**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 June
      30, 2007





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. See definition of “accelerated
      filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check
      one): Large accelerated filer  o  Accelerated
      filer o  Non-accelerated
      filer x





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: 785,512 shares of common stock issued and outstanding as of August 1,
      2007











**PEOPLES
      BANCORP, INC.**





**FORM
      10-Q**


**INDEX**




PagePart
                I - Financial InformationItem
                1.
            Financial
                Statements
            3Consolidated
                Balance Sheets at June 30, 2007 (unaudited) and December 31,
                2006
            3Consolidated
                Statements of Income (unaudited) for three and six months ended June
                30,
                2007 and 2006
            4Consolidated
                Statements of Changes in Stockholders’ Equity (unaudited) for the six
                months ended June 30, 2007 and 2006
            5Consolidated
                Statements of Cash Flows (unaudited) for six months ended June 30,
                2007
                and 2006
            6Notes
                to Financial Statements (unaudited)
            7Item
                2.
            Management’s
                Discussion and Analysis of Financial Condition And Results of
                Operations
            11Item
                3.
            Quantitative
                and Qualitative Disclosures About Market Risk
            19Item
                4.
            Controls
                and Procedures
            20Part
                II - Other InformationItem
                1.
            Legal
                Proceedings
            20Item
                1A.
            Risk
                Factors
            20Item
                2.
            Unregistered
                Sales of Equity Securities and Use of Proceeds
            21Item
                3.
            Defaults
                Upon Senior Securities
            21Item
                4.
            Submission
                of Matters to a Vote of Security Holders
            21Item
                5.
            Other
                Information
            22Item
                6.
            Exhibits
            22Signatures
            
            23Exhibit
                Index
            
            24





-
          2 -




**PART
      I - FINANCIAL INFORMATION**





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


**PEOPLES
                BANCORP, INC. AND
                SUBSIDIARIES**


**Consolidated
                Balance Sheets**
              
              June
                  30,
              
              December
                  31,2007
              
              2006**ASSETS**
              
              (unaudited)Cash
                  and due from banks
              
              $
              5,143,851
              
              $
              5,990,866Federal
                  funds sold
              
              
              3,122,908
              
              
              1,474,544Securities
                  available for sale
              
              
              6,966,402
              
              
              7,937,008Securities
                  held to maturity (approximate fairvalue
                  of $11,889,373 and $10,887,433)
              
              
              11,981,560
              
              
              10,928,766Federal
                  Home Loan Bank stock, at cost
              
              
              2,897,600
              
              
              2,533,100Loans,
                  less allowance for loan lossesof
                  $1,811,978 and $1,860,283
              
              
              212,829,706
              
              
              206,077,157Premises
                  and equipment
              
              
              5,645,943
              
              
              3,991,077Goodwill
                  and intangible assets
              
              
              805,432
              
              
              —Accrued
                  interest receivable
              
              
              1,719,877
              
              
              1,445,833Deferred
                  income taxes
              
              
              923,494
              
              
              918,012Other
                  assets
              
              
              899,356
              
              
              1,008,419**Total
                  Assets**
              
              $
              252,936,129
              
              $
              242,304,782**LIABILITIES
                  AND STOCKHOLDERS’ EQUITY**DepositsNoninterest-bearing
              
              $
              32,102,127
              
              $
              29,900,976Interest-bearing
              
              
              127,254,089
              
              
              125,284,608159,356,216
              
              
              155,185,584Securities
                  sold under repurchase agreementsand
                  federal funds purchased
              
              
              9,088,768
              
              
              15,573,593Federal
                  Home Loan Bank advances
              
              
              54,700,000
              
              
              43,700,000Other
                  borrowings
              
              
              301,236
              
              
              —Accrued
                  interest payable
              
              
              525,306
              
              
              469,747Other
                  liabilities
              
              
              2,064,851
              
              
              1,768,702226,036,377
              
              
              216,697,626Stockholders'
                  equityCommon
                  stock, par value $10 per share, 1,000,000 sharesauthorized;
                  issued and outstanding 785,512 shares atJune
                  30, 2007 and 789,012 shares at December 31, 2006
              
              
              7,855,120
              
              
              7,890,120Additional
                  Paid in Capital
              
              
              2,920,866
              
              
              2,920,866Retained
                  earnings
              
              
              16,969,262
              
              
              15,632,96527,745,248
              
              
              26,443,951Accumulated
                  other comprehensive income (loss)Unrealized
                  gain (loss) on available for sales securities
              
              
              (24,962
              )
              
              (16,261
              )Unfunded
                  liability for defined benefit plan
              
              
              (820,534
              )
              
              (820,534
              )26,899,752
              
              
              25,607,156**Total
                  Liabilities and Stockholders’ Equity**
              
              $
              252,936,129
              
              $
              242,304,782


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


-
          3 -




**PEOPLES
      BANCORP, INC. AND SUBSIDIARIES**


**Consolidated
        Statements of Income (unaudited)**


For
                the three months ended
            
            
            For
                the six months endedJune
                30
            
            
            June
                302007
            
            
            2006
            
            
            2007
            
            
            2006Interest
              and dividend revenueLoans,
                including fees
            
