**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, 2008





 ̈ 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, a non-accelerated filer or a smaller reporting company.
      See
      the definitions of “large accelerated filer”, “accelerated filer” and “smaller
      reporting company” in Rule 12b-2 of the Exchange Act. (Check one):





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





Indicate
      by check mark whether the registrant is a shell company (as defined in Rule
      12b-2 of the Act).


Yes o
      No x





**APPLICABLE
      ONLY TO CORPORATE ISSUERS**





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





**PEOPLES
      BANCORP, INC.**





**FORM
      10-Q**


**INDEX**





PagePart
                I – Financial InformationItem
                1.
            Financial
                Statements
            3Consolidated
                Balance Sheets at June 30, 2008 (unaudited) and December 31,
                2007
            3Consolidated
                Statements of Income (unaudited) for three and six months ended June
                30,
                2008 and 2007
            4Consolidated
                Statements of Changes in Stockholders’ Equity (unaudited) for the six
                months ended June 30, 2008 and 2007
            5Consolidated
                Statements of Cash Flows (unaudited) for six months ended June 30,
                2008
                and 2007
            6Notes
                to Financial Statements (unaudited)
            8Item
                2.
            Management’s
                Discussion and Analysis of Financial Condition And
                Results of Operations
            13Item
                3.
            Quantitative
                and Qualitative Disclosures About Market Risk
            22Item
                4T.
            Controls
                and Procedures
            23Part
                II – Other InformationItem
                1.
            Legal
                Proceedings
            24Item
                1A.
            Risk
                Factors
            24Item
                2.
            Unregistered
                Sales of Equity Securities and Use of Proceeds
            24Item
                3.
            Defaults
                Upon Senior Securities
            25Item
                4.
            Submission
                of Matters to a Vote of Security Holders
            25Item
                5.
            Other
                Information
            25Item
                6.
            Exhibits
            25Signatures
            26Exhibit
                Index
            27




-
          2 -


**PART
      I - FINANCIAL INFORMATION**





**Item
      1. Financial Statements.**





**PEOPLES
      BANCORP, INC. AND SUBSIDIARIES**


**Consolidated
      Balance Sheets**





June 30,
            
            December 31,2008
            
            2007(unaudited)******ASSETS**Cash
                and due from banks
            
            $
            6,268,877
            
            $
            5,399,704Federal
                funds sold
            
            
            3,497,949
            
            
            4,440,438Cash
                and cash equivalents
            
            
            9,766,826
            
            
            9,840,142Securities
                available for sale
            
            
            4,050,625
            
            
            5,037,273Securities
                  held to maturity (approximate fairvalue of $12,173,909 and
                  $13,198,704)
            
            
            12,028,383
            
            
            13,026,151Federal
                Home Loan Bank stock, at cost
            
            
            2,629,000
            
            
            2,897,600Loans,
                  less allowance for loan lossesof $1,757,674 and
                  $2,328,792
            
            
            214,783,650
            
            
            220,425,725Premises
                and equipment
            
            
            6,064,998
            
            
            5,901,649Goodwill
                and intangible assets
            
            
            740,432
            
            
            767,932Accrued
                interest receivable
            
            
            1,680,794
            
            
            1,814,574Deferred
                income taxes
            
            
            1,117,883
            
            
            1,121,746Other
                assets
            
            
            1,448,342
            
            
            974,970**Total
                Assets**
            
            $
            254,310,933
            
            **$**
            261,807,762**LIABILITIES
                AND STOCKHOLDERS’ EQUITY**DepositsNon-interest-bearing
            
            $
            34,647,353
            
            $
            36,630,744Interest-bearing
            
            
            134,244,220
            
            
            132,421,505168,891,573
            
            
            169,052,249Securities
                  sold under repurchase agreementsand federal funds
                  purchased
            
            
            8,481,263
            
            
            9,041,476Federal
                Home Loan Bank advances
            
            
            46,000,000
            
            
            53,000,000Other
                borrowings
            
            
            180,561
            
            
            192,597Accrued
                interest payable
            
            
            484,542
            
            
            521,219Other
                liabilities
            
            
            1,995,950
            
            
            1,960,427226,033,889
            
            
            233,767,968Stockholders'
                equityCommon
                  stock, par value $10 per share, 1,000,000 shares authorized; issued
                  and
                  outstanding 779,512 shares atJune 30, 2008 and 785,512 shares at
                  December 31, 2007
            
            
            7,795,120
            
            
            7,855,120Additional
                paid-in capital
            
            
            2,920,866
            
            
            2,920,866Retained
                earnings
            
            
            18,287,168
            
            
            17,997,28629,003,154
            
            
            28,773,272Accumulated
                other comprehensive income (loss)Unrealized
                gain (loss) on available for sales securities
            
            
            40,335
            
            
            32,967Unfunded
                liability for defined benefit plan
            
            
            (766,445
            )
            
