UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549
                         -------------------------------

                                    FORM 10-Q



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

                For the Quarterly Period Ended September 30, 2004

                                       OR

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

               For the transition period from ________ to ________

                         Commission file number 0-22345

                             SHORE BANCSHARES, INC.
             (Exact name of registrant as specified in its charter)

           Maryland                                     52-1974638
- --------------------------------------             ------------------
(State or Other Jurisdiction of                    (I.R.S. Employer
Incorporation or Organization)                       Identification No.)

18 East Dover Street, Easton, Maryland                     21601
- --------------------------------------             ------------------
(Address of Principal Executive Offices)                 (Zip Code)

                                 (410) 822-1400
                                 --------------
               Registrant's Telephone Number, Including Area Code

                                       N/A
                                 --------------
               Former name, former address and former fiscal year,
                         if changed since last report.

Indicate  by check  mark  whether  the  registrant:  (1) has filed  all  reports
required to be filed by Section 13 or 15(d) of the  Securities  Exchange  Act of
1934  during  the  preceding  12 months  (or for such  shorter  period  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
                                                ---      ---

Indicate by checkmark whether the registrant is an accelerated filer (as defined
in Rule 12b-2 of the Exchange Act). Yes  X   No
                                        ---     ---

                      APPLICABLE ONLY TO CORPORATE ISSUERS

Indicate the number of shares  outstanding  of each of the  issuer's  classes of
common  stock,  as  of  the  latest  practicable  date:   5,513,725  issued  and
outstanding shares of common stock as of October 31, 2004.






                                      INDEX


Part I.



Item 1.  Financial Statements                                                           Page

                                                                                  
     Condensed Consolidated Balance Sheets -
         September 30, 2004 (unaudited) and December 31, 2003                              3

     Condensed Consolidated Statements of Income -
         For the three and nine months ended September 30, 2004 and 2003 (unaudited)       4

     Condensed Consolidated Statements of Changes in Stockholders'
         Equity - For the nine months ended September 30, 2004 and 2003
         (unaudited)                                                                       5

     Condensed Consolidated Statements of Cash Flows -
         For the nine months ended September 30, 2004 and 2003 (unaudited)                 6

     Notes to Condensed Consolidated Financial Statements (unaudited)                   7-10

Item 2.  Management's Discussion and Analysis of Financial Condition
         and Results of Operations                                                     11-16

Item 3.  Quantitative and Qualitative Disclosures about Market Risk                       16

Item 4.  Controls and Procedures                                                          17

Part II.

Item 6.  Exhibits                                                                         18

Signatures                                                                                19


                                      -2-




                                     Part I
Item 1.  Financial Statements
                             SHORE BANCSHARES, INC.
                      CONDENSED CONSOLIDATED BALANCE SHEETS
                             (Dollars in Thousands)


                                                                      September 30,      December 31,
ASSETS:                                                                   2004               2003
- -------                                                              ---------------  --------------------
                                                                      (unaudited)
                                                                                    
Cash and due from banks                                                 $ 28,237          $   19,391
Interest bearing deposits with other banks                                   137               9,897
Federal funds sold                                                        13,593              17,443
Investment securities:
   Held-to-maturity, at amortized cost (fair value of $15,595,
   $15,585, respectively)                                                 15,437              15,313
   Available for sale, at fair value                                     118,359             144,368
Loans, less allowance for credit losses ($4,402,
   $4,060, respectively)                                                 571,667             470,895
Insurance premiums receivable                                                195                 845
Premises and equipment, net                                               12,631              11,302
Accrued interest receivable on loans and investment securities             3,295               3,042
Investment in unconsolidated subsidiary                                      843               1,203
Goodwill                                                                   8,626               5,990
Other intangible assets                                                    2,327               1,581
Other assets                                                               4,607               4,109
                                                                     -----------         -----------

   TOTAL ASSETS                                                         $779,954            $705,379
                                                                     ===========         ===========

LIABILITIES:
Deposits:
   Noninterest bearing demand                                           $ 96,081            $ 91,669
   NOW and Super NOW                                                     120,822             103,415
   Certificates of deposit $100,000 or more                               78,814              71,385
   Other time and savings                                                352,662             325,940
                                                                     -----------         -----------
       Total Deposits                                                    648,379             592,409

Short term borrowings                                                     30,825              20,957
Long term debt                                                             5,000               5,000
Other liabilities                                                          3,821               3,486
                                                                     -----------         -----------
   TOTAL LIABILITIES                                                     688,025             621,852
                                                                     -----------         -----------

STOCKHOLDERS' EQUITY:
Common stock, par value $.01; authorized 35,000,000 shares; issued and
   outstanding:
     September 30, 2004      5,513,619
     December 31, 2003       5,400,793                                        55                  54
Additional paid in capital                                                27,971               24,231
Retained earnings                                                         64,028               58,932
Accumulated other comprehensive (loss) income                               (125)                 310
                                                                    ------------          -----------
   TOTAL STOCKHOLDERS' EQUITY                                             91,929               83,527
                                                                    ------------          -----------

TOTAL LIABILITIES & STOCKHOLDERS' EQUITY                                $779,954             $705,379
                                                                    ============          ===========
See accompanying notes to Condensed Consolidated Financial Statements.



                                      -3-



                             SHORE BANCSHARES, INC.
             CONDENSED CONSOLIDATED STATEMENTS OF INCOME (Unaudited)
                (Dollars in thousands, except per share amounts)



                                                           Three months ended September 30,     Nine months ended September 30,
                                                                2004           2003                  2004           2003
                                                                ----           ----                  ----           ----
  INTEREST INCOME
                                                                                                      
    Loans, including fees                                        $8,657        $ 7,072             $23,819        $21,663
    Interest and dividends on investment securities:
       Taxable                                                    1,088            960               3,380          3,107
       Tax-exempt                                                   146            159                 450            448
    Other interest income                                            90            148                 227            390
                                                                  -----        -------            --------       --------

         Total interest income                                    9,981          8,339              27,876         25,608
                                                               --------        -------             -------       --------

  INTEREST EXPENSE
       Certificates of deposit, $100,000 or more                    589            621               1,730          1,939
       Other deposits                                             1,568          1,621               4,608          5,264
       Other interest                                               120            109                 325            332
                                                               --------        -------             -------       --------

         Total interest expense                                   2,277          2,351               6,663          7,535
                                                               --------         ------              ------       --------

  NET INTEREST INCOME                                             7,704          5,988              21,213         18,073
  PROVISION FOR CREDIT LOSSES                                       165             75                 370            235
                                                               --------        -------             -------       --------

  NET INTEREST INCOME AFTER PROVISION FOR
    CREDIT LOSSES                                                 7,539          5,913              20,843         17,838
                                                               --------        -------             -------       --------