            $
            4,053,906
            
            $
            3,742,675
            
            $
            8,012,102
            
            $
            7,352,713Government
                Agency securities
            
            
            220,023
            
            
            208,548
            
            
            436,918
            
            
            411,966Deposits
                in other banks
            
            
            1,404
            
            
            745
            
            
            6,292
            
            
            1,952Federal
                funds sold
            
            
            24,073
            
            
            24,235
            
            
            47,321
            
            
            48,783Equity
                securities
            
            
            40,136
            
            
            32,730
            
            
            77,934
            
            
            58,382Total
                interest and dividend revenue
            
            
            4,339,452
            
            
            4,008,933
            
            
            8,580,567
            
            
            7,873,796Interest
                ExpenseDeposits
            
            
            915,208
            
            
            762,547
            
            
            1,801,025
            
            
            1,469,812Borrowed
                funds
            
            
            722,213
            
            
            593,316
            
            
            1,401,095
            
            
            1,160,136Total
                interest expense
            
            
            1,637,421
            
            
            1,355,863
            
            
            3,202,120
            
            
            2,629,948


Net
                interest income
            
            
            2,702,121
            
            
            2,653,070
            
            
            5,378,447
            
            
            5,243,848Provision
                for loan losses
            
            
            30,000
            
            
            120,000
            
            
            30,000
            
            
            240,000Net
                interest income afterprovision
                for loan losses
            
            
            2,672,121
            
            
            2,533,070
            
            
            5,348,447
            
            
            5,003,848Noninterest
                revenueService
                charges on deposit accounts
            
            
            253,125
            
            
            218,503
            
            
            472,903
            
            
            426,703Insurance
                commissions
            
            
            152,510
            
            
            —
            
            
            554,300
            
            
            —Other
                noninterest revenue
            
            
            83,454
            
            
            58,966
            
            
            164,695
            
            
            172,855Total
                noninterest revenue
            
            
            489,089
            
            
            277,469
            
            
            1,191,898
            
            
            599,558Noninterest
                expensesSalaries
                and employee benefits
            
            
            948,728
            
            
            709,549
            
            
            1,897,169
            
            
            1,370,903Occupancy
            
            
            101,357
            
            
            66,535
            
            
            180,720
            
            
            130,152Furniture
                and equipment
            
            
            72,818
            
            
            60,617
            
            
            116,032
            
            
            112,333Other
                operating
            
            
            427,066
            
            
            377,118
            
            
            813,858
            
            
            718,093Total
                noninterest expenses
            
            
            1,549,969
            
            
            1,213,819
            
            
            3,007,779
            
            
            2,331,481Income
                before income taxes
            
            
            1,611,241
            
            
            1,596,720
            
            
            3,532,566
            
            
            3,271,925Income
                taxes
            
            
            607,152
            
            
            600,794
            
            
            1,328,780
            
            
            1,231,604Net
                income
            
            $
            1,004,089
            
            $
            995,926
            
            $
            2,203,786
            
            $
            2,040,321Earnings
                per common share
            
            $
            1.27
            
            $
            1.26
            
            $
            2.79
            
            $
            2.59


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


-
            4 -




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




**SIX
      MONTHS ENDED JUNE 30, 2007 and 2006**


AccumulatedAdditional
            
            
            
            otherpaid-in
            
            Retained
            
            comprehensive
            
            ComprehensivePar
                value
            
            Capital
            
            earnings
            
            income
            
            Income**Balance,
                December 31, 2005**
            
            $
            7,890,120
            
            $
            2,920,866
            
            $
            12,763,903
            
            
            ($6,668
            )Net
                income
            
            
            —
            
            
            —
            
            
            2,040,321
            
            
            —
            
            $
            2,040,321Unrealized
                loss on investmentsecurities
                available for sale netof
                income taxes of $48,904
            
            
            —
            
            
            —
            
            
            —
            
            
            (77,626
            )
            
            (77,626
            )Comprehensive
                income
            
            
            
            
            
            
            
            
            
            
            
            
            
            $
            1,962,695Cash
                dividend, $0.78 per share
            
            
            —
            
            
            —
            
            
            (615,429
            )
            
            —**Balance,
                June 30, 2006**
            
            $
            7,890,120
            
            $
            2,920,866
            
            $
            14,188,795
            
            
            ($84,294
            )**Balance,
                December 31, 2006**
            
            $
            7,890,120
            
            $
            2,920,866
            
            $
            15,632,965
            
            
            ($836,795
            )Net
                income
            
            
            —
            
            
            —
            
            
            2,203,786
            
            
            —
            
            $
            2,203,786Unrealized
                loss on investmentsecurities
                available for sale netof
                income taxes of $5,475
            
            
            —
            
            
            —
            
            
            —
            
            
            (8,701
            )
            
            (8,701
            )Comprehensive
                income
            
            
            
            
            
            
            
            
            
            
            
            
            
            $
            2,195,085Repurchase
                of stock
            
            
            (35,000
            )
            
            —
            
            
            (220,500
            )
            
            —Cash
                dividend, $0.82 per share
            
            
            —
            
            
            —
            
            
            (646,989
            )
            
            —**Balance,
                June 30, 2007**
            
            $
            7,855,120
            
            $
            2,920,866
            
            $
            16,969,262
            
            $
            (845,496
            )


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


-
            5 -




**PEOPLES
                BANCORP, INC. AND SUBSIDIARIES**


**Consolidated
                Statements of Cash Flows (unaudited)**
            
            For
                the six months endedJune
                30**2007**
            
            **2006****CASH
                FLOWS FROM OPERATING ACTIVITIES**Interest
                received
            
            $
            8,262,103
            
            $
            7,607,472Fees
                and commissions received
            
            
            1,191,898
            
            
            599,558Cash
                paid to suppliers and employees
            
            
            (2,459,569
            )
            
            (2,354,758
            )Interest
                paid
            
            
            (3,146,561
            )
            
            (2,591,639
            )Taxes
                paid
            
            
            (1,328,780
            )
            
            (1,332,390
            )2,519,091
            
            
            1,928,243**CASH
                FLOWS FROM INVESTING ACTIVITIES**Cash
                paid for premises, equipment, and software
            
            
            (1,277,705
            )
            
            (109,488
            )Loans
                made, net of principal collected
            
            
            (6,768,579
            )
            
            (3,507,600
            )Proceeds
                from maturities and calls of securitiesAvailable
                for sale
            