            (766,445
            )28,277,044
            
            
            28,039,794**Total
                Liabilities and Stockholders’ Equity**
            
            $
            254,310,933
            
            $
            261,807,762




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
              June 30
            
            For the six months ended
              June 302008
            
            2007
            
            2008
            
            2007Interest and dividend revenueLoans,
                including fees
            
            $
            3,662,673
            
            $
            4,053,906
            
            $
            7,520,516
            
            $
            8,012,102U.
                S. government agency securities
            
            
            192,818
            
            
            220,023
            
            
            398,050
            
            
            436,918Deposits
                in other banks
            
            
            3,906
            
            
            1,404
            
            
            12,788
            
            
            6,292Federal
                funds sold
            
            
            21,122
            
            
            24,073
            
            
            70,381
            
            
            47,321Equity
                securities
            
            
            42,659
            
            
            40,136
            
            
            86,480
            
            
            77,934Total
                interest and dividend revenue
            
            
            3,923,178
            
            
            4,339,542
            
            
            8,088,215
            
            
            8,580,567Interest
                expenseDeposits
            
            
            869,291
            
            
            918,239
            
            
            1,827,896
            
            
            1,804,056Borrowed
                funds
            
            
            614,597
            
            
            719,182
            
            
            1,306,085
            
            
            1,398,064Total
                interest expense
            
            
            1,483,888
            
            
            1,637,421
            
            
            3,133,981
            
            
            3,202,120Net
                interest income
            
            
            2,439,290
            
            
            2,702,121
            
            
            4,954,234
            
            
            5,378,447Provision
                for loan losses
            
            
            480,000
            
            
            30,000
            
            
            600,000
            
            
            30,000Net
                  interest income afterprovision for loan
                  losses
            
            
            1,959,290
            
            
            2,672,121
            
            
            4,354,234
            
            
            5,348,447Noninterest
                revenueService
                charges on deposit accounts
            
            
            257,817
            
            
            253,125
            
            
            491,892
            
            
            472,903Insurance
                commissions
            
            
            219,133
            
            
            236,206
            
            
            660,276
            
            
            637,990Other
                noninterest revenue
            
            
            73,178
            
            
            83,448
            
            
            170,001
            
            
            164,695Total noninterest revenue
            
            
            550,128
            
            
            572,779
            
            
            1,322,169
            
            
            1,275,588Noninterest
                expensesSalaries
                and employee benefits
            
            
            1,141,572
            
            
            1,032,418
            
            
            2,236,466
            
            
            1,980,859Occupancy
            
            
            84,152
            
            
            101,357
            
            
            188,519
            
            
            180,720Furniture
                and equipment
            
            
            66,123
            
            
            72,818
            
            
            139,331
            
            
            116,032Other
                operating
            
            
            449,442
            
            
            427,066
            
            
            901,386
            
            
            813,858Total noninterest expenses
            
            
            1,741,289
            
            
            1,633,659
            
            
            3,465,702
            
            
            3,091,469Income
                before income taxes
            
            
            768,129
            
            
            1,611,241
            
            
            2,210,701
            
            
            3,532,566Income
                taxes
            
            
            284,808
            
            
            607,152
            
            
            817,423
            
            
            1,328,780Net
                income
            
            $
            483,321
            
            $
            1,004,089
            
            $
            1,393,278
            
            $
            2,203,786Earnings
                per common share
            
            $
            0.62
            
            $
            1.27
            
            $
            1.77
            
            $
            2.79





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, 2008 and 2007**





Par value
            
            Additional
              paid-in
              capital
            
            Retained
              earnings
            
            Accumulated
              other
              comprehensive
              income
            
            Comprehensive
              Income**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 investment securities
                  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
            )**Balance,
                December 31, 2007**
            
            $
            7,855,120
            
            $
            2,920,866
            
            $
            17,997,286
            
            $
            (733,478
            )Net
                income
            
            
            -
            
            
            -
            
            
            1,393,278
            
            
            -
            
            $
            1,393,278Unrealized
                  gain on investment securities
                  available for sale netof income taxes of
                  $4,800
            
            
            -
            
            
            -
            
            
            -
            
            
            7,368
            
            
            7,368Comprehensive
                income
            
            
            
            
            
            
            
            
            
            
            
            
            
            $
            1,400,646Repurchase
                of stock
            
            
            (60,000
            )
            
            -
            
            
            (420,000
            )
            
            -Cash
                dividend, $0.87 per share
            
            
            -
            
            
            -
            
            
            (683,396
            )
            
            -**Balance,
                June 30, 2008**
            
            $
            7,795,120
            
            $
            2,920,866
            
            $
            18,287,168
            
            $
            (726,110
            )





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 ended****June 30****2008**
            
            **2007****CASH FLOWS FROM OPERATING ACTIVITIES**Interest
                received
            
            $
            8,266,849
            
            $
            8,262,103Fees
                and commissions received
            
            
            1,322,169
            
            
            1,191,898Cash
                paid to suppliers and employees
            
            
            (3,924,203
            )
            
            (2,459,569
            )Interest
                paid
            
            
            (3,170,658
            )
            
            (3,146,561
            )Taxes
                paid
            
            
            (628,502
            )
            
            (1,328,780
            )1,865,655
            
            
            2,519,091**CASH
                FLOWS FROM INVESTING ACTIVITIES**Cash
                paid for premises, equipment, and software
            
            
            (304,119
            )
            
            (1,277,705
            )Loans
                made, net of principal collected
            
            
            4,980,895
            
            
            (6,768,579
            )Proceeds
                from maturities and calls of securitiesAvailable
                for sale
            
            
            1,000,000
            
            
            1,000,000Held
                to maturity
            
            
            3,000,794
            
            
            1,001,808Purchase
                of securities held to maturity
            
            
            (1,988,820
            )
            
            (2,037,521
            )Acquisition
                of Insurance agency, net
            
            
            0
            
            
            (884,634
            )Acquisition
                of FHLB stock, net of purchases
            
            
            268,600
            
            
            (364,500
            )6,957,350
            
            
            (9,331,131
            )**CASH
                FLOWS FROM FINANCING ACTIVITIES**Net
                increase (decrease) inTime
                deposits
            
            
            1,096,994
            
            
            3,353,241Other
                deposits
            
            
            (1,257,670
            )
            
            817,391Securities
                sold under repurchase agreements
            
            
            (560,213
            )
            
            (6,484,825
            )Advances
                under (repayments of) notes payable, net
            
            
            (7,000,000
            )
            