NONINTEREST INCOME
    Service charges on deposit accounts                             658            466               1,811          1,421
    Gain (loss) on sale of securities                               (13)            91                   1            449
    Insurance agency commissions                                  1,577          1,354               4,985          4,683
    Other noninterest income                                        492            379               1,447          1,160
                                                               --------        -------             -------       --------

         Total noninterest income                                 2,714          2,290               8,244          7,713
                                                               --------        -------             -------       --------

NONINTEREST EXPENSE
    Salaries and employee benefits                                3,519          3,046              10,167          9,120
    Expenses of premises and equipment                              594            515               1,757          1,490
    Other noninterest expense                                     1,571          1,200               4,559          3,706
                                                               --------        -------             -------       --------

    Total noninterest expense                                     5,684          4,761              16,483         14,316
                                                               --------        -------             -------       --------


  INCOME BEFORE TAXES ON INCOME                                   4,569          3,442              12,604         11,235
  Federal and State income taxes                                  1,634          1,247               4,553          4,063
                                                               --------        -------             -------       --------

  NET INCOME                                                     $2,935         $2,195              $8,051         $7,172
                                                               ========        =======             =======       ========

    Basic earnings per common share                                $.53           $.40               $1.47          $1.33
    Diluted earnings per common share                              $.53           $.40               $1.46          $1.31
    Dividends declared per common share                            $.18           $.18                $.54           $.49

  See accompanying notes to Condensed Consolidated Financial Statements.



                                      -4-




                             SHORE BANCSHARES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (Unaudited)
                             (Dollars in thousands)





                                                                                               Accumulated
                                                                    Additional                    other             Total
                                                         Common       Paid in    Retained     Comprehensive     Stockholders'
                                                          Stock       Capital    Earnings       Income(loss)        Equity
                                                      -------------------            -----------------------------------------------

                                                                                                         
Balances, January 1, 2004                           $       54       $ 24,231        $ 58,932              $310            $83,527

Comprehensive income:
   Net income                                                -              -           8,051                 -              8,051

   Other comprehensive income, net of tax:
   Unrealized loss on available for sale
     securities                                              -              -               -             (435)              (435)
                                                                                                                        ----------

     Total comprehensive income                                                                                              7,616
                                                                                                                        ----------

Shares issued                                                1          3,740               -                 -              3,741

Cash dividends paid $0.54 per share                          -              -         (2,955)                 -            (2,955)
                                                  ------------   ------------    ------------      ------------       ------------

   Balances, September 30, 2004                     $       55       $ 27,971        $ 64,028           $ (125)           $ 91,929
                                                    ==========       ========        ========          ========           ========



Balances, January 1, 2003                           $       54       $ 23,837        $ 52,985            $1,152            $78,028

Comprehensive income:
   Net income                                                -              -           7,172                 -              7,172

   Other comprehensive income, net of tax:
   Unrealized loss on available for sale
     securities                                              -              -               -           (1,144)            (1,144)
                                                                                                                       -----------

     Total comprehensive income                                                                                              6,028
                                                                                                                       -----------

Shares issued                                                -            129               -                 -                129

Cash dividends paid $0.49 per share                          -              -         (2,634)                 -            (2,634)
                                                  ------------   ------------    ------------      ------------       ------------

   Balances, September 30, 2003                     $       54       $ 23,966        $ 57,523              $  8           $ 81,551
                                                    ==========       ========        ========             =====           ========





See accompanying Notes to Condensed Consolidated Financial Statements


                                      -5-




                             SHORE BANCSHARES, INC.
           CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
                             (Dollars in thousands)




                                                                     For the Nine Months Ended September 30,
                                                                         2004                     2003
                                                                    --------------          --------------
CASH FLOWS FROM OPERATING ACTIVITIES:
                                                                                         
   Net Income                                                         $   8,051                $     7,172
   Adjustments to reconcile net income to net cash provided by
   operating activities:
     Depreciation and amortization                                        1,092                      1,152
     Discount accretion on debt securities                                 (90)                       (42)
     Provision for credit losses, net                                       342                       (31)
     Deferred Income Taxes                                                    -                         52
     Gain on sale of securities                                             (1)                      (449)
     Loss on other real estate owned                                          -                          2
     Equity in earnings of unconsolidated subsidiary                       (20)                          -
     Net changes in:
       Insurance premiums receivable                                        649                      (288)
       Accrued interest receivable                                         (21)                        117
       Other assets                                                        (23)                      (214)
       Accrued interest payable on deposits                                (47)                      (160)
       Accrued expenses                                                      69                        108
                                                                    --------------           --------------
       Net cash provided by operating activities                         10,001                      7,419
                                                                    --------------           --------------

CASH FLOWS FROM INVESTING ACTIVITIES:
   Proceeds from maturities and principal payments of securities
     available for sale                                                  52,607                     88,398
   Proceeds from sale of investment securities available for sale        13,931                      8,771
   Purchase of securities available for sale                           (31,224)                  (112,663)
   Proceeds from maturities and principal payments of securities
     held to maturity                                                     1,911                      1,516
   Purchase of securities held to maturity                              (2,056)                    (4,468)
   Net increase in loans                                               (63,267)                   (19,500)
   Purchase of Loans                                                                                 (291)
   Proceeds from sale of loans                                                -                        668
   Purchase of premises and equipment                                   (1,113)                    (3,379)
   Purchase of other real estate owned                                    (117)                          -
   Proceeds from sale of other real estate owned                              -                         52
   Proceeds from sale of investment in unconsolidated subsidiary            380                          -
   Acquisition, net of stock issued                                       (235)                         -
                                                                    --------------           --------------
       Net cash used in investing activities                           (29,183)                   (40,896)
                                                                    --------------           --------------

CASH FLOWS FROM FINANCING ACTIVITIES:
   Net increase in demand, NOW, money market and
     savings deposits                                                     9,887                     51,492
   Net decrease in certificates of deposit                               (2,914)                    (4,922)
   Net increase in securities sold under agreement to repurchase          9,867                      6,744
   Proceeds from issuance of common stock                                   533                        129
   Dividends paid                                                       (2,955)                    (2,634)
                                                                    --------------           --------------
       Net cash provided by financing activities                         14,418                     50,809
                                                                    --------------           --------------

NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS                     (4,764)                    17,332
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD                         46,731                     69,468
                                                                    --------------           --------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD                             $ 41,967                  $  86,800
                                                                    ==============           ==============




See accompanying notes to Condensed Consolidated Financial Statements


                                      -6-





                             Shore Bancshares, Inc.
              Notes to Condensed Consolidated Financial Statements
                                   (Unaudited)