            
            1,000,000
            
            
            3,500,000Held
                to maturity
            
            
            1,001,808
            
            
            623Purchase
                of securities Available for Sale
            
            
            0
            
            
            (2,434,605
            )Purchase
                of securities held to maturity
            
            
            (2,037,521
            )
            
            (990,920
            )Acquisition
                of Insurance agency, net
            
            
            (884,634
            )
            
            0Acquisition
                of FHLB Stock
            
            
            (364,500
            )
            
            (250,700
            )(9,331,131
            )
            
            (3,792,690
            )**CASH
                FLOWS FROM FINANCING ACTIVITIES**Net
                increase (decrease) inTime
                deposits
            
            
            3,353,241
            
            
            1,857,037Other
                deposits
            
            
            817,391
            
            
            (6,151,157
            )Securities
                sold under repurchase agreements
            
            
            (6,484,825
            )
            
            4,907,308Advances
                under (repayments of) notes payable
            
            
            11,000,000
            
            
            3,000,000Repayment
                of other borrowings
            
            
            (169,929
            )
            
            0Repurchase
                of Stock
            
            
            (255,500
            )
            
            0Dividends
                paid
            
            
            (646,989
            )
            
            (615,429
            )7,613,389
            
            
            2,997,759**NET
                INCREASE (DECREASE) IN CASH**
            
            
            801,349
            
            
            1,133,312CASH
                AND EQUIVALENTS AT BEGINNING OF PERIOD
            
            
            7,465,410
            
            
            6,809,595CASH
                AND EQUIVALENTS AT END OF PERIOD
            
            $
            8,266,759
            
            $
            7,942,907





-
            6 -




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




**RECONCILIATION
              OF NET INCOME TO NET CASH PROVIDED****FROM
                OPERATING ACTIVITIES**Net
                income
            
            $
            2,203,786
            
            $
            2,040,321**ADJUSTMENTS**Depreciation
                and amortization
            
            
            102,839
            
            
            109,337Provision
                for loan losses
            
            
            30,000
            
            
            240,000Security
                discount accretion, net of premium amortization
            
            
            (30,450
            )
            
            (18,105
            )Decrease
                (increase) inAccrued
                interest receivable
            
            
            (274,044
            )
            
            (106,403
            )Other
                assets
            
            
            285,355
            
            
            (207,058
            )Increase
                (decrease) inDeferred
                origination fees and costs, net
            
            
            (13,970
            )
            
            (141,816
            )Accrued
                Interest payable and other liabilities
            
            
            188,075
            
            
            112,753Income
                taxes payable
            
            
            0
            
            
            (100,786
            )$
            2,491,591
            
            $
            1,928,243




Supplemental
                disclosureFair
                  value of assets acquired
              
              $
              686,499
              
              $
              0Fair
                  value of liabilities assumed
              
              
              (634,797
              )
              
              0Purchase
                  price in excess of assets acquired
              
              
              832,932
              
              
              0Net
                  cash paid for acquisition
              
              $
              884,634
              
              $
              0
 The
      accompanying notes are an integral part of these financial
      statements.


-
          7 -


**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 Subsidiary”), 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 footnotes
      required by generally accepted accounting principles for complete financial
      statements. In the opinion of management, all adjustments (consisting of normal
      recurring accruals) considered necessary for a fair presentation have been
      included. Operating results for the three and six months ended June 30, 2007
      are
      not necessarily indicative of the results that may be expected for the year
      ending December 31, 2007 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,
      2006.





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
      six months ended June 30, 2007 and 2006, total comprehensive income, net of
      taxes, was $2,195,085 and $1,962,695, 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 June 30, 2007.




At
                June 30, 2007Revolving
                Home Equity Lines
            
            $
            4,031,316Commercial
                Real Estate
            
            $
            7,734,412Other
                Unused Commitments
            
            $
            19,936,619Commercial
                Letters of Credit
            
            $
            4,665,070





-
          8 -




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 787,845 and 788,915 for the three- and six-month periods ended
      June 30, 2007, respectively. For both the three- and six month periods ended
      June 30, 2006, the weighted average number of shares of common stock outstanding
      was 789,012.





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 10 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 six months ended June 30, 2007 and 2006, the Bank recognized net periodic
      costs for this plan of $137,500 and $95,000, respectively. During the six months
      ended June 30, 2007, the Bank contributed $91,000 to the plan.




The
      Insurance Subsidiary does not maintain a defined benefit pension plan covering
      its employees.




*Restatement
      of Comprehensive Income for the Year Ended December 31, 2006*





The
      Company adopted Financial Accounting Standards No. 158 *Employers’
      Accounting for Defined Benefit Plans and Other Postretirement Plans* (SFAS
      No.
      158) during the year ended December 31, 2006. The adoption of SFAS No. 158
      required the Company to reflect the underfunded status of its defined benefit
      pension plan on its Consolidated Balance Sheet, which included an adjustment
      to
      Accumulated Other Comprehensive Income. In the Company’s Consolidated Statement
      of Changes in Stockholders’ Equity for the year ended December 31, 2006 included
      in Form 10-K, the Company incorrectly included the adjustment to Accumulated
      Other Comprehensive Income in its calculation of Comprehensive Income. The
      adjustment to Accumulated Other Comprehensive Income related to the adoption
      of
      SFAS No. 158 as originally reported resulted in a reduction of Comprehensive
      Income in the amount of $820,534.




The
      Company will reflect the correction to it adoption of SFAS No. 158 in its
      Consolidated Statement of Changes in Stockholders’ Equity when it files its Form
      10-K for the year ending December 31, 2007. It will report the following change
      to Comprehensive Income for the year ended December 31, 2006:





Comprehensive
                Income for the year ended December 31, 2006:As
                originally reported
            
            $
            3,285,574As
                revised
            
            
            4,106,108





-
          9 -


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 five 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.