            11,000,000Repayment
                of other borrowings
            
            
            (12,036
            )
            
            (169,929
            )Repurchase
                of stock
            
            
            (480,000
            )
            
            (255,500
            )Dividends
                paid
            
            
            (683,396
            )
            
            (646,989
            )(8,896,321
            
            
            7,613,389**NET
                INCREASE (DECREASE) IN CASH**
            
            
            (73,316
            )
            
            801,349CASH
                AND EQUIVALENTS AT BEGINNING OF PERIOD
            
            
            9,840,142
            
            
            7,465,410CASH
                AND EQUIVALENTS AT END OF PERIOD
            
            $
            9,766,826
            
            $
            8,266,759




-
          6 -





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




**For the six months ended June 30,****2008**
            
            **2007****RECONCILIATION
                  OF NET INCOME TO NET CASH PROVIDED FROM OPERATING
                  ACTIVITIES**Net
                income
            
            $
            1,393,278
            
            $
            2,203,786**ADJUSTMENTS**Depreciation
                and amortization
            
            
            140,770
            
            
            102,839Provision
                for loan losses
            
            
            600,000
            
            
            30,000Amortization
                of intangible assets
            
            
            27,500
            
            
            0Security
                discount accretion, net of premium amortization
            
            
            (16,327
            )
            
            (30,450
            )Decrease
                (increase) inAccrued
                interest receivable
            
            
            133,780
            
            
            (274,044
            )Income
                tax refund receivable
            
            
            188,921
            
            
            0Other
                assets
            
            
            (662,293
            )
            
            285,355Increase
                (decrease) inDeferred
                origination fees and costs, net
            
            
            61,180
            
            
            (13,970
            )Accrued
                interest payable and other liabilities
            
            
            (1,154
            )
            
            188,075Income
                taxes payable
            
            
            0
            
            
            0$
            1,865,655
            
            $
            2,491,591Supplemental
                disclosureFair
                value of assets acquired
            
            $
            0
            
            $
            686,499Fair
                value of liabilities assumed
            
            
            0
            
            
            (634,797
            )Purchase
                price in excess of assets acquired
            
            
            0
            
            
            832,932Net
                cash paid for acquisition
            
            $
            0
            
            $
            884,634




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





2.
            Cash
                Flows





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





3.
            Comprehensive
                income





For
      the
      six months ended June 30, 2008 and 2007, total comprehensive income, net of
      taxes, was $1,400,646 and $2,195,085, 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, 2008 and December 31,
      2007.




At June 30, 2008
            
            At December 31, 2007Revolving Home
                Equity Lines
            
            $
            3,700,105
            
            $
            3,717,9641-4
                Family Residential Construction Loans
            
            $
            1,079,566
            
            $
            991,715Commercial
                Real Estate
            
            $
            4,919,941
            
            $
            5,864,181Other
                Unused Commitments
            
            $
            20,835,175
            
            $
            15,382,454Commercial
                Letters of Credit
            
            $
            4,861,064
            
            $
            4,636,444




-
          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 781,512 and 784,979 for the three- and six-month periods ended
      June 30, 2008, respectively. For the three- and six month periods ended June
      30,
      2007, the weighted average number of shares of common stock outstanding was
      787,845 and 788,915, respectively.





6.
            Pension





The
      Bank
      maintains a defined benefit pension plan covering substantially all employees
      of
      the Bank. Benefits are based on years of service and the employee’s highest
      average rate of earnings for five consecutive years during the final 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, 2008 and 2007, the Bank recognized net periodic
      costs for this plan of $140,000 and $137,500, respectively. During the six
      months ended June 30, 2008, the Bank contributed $103,937 to the plan.





7
            Segment
                Reporting





The
      Company operates two primary businesses: Community Banking and Insurance
      Products & Services. Through the Community Banking business, the Company
      provides services to consumers and small businesses on the upper Eastern Shore
      of Maryland through its six branches. Community banking activities include
      serving the deposit needs of small business and individual consumers by
      providing banking products and services to fit their needs. Loan products
      available to consumers include mortgage, home equity, automobile, marine, and
      installment loans and other secured and unsecured personal lines of credit.
      Small business lending includes commercial mortgages, real estate development
      loans, equipment and operating loans, as well as secured and unsecured lines
      of
      credit, accounts receivable financing arrangements, and merchant card services.





Through
      the Insurance Products and Services business, the Company provides a full range
      of insurance products and services to businesses and consumers in the Company’s
      market areas. Products include property and casualty, life, marine, individual
      health and long-term care insurance.


-
          9 -


Selected
      financial information by line of business, is included in the following
      table:


**Insurance****For the six months ended**
              
              **Community**
              
              **products**
              
              **Intersegment**
              
              **Consolidated****June 30 2008**
              
              **banking**
              
              **and services**
              
              **Transactions**
              
              **Total**Net
                  interest income
              
              $
              4,960,686
              
              
              ($6,452
              )
              $
              0
              
              $
              4,954,234Provision
                  for loan losses
              
              
              600,000
              
              
              0
              
              
              0
              
              
              600,000Net
                  interest income after provision
              
              
              4,360,686
              
              
              (6,452
              )
              
              0
              
              
              4,354,234Noninterest
                  revenue
              
              
              658,908
              
              
              663,261
              
              
              0
              
              
              1,322,169Noninterest
                  expense
              
              
              2,942,133
              
              
              523,569
              
              
              0
              
              
              3,465,702Income
                  before income taxes
              
              
              2,077,461
              
              
              133,240
              
              
              0
              
              
              2,210,701Income
                  taxes
              
              
              773,553
              
              
              43,870
              
              
              0
              
              
              817,423Net
                  income
              
              $
              1,303,908
              
              $
              89,370
              
              $
              0
              
              $
              1,393,278Average
                  assets
              
              $
              256,791,692
              
              $
              1,499,978
              
              
              ($212,052
              )
              $
              258,079,618
  **Insurance****For the six months ended**
              