1)   The  consolidated  financial  statements  include  the  accounts  of  Shore
     Bancshares,  Inc. ("the Company") and its subsidiaries with all significant
     intercompany transactions eliminated. The consolidated financial statements
     conform to accounting principles generally accepted in the United States of
     America  and to  prevailing  practices  within the  banking  industry.  The
     accompanying  interim financial  statements are unaudited;  however, in the
     opinion of  management  all  adjustments  necessary  to present  fairly the
     financial position at September 30, 2004, the results of operations for the
     three- and nine-month  periods ended  September 30, 2004 and 2003, and cash
     flows for the nine-month  periods ended  September 30, 2004 and 2003,  have
     been  included.  The amounts as of  December  31,  2003 were  derived  from
     audited  financial  statements.  All  such  adjustments  are  of  a  normal
     recurring  nature.  The results of operations for the three- and nine-month
     periods  ended  September  30, 2004 are not  necessarily  indicative of the
     results to be expected  for the full year.  This  quarterly  report on Form
     10-Q should be read in conjunction with the Company's Annual Report on Form
     10-K, as amended  by  Amendment  No. 1 on Form  10-K/A,  for the year ended
     December 31, 2003.

2)   Year to date basic  earnings  per share is derived by  dividing  net income
     available to common  stockholders by the weighted  average number of common
     shares  outstanding  during the  period.  The  diluted  earnings  per share
     calculation  is derived by  dividing  net  income by the  weighted  average
     number  of  shares  outstanding  during  the  period,   adjusted  for   the
     dilutive   effect  of  outstanding   options   and   warrants.  Information
     relating to the calculation of earnings per share is summarized as follows:


                                           Three Months Ended September 30,
                                           --------------------------------
                                              2004                 2003
                                              ----                 ----
                                         Basic   Diluted      Basic  Diluted
                                         -----------------------------------
                                                    (in thousands)


Net Income                              $2,935   $2,935      $2,195  $2,195
                                         -----    -----       -----   -----

Weighted Average Shares Outstanding      5,513    5,513       5,377   5,377

Dilutive securities                          -       44           -      91
                                         -----    -----       -----   -----

Adjusted weighted average shares         5,513    5,557       5,377   5,468
                                         =====    =====       =====   =====

Net income per common share             $ 0.53   $ 0.53      $ 0.40  $ 0.40
                                         =====    =====       =====   =====


                                            Nine Months Ended September 30,
                                           --------------------------------
                                              2004                 2003
                                              ----                 ----
                                         Basic   Diluted      Basic  Diluted
                                         -----------------------------------
                                                    (in thousands)


Net Income                              $8,051   $8,051      $7,172  $7,172
                                         -----    -----       -----   -----

Weighted Average Shares Outstanding      5,472    5,472       5,375   5,375

Dilutive securities                          -       44           -      91
                                         -----    -----       -----   -----

Adjusted weighted average shares         5,472    5,517       5,375   5,464
                                         =====    =====       =====   =====

Net income per common share             $ 1.47   $ 1.46      $ 1.33  $ 1.31
                                         =====    =====       =====   =====



                                      -7-


Antidilutive  stock options  excluded from the computation of earnings per share
were 4,000 for the three and nine-months ended September 30, 2004. There were no
antidilutive  stock options  excluded from the calculation of earnings per share
for the three months or nine months ended September 30, 2003.


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


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



                                                                              Sept 30,          December 31,
(Dollars in thousands)                                                         2004                 2003
- ------------------------------------------------------------------------------------------------------------

                                                                                            
Impaired loans with valuation allowance                                         $ 432             $   729
Impaired loans with no valuation allowance                                        641                 273
                                                                                -----             -------
     Total impaired loans                                                      $1,073             $ 1,002
                                                                               ======           =========

Allowance for credit losses applicable to impaired loans                        $ 287              $  349
Allowance for credit losses applicable to other than impaired loans             4,115               3,711
                                                                              -------             -------
     Total allowance for credit losses                                         $4,402              $4,060
                                                                               ======              ======

Interest income on impaired loans recorded on the cash basis                   $    9            $     26
                                                                               ======            ========


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

4)   In the  normal  course  of  business,  to meet the  financial  needs of its
     customers,  the  Company's  bank  subsidiaries  are  parties  to  financial

                                      -8-



     instruments  with  off-balance  sheet  risk.  These  financial  instruments
     include  commitments  to extend  credit and standby  letters of credit.  At
     September 30, 2004, total  commitments to extend credit were  approximately
     $117,391,000.  Outstanding letters of credit were approximately  $6,504,000
     at September 30, 2004.

5)   The Company has adopted  the  disclosure-only  provisions  of SFAS No. 123,
     "Accounting for Stock-based  Compensation" and SFAS No. 148 "Accounting for
     Stock-Based  Compensation  - Transition  and  Disclosure",  but applies APB
     Opinion No. 25 and related  interpretations in accounting for its plans. No
     compensation expense related to the plans was recorded during the three-
     month periods ended September 30, 2004 and 2003. If the Company had elected
     to recognize compensation cost based on fair value at the vesting dates for
     awards under the plans  consistent  with the method  prescribed by SFAS No.
     123,  net income and  earnings per share would have been changed to the pro
     forma amounts as follows:



                                                                 Nine-month period Ended September 30,
                                                                     2004                      2003
                                                                  ---------                 ---------
Net income:
                                                                                         
   As reported                                                       $8,051                    $7,172
   Less pro forma stock-based compensation
      expense determined under the fair value
      method, net of related tax effects                               (29)                      (39)
                                                                  ---------                 ---------
Pro forma net income                                                 $8,022                    $7,133
                                                                  ---------                 ---------

Basic net income per share:
   As reported                                                        $1.47                     $1.33
   Pro forma                                                           1.47                      1.33

Diluted earnings per share
   As reported                                                         1.46                     $1.31
   Pro forma                                                           1.45                      1.31


                                                                 Three-month Period Ended September 30,
                                                                     2004                      2003
                                                                  ---------                 ---------
Net income:
   As reported                                                        2,935                    $2,195
   Less pro forma stock-based compensation
      expense determined under the fair value
      method, net of related tax effects                                  -                        -
                                                                  ---------                 ---------
Pro forma net income                                                 $2,935                    $2,195
                                                                  =========                 =========

Basic net income per share:
   As reported                                                        $0.53                     $0.40
   Pro forma                                                           0.53                      0.40

Diluted earnings per share
   As reported                                                         0.53                     $0.40
   Pro forma                                                           0.53                      0.40



The pro forma  amounts are not  representative  of the  effects on reported  net
income for future periods.