Selected
      financial information by line of business for the six months ended June 30
      2007,is included in the following table:


**2007**
                
                **Community**
                  **banking**
                
                **Insurance**
                  **products**
                  **and
                    services**
                
                **Intersegment**
                  **Transactions**
                
                **Consolidated**
                  **Total**Net
                    interest income
                
                $
                5,385,816
                
                
                ($7,369
                )
                $
                0
                
                $
                5,378,447Provision
                    for loan losses
                
                
                30,000
                
                
                0
                
                
                0
                
                
                30,000Net
                    interest income after provision
                
                
                5,355,816
                
                
                (7,369
                )
                
                0
                
                
                5,348,447Noninterest
                    revenue
                
                
                634,572
                
                
                557,326
                
                
                0
                
                
                1,191,898Noninterest
                    expense
                
                
                2,585,901
                
                
                421,878
                
                
                0
                
                
                3,007,779Income
                    before income taxes
                
                
                3,404,487
                
                
                128,079
                
                
                0
                
                
                3,532,566Income
                    taxes
                
                
                1,279,328
                
                
                49,452
                
                
                0
                
                
                1,328,780Net
                    income
                
                $
                2,125,159
                
                $
                78,627
                
                $
                0
                
                $
                2,203,786Average
                    assets
                
                $
                247,077,450
                
                $
                916,362
                
                $
                2,420
                
                $
                247,996,232





8.
            Insurance
                Agency Acquisition





On
      January 2, 2007, the Company completed the acquisition of the Insurance Agency,
      a Maryland insurance agency with an office located in Chestertown, Maryland.
      Under the terms of the acquisition agreement, the Company acquired all of the
      outstanding common stock of the Insurance Agency for approximately
      $1,000,000.





In
      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 $280,000 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. Pre-acquisition operating results of the
      Insurance Agency are not readily determinable.





During
      the six months ended June 30. 2007, the Company recorded amortization of
      intangible assets of approximately $27,500.


-
          10 -




**Item
      2.**   **Management’s
      Discussion and Analysis or Plan of Operation.**





Peoples
      Bancorp, Inc. is a Maryland corporation and a bank holding company registered
      under the Bank Holding Company Act of 1956, as amended, located in Chestertown,
      Kent County, Maryland. Peoples Bancorp, Inc. 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.





During
      2006, we operated in only one business segment: community banking. On January
      2,
      2007, the Company acquired the Insurance Subsidiary and began operating in
      the
      insurance products and services business segment.





The
      Bank
      was incorporated on April 13, 1910 and operates five branches located in Kent
      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. During the third quarter of 2007, the Bank plans to open
      its
      sixth branch in Church Hill, Queen Anne’s County, Maryland.





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 Subsidiary 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 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.


-
          11 -


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 our
      financial condition and results of operation and should be read in conjunction
      with the June 30, 2007 Consolidated Financial Statements and Notes thereto
      included elsewhere in this report, and in conjunction with the December 31,
      2006
      audited Consolidated Financial Statements and Notes thereto and Management’s
      Discussion and Analysis or Plan of Operation set forth in the Annual Report
      of
      Peoples Bancorp, Inc. on Form 10-K for the year ended December 31, 2006.





**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
      periodic reports that Peoples Bancorp, Inc. files with the Securities and
      Exchange Commission (see Item 1A of Part II of this report. 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


-
          12 -


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.





**RESULTS
      OF OPERATIONS**





**General**





For
      the
      three- and six-month periods ended June 30, 2007, we reported net income of
      $1,004,089, or $1.27 per share, and $2,203,786, or $2.79 per share,
      respectively, compared to $995,926, or $1.26 per share, and $2,040,321, or
      $2.59
      per share, respectively, for the same periods in 2006. The increases for the
      three months (0.82%) and six months (8.01%) ended June 30, 2007 over the same
      periods last year resulted primarily from increased loan interest income and
      reduced loan loss provisions, offset by an increase in interest expense on
      deposits and borrowed funds. The insurance subsidiary produced a net loss of
      $34,229 for the three-month period ended June 30, 2007 and net income of $78,627
      for the six-month period ended June 30, 2007.





**Net
      Interest Income**





Our
      primary source of income 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.





Net
      interest income for the three-month period ended June 30, 2007 was $2,702,121,
      which represents an increase of $49,051 or 1.85% over net interest income for
      the same period in 2006. Net interest income for the six-month period ended
      June
      30, 2007 was $5,378,447, which represents an increase of $134,599 or 2.57%
      over
      the net interest income for the first six months of 2006. During 2006 and
      continuing through the second quarter of 2007, market interest rates rose
      moderately .





Interest
      revenue for the three and six months ended June 30, 2007 totaled $4,339,452
      and
      $8,580,567, respectively, compared to $4,008,933 and $7,873,796, respectively,
      for the same periods last year, representing increases of $330,609 or 8.25%
      and
      $706,771 or 8.98%, respectively. The increases are attributable primarily to
      an
      increase in loan income of $659,389 for the first six months of 2007 over the
      same time period in 2006 due to continued strong loan demand in our primary
      market area.





Interest
      expense for the three- and six-month periods ended June 30, 2007 totaled
      $1,637,421 and $3,202,120, respectively, compared to $1,355,863 and $2,629,948,
      respectively, for the same periods last year, representing increases of $281,558
      or 20.77% and $572,172 or 21.76, respectively. Although deposits have increased
      slightly during the first six months of 2007, the Company increased its Federal
      Home Loan Bank (“FHLB”) borrowings during the first quarter of 2007 to fund loan
      demand from $43,700,000 at December 31, 2006 to $54,700,000 at June 30, 2007,
      resulting in an increase in borrowed funds interest expense for the first six
      months of 2007 of $240,959 when compared to the same period last year. Advances
      from the FHLB were $51,700,000 at March 31, 2007. The Company assumed
      approximately $450,000 of debt in connection with the acquisition of the
      Insurance Subsidiary.