              **Community**
              
              **products**
              
              **Intersegment**
              
              **Consolidated****June 30 2007**
              
              **banking**
              
              **and services**
              
              **Transactions**
              
              **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
              
              
              634,571
              
              
              641,017
              
              
              0
              
              
              1,275,588Noninterest
                  expense
              
              
              2,585,901
              
              
              505,569
              
              
              0
              
              
              3,091,469Income
                  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 acquired all of the outstanding common stock of
      the
      Insurance Agency for approximately $1,000,000. The Insurance Agency has an
      office located in Chestertown, Maryland.





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





During
      the six months ended June 30. 2008, the Company recorded amortization of
      intangible assets of approximately $27,500.




-
          10 -






9.
            Fair
                Value





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





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





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





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





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





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





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





Total
            
            Level 1 Inputs
            
            Level 2 Inputs
            
            Level 3 InputsSecurities
            
            $
            4,050,627
            
            $
            4,050,627
            
            $
            -
            
            $
            -





10.
            Recent
                Accounting Standards





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





FASB
      Statement No. 160 (revised 2007), *Noncontrolling
      Interests in Consolidated Financial Statement* amends
      Accounting Research Bulletin 51, *Consolidated
      Financial Statements* ,
      to
      establish accounting and reporting standards for noncontrolling interest in
      a
      subsidiary and for the deconsolidation of a subsidiary. It also clarifies that
      a
      noncontrolling interest in a subsidiary is an ownership interest in the
      consolidated entity that should be reported as equity in the consolidated
      financial statements. SFAS 160 also changes the way the consolidated income
      statement is presented by requiring consolidated net income to be reported
      at
      amounts that include the amounts attributable to both the parent and the
      noncontrolling interest. It also requires disclosure, on the face of the
      consolidated income statement of income, of the amounts of consolidated net
      income attributable to the parent and to the noncontrolling interest. SFAS
      160
      is effective at the beginning of the company’s first fiscal year after December
      15, 2008. Management does not expect that SFAS 160 will have a material impact
      on the Company’s results of operations or financial position.


-
          11 -





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





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


-
          12 -


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





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





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





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





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





**Application
      of Critical Accounting Policies**





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


-
          13 -




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


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





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





**Forward-Looking
      Information**





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


-
          14 -





**RESULTS
      OF OPERATIONS**





**General**





For
      the
      three- and six-month periods ended June 30, 2008, we reported net income of
      $483,321, or $0.62 per share, and $1,393,278, or $1.77 per share, respectively,
      compared to $1,004,089, or $1.27 per share, and $2,203,786, or $2.79 per share,
      respectively, for the same periods in 2007. The decreases for the three months
      (51.86%) and six months (36.78%) ended June 30, 2008 over the same periods
      last
      year resulted primarily from decreased net interest income and increased loan
      loss reserve. The insurance Agency produced a net loss of $46,893 for the
      three-month period ended June 30, 2008 and net income of $89,370 for the
      six-month period ended June 30, 2008. The Insurance Agency received its annual
      contingent sales commission during the first quarter of 2008 which increased
      income. The Insurance Agency disbursed agent’s commissions during the second
      quarter of 2008, which reduced income for that quarter.





**Net
      Interest Income**





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





The
      key
      performance measure for net interest income is the “net margin on
      interest-earning assets,” or net interest income divided by average
      interest-earning assets. The Company’s net interest margin for the six-month
      period ended June 30, 2008 was 4.16%, compared to 4.67% for the same period
      in
      2007. The net margin may decline if competition increases, loan demand
      decreases, or the cost of funds rises faster than the return on loans and
      securities. Although these expectations are based on management’s judgment,
      actual results may be impacted by a number of unpredictable factors and cannot
      be assured.





Net
      interest income for the three-month period ended June 30, 2008 was $2,439,290,
      which represents a decrease of $262,831 or 9.73% over net interest income for
      the same period in 2007. Net interest income for the six-month period ended
      June
      30, 2008 was $4,954,234, which represents a decrease of $424,213 or 7.89% over
      the net interest income for the first six months of 2007. The primary
      contributor to this decrease was lower interest rates on loans and deposits
      in
      other banks. This was a direct result of a reduction in the federal funds rate
      from 4.25% at December 31, 2007 to 2.00% at June 30, 2008. The 225 basis-point
      reduction in interest rates by the Federal Reserve in the first six months
      of
      2008 had a significant and immediate impact on the overall yield on earning
      assets, while reductions on the rates we pay on deposit have lagged due to
      certificate of deposit rates that do not re-price until the certificate
      matures.





Interest
      revenue for the three and six months ended June 30, 2008 totaled $3,923,178
      and
      $8,088,215, respectively, compared to $4,339,542 and $8,580,567, respectively,
      for the same periods last year, representing decreases of $416,364 or 9.59%
      and
      $492,352 or 5.74%, respectively. Although our average loan balances have
      increased by $5,021,073 (net of the allowance for loan losses) when compared
      to
      the first six months of 2007, we experienced a $491,586 decrease in interest
      income earned on loans primarily because of the aforementioned rate reductions.