6)   Shore Bancshares  operates two primary  businesses:  Community  Banking and
     Insurance  Products and Services.  Through the Community  Banking business,
     the Company  provides  services to consumers  and small  businesses  on the
     Eastern  Shore of Maryland  and  Delaware  through its  14-branch  network.
     Community  banking  activities  include  small  business  services,  retail
     brokerage,  and consumer  banking  products  and  services.  Loan  products
     available to consumers include mortgage, home equity,  automobile,  marine,
     and  installment  loans,  credit  cards and  other  secured  and  unsecured
     personal  lines of  credit.  Small  business  lending  includes  commercial
     mortgages, real estate development loans, equipment and operating loans, as
     well as secured  and  unsecured  lines of credit,  credit  cards,  accounts
     receivable financing arrangements, and merchant card services.

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

                                      -9-




Selected  financial  information  by line of business  for the nine months ended
September 30 is included in the following table:




                                               Community      Insurance products       Parent          Intersegment    Consolidated
(In thousands)                                  banking          and services        Company(a)        Transactions      Total
- -----------------------------------------------------------------------------------------------------------------------------------
2004
                                                                                                          
   Net Interest income                         $  21,212         $      -               $    1              -         $  21,213
   Provision for credit losses                       370                -                    -              -               370
                                               -------------------------------------------------------------------------------------
   Net interest income after provision            20,842                -                    1              -            20,843

   Noninterest income                              3,055            5,148                1,679         (1,638)            8,244
   Noninterest expense                            12,254            4,182                1,685         (1,638)           16,483
                                               -------------------------------------------------------------------------------------
   Income before taxes                            11,643              966                   (5)             -            12,604
   Income tax expense                              4,173              382                   (2)             -             4,553
                                               -------------------------------------------------------------------------------------
   Net income                                  $   7,470             $584               $   (3)             -         $   8,051
                                               -------------------------------------------------------------------------------------

   Intersegment revenue(expense)               $ (1,461)         $  (138)               $ 1,599              -        $       -
   Average assets                              $ 761,981         $  6,527               $ 3,273              -        $ 771,781

2003
   Net Interest income                         $  18,074         $    (14)              $    13              -        $  18,073
   Provision for credit losses                       235                -                     -              -              235
                                               -------------------------------------------------------------------------------------
   Net interest income after provision            17,839              (14)                   13              -           17,838

   Noninterest income                              2,879            4,745                 1,072           (983)           7,713
   Noninterest expense                            10,593            3,750                   956           (983)          14,316
                                               -------------------------------------------------------------------------------------
   Income before taxes                            10,125              981                   129              -           11,235
   Income tax expense                              3,624              388                    51              -            4,063
                                               -------------------------------------------------------------------------------------
   Net income                                  $   6,501         $   $593                    78              -        $   7,172
                                               -------------------------------------------------------------------------------------

   Intersegment revenue(expense)               $    (969)        $    (14)              $   983              -        $       -
   Average assets                              $ 660,503         $  6,393               $   605              -        $ 667,501



(a)  Amount  included in Parent Company in 2004 relates to services  provided to
     subsidiaries by the Company and rental income.


7)   On April 1, 2004, the Company  completed its merger with Midstate  Bancorp,
     Inc., a Delaware bank holding company ("Midstate Bancorp"). Pursuant to the
     merger  agreement,  each  share of common  stock of  Midstate  Bancorp  was
     converted  into the right to receive  (i) $31.00 in cash,  plus (ii) 0.8732
     shares of the common stock of the Corporation, with cash being paid in lieu
     of  fractional  shares at the rate of $33.83 per share.  The  Company  paid
     $2,953,710 in cash and issued 82,786 shares of common stock to stockholders
     of Midstate  Bancorp in connection  with the Merger.  The Company  recorded
     approximately  $2,636,000  of Goodwill  and  $968,000  of other  intangible
     assets as a result of the acquisition.

                                      -10-

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

Introduction
The  following  discussion  and analysis is intended as a review of  significant
factors  affecting  the  financial  condition and results of operations of Shore
Bancshares,  Inc. and its consolidated  subsidiaries for the periods  indicated.
This  discussion and analysis  should be read in conjunction  with the unaudited
consensed  consolidated financial statements and related notes presented in this
report,  as well as the audited  consolidated  financial  statements and related
notes included in the Annual Report of Shore  Bancshares,  Inc. on Form 10-K, as
amended by Amendment No. 1 on Form 10-K/A, for the year ended December 31, 2003.
Unless the context clearly suggests otherwise, references to the Company in this
report are to Shore Bancshares, Inc. and its consolidated subsidiaries.

Shore  Bancshares,  Inc. is the largest  independent  financial  holding company
located on the Eastern Shore of Maryland. It is the parent company of The Talbot
Bank of Easton,  Maryland  located  in Easton,  Maryland  ("Talbot  Bank"),  The
Centreville   National  Bank  of  Maryland  located  in  Centreville,   Maryland
("Centreville  National Bank") and The Felton Bank, located in Felton,  Delaware
("Felton Bank") (collectively,  the "Banks").  The Banks operate 14 full service
branches in Kent,  Queen Anne's,  Talbot,  Caroline and  Dorchester  Counties in
Maryland  and Kent and Sussex  Counties in Delaware.  The Company  offers a full
range of insurance products and services to its customers through The Avon-Dixon
Agency,   LLC,  Elliott  Wilson   Insurance,   LLC,  and  Mubell  Finance,   LLC
(collectively,  the "Insurance Agency") and investment advisory services through
Wye Financial Services,  LLC, all of which are wholly-owned  subsidiaries of the
Company.  The  shares of the  Company's  common  stock are  listed on the Nasdaq
SmallCap Market under the symbol "SHBI."

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

Forward-Looking Information
Portions  of  this  Quarterly  Report  on  Form  10-Q  contain   forward-looking
statements within the meaning of The Private Securities Litigation Reform Act of
1995.  Statements that are not historical in nature,  including  statements that
include  the  words  "anticipate,"  "estimate,"  "should,"  expect,"  "believe,"
"intend,"  and  similar   expressions,   are  expressions  about  the  Company's
confidence,  policies,  and  strategies,  the  adequacy of capital  levels,  and
liquidity and are not  guarantees of future  performance.  Such  forward-looking
statements   involve  certain  risks  and   uncertainties,   including  economic
conditions,  competition  in the  geographic  and  business  areas in which  the
Company operates,  inflation,  fluctuations in interest rates, legislation,  and
governmental  regulation.  These risks and  uncertainties  are described in more
detail  in Item 1 of Part I of the  Company's  Annual  Report on Form  10-K,  as
amended by Amendment No. 1 on Form 10-K/A, for the year ended December 31, 2003,
under the heading "Risk Factors". Actual results may differ materially from such
forward-looking  statements,  and the Company  assumes no  obligation  to update
forward-looking statements at any time.