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. Our net interest margin for the six-month period ended
      June 30, 2007 was 4.67%, compared to 4.66% for the same period in 2006. The
      net
      margin may decline if competition increases, loan demand decreases, or the
      cost
      of funds rises faster


-
          13 -


than
      the
      return on loans and securities. Although these expectations are based on
      management’s judgment, actual results may be impacted by a number of
      unpredictable factors and cannot be assured.





A
      table
      of our average balances, interest and yields follows.





**Average
      Balances, Interest, and Yield**




For
                the Six Months Ended
            
            For
                the Six Months EndedJune
                30, 2007
            
            June
                30, 2006Average
            
            
            
            
            
            AverageBalance
            
            Interest
            
            Yield
            
            Balance
            
            Interest
            
            Yield**Assets**Federal
                funds sold
            
            $
            1,736,500
            
            $
            47,322
            
            
            5.50
            %
            $
            2,118,621
            
            $
            48,783
            
            
            4.64
            %Interest-bearing
                deposits
            
            
            308,734
            
            
            6,581
            
            
            4.30
            %
            
            87,109
            
            
            2,047
            
            
            4.74
            %Investment
                securities:U.
                S. government agency
            
            
            18,867,894
            
            
            458,068
            
            
            4.90
            %
            
            19,828,988
            
            
            431,905
            
            
            4.39
            %Other
            
            
            27,095
            
            
            266
            
            
            1.98
            %
            
            0
            
            
            0
            
            
            —
            %FHLB
                of Atlanta Stock
            
            
            2,783,857
            
            
            81,430
            
            
            5.90
            %
            
            2,474,042
            
            
            61,210
            
            
            4.99
            %Total
                investment securities
            
            
            21,678,846
            
            
            539,764
            
            
            5.02
            %
            
            22,303,030
            
            
            493,115
            
            
            4.46
            %Loans:Demand
                and time
            
            
            42,589,710
            
            
            1,954,167
            
            
            9.25
            %
            
            40,535,791
            
            
            1,778,068
            
            
            8.85
            %Mortgage
            
            
            165,651,855
            
            
            5,885,092
            
            
            7.16
            %
            
            160,546,226
            
            
            5,396,300
            
            
            6.78
            %Installment
            
            
            4,814,429
            
            
            206,245
            
            
            8.64
            %
            
            5,072,721
            
            
            202,207
            
            
            8.04
            %Total
                loans
            
            
            213,055,994
            
            
            8,045,504
            
            
            7.62
            %
            
            206,154,738
            
            
            7,376,575
            
            
            7.22
            %Allowance
                for loan losses
            
            
            1,822,421
            
            
            
            
            
            
            
            
            1,736,832Total
                loans, net of allowance
            
            
            211,233,573
            
            
            8,045,504
            
            
            7.68
            %
            
            204,417,906
            
            
            7,376,575
            
            
            7.28
            %Total
                interest-earning assets
            
            
            234,957,653
            
            
            8,639,171
            
            
            7.41
            %
            
            228,926,666
            
            
            7,920,520
            
            
            6.98
            %Non-interest-bearing
                cash
            
            
            4,527,840
            
            
            
            
            
            
            
            
            4,748,028Premises
                and equipment
            
            
            4,979,554
            
            
            
            
            
            
            
            
            3,815,583Other
                assets
            
            
            3,531,185
            
            
            
            
            
            
            
            
            2,124,921Total
                assets
            
            $
            247,996,232
            
            
            
            
            
            
            
            $
            239,615,198Liabilities
                and Stockholders’ EquityInterest-bearing
                DepositsSavings
                and NOW deposits
            
            $
            37,444,809
            
            
            107,638
            
            
            0.58
            %
            $
            41,999,824
            
            
            116,745
            
            
            0.56
            %Money
                market and supernow
            
            
            16,241,553
            
            
            122,553
            
            
            1.52
            %
            
            17,587,922
            
            
            96,268
            
            
            1.10
            %Other
                time deposits
            
            
            73,674,015
            
            
            1,573,865
            
            
            4.31
            %
            
            69,694,719
            
            
            1,256,799
            
            
            3.64
            %Total
                interest-bearing deposits
            
            
            127,360,377
            
            
            1,804,056
            
            
            2.86
            %
            
            129,282,465
            
            
            1,469,812
            
            
            2.29
            %Borrowed
                funds
            
            
            61,755,156
            
            
            1,398,064
            
            
            4.57
            %
            
            54,239,014
            
            
            1,160,136
            
            
            4.31
            %Total
                interest-bearing liabilities
            
            
            189,115,533
            
            
            3,202,120
            
            
            3.41
            %
            
            183,521,479
            
            
            2,629,948
            
            
            2.89
            %Noninterest-bearing
                deposits
            
            
            30,611,574
            
            
            
            
            
            
            
            
            31,096,183219,727,107
            
            
            
            
            
            
            
            
            214,617,662Other
                liabilities
            
            
            2,289,309
            
            
            
            
            
            
            
            
            685,506Stockholders’
                equity
            
            
            25,979,816
            
            
            
            
            
            
            
            
            24,312,030Total
                liabilities and stockholders equity
            
            $
            247,996,232
            
            
            
            
            
            
            
            $
            239,615,198Net
                interest spread
            
            
            
            
            
            
            
            
            4.00
            %
            
            
            
            
            
            
            
            4.09
            %Net
                interest income
            
            
            
            
            $
            5,437,051
            
            
            
            
            
            
            
            $
            5,290,572Net
                margin on interest-earning assets
            
            
            
            
            
            
            
            
            4.67
            %
            
            
            
            
            
            
            
            4.66
            %




Interest
      on tax-exempt loans and investments are reported on fully taxable equivalent
      basis (a non GAAP financial measure).


