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




**PEOPLES
      BANCORP, INC.**




Date:
      November 12, 2008


By: /s/
      Thomas G. Stevenson


Thomas
      G.
      Stevenson


President/Chief
      Executive Officer &
      Chief Financial Officer




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          of Contents*




**EXHIBIT
      INDEX**




Exhibit
              No.
            Description  31.1
            Certifications
                of the CEO/CFO pursuant to Section 302 of the Sarbanes-Oxley Act
                of 2002
                (filed herewith)


32.1
                Certification
                    of the CEO/CFO pursuant to Section 906 of the Sarbanes-Oxley
                    Act of 2002
                    (furnished herewith)


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