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

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

Management has significant  discretion in making the adjustments inherent in the
determination  of the provision and  allowance for credit  losses,  including in
connection  with the  valuation  of  collateral,  the  borrower's  prospects  of
repayment,  and in establishing  allowance  factors on the formula allowance and
unallocated  allowance  components  of  the  allowance.   The  establishment  of
allowance  factors is a continuing  exercise,  based on Management's  continuing
assessment  of the  totality  of all  factors,  including,  but not  limited to,

                                      -11-

delinquencies,  loss  history,  trends in volume and terms of loans,  effects of
changes in lending policy, the experience and depth of Management,  national and
local economic trends,  concentrations of credit,  quality of loan review system
and  the  effect  of  external   factors  such  as  competition  and  regulatory
requirements,  and their  impact on the  portfolio,  and  allowance  factors may
change from period to period, resulting in an increase or decrease in the amount
of the provision or allowance,  based upon the same volume and classification of
loans.  Changes in allowance  factors will have a direct impact on the amount of
the provision,  and a corresponding effect on net income. Errors in Management's
perception  and  assessment  of these  factors and their impact on the portfolio
could  result  in the  allowance  not  being  adequate  to cover  losses  in the
portfolio, and may result in additional provisions or charge-offs.

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

OVERVIEW

Net income for the quarter ended September 30, 2004 was  $2,935,000,  or diluted
earnings  per share of $.53,  compared to  $2,195,000,  or diluted  earnings per
share of $.40,  for the third  quarter of 2003.  Net income for the nine  months
ended  September 30, 2004 was  $8,051,000,  compared to $7,172,000  for the same
period in 2003. On a per share basis, diluted earnings for the nine months ended
September 30, 2004 were $1.46,  compared to $1.31 for the same period last year.
Return on average  assets was 1.39% for the first nine months of 2004,  compared
to 1.43% for the same period in 2003. Return on average stockholders' equity was
11.85%  and  11.97%  for the nine  months  ended  September  30,  2004 and 2003,
respectively.

RESULTS OF OPERATIONS

Net Interest Income
Net interest  income for the quarter ended  September 30, 2004  increased  28.7%
totaling  $7,704,000,  compared to $5,988,000 for the same period last year. Net
interest  income for the nine months ended  September 30, 2004  increased  17.4%
totaling  $21,213,000,  a  $3,140,000  increase  over the same period last year.
These  increases  are  attributable  primarily to  increases in earning  assets,
mostly  loans,   and  increases  in  interest  rates  for  the  periods,   which
collectively  resulted in  increased  interest  income.  Total  interest  income
increased  $1,642,000 and $2,268,000 for the three- and nine-month periods ended
September 30, 2004,  respectively,  when compared to the same periods last year.
Approximately  $844,000 and  $1,628,000 of the increases in the Company's  total
interest  income  for the  three  and nine  months  ended  September  30,  2004,
respectively, relate to the interest income of Felton Bank for these periods.

The Company's net interest  margin was 3.98% for the nine months ended September
30,  2004,  which  is 8 basis  points  higher  than one year  ago.  The  Company
continued to increase its volume of earning assets, which averaged  $719,922,000
for the nine months ended  September  30, 2004, as compared to  $627,556,000  at
September  30,  2003.   Approximately  58%  of  the  growth  resulted  from  the
acquisition  of Felton  Bank,  while the balance was the result of loan  growth.
Average loans increased $90,702,000,  totaling $544,145,000,  for the nine-month
period ended  September 30, 2004. The yield on earning assets  declined 29 basis
points to 5.21% for the nine-month period ended September 30, 2004 when compared
to the same period in 2003.

The overall  yield on loans for the nine  months  ended  September  30, 2004 was
5.84%,  compared to 6.39% for the same period of 2003.  The yield on  investment
securities  declined  from 4.02% for the first nine  months of 2003 to 3.67% for
the same  period in 2004,  and the  average  balance  of  investment  securities
increased  $21,498,000 to  $147,584,000  for the nine months ended September 30,
2004 when compared to September 30, 2003.

                                      -12-

Total  interest  expense for the three and nine months ended  September 30, 2004
was  $2,277,000  and  $6,663,000,  respectively.  This  represents a decrease of
$74,000 and $872,000 or 3.15% and 11.6%, respectively, when compared to the same
periods last year.  Interest  expense  attributable to the acquisition of Felton
Bank totaled  $186,000 and $361,000 for the three and  nine-month  periods ended
September 30, 2004,  respectively.  Lower rates paid for certificates of deposit
were the  primary  cause for the overall  decline in interest  expense for these
periods.  The average balance of all categories of deposits increased during the
nine-month  period ended September 30, 2004,  except for Certificates of Deposit
$100,000 or more,  which  declined  $5,036,000.  The decline was the result of a
single  municipal  depositor  moving  certificates  of deposit outside of Talbot
Bank.  The  average  balance  of  interest  bearing  demand  deposits  increased
$9,155,000,  while the average  rate paid for those  deposits  declined 19 basis
points for the nine months ended  September  30, 2004 when  compared to the same
period in 2003. The average balance of all  certificates of deposits,  including
those $100,000 or more, increased $9,645,000 for the nine months ended September
30, 2004 when compared to the same period last year, while the average rate paid
for  certificates  of deposit  decreased 53 basis points to 2.67%. As short-term
interest rates started to increase  during the third quarter so did the customer
demand for more competitive  deposit rates. The payment of higher interest rates
on  certificates  of deposit will cause the average rate paid for those deposits
to increase in the future.

Loans comprised 75.6% and 72.3% of total average earning assets at September 30,
2004 and 2003, respectively.

Analysis of Interest Rates and Interest Differentials.
The following table presents the distribution of the average consolidated
balance sheets, interest income/expense, and annualized yields earned and rates
paid through the first nine months of the year.