-
          15 -





Interest
      expense for the three- and six-month periods ended June 30, 2008 totaled
      $1,483,888 and $3,133,981, respectively, compared to $1,637,421 and $3,202,120,
      respectively, for the same periods last year, representing decreases of $153,533
      or 9.38% and $68,139 or 2.13%, respectively. Since loan balances have decreased
      slightly during the first six months of 2008, the Company was able to decrease
      its Federal Home Loan Bank (“FHLB”) borrowings from $53,000,000 at December 31,
      2007 to $46,000,000 at June 30, 2008, resulting in a decrease in borrowed funds
      interest expense for the first six months of 2008 of $95,010 when compared
      to
      the same period last year. Advances from the FHLB were $54,700,000 at June
      30,
      2007. The Company assumed approximately $450,000 of debt in connection with
      the
      acquisition of the Insurance Subsidiary. This debt has been reduced to $180,561
      at June 30, 2008.


-
          16 -


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





**Average
      Balances, Interest, and Yield**


For the Six Months Ended
                June 30, 2008
              
              For the Six Months Ended
                June 30, 2007Average
                Balance
              
              Interest
              
              Yield
              
              Average
                Balance
              
              Interest
              
              Yield**Assets**Federal
                  funds sold
              
              $
              5,141,860
              
              $
              70,381
              
              
              2.75
              %
              $
              1,736,500
              
              $
              47,322
              
              
              5.50
              %Interest-bearing
                  deposits
              
              
              1,001,081
              
              
              13,408
              
              
              2.69
              %
              
              308,734
              
              
              6,581
              
              
              4.30
              %Investment
                  securities:U.S.government
                  agency
              
              
              17,409,771
              
              
              417,321
              
              
              4.82
              %
              
              18,867,894
              
              
              458,068
              
              
              4.90
              %Other
              
              
              0
              
              
              0
              
              
              0.00
              %
              
              27,095
              
              
              266
              
              
              1.98
              %FHLB
                  of Atlanta Stock
              
              
              2,763,875
              
              
              90,668
              
              
              6.60
              %
              
              2,783,857
              
              
              81,430
              
              
              5.90
              %Total
                  investment securities
              
              
              20,173,646
              
              
              507,989
              
              
              5.06
              %
              
              21,678,846
              
              
              539,764
              
              
              5.02
              %Loans:Demand
                  and time
              
              
              41,213,835
              
              
              1,403,895
              
              
              6.85
              %
              
              42,589,710
              
              
              1,954,167
              
              
              9.25
              %Mortgage
              
              
              172,835,017
              
              
              5,962,687
              
              
              6.94
              %
              
              165,651,855
              
              
              5,885,092
              
              
              7.16
              %Installment
              
              
              4,608,113
              
              
              189,553
              
              
              8.27
              %
              
              4,814,429
              
              
              206,245
              
              
              8.64
              %Total
                  loans
              
              
              218,656,965
              
              
              7,556,135
              
              
              6.95
              %
              
              213,055,994
              
              
              8,045,504
              
              
              7.62
              %Allowance
                  for loan losses
              
              
              2,402,319
              
              
              
              
              
              
              
              
              1,822,421Total
                  loans, net of allowance
              
              
              216,254,646
              
              
              7,556,135
              
              
              7.03
              %
              
              211,233,573
              
              
              8,045,504
              
              
              7.68
              %Total
                  interest-earning assets
              
              
              242,571,233
              
              
              8,147,913
              
              
              6.75
              %
              
              234,957,653
              
              
              8,639,171
              
              
              7.41
              %Non-interest-bearing
                  cash
              
              
              4,841,992
              
              
              
              
              
              
              
              
              4,527,840Premises
                  and equipment
              
              
              6,001,812
              
              
              
              
              
              
              
              
              4,979,554Other
                  assets
              
              
              4,664,581
              
              
              
              
              
              
              
              
              3,531,185Total
                  assets
              
              $
              258,079,618
              
              
              
              
              
              
              
              $
              247,996,232Liabilities
                  and Stockholders’ EquityInterest-bearing
                  DepositsSavings
                  and NOW deposits
              
              $
              36,604,766
              
              
              57,250
              
              
              0.31
              %
              $
              37,444,809
              
              
              107,638
              
              
              0.58
              %Money
                  market and supernow
              
              
              17,374,889
              
              
              95,959
              
              
              1.11
              %
              
              16,241,553
              
              
              122,553
              
              
              1.52
              %Other
                  time deposits
              
              
              79,891,507
              
              
              1,674,687
              
              
              4.22
              %
              
              73,674,015
              
              
              1,573,865
              
              
              4.31
              %Total
                  interest-bearing deposits
              
              
              133,871,162
              
              
              1,827,896
              
              
              2.75
              %
              
              127,360,377
              
              
              1,804,056
              
              
              2.86
              %Borrowed
                  funds
              
              
              59,604,508
              
              
              1,306,085
              
              
              4.41
              %
              
              61,755,156
              
              
              1,398,064
              
              
              4.57
              %Total
                  interest-bearing liabilities
              
              
              193,475,670
              
              
              3,133,981
              
              
              3.26
              %
              
              189,115,533
              
              
              3,202,120
              
              
              3.41
              %Noninterest-bearing
                  deposits
              
              
              33,514,276
              
              
              
              
              
              
              
              
              30,611,574226,989,946
              
              
              
              
              
              
              
              
              219,727,107Other
                  liabilities
              
              
              2,063,435
              
              
              
              
              
              
              
              
              2,289,309Stockholders’
                  equity
              
              
              29,026,237
              
              
              
              
              
              
              
              
              25,979,816Total
                  liabilities and stockholders equity
              
              $
              258,079,618
              
              
              
              
              
              
              
              $
              247,996,232Net
                  interest spread
              
              
              
              
              
              
              
              
              3.49
              %
              
              
              
              
              
              
              
              4.00
              %Net
                  interest income
              
              
              
              
              $
              5,013,932
              
              
              
              
              
              
              
