**SECURITIES
      AND EXCHANGE COMMISSION**


**WASHINGTON,
      DC 20549**







**FORM
      10-Q**





(Mark
      One)


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





For
      the
      quarterly period ended  March
      31,
      2008


OR


 ̈
            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 0-17706





QNB
      Corp.





(Exact
      Name of Registrant as Specified in Its Charter)





Pennsylvania
            23-2318082(State
                or Other Jurisdiction of Incorporation or Organization)
            (I.R.S.
                Employer Identification No.)15
                North Third Street, Quakertown, PA
            18951-9005(Address
                of Principal Executive Offices)
            (Zip
                Code)





Registrant's
      Telephone Number, Including Area Code (215)
      538-5600





Not
      Applicable





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 þ  No
 ̈





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
      definition of “large accelerated filer,” “accelerated filer” and “smaller
      reporting company” in Rule 12b-2 of the Exchange Act.




Large
                accelerated filer ̈
            Accelerated
                filerþNon-accelerated
                filer ̈
            Smaller
                Reporting Company ̈





Indicate
      by check mark whether the Registrant is a shell company (as defined in Rule
      12b-2 of the Exchange
      Act). Yes   ̈  No  þ





Indicate
      the number of shares outstanding of each of the issuer's classes of common
      stock, as of the latest practicable date.





Class
            
            Outstanding
                at May 6, 2008Common
                Stock, par value $.625
            
            3,134,704







**QNB
      CORP. AND SUBSIDIARY**


**FORM
      10-Q**


**QUARTER
      ENDED MARCH 31, 2008**





**INDEX**





**PAGE****PART
                I - FINANCIAL INFORMATION****ITEM
                1.**
            **CONSOLIDATED
                FINANCIAL STATEMENTS (Unaudited)**
            ****Consolidated
                Balance Sheets at March 31, 2008
              and
                December 31, 2007
            
            1Consolidated
                Statements of Income for the Three
              Months
                Ended March 31, 2008 and 2007
            
            2Consolidated
                Statement of Shareholders’ Equity for the Three
              Months
                Ended March 31, 2008
            
            3Consolidated
                Statements of Cash Flows for the Three
              Months
                EndedMarch
                31, 2008 and 2007
            
            4Notes
                to Consolidated Financial Statements
            
            5**ITEM
                2.**
            **MANAGEMENT'S
                DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
                OPERATIONS**
            
            15**ITEM
                3.**
            **QUANTITATIVE
                AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK**
            
            38**ITEM
                4.**
            **CONTROLS
                AND PROCEDURES**
            
            38**PART
                II - OTHER INFORMATION****ITEM
                1.**
            **LEGAL
                PROCEEDINGS**
            
            39**ITEM
                1A.**
            **RISK
                FACTORS**
            
            39**ITEM
                2.**
            **UNREGISTERED
                SALES OF EQUITY SECURITIES AND USE OF PROCEEDS**
            
            39**ITEM
                3.**
            **DEFAULTS
                UPON SENIOR SECURITIES**
            
            39**ITEM
                4.**
            **SUBMISSIONS
                OF MATTERS TO A VOTE OF SECURITY HOLDERS**
            
            39**ITEM
                5.**
            **OTHER
                INFORMATION**
            
            39**ITEM
                6.**
            **EXHIBITS**
            
            39**SIGNATURES****CERTIFICATIONS**







*QNB
        Corp. and Subsidiary*
 
 CONSOLIDATED
        BALANCE SHEETS
 
 (in
                  thousands, except share data)(unaudited)**March
                  31,**
                **2008**
              
              **December
                  31,**
                **2007****Assets**Cash
                  and due from banks
              
              $
              16,364
              
              $
              14,322Federal
                  funds sold
              
              
              441
              
              
              –Total
                  cash and cash equivalents
              
              
              16,805
              
              
              14,322Investment
                  securitiesAvailable-for-sale
                  (amortized cost $194,953 and $189,273)
              
              
              198,170
              
              
              191,552Held-to-maturity
                  (fair value $4,144 and $4,122)
              
              
              3,980
              
              
              3,981Non-marketable
                  equity securities
              
              
              1,022
              
              
              954Loans
                  held-for-sale
              
              
              1,126
              
              
              688Total
                  loans, net of unearned costs
              
              
              379,671
              
              
              381,016Allowance
                  for loan losses
              
              
              (3,411
              )
              