                                                          September 30, 2004                         September 30, 2003
                                                          ------------------                         ------------------
                                                       Average    Income      Yield             Average      Income      Yield
(Dollars in thousands)                                 Balance    Expense     Rate              Balance      Expense     Rate
- -----------------------------------------------------------------------------------------------------------------------------
Earning Assets
                                                                                                        
   Investment securities                             $147,584     $4,065       3.67%            $126,086      $3,801      4.02%
   Loans                                              544,145     23,842       5.84%             453,443      21,719      6.39%
   Interest bearing deposits                            6,229         46        .98%              19,271         155      1.07%
   Federal funds sold                                  21,964        182       1.11%              28,756         235      1.09%
                                                   ----------   --------       -----        ------------    --------      -----
   Total earning assets                               719,922     28,135       5.21%             627,556      25,910      5.50%
Noninterest earning assets                             51,859                                     39,945
                                                   ----------                               ------------
Total Assets                                          771,781                                    667,501
                                                   ==========                               ============

Interest bearing liabilities
   Interest bearing deposits                          553,409      6,338       1.53%             484,154       7,203      1.98%
   Short term borrowing                                25,251        137        .72%              23,520         144      0.82%
   Long term debt                                       5,000        188       5.04%               5,000         188      5.03%
                                                   ----------   --------       -----        ------------    --------      -----
   Total interest bearing liabilities                 583,660      6,663       1.52%             512,674       7,535      1.95%
Noninterest bearing liabilities                        97,522                                     74,939
Stockholders' equity                                   90,599                                     79,888
                                                   ----------                               ------------
Total liabilities and stockholders' equity           $771,781                                   $667,501
                                                   ==========                               ============
Net interest spread                                              $21,472       3.69%                         $18,375      3.55%
                                                                ========                                    ========
Net interest margin                                                            3.98%                                      3.90%

<FN>
(1) All  amounts are  reported  on a tax  equivalent  basis  computed  using the
statutory federal income tax rate exclusive of the alternative  minimum tax rate
of 35% and nondeductible interest expense.
(2) Average loan balances include nonaccrual loans.
(3) Interest  income on loans includes  amortized  loan fees, net of costs,  for
each loan category and yield calculations are stated to include all.
</FN>


Noninterest Income

Excluding  gains and losses on sales of securities for the three- and nine-month
periods ended  September 30, 2004,  noninterest  income  increased  $528,000 and
$979,000,   respectively,   when   compared  to  the  same  periods  last  year.
Approximately $88,000 and $159,000 of the increase for the three- and nine-month
periods  ended  September  30, 2004 is related to  noninterest  income of Felton
Bank.  Excluding amounts  attributable to Felton Bank,  $146,000 and $297,000 of
these increases,  respectively,  relate to increased  service charges on deposit
accounts resulting from enhanced services offered to

                                      -13-


customers  as well as to  certain  fee  increases  implemented  during the first
quarter of 2004.  Insurance to agency  commissions  increased  16.5% or $223,000
during the third quarter, resulting in a nine-month increase of 6.4% or $302,000
at  September  30,  2004.  Other  noninterest  income of the  Company  increased
$113,000 and $287,000 for the three and nine-month periods, respectively.

Noninterest Expense
Total noninterest  expense increased  $923,000 and $2,167,000 for the three- and
nine-month periods ended September 30, 2004,  respectively,  from the comparable
periods in 2003.  Operation of Felton Bank represented  $462,000 and $923,000 of
these increases,  respectively.  For the nine months ended  September  30, 2004,
Salaries and Benefits expense increased $1,047,000,  occupancy expense increased
$267,000 and other noninterest expense increased $853,000,  when compared to the
same period in 2003. These increases are due to overall growth of the Company.

Income Taxes
The effective tax rates for the three- and  nine-month  periods ended  September
30, 2004 were 35.7% and 36.2%,  respectively,  which  compare to 36.1% and 36.2%
for the same  periods  last year.  Management  believes  that there have been no
changes in tax law or to the Company's  tax structure  that are likely to have a
material impact on the Company's effective tax rate.

ANALYSIS OF FINANCIAL CONDITION

Loans
Loans,  net of unearned income,  totaled  $576,069,000 at September 30, 2004, an
increase  of  $101,114,000  or 21.3%  since  December  31,  2003.  Approximately
$47,906,000 of the increase is  attributable  to the acquisition of Felton Bank,
with the remaining  growth  concentrated in real estate lending.  Average loans,
net of unearned income, increased $90,702,000 or 20.0% for the nine-months ended
September 30, 2004 totaling $544,145,000, compared to an increase of $33,943,000
or 8.1% for the same period last year, with a total of $453,443,000 at September
30, 2003.

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

The  provision  for credit  losses for the three- and  nine-month  periods ended
September 30, 2004 was $165,000 and $370,000, respectively,  compared to $75,000
and  $235,000 for the same  periods in 2003.  Despite an increase in  nonaccrual
loans, the specific allowance associated with those loans has declined, based on
Management's evaluation of each borrower's ability to repay and the value of the
underlying loan collateral.  The increased  provision is the result of increases
in both the formula allowance and nonspecific  allowance  components.  Growth of
the loan  portfolio and  Management's  assessment of factors used in calculating
the nonspecific  allowance  contributed to the increased provision.  The Company
continues to maintain strong  underwriting  guidelines,  and Management believes
that the local economy remains stable and that collateral  values have increased
as a result of the  strength  of the local real  estate  economy.  Each of these
factors  has  had a  positive  effect  on  the  quality  of the  Company's  loan
portfolio.  The Company's historical charge-off ratios are much lower than those
of similarly  sized  institutions  according  to the most recent FDIC  quarterly
banking profile. During the first nine months of 2004, however, charge-offs have
increased.  Net  charge-offs  were  $454,000  for the  nine-month  period  ended
September  30,  2004,  compared  to  $204,000  for the same  period  last  year.
Nonaccrual loans increased $71,000,  totaling  $1,073,000 at September 30, 2004,
when  compared to December 31, 2003.  Loans past due 90 days and still  accruing
decreased  $285,000 since December 31, 2003,  totaling $843,000 at September 30,
2004. The Company's ratio of nonperforming  assets,  including other real estate
owned  remains low. The  allowance  for credit losses as a percentage of average
loans  declined  from .91% as of September  30, 2003 to .81% as of September 30,
2004.  The decline is  primarily  the result of growth in loans  secured by real
estate,  which Management believes present less risk of loss to the Company than
other types of loans. Based on Management's quarterly evaluation of the adequacy
of the  allowance for credit  losses,  it believes that the allowance for credit
losses and the related provision are adequate at September 30, 2004.

                                      -14-

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

                                                Nine months Ended September 30,
(Dollars in thousands)                               2004            2003
- -------------------------------------------------------------------------------
Allowance balance - beginning of year               $  4,060      $  4,117
Charge-offs:
   Commercial and other                                  448           189
   Real estate                                            50             2
   Consumer                                               92            99
                                                    --------     ---------
     Totals                                              590           290
                                                    --------     ---------
Recoveries:
   Commercial                                             64            32
   Real estate                                            19             4
   Consumer                                               53            50
                                                    --------     ---------
     Totals                                              136           86
                                                    --------     ---------
Net charge-offs:                                        454            204
Allowance of acquired institution                        426             -
Provision for credit losses                              370           235
                                                    --------     ---------
Allowance balance-ending                              $4,402       $ 4,148
                                                    ========     =========

Average loans outstanding during period             $544,145      $453,443
                                                    ========     =========
Net charge-offs (annualized) as a percentage of
   average loans outstanding during period              .11%          .06%
                                                    ========     =========
Allowance for credit losses at period end as a
   percentage of average loans                          .81%          .91%
                                                    ========     =========

Because the Company's loans are predominately secured by real estate, weaknesses
in the local real estate market may have a material adverse effect on collateral
values.  The Company has a  concentration  of contruction  and land  development
loans.  As of September  30, 2004, the balance of such loans was $91,208,000  or
15.8% of total  outstanding  loans,  compared to $36,639,000 or 7.7% at December
31, 2003. The Company does not engage in foreign lending activities.