              $
              5,437,051Net
                  margin on interest-earning assets
              
              
              
              
              
              
              
              
              4.16
              %
              
              
              
              
              
              
              
              4.67
              %




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


-
          17 -


**Noninterest
      Revenue**





Noninterest
      revenue for the three- and six-month periods ended June 30, 2008 totaled
      $550,128 and $1,322,169, respectively, which represent a decrease of 3.95%
      and
      an increase of 3.65% over $572,779 and $1,275,588, respectively, for the same
      periods in 2007. The
      six-month increase resulted from a $22,286 or 3.49% increase in commission
      income earned by the Insurance Agency during the first six months of 2008.
      In
      addition, we experienced an increase in deposit service charges of $18,989
      or
      4.02% during the first six months of 2008 when compared to the same period
      of
      2007 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 $1,741,289 and $3,465,702 for the three-
      and six-month periods ended June 30, 2008, respectively, compared to $1,633,659
      and $3,091,469, respectively, for the same periods in 2007, representing
      increases of $107,630 or 6.59% and $374,233 or 12.11%, respectively, The
      increases are mainly attributable to increased salaries and employee benefits
      of
      $255,607 for the first six months of 2008, which is primarily due to our new
      branch in Church Hill, which opened in August of 2007. All noninterest expenses
      increased as the result of increased cost of operations at all branches due
      to
      rising fuel and energy costs.





**Income
      Tax Expense**





The
      Company’s effective tax rate for the three- and six-month periods ended June 30,
      2008 was 37.1% and 37.0%, respectively, when compared to 37.7% and 37.6% for
      the
      same period in 2007. The Company’s income tax expense was $284,808 and $817,423
      for the three- and six-months ended June 30, 2008, respectively, compared to
      $607,152 and $1,328,780, respectively, for the same periods in 2007. The
      decreases of $322,344 or 53.09% and $511,357 or 38.48% for the three- and
      six-month periods ended June 30, 2008, respectively, when compared the same
      periods in 2007 were comparable to the percentage decreases in income before
      income taxes.





**FINANCIAL
      CONDITION**





**Overview**





Total
      assets at June 30, 2008 were $254,310,933, compared to $261,807,762 at December
      31, 2007, representing a decrease of $7,496,829 or 2.86% over December 31, 2007.





Total
      liabilities at June 30, 2008 were $226,033,889, compared to $233,767,968 at
      December 31, 2007, representing a decrease of $7,734,079 or 3.31%.





Stockholders’
      equity was $28,277,044 as of June 30, 2008, compared to $28,039,794 as of
      December 31, 2007, an increase of $237,250. The increase was due to net income
      for the period totaling $1,393,278 plus an increase in the unrealized gain
      on
      securities available for sale net of income taxes of $7,368, offset by stock
      repurchases of $480,000 and dividends paid to stockholders of
      $683,396. .


-
          18 -


Return
      on
      average equity for the six months ended June 30, 2008 was 9.65%, compared to
      17.11% for the same period in 2007. Return on average assets was 1.09% for
      the
      six months ended June 30, 2008, compared to 1.79% for the same period in
      2007.





**Composition
      of Loan Portfolio**





At
      June
      30, 2008, loans, net of unearned income, were $214,783,650, a decrease of
      $5,642,075 since December 31, 2007. Because loans are expected to produce higher
      yields than investment securities and other interest-earning assets, the
      absolute volume of loans and the volume as a percentage of total earning assets
      is an important determinant of net interest margin. Average loans, net of the
      allowance for loan losses, were $216,254,646 and $211,233,573 during the first
      six months of 2008 and 2007, respectively, which constituted 89.15% and 89.90%
      of average interest-earning assets for the respective periods. For the six
      months ended June 30, 2008, our average loan to deposit ratio was 129.20%,
      compared to 133.72% for the six months ended June 30, 2007. The securities
      sold
      under repurchase agreements function like deposits, with the securities
      providing collateral in place of the FDIC insurance. Our ratio of average loans
      to deposits plus borrowed funds was 95.27% for the six months ended June 30,
      2008, compared to 96.13% for the six months ended June 30, 2007. The Company
      extends credit primarily to customers located in and near the Maryland counties
      of Kent County, Queen Anne’s County, and Cecil County. There are no industry
      concentrations in our loan portfolio. A substantial portion of our loans are,
      however, secured by real estate, and the real estate market in the region will
      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, 2008 was
      adequate to cover possible losses in the loan portfolio identified as of that
      date; however, management's judgment is based upon a number of assumptions
      about
      future events, which are believed to be reasonable, but which may not prove
      valid. Thus, there can be no assurance that charge-offs in future periods will
      not exceed the allowance for loan losses or that additional increases in the
      loan loss allowance will not be required. Because of the current economic
      conditions in our market area and a decline in local real estate values,
      management anticipates that it will add additional reserves to the allowance
      in
      the third and fourth quarters of 2008 to cover potential future losses that
      may
      be identified in those quarters.





For
      significant problem loans, management's review consists of evaluation of the
      financial strength 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. This allowance may be increased to accommodate reserves for specific
      loans identified as substandard during management's loan review. Net recoveries
      and/or decreases in loans may cause the allowance as a percentage of gross
      loans
      to exceed our target. Historically, our regulators have discouraged negative
      provisions, however, management would consider a negative provision if
      warranted.