-
          14 -




**Noninterest
      Revenue**





Noninterest
      revenue for the three- and six-month periods ended June 30, 2007 totaled
      $489,089 and $1,191,898, respectively, which represent increases of 76.27%
      and
      98.80% over $277,469 and $599,558, respectively, for the same periods in 2006. The
      increases resulted primarily from $554,300 of commission income earned by the
      Insurance Subsidiary during the first six months of 2007. We expect the
      insurance subsidiary to generate lower revenue and net income during the
      remaining six months of 2007 .
      In
      addition, we experienced an increase in deposit service charges of $46,200
      or
      10.83% during the first six months of 2007 when compared to the same period
      of
      2006 primarily due to increased overdraft activity. Management does not view
      the
      increased overdraft activity as an indication of economic problems within our
      customer base, as we have generally been successful at collecting these
      overdrawn balances and the fees associated with them.





**Noninterest
      Expense**





The
      Company recorded noninterest expense of $1,549,969 and $3,007,779 for the three-
      and six-month periods ended June 30, 2007, respectively, compared to $1,213,819
      and $2,331,481, respectively, for the same periods in 2006, representing
      increases of $336,150 or 27.69% and $676,298 or 29.01%, respectively, The
      increases are mainly attributable to increased salaries and employee benefits
      of
      $526,266 for the first six months of 2007, which is primarily due to the
      acquisition of the Insurance Subsidiary. Other operating costs for the first
      six
      months of 2007 also increased when compared to the same period last year,
      primarily due to Insurance Subsidiary operations.





**Income
      Tax Expense**





The
      Company’s effective tax rate for the three- and six-month periods ended June 30,
      2007 was 37.7% and 37.6%, respectively, when compared to 37.6% and 37.7% for
      the
      same period in 2006. The Company’s income tax expense was $607,152 and
      $1,328,780 for the three- and six-months ended June 30, 2007, respectively,
      compared to $600,794 and $1,231,604, respectively, for the same periods in
      2006.
      The increases of $6,358 or 1.06% and $97,176 or 7.89% for the three- and
      six-month periods ended June 30, 2007, respectively, when compared the same
      periods in 2006 were comparable to the percentage increases in income before
      income taxes.





**FINANCIAL
      CONDITION**





**Overview**





Total
      assets at June 30, 2007 were $252,936,129, compared to $242,304,782 at December
      31, 2006, representing an increase of $10,631,347 or 4.39% over December 31,
      2006.





Total
      liabilities at June 30, 2007 were $226,036,377, compared to $216,697,626 at
      December 31, 2006, representing an increase of $9,338,751 or 4.31%.





Stockholders’
      equity was $26,899,752 as of June 30, 2007, compared to $25,607,156 as of
      December 31, 2006, an increase of $1,292,596. The increase was due to
      comprehensive income for the period totaling $2,195,085 offset by dividends
      paid
      to stockholders of $646,989 and the repurchase of 3,500 shares of stock totaling
      $255,500.


-
          15 -




Return
      on
      average equity for the six months ended June 30, 2007 was 17.11%, compared
      to
      16.92 for the same period in 2006. Return on average assets was 1.79% for the
      six months ended June 30, 2007, compared to 1.72% for the same period in
      2006.





**Composition
      of Loan Portfolio**





At
      June
      30, 2007, loans, net of unearned income, were $212,829,706, an increase of
      $6,752,549 since December 31, 2006. 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 $211,233,573 and $204,417,906 during the first
      six months of 2007 and 2006, respectively, which constituted 89.90% and 89.29%
      of average interest-earning assets for the respective periods. For the six
      months ended June 30, 2007, our average loan to deposit ratio was 133.72%,
      compared to 127.46% for the six months ended June 30, 2006. The securities
      sold
      under repurchase agreements function like deposits, with the securities
      providing collateral in place of the FDIC insurance. The Company’s ratio of
      average loans to deposits plus borrowed funds, which includes FHLB advances,
      was
      96.13% for the six months ended June 30, 2007, compared to 95.25% for the six
      months ended June 30, 2006. 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 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 June 30, 2007 is
      adequate to cover possible losses in the loan portfolio; 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.





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. Generally,
      however, neither net recoveries nor a decrease in loans will require a negative
      provision to reduce the allowance. Therefore, net recoveries and/or decreases
      in
      loans may cause the allowance as a percentage of gross loans to exceed the
      Company’s target. Historically, our regulators have discouraged negative
      provisions.


-
          16 -


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. As of June 30, 2007 and December 31, 2006, the allowance for loan
      losses compared to gross loans was 0.84% and 0.90%, respectively.





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





**Allowance
      for Loan Losses**




Six
                  months ended
              
              Six
                  months ended
              
              Year
                  endedJune
                  30,
              
              June
                  30,
              
              December
                  31,2007
              
              2006
              
              2006Balance
                  at beginning of year
              
              $
              1,860,283
              
              $
              1,649,420
              
              $
              1,649,420Loan
                  losses:Commercial
              
              
              69,950
              
              
              3,243
              
              
              4,947Mortgages
              
              
              0
              
              
              0
              
              
              15,000Consumer
              
              
              11,538
              
              
              1,997
              
              
              16,214Total
                  loan losses
              
              
              81,488
              
              
              5,240
              
              
              36,161Recoveries
                  on loans previously charged offCommercial
              
              
              0
              
              
              0
              
              
              25Mortgages
              
              
              2,271
              
              
              0
              
              
              0Consumer
              
              
              912
              
              
              4,281
              
              
              6,999Total
                  loan recoveries
              
              
              3,183
              
              
              4,281
              
              
              7,024Net
                  loan losses
              
              
              78,305
              
              
              959
              
              
              29,137Provision
                  for loan losses charged to expense
              
              
              30,000
              
              
              240,000
              
              
              240,000Balance
                  at end of year
              
              $
              1,811,978
              
              $
              1,888,461
              
              $
              1,860,283Allowance
                  for loan losses to gross loans outstandingat
                  end of period
              