Nonperforming Assets
The following table summarizes past due and nonperforming assets of the Company
(in thousands):

                                               September 30,    December 31,
Nonperforming Assets:                               2004              2003
                                                -----------       ----------
   Nonaccrual loans                                 1,073            1,002
   Other real estate owned                            117                -
                                                -----------       ----------
                                                    1,190            1,002
   Past due loans still accruing                      843            1,128
                                                -----------       ----------
   Total nonperforming and past due loans          $2,033           $2,130
                                                ===========       ==========

Investment Securities
Investment  securities  declined  $25,885,000 during the nine-month period ended
September  30,  2004 when  compared to December  31,  2003.  The yields on bonds
purchased  during  2004 are much lower  than the  yields on  similar  bonds that
either  matured or were  called  during the first nine  months of the year.  The
average balance of investment  securities was  $147,584,000  for the nine-months
ended September 30, 2004,  compared to $126,086,000 for the same period in 2003.
The tax equivalent yields on investment  securities were 3.67% and 4.02% for the
nine-month periods ended September 30, 2004 and 2003, respectively.

Deposits
Total deposits at September 30, 2004 were $648,379,000, compared to $592,409,000
at December  31,  2003.  Certificates  of deposit of  $100,000 or more  declined
$11,418,000  during the third  quarter as a result of the loss of a  substantial
portion of the accounts of one  municipal  depositor.  Since  December 31, 2003,
however,  certificates of deposit $100,000 or more have increased  $7,429,000 or
10.4% totaling $78,814,000.  Other certificates of deposit increased $11,136,000
since December 31, 2003. A substantial  amount of this growth is attributable to
the acquisition of Felton Bank.

Borrowed Funds
Short-term  borrowings  at September  30, 2004 and 2003  consisted of securities
sold under agreements to repurchase.  The Company also had a convertible advance
from the  Federal  Home Loan Bank of  Atlanta  in the  amount of  $5,000,000  at
September 30, 2004 and 2003. The advance is due in March 2006 and has a one-time
call provision in 2004.

                                      -15-

Liquidity and Capital Resources
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  arrangements  with
correspondent  banks. Talbot Bank and Centreville National Bank are also members
of the Federal Home Loan Bank of Atlanta to which they have  pledged  collateral
sufficient to permit additonal  borrowings of up to approximately $59 million at
September  30,  2004.  Management  is  not  aware  of  any  trends  or  demands,
commitments,  events or uncertainties  that are likely to materially  affect the
Company's ability to maintain liquidity at satisfactory levels.

Total  stockholders'  equity was $91.9  million at  September  30, 2004, a 10.1%
increase since December 31, 2003.  Accumulated other comprehensive income, which
consists solely of net unrealized losses on investment  securities available for
sale,  decreased  $435,000  during this period,  resulting in accumulated  other
comprehensive  loss of $125,000 at September  30, 2004 when compared to December
31, 2003.

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

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

A comparison  of the  Company's  capital ratios as of September 30, 2004 to the
minimum regulatory requirements is presented below:

                                                       Minimum
                                        Actual       Requirements
                                        ------       ------------
   Tier 1 risk-based capital            13.59%           4.00%
   Total risk-based capital             14.36%           8.00%
   Leverage ratio                       10.47%           4.00%

Item 3.  Quantitative and Qualitative Disclosures about Market Risk

The Company's  principal market risk exposure is to fluctuating  interest rates.
The Company utilizes a simulation model to quantify the effect that hypothetical
plus or  minus  200 and 100  basis  point  changes  in rates  would  have on net
interest   income  and  the  fair  value  of  capital.   The  model  takes  into
consideration  the effect of call features of  investments as well as repayments
of loans in periods of declining  rates.  When actual  changes in interest rates
occur, the changes in interest  earning assets and interest bearing  liabilities
may differ from the assumptions used in the model. As of September 30, 2004, the
model produced the following sensitivity profile for net interest income and the
fair value capital:



                                                             Immediate Change in Rates
                                               +200           +100            -100           -200        Policy
                                           Basis Points   Basis Points    Basis Points   Basis Points     Limit
                                           --------------------------------------------------------------------

                                                                                             
% Change in Net Interest Income                 9.54%          5.70%          (7.10)%       (15.67)%      + 25%
                                                                                                          -
% Change in Fair Value of Capital               3.58%          2.59%          (4.77)%       (11.86)%      + 15%
                                                                                                          -



Further  information  regarding  market risk and the  Company's  objectives  and
strategies in managing  market risk is set forth in the Company's  Annual Report
on Form 10-K, as amended by Amendment  No. 1 on Form 10-K/A,  for the year ended
December 31, 2003,  under the caption  "Management's  Discussion and Analysis of
Financial Condition and Results of Operations--Market Risk Management".

                                      -16-



Item 4.  Controls and Procedures

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

An evaluation of the effectiveness of these disclosure  controls as of September
30, 2004 was carried out under the  supervision  and with the  participation  of
Management, including the CEO and the PAO. Based on that evaluation, Management,
including  the CEO and the PAO,  has  concluded  that the  Company's  disclosure
controls and procedures are effective.

During the third quarter of 2004, there was no change in the Company's  internal
control over financial reporting that has materially affected,  or is reasonably
likely to materially  affect,  the  Company's  internal  control over  financial
reporting.



                                      -17-


                                     Part II


Item 6.  Exhibits

         3.1    Shore   Bancshares,   Inc.  Amended  and  Restated  Articles  of
                Incorporation  (incorporated by reference to Exhibit 3.1 on Form
                8-K filed by Shore Bancshares, Inc. on December 14, 2000).

         3.2    Shore   Bancshares,    Inc.   Amended   and   Restated   By-Laws
                (incorporated  by  reference to Exhibit 3.2 on Form 8-K filed by
                Shore Bancshares, Inc. on December 14, 2000).

         10.1   Form  of  Employment   Agreement   with  W.  Moorhead   Vermilye
                (incorporated  by reference  to Appendix  XIII of Exhibit 2.1 on
                Form 8-K filed by Shore Bancshares, Inc. on July 31, 2000).