              (3,279
              )Net
                  loans
              
              
              376,260
              
              
              377,737Bank-owned
                  life insurance
              
              
              8,538
              
              
              8,651Premises
                  and equipment, net
              
              
              6,690
              
              
              6,728Accrued
                  interest receivable
              
              
              2,754
              
              
              2,742Other
                  assets
              
              
              2,528
              
              
              2,458Total
                  assets
              
              $
              617,873
              
              $
              609,813**Liabilities**DepositsDemand,
                  non-interest bearing
              
              $
              53,439
              
              $
              50,043Interest-bearing
                  demand
              
              
              89,988
              
              
              97,290Money
                  market
              
              
              48,143
              
              
              49,666Savings
              
              
              44,517
              
              
              42,075Time
              
              
              197,368
              
              
              190,461Time
                  of $100,000 or more
              
              
              71,837
              
              
              64,589Total
                  deposits
              
              
              505,292
              
              
              494,124Short-term
                  borrowings
              
              
              18,736
              
              
              33,990Long-term
                  debt
              
              
              35,000
              
              
              25,000Accrued
                  interest payable
              
              
              2,433
              
              
              2,344Other
                  liabilities
              
              
              2,020
              
              
              1,104Total
                  liabilities
              
              
              563,481
              
              
              556,562**Shareholders'
                  Equity**Common
                  stock, par value $.625 per share;
                authorized
                  10,000,000 shares; 3,241,390 shares issued;
                3,134,704
                  shares outstanding
              
              
              2,026
              
              
              2,026Surplus
              
              
              9,947
              
              
              9,933Retained
                  earnings
              
              
              41,790
              
              
              41,282Accumulated
                  other comprehensive income, net
              
              
              2,123
              
              
              1,504Treasury
                  stock, at cost; 106,686 shares
              
              
              (1,494
              )
              
              (1,494
              )Total
                  shareholders' equity
              
              
              54,392
              
              
              53,251Total
                  liabilities and shareholders' equity
              
              $
              617,873
              
              $
              609,813
  *The
        accompanying notes are an integral part of the unaudited consolidated financial
        statements.*
  Page
            1
  *QNB
        Corp. and Subsidiary*
 
 CONSOLIDATED
        STATEMENTS OF INCOME
 
 (in
                  thousands, except share data)(unaudited)**Three
                  Months Ended March 31,**
              
              **2008**
              
              **2007****Interest
                  Income**Interest
                  and fees on loans
              
              $
              6,173
              
              $
              5,782Interest
                  and dividends on investment securities:Taxable
              
              
              2,095
              
              
              2,219Tax-exempt
              
              
              462
              
              
              437Interest
                  on Federal funds sold
              
              
              42
              
              
              40Interest
                  on interest-bearing balances and other interest income
              
              
              18
              
              
              61Total
                  interest income
              
              
              8,790
              
              
              8,539**Interest
                  Expense**Interest
                  on depositsInterest-bearing
                  demand
              
              
              307
              
              
              492Money
                  market
              
              
              291
              
              
              384Savings
              
              
              42
              
              
              44Time
              
              
              2,210
              
              
              1,917Time
                  of $100,000 or more
              
              
              792
              
              
              659Interest
                  on short-term borrowings
              
              
              171
              
              
              225Interest
                  on long-term debt
              
              
              363
              
              
              720Total
                  interest expense
              
              
              4,176
              
              
              4,441Net
                  interest income
              
              
              4,614
              
              
              4,098Provision
                  for loan losses
              
              
              225
              
              
              75Net
                  interest income after provision for loan losses
              
              
              4,389
              
              
              4,023**Non-Interest
                  Income**Fees
                  for services to customers
              
              
              445
              
              
              424ATM
                  and debit card income
              
              
              219
              
              
              188Income
                  on bank-owned life insurance
              
              
              58
              
              
              64Mortgage
                  servicing fees
              
              
              20
              
              
              25Net
                  gain (loss) on investment securities available-for-sale
              
              
              222
              
              
              (2,498
              )Net
                  gain on sale of loans
              
              
              32
              
              
              21Other
                  operating income
              
              
              388
              
              
              108Total
                  non-interest income
              
              
              1,384
              
              
              (1,668
              )**Non-Interest
                  Expense**Salaries
                  and employee benefits
              