              
              0.84
              %
              
              0.91
              %
              
              0.90
              %





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
      $668,486 and $422,338 at June 30, 2007 and December 31, 2006, respectively.
      These loans are detailed below:




**Risk
      Elements of Loan Portfolio**


**June
                31,**
            
            **December
                31,****2007**
            
            **2006**Non-Accrual
                Loans
            
            $
            7,045
            
            $
            23,201Accruing
                Loans Past Due 90 Days or More
            
            
            661,441
            
            
            399,137  -
            17 -




Loans
      are
      classified as impaired when the collection of contractual obligations, including
      principal and interest, is doubtful. Management has identified no significant
      impaired loans as of June 30, 2007 or December
      31 ,
      2006.





**Deposits
      and Other Interest-Bearing Liabilities**





Average
      interest-bearing deposits decreased $1,922,088 or 1.49% to $127,360,377 for
      the
      six months ended June 30, 2007, from $129,282,465 for the same period in 2006.
      Average noninterest-bearing deposits decreased $484,609 or 1.56% to $30,611,574
      for the six months ended June 30, 2007, from $31,096,183 for the same period
      in
      2006. Average total deposits have decreased 1.50% or $2,406,697 to $157,971,951
      for the six months ended June 30, 2007 from $160,378,648 for the same period
      in
      2006. Borrowings, primarily from the Federal Home Loan Bank of Atlanta to fund
      loan demand, increased to $54,700,000 from $43,700,000 at December 31, 2006,
      an
      increase of 25.17%.





Deposits,
      particularly core deposits, and borrowed funds have been the Company’s primary
      source of funding and have enabled the Company to meet both its short-term
      and
      long-term liquidity needs. Management anticipates that deposits will continue
      to
      be the Company’s primary source of funding for the foreseeable future. It should
      be noted, however, 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.





**Short-term
      Borrowings**




The
      following table sets forth the our position with respect to short-term
      borrowings for June 30, 2007 and December 31 2006.





**June
                30, 2007**
            
            **December
                31, 2006****Amount**
            
            **Rate**
            
            **Amount**
            
            **Rate**Federal
                Home Loan Bank (daily re-price)
            
            $
            0
            
            
            —
            %
            $
            0
            
            
            —
            %Retail
                Repurchase Agreements
            
            
            9,088,768
            
            
            3.76
            %
            
            9,513,593
            
            
            2.85
            %Federal
                Funds Borrowed
            
            
            0
            
            
            —
            %
            
            6,060,000
            
            
            1.60
            %Total
            
            $
            9,088,768
            
            
            
            
            $
            15,573,593





The
      Company 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
      has lines of credit of $19,400,000 in unsecured overnight federal funds and
      $5,000,000 in secured overnight federal funds with correspondent banks at June
      30, 2007.


-
          18 -




**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 $24,400,000 from correspondent banks, namely, Bank of America,
      Community 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 $71,450,000 of which $54,700,000 has
      been advanced as of June 30, 2007.





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
      Bank’s capital ratios as of June 30, 2007 to the minimum ratios required by
      federal banking regulators is presented below.




**Minimum**
            
            **To
                be well****Actual**
            
            **Requirements**
            
            **capitalized****Tier
                1 risk-based capital**
            
            
            12.54
            %
            
            4.00
            %
            
            6.00
            %**Total
                risk-based capital**
            
            
            13.40
            %
            
            8.00
            %
            
            10.00
            %**Leverage
                ratio**
            
            
            10.58
            %
            
            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, 2006 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, 2006. 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 June 30, 2007 and December 31, 2006:


**Immediate
                Change in Rates****+200**
            
            **+100**
            
            **-100**
            
            **-200**
            
            **Policy****Basis
                Points**
            
            **Basis
                Points**
            
            **Basis
                Points**
            
            **Basis
                Points**
            
            **Limit****June
                30, 2007**%
                Change in Net Interest Income
            
            
            4.04
            %
            
            2.08
            %
            
            -2.57
            %
            
            -
                6.31
            %
            
            +10
            %%
                Change in Fair Value of Capital
            
            
            8.80
            %
            
            4.47
            %
            
            -5.01
            %
            
            -10.52
            %
            
            +20
            %**December
                31, 2006**%
                Change in Net Interest Income
            
            
            3.26
            %
            
            1.66
            %
            
            -2.15
            %
            
            -
                5.03
            %
            
            +10
            %%
                Change in Fair Value of Capital
            
            
            6.79
            %
            
            3.44
            %
            
            -3.82
            %
            
            -
                8.10
            %
            
            +20
            %




-
          19 -




The
      change in our interest rate sensitivity profile since December 31. 2006 to
      June
      30, 2007 resulted from a decrease in our excess assets repricing within one
      year
      from $71,576,000 as of December 31, 2006 to $69,244,000 at June 30,
      2007.





**Item
      4.** **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, who also serves as the
      Chief Financial Officer (the “CEO”), to allow for timely decisions regarding
      required disclosure. A control system, no matter how well conceived and
      operated, can provide only reasonable, not absolute, assurance that the
      objectives of the control system are met. Further, the design of a control
      system must reflect the fact that there are resource constraints, and the
      benefits of controls must be considered relative to their costs. These inherent
      limitations include the realities that judgments in decision-making can be
      faulty, and that breakdowns can occur because of simple error or mistake.
      Additionally, controls can be circumvented by the individual acts of some
      persons, by collusion of two or more people, or by management override of the
      control. The design of any system of controls also is based in part upon certain
      assumptions about the likelihood of future events, and there can be no assurance
      that any design will succeed in achieving its stated goals under all potential
      future conditions; over time, control may become inadequate because of changes
      in conditions, or the degree of compliance with the policies or procedures
      may
      deteriorate.