-
          19 -


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, 2008 and December 31, 2007, the allowance for loan
      losses compared to gross loans was 0.81% and 1.05%, 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 31,2008
              
              2007
              
              2007Balance at
                  beginning of year
              
              $
              2,328,792
              
              $
              1,860,283
              
              $
              1,860,283Loan
                  losses:Commercial
              
              
              1,163,214
              
              
              69,950
              
              
              82,881Mortgages
              
              
              0
              
              
              0
              
              
              0Consumer
              
              
              11,410
              
              
              11,538
              
              
              31,882Total
                  loan losses
              
              
              1,174,624
              
              
              81,488
              
              
              114,763Recoveries
                  on loans previously charged offCommercial
              
              
              1,000
              
              
              0
              
              
              0Mortgages
              
              
              0
              
              
              2,271
              
              
              2,271Consumer
              
              
              2,506
              
              
              912
              
              
              1,001Total
                  loan recoveries
              
              
              3,506
              
              
              3,183
              
              
              3,272Net
                  loan losses
              
              
              1,171,118
              
              
              78,305
              
              
              111,491Provision
                  for loan losses charged to expense
              
              
              600,000
              
              
              30,000
              
              
              580,000Balance
                  at end of year
              
              $
              1,757,674
              
              $
              1,811,978
              
              $
              2,328,792Allowance
                  for loan losses to gross loans outstanding at end of
                  period
              
              
              0.81
              %
              
              0.84
              %
              
              1.05
              %





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
      $7,558,331 and $5,449,838 at June 30, 2008 and December 31, 2007, respectively.
      These loans are detailed below:





**Risk
      Elements of Loan Portfolio**


**June 30, 2008**
              
              **December 31, 2007**Nonaccrual
                  LoansCommercial
              
              $
              1,095,781
              
              $
              2,462,002Mortgage
              
              
              2,342,853
              
              
              415,000Consumer
              
              
              9,170
              
              
              03,447,804
              
              
              2,877,002Accruing
                  Loans Past Due 90 Days or MoreCommercial
              
              
              0
              
              
              396,003Mortgage
              
              
              4,091,341
              
              
              2,162,828Consumer
              
              
              19,186
              
              
              14,0054,110,527
              
              
              2,572,836$
              7,558,331
              
              $
              5,449,838




-
          20 -





Gross
      interest income of $217,363 for the first half of 2008, $59,586 for fiscal
      year
      2007 and $494 for the first half of 2007 would have been recorded if nonaccrual
      loans had been current and performing in accordance with their original terms.
      Interest actually recorded on such loans was $42,395 for the first half of
      2008,
      $663 for fiscal year 2007 and $399 for the first half of 2007.





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





**Deposits
      and Other Interest-Bearing Liabilities**





Average
      interest-bearing deposits increased $6,510,785 or 5.11% to $133,871,162 for
      the
      six months ended June 30, 2008, from $127,360,377 for the same period in 2007.
      Average noninterest-bearing deposits increased $2,902,702 or 9.48% to
      $33,514,276 for the six months ended June 30, 2008, from $30,611,574 for the
      same period in 2007. Average total deposits have increased 5.96% or $9,413,487
      to $167,385,438 for the six months ended June 30, 2008 from $157,971,951 for
      the
      same period in 2007. Borrowings, primarily from the Federal Home Loan Bank
      of
      Atlanta to fund loan demand, decreased to $46,000,000 from $53,000,000 at
      December 31, 2007, a decrease of 13.21%.





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





**Short-Term
      Borrowings**




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





**June 30, 2008**
            
            **December 31, 2007****Amount**
            
            **Rate**
            
            **Amount**
            
            **Rate**Federal
                Home Loan Bank (daily re-price)
            
            $
            0
            
            
            -
            %
            $
            0
            
            
            -
            %Retail
                Repurchase Agreements
            
            
            8,481,263
            
            
            2.14
            %
            
            9,041,476
            
            
            2.85
            %Federal
                Funds Borrowed
            
            
            0
            
            
            -
            %
            
            0
            
            
            -
            %Total
            
            $
            8,481,263
            
            
            
            
            $
            9,041,476


-
          21 -





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 $19,500,000 in unsecured overnight federal funds and
      $5,000,000 in secured overnight federal funds with correspondent banks at June
      30, 2008.





**Liquidity
      and Capital Resources**





Liquidity
      describes our ability to meet financial obligations that arise out of the
      ordinary course of business. Liquidity is needed primarily to fund loans, meet
      depositor withdrawal requirements, and fund current and planned expenditures.
      The Company derives liquidity through increased customer deposits, maturities
      in
      the investment portfolio, loan repayments and income from earning assets. To
      the
      extent that deposits are not adequate to fund customer loan demand, liquidity
      needs can be met in the short-term funds markets through lines of credit
      totaling $24,500,000 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 $49,533,006 of which $46,000,000 has
      been advanced as of June 30, 2008.





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





Risk-based
      capital standards have been supplemented with requirements for a minimum Tier
      1
      capital to assets ratio (leverage ratio). In addition, regulatory agencies
      consider the published capital levels as minimum levels and may require a
      financial institution to maintain capital at higher levels. A comparison of
      the
      Company’s capital ratios as of June 30, 2008 to the minimum ratios required by
      federal banking regulators is presented below.