              
              1,963
              
              
              1,858Net
                  occupancy expense
              
              
              340
              
              
              312Furniture
                  and equipment expense
              
              
              289
              
              
              255Marketing
                  expense
              
              
              153
              
              
              156Third
                  party services
              
              
              188
              
              
              161Telephone,
                  postage and supplies expense
              
              
              161
              
              
              126State
                  taxes
              
              
              130
              
              
              122Other
                  expense
              
              
              319
              
              
              332Total
                  non-interest expense
              
              
              3,543
              
              
              3,322Income
                  (loss) before income taxes
              
              
              2,230
              
              
              (967
              )Provision
                  (benefit) for income taxes
              
              
              520
              
              
              (514
              )**Net
                  Income (Loss)**
              
              $
              1,710
              
              $
              (453
              )**Earnings
                  (Loss) Per Share - Basic**
              
              $
              .55
              
              $
              (.14
              )**Earnings
                  (Loss) Per Share - Diluted**
              
              $
              .54
              
              $
              (.14
              )**Cash
                  Dividends Per Share**
              
              $
              .23
              
              $
              .22
 
 *The
        accompanying notes are an integral part of the unaudited consolidated financial
        statements.*
  Page
            2
  *QNB
        Corp. and Subsidiary*
 
 CONSOLIDATED
        STATEMENT OF SHAREHOLDERS' EQUITY
 
 **Accumulated**(in
                  thousands, except share data)
              
              **Number**
              
              **Comprehensive**
              
              **Other**
                **Comprehensive**
              
              **Common**
              
              
              
              **Retained**
              
              **Treasury**(unaudited)
              
              **of
                  Shares**
              
              **Income**
              
              **Income**
              
              **Stock**
              
              **Surplus**
              
              **Earnings**
              
              **Stock**
              
              **Total**Balance,
                  December 31, 2007
              
              
              3,134,704
              
              
              
              
              $
              1,504
              
              $
              2,026
              
              $
              9,933
              
              $
              41,282
              
              $
              (1,494
              )
              $
              53,251Net
                  income
              
              
              –
              
              $
              1,710
              
              
              –
              
              
              –
              
              
              –
              
              
              1,710
              
              
              –
              
              
              1,710Other
                  comprehensive income, net of taxesUnrealized
                  holding gains on investment securities available-for-sale
              
              
              –
              
              
              766
              
              
              –
              
              
              –
              
              
              –
              
              
              –
              
              
              –
              
              
              –Reclassification
                  adjustment for gains included in net income
              
              
              –
              
              
              (147
              )
              
              –
              
              
              –
              
              
              –
              
              
              –
              
              
              –
              
              
              –Other
                  comprehensive income
              
              
              –
              
              
              619
              
              
              619
              
              
              –
              
              
              –
              
              
              –
              
              
              –
              
              
              619Comprehensive
                  income
              
              
              –
              
              $
              2,329
              
              
              –
              
              
              –
              
              
              –
              
              
              –
              
              
              –
              
              
              –Cash
                  dividends paid
                ($.23
                  per share)
              
              
              –
              
              
              
              
              
              –
              
              
              –
              
              
              –
              
              
              (721
              )
              
              –
              
              
              (721
              )Stock-based
                  compensation expense
              
              
              –
              
              
              
              
              
              –
              
              
              –
              
              
              14
              
              
              –
              
              
              –
              
              
              14Cumulative
                  effect of adoption of newaccounting
                  principle - accounting fordeferred
                  compensation aspects of splitdollar
                  life insurance arrangements(EITF
                  06-4)
              
              
              –
              
              
              
              
              
              –
              
              
              –
              
              
              –
              
              
              (481
              )
              
              –
              
              
              (481
              )Balance,
                  March 31, 2008
              
              
              3,134,704
              
              
              
              
              $
              2,123
              
              $
              2,026
              
              $
              9,947
              
              $
              41,790
              
              $
              (1,494
              )
              $
              54,392
 
 *The
        accompanying notes are an integral part of the consolidated financial
        statements.*
  Page
            3
  *QNB
        Corp. and Subsidiary*
 
 CONSOLIDATED
        STATEMENTS OF CASH FLOWS
 
 (in
                  thousands,(unaudited)**Three
                  Months Ended March 31,**
              
              **2008**
              
              **2007****Operating
                  Activities**Net
                  income (loss)
              
              $
              1,710
              
              $
              (453
              )Adjustments
                  to reconcile net income (loss) to net cash provided by operating
                  activitiesDepreciation
                  and amortization
              
              
              201
              
              
              175Provision
                  for loan losses
              
              
              225
              
              
              75Securities
                  (gains) losses, net
              
              
              (222
              )
              
              2,498Gain
                  on sale of equity investment
              
              
              (175
              )
              