An
      evaluation of the effectiveness of these disclosure controls was carried out
      as
      of June 30, 2007 under the supervision and with the participation of management,
      including the CEO. Based on that evaluation, management, including the CEO,
      has
      concluded that our disclosure controls and procedures are, in fact, effective
      at
      the reasonable assurance level.





During
      the second quarter of 2007, 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.**





None.





**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, 2006. Management does not believe that any material changes
      in these risk factors have occurred since December 31, 2006.




-
          20 -




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





The
      following table provides information about shares of common stock purchased
      by
      or on behalf of Peoples Bancorp, Inc. and its affiliates (as defined by Exchange
      Act Rule 10b-18) during the three-month period ended June 30, 2007:




**Period**
              
              **Total
                  Number of Shares (or Units) Purchased****(1)**
              
              **Average
                  Price Paid per Share (or Unit)**
              
              **Total
                  Number of Shares (or Units) Purchased as Part of Publicly Announced
                  Plans
                  or Programs**
              
              **Maximum
                  Number (or Approximate Dollar Value) of Shares (or Units) that
                  May Yet Be
                  Purchased Under the Plans or Programs**April
                  2007
              
              
              0
              
              
              0
              
              
              0
              
              
              0May
                  2007
              
              
              0
              
              
              0
              
              
              0
              
              
              0June
                  2007
              
              
              3,500
              
              $
              70.75
              
              
              3,500
              
              
              35,951**Total**
              
              
              **3,500**
              
              **$**
              **70.75**
              
              
              **3,500**
              
              
              **35,951**




**Note** : **(1)** These
      shares were purchased fro m
      Nylon
      Capital Shopping Center, Inc. pursuant to a stock repurchase
      program that was approved by the Board of Directors of the Company at its May
      30, 2007 meeting. The repurchase program authorizes the Company to purchase
      up
      to 5% of its outstanding stock over the next 36 months, at times and prices
      determined by the President. The Company’s previous repurchase authorization
      expired on January 22, 2006. The husband of director Patricia Joan Ozman Horsey is
      the
      President, Treasurer and director of Nylon Capital Shopping Center,
      Inc.





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




Not
      applicable.





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





At
      the
      Annual Meeting of Stockholders held on May 23, 2007, the stockholders of Peoples
      Bancorp, Inc. were asked to vote upon the election of 12 directors to serve
      on
      the Board of Directors of Peoples Bancorp, Inc. for one-year terms and until
      their successors are duly elected and qualify (“Proposal 1”). The stockholders
      also were asked to ratify the selection of Rowles & Company, LLP as our
      independent auditing and accounting firm for 2007 (“Proposal 2”). The Board of
      Directors submitted these matters to a vote through the solicitation of proxies.


-
          21 -


The
      results of Proposal 1 were as follows:





**Nominees**
              **(terms
                expire 2008)**
            
            **For**
            
            **Against**
            
            **Abstain**
            
            **Broker**
              **Non-Votes**E.
                Jean Anthony.
            
            567,873
            
            1,122
            
            1,274
            
            51Robert
                W. Clark, Jr.
            
            568,995
            
            0
            
            1,274
            
            51LaMonte
                E. Cooke
            
            568,599
            
            396
            
            1,274
            
            51Gary
                B. Fellows
            
            568,995
            
            0
            
            1,274
            
            51Herman
                E. Hill, Jr.
            
            568,162
            
            833
            
            1,274
            
            51Patricia
                Joan Ozman Horsey
            
            568,945
            
            50
            
            1,274
            
            51P.
                Patrick McClary
            
            568,995
            
            0
            
            1,274
            
            51Alexander
                P. Rasin, III
            
            567,873
            
            1,122
            
            1,274
            
            51Stefan
                R. Skipp
            
            568,995
            
            0
            
            1,274
            
            51Thomas
                G. Stevenson
            
            568,995
            
            0
            
            1,274
            
            51Elizabeth
                A. Strong
            
            568,995
            
            0
            
            1,274
            
            51William
                G. Wheatley
            
            568,995
            
            0
            
            1,274
            
            51





The
      results of Proposal 2 were as follows: 566,996 votes for the proposal; 2,599
      votes against the proposal; 3,075 abstentions; and 5 1 broker
      non-votes.





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





The
      information contained in Item 2 of Part II of this report regarding the
      Company’s authorization of a stock repurchase program on May 30, 2007 is
      incorporated herein by reference.





**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.




-
          22 -




**SIGNATURES**





Pursuant
      to the requirements of the Securities 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:
      August 10, 2007


By: /s/
      Thomas G. Stevenson


Thomas
      G.
      Stevenson


President/Chief
      Executive Officer &
      Chief Financial Officer


-
          23 -




**EXHIBIT
      INDEX**




Exhibit
              No.
            Description  3.1
            Articles
                of Incorporation of the Company, as corrected and amended (incorporated
                by
                reference to Exhibit 3.1 of the Company’s Current Report on Form 8-K filed
                on January 24, 2005)


3.2
            Bylaws
                of the Company, as amended (incorporated by reference to Exhibit
                3.2 of
                the Company’s Annual Report on Form 10-K for the year ended December 31,
                2004)


10.1
            Changes
                to Director Compensation Arrangement (incorporated by reference to
                Exhibit
                10.1 of the Company’s Current Report on Form 8-K filed on May 24,
                2006)


31.1
            Certifications
                of the Chief Executive Officer and Chief Financial Officer pursuant
                to
                Section 302 of the Sarbanes-Oxley Act of 2002 (filed
                herewith)


32.1
            Certifications
                of the Chief Executive Officer and Chief Financial Officer pursuant
                to
                Section 906 of the Sarbanes-Oxley Act of 2002 (furnished
                herewith)






-
        24 -