**Actual**
            
            **Minimum**
              **Requirements**
            
            **To be well**
              **capitalized****Tier
                1 risk-based capital**
            
            
            12.87
            %
            
            4.00
            %
            
            6.00
            %**Total
                risk-based capital**
            
            
            13.69
            %
            
            8.00
            %
            
            10.00
            %**Leverage
                ratio**
            
            
            10.82
            %
            
            4.00
            %
            
            5.00
            %





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





Our
      primary market risk is to interest rate fluctuation and management has
      procedures in place to evaluate and mitigate this risk, both of which are
      discussed in Item 7 of Part II of the Annual Report of Peoples Bancorp, Inc.
      on
      Form 10-K for the year ended December 31, 2007 under the caption “Market Risk
      Management”. Management believes that there have been no material changes in our
      market risks or the procedures used to evaluate and mitigate these risks since
      December 31, 2007. The simulation models that we use to quantify the effect
      a
      hypothetical immediate plus or minus 200 basis point change in rates would
      have
      on net interest income and the fair value of capital produced the following
      results as of June 30, 2008 and December 31, 2007:


-
          22 -





**Immediate Change in Rates****+200**
              **Basis Points**
            
            **+100**
              **Basis Points**
            
            **-100**
              **Basis Points**
            
            **-200**
              **Basis Points**
            
            **Policy**
              **Limit****June
                30, 2008**%
                Change in Net Interest Income
            
            
            5.34
            %
            
            2.71
            %
            
            -3.31
            %
            
            -7.95
            %
            
            ±10
            %%
                Change in Fair Value of Capital
            
            
            5.81
            %
            
            3.15
            %
            
            -3.02
            %
            
            -5.98
            %
            
            ±20
            %**December
                31, 2007**%
                Change in Net Interest Income
            
            
            4.12
            %
            
            2.07
            %
            
            -2.55
            %
            
            -5.62
            %
            
            ±10
            %%
                Change in Fair Value of Capital
            
            
            5.89
            %
            
            2.88
            %
            
            -3.26
            %
            
            -6.50
            %
            
            ±20
            %





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





We
      maintain disclosure controls and procedures that are designed to ensure that
      information required to be disclosed in the reports that Peoples Bancorp, Inc.
      files under the Securities and Exchange Act of 1934 with the Securities and
      Exchange Commission, such as this quarterly report, is recorded, processed,
      summarized and reported within the time periods specified in those rules and
      forms, and that such information is accumulated and communicated to management,
      including the President and Chief Executive Officer (the “CEO”), who also serves
      as the Chief Financial Officer (the “CFO”), to allow for timely decisions
      regarding required disclosure. A control system, no matter how well conceived
      and operated, can provide only reasonable, not absolute, 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, 2008 under the supervision and with the participation of management,
      including the CEO. Based on that evaluation, the Company’s management, including
      the CEO, has concluded that our disclosure controls and procedures are, in
      fact,
      effective at the reasonable assurance level.





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


-
          23 -





**PART
      II - OTHER INFORMATION**




**Item
      1. Legal Proceedings.**





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





**Item
      1A.** **Risk Factors.**





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





**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, 2008:




**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****Period**April 2008
            
            
            0
            
            
            0
            
            
            0
            
            
            0May 2008
            
            
            6,000
            
            $
            80.00
            
            
            6,000
            
            
            29,951June
                2008
            
            
            0
            
            
            0
            
            
            0
            
            
            0**Total**
            
            
            **6,000**
            
            **$**
            **80.00**
            
            
            **6,000**
            
            
            **29,951**





**Note** : **(1)** During
      June of 2007, 3,500 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. 5,000 shares were purchased from Nylon Capital
      Shopping Center, Inc. during May 2008.The husband of director Patricia Joan
      Ozman Horsey is
      the
      President, Treasurer and director of Nylon Capital Shopping Center,
      Inc.


-
          24 -


**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 28, 2008, 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 2008 (“Proposal 2”). The Board of
      Directors submitted these matters to a vote through the solicitation of proxies.





The
      results of Proposal 1 were as follows:





**Nominees**
              **(terms expire 2008)**
            
            **For**
            
            **Against**
            
            **Abstain**
            
            **Broker**
              **Non-Votes**E.
                Jean Anthony.
            
            
            624,757
            
            
            0
            
            
            432
            
            
            4,214Robert
                W. Clark, Jr.
            
            
            624,757
            
            
            0
            
            
            432
            
            
            4,214LaMonte
                E. Cooke
            
            
            624,557
            
            
            200
            
            
            432
            
            
            4,214Gary
                B. Fellows
            
            
            624,757
            
            
            0
            
            
            432
            
            
            4,214Herman
                E. Hill, Jr.
            
            
            624,757
            
            
            0
            
            
            432
            
            
            4,214Patricia
                Joan Ozman Horsey
            
            
            624,157
            
            
            600
            
            
            432
            
            
            4,214P.
                Patrick McClary
            
            
            624,557
            
            
            200
            
            
            432
            
            
            4,214Alexander
                P. Rasin, III
            
            
            622,735
            
            
            2,022
            
            
            432
            
            
            4,214Stefan
                R. Skipp
            
            
            624,757
            
            
            0
            
            
            432
            
            
            4,214Thomas
                G. Stevenson
            
            
            623,857
            
            
            900
            
            
            432
            
            
            4,214Elizabeth
                A. Strong
            
            
            624,757
            
            
            0
            
            
            432
            
            
            4,214William
                G. Wheatley
            
            
            624,757
            
            
            0
            
            
            432
            
            
            4,214





The
      results of Proposal 2 were as follows: 625,023 votes for the proposal; 2,358
      votes against the proposal; 630 abstentions; and 4,214 broker
      non-votes.





**Item
      5. Other Information.**





None.





**Item
      6. Exhibits.**





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


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          25 -


**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 11, 2008
            By:
            /s/
                Thomas G. StevensonThomas
                G. StevensonPresident/Chief
                Executive Officer&
                Chief Financial Officer


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          26 -


**EXHIBIT
      INDEX**





Exhibit
                No.
            
            Description31.1
            
            Certifications
                of the CEO/CFO pursuant to Section 302 of the Sarbanes-Oxley Act
                of 2002
                (filed herewith)32.1
            
            Certifications
                of the CEO/CFO pursuant to Section 906 of the Sarbanes-Oxley Act
                of 2002
                (furnished herewith)


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          27 -