         10.2   Form of Employment Agreement with Daniel T. Cannon (incorporated
                by reference  to Appendix  XIII of Exhibit 2.1 on Form 8-K filed
                by Shore Bancshares, Inc. on July 31, 2000).

         10.3   Form of Employment  Agreement between Avon Dixon Agency, LLC and
                Kevin P. LaTulip  (incorporated  by reference to Exhibit 10.3 of
                the  Company's  Annual  Report  on Form 10K for the  year  ended
                December 31, 2002).

         10.4   Form  of   Supplemental   Retirement  Plan  Agreement  and  Life
                Insurance Endorsement Method Split Dollar Plan Agreement between
                The  Centreville  National Bank of Maryland and Daniel T. Cannon
                (incorporated  by  reference  to Exhibit  10.4 of the  Company's
                Quarterly  Report on Form  10-Q for the  period  ended  June 30,
                2003).

         10.5   Form of Life  Insurance  Endorsement  Method  Split  Dollar Plan
                Agreement between The Centreville  National Bank of Maryland and
                Daniel T. Cannon  (incorporated  by reference to Exhibit 10.5 of
                the Company's Quarterly Report on Form 10-Q for the period ended
                June 30, 2003).

         10.6   Employment  Agreement  between  The  Avon-Dixon  Agency, LLC and
                Steven Fulwood (incorporated by reference to Exhibit 10.6 of the
                Company's  Quarterly  Report  on  Form 10-Q for the period ended
                June 30, 2004).

         31.1   Certifications  of  the  CEO  pursuant  to  Section  302  of the
                Sarbanes-Oxley Act (filed herewith).

         31.2   Certifications  of  the  PAO  pursuant  to  Section  302  of the
                Sarbanes-Oxley Act (filed herewith).

         32.1   Certifications of the CEO and the Principal  Accounting  Officer
                pursuant to 18 U.S.C. ss. 1350 (furnished herewith)

         99.1   Shore  Bancshares,  Inc. 1998 Employee  Stock  Purchase Plan, as
                amended and restated (incorporated by reference to Appendix A of
                the Company's Definitive Proxy Statement on Schedule 14A for the
                2003 Annual Meeting of Stockholders, filed on March 31, 2003).

         99.2   1998 Stock Option Plan (incorporated by reference from the Shore
                Bancshares,  Inc.  Registration  Statement  on Form S-8 filed on
                September 25, 1998 (Registration No. 333-64319)).

         99.3   Talbot Bancshares, Inc. Employee Stock Option Plan (incorporated
                by  reference  from  the  Shore  Bancshares,  Inc.  Registration
                Statement  on Form S-8  filed on May 4, 2001  (Registration  No.
                333-60214)).



                                      -18-




                                   Signatures

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

                                 Shore Bancshares, Inc.


Date: November 9, 2004           By: /s/ W. Moorhead Vermilye
                                    -----------------------------------------
                                     W. Moorhead Vermilye
                                     President and Chief Executive Officer


Date: November 9, 2004           By:  /s/ Susan E. Leaverton
                                     ----------------------------------------
                                     Susan E. Leaverton, CPA
                                     Treasurer and Principal Accounting Officer


                                      -19-


                                 Exhibit Index

Exhibit No.     Description
- -----------     ------------

3.1             Shore   Bancshares,   Inc.  Amended  and  Restated  Articles  of
                Incorporation  (incorporated by reference to Exhibit 3.1 on Form
                8-K filed by Shore Bancshares, Inc. on December 14, 2000).

3.2             Shore   Bancshares,    Inc.   Amended   and   Restated   By-Laws
                (incorporated  by  reference to Exhibit 3.2 on Form 8-K filed by
                Shore Bancshares, Inc. on December 14, 2000).

10.1            Form  of  Employment   Agreement   with  W.  Moorhead   Vermilye
                (incorporated  by reference  to Appendix  XIII of Exhibit 2.1 on
                Form 8-K filed by Shore Bancshares, Inc. on July 31, 2000).

10.2            Form of Employment Agreement with Daniel T. Cannon (incorporated
                by reference  to Appendix  XIII of Exhibit 2.1 on Form 8-K filed
                by Shore Bancshares, Inc. on July 31, 2000).

10.3            Form of Employment  Agreement between Avon Dixon Agency, LLC and
                Kevin P. LaTulip  (incorporated  by reference to Exhibit 10.3 of
                the  Company's  Annual  Report  on Form 10K for the  year  ended
                December 31, 2002).

10.4            Form  of   Supplemental   Retirement  Plan  Agreement  and  Life
                Insurance Endorsement Method Split Dollar Plan Agreement between
                The  Centreville  National Bank of Maryland and Daniel T. Cannon
                (incorporated  by  reference  to Exhibit  10.4 of the  Company's
                Quarterly  Report on Form  10-Q for the  period  ended  June 30,
                2003).

10.5            Form of Life  Insurance  Endorsement  Method  Split  Dollar Plan
                Agreement between The Centreville  National Bank of Maryland and
                Daniel T. Cannon  (incorporated  by reference to Exhibit 10.5 of
                the Company's Quarterly Report on Form 10-Q for the period ended
                June 30, 2003).

10.6            Employment  Agreement  between  The  Avon-Dixon  Agency, LLC and
                Steven Fulwood (incorporated by reference to Exhibit 10.6 of the
                Company's  Quarterly  Report  on  Form 10-Q for the period ended
                June 30, 2004).


31.1            Certifications  of  the  CEO  pursuant  to  Section  302  of the
                Sarbanes-Oxley Act (filed herewith).

31.2            Certifications  of  the  PAO  pursuant  to  Section  302  of the
                Sarbanes-Oxley Act (filed herewith).

32.1            Certifications of the CEO and the Principal  Accounting  Officer
                pursuant to 18 U.S.C. ss. 1350 (furnished herewith).

99.1            Shore  Bancshares,  Inc. 1998 Employee  Stock  Purchase Plan, as
                amended and restated (incorporated by reference to Appendix A of
                the Company's Definitive Proxy Statement on Schedule 14A for the
                2003 Annual Meeting of Stockholders, filed on March 31, 2003).

99.2            1998 Stock Option Plan (incorporated by reference from the Shore
                Bancshares,  Inc.  Registration  Statement  on Form S-8 filed on
                September 25, 1998 (Registration No. 333-64319)).

99.3            Talbot Bancshares, Inc. Employee Stock Option Plan (incorporated
                by  reference  from  the  Shore  Bancshares,  Inc.  Registration
                Statement  on Form S-8  filed on May 4, 2001  (Registration  No.
                333-60214)).