              –Net
                  loss on sale of repossessed assets
              
              
              1
              
              
              –Loss
                  on disposal of premises and equipment
              
              
              3
              
              
              –Net
                  gain on sale of loans
              
              
              (32
              )
              
              (21
              )Proceeds
                  from sales of residential mortgages
              
              
              3,278
              
              
              1,537Originations
                  of residential mortgages held-for-sale
              
              
              (3,708
              )
              
              (1,466
              )Income
                  on bank-owned life insurance
              
              
              (58
              )
              
              (64
              )Life
                  insurance (premiums)/proceeds, net
              
              
              171
              
              
              (5
              )Stock-based
                  compensation expense
              
              
              14
              
              
              32Deferred
                  income tax benefit
              
              
              (25
              )
              
              (942
              )Net
                  increase in income taxes payable
              
              
              545
              
              
              400Net
                  increase in accrued interest receivable
              
              
              (12
              )
              
              (51
              )Amortization
                  of mortgage servicing rights and identifiable intangible
                  assets
              
              
              23
              
              
              32Net
                  (accretion) amortization of premiums and discounts on investment
                  securities
              
              
              (83
              )
              
              52Net
                  increase in accrued interest payable
              
              
              89
              
              
              60Increase
                  in other assets
              
              
              (417
              )
              
              (1,277
              )(Decrease)
                  increase in other liabilities
              
              
              (25
              )
              
              144Net
                  cash provided by operating activities
              
              
              1,503
              
              
              726**Investing
                  Activities**Proceeds
                  from maturities and calls of investment securities
                available-for-sale
              
              
              13,728
              
              
              8,434Proceeds
                  from sales of investment securities
                available-for-sale
              
              
              1,122
              
              
              12,638Purchase
                  of investment securities
                available-for-sale
              
              
              (20,223
              )
              
              (8,132
              )Proceeds
                  from sale of equity investment
              
              
              175
              
              
              –Proceeds
                  from redemption of non-marketable equity securities
              
              
              332
              
              
              154Purchase
                  of non-marketable equity securities
              
              
              (400
              )
              
              –Net
                  decrease (increase) in loans
              
              
              1,133
              
              
              (20,046
              )Net
                  purchases of premises and equipment
              
              
              (166
              )
              
              (57
              )Proceeds
                  from sale of repossessed assets
              
              
              86
              
              
              –Net
                  cash used by investing activities
              
              
              (4,213
              )
              
              (7,009
              )**Financing
                  Activities**Net
                  increase in non-interest bearing deposits
              
              
              3,396
              
              
              3,203Net
                  (decrease) increase in interest-bearing non-maturity
                  deposits
              
              
              (6,383
              )
              
              1,016Net
                  increase in time deposits
              
              
              14,155
              
              
              8,026Net
                  decrease in short-term borrowings
              
              
              (15,254
              )
              
              (6,875
              )Proceeds
                  from long-term debt
              
              
              10,000
              
              
              –Repayment
                  of long-term debt
              
              
              –
              
              
              (2,000
              )Cash
                  dividends paid
              
              
              (721
              )
              
              (688
              )Net
                  cash provided by financing activities
              
              
              5,193
              
              
              2,682Increase
                  (decrease) in cash and cash equivalents
              
              
              2,483
              
              
              (3,601
              )Cash
                  and cash equivalents at beginning of year
              
              
              14,322
              
              
              24,103Cash
                  and cash equivalents at end of period
              
              $
              16,805
              
              $
              20,502**Supplemental
                  Cash Flow Disclosures**Interest
                  paid
              
              $
              4,087
              
              $
              4,381Income
                  taxes paid
              
              
              –
              
              
              –Non-Cash
                  TransactionsChange
                  in net unrealized holding losses (gains), net of taxes, on investment
                  securities
              
              
              619
              
              
              1,678Transfer
                  of loans to repossessed assets
              
              
              119
              
              
              48
 
 *The
        accompanying notes are an integral part of the unaudited consolidated financial
        statements.*
 
 Page
            4




**QNB
      CORP. AND SUBSIDIARY**





**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**


**MARCH
      31, 2008 AND 2007, AND DECEMBER 31, 2007**


**(Unaudited)**




**1.
      BASIS OF PRESENTATION**





The
      accompanying unaudited consolidated financial statements include the accounts
      of
      QNB Corp. (the Company) and its wholly-owned subsidiary, QNB Bank (the Bank).
      The consolidated entity is referred to herein as “QNB”. All significant
      intercompany accounts and transactions are eliminated in the consolidated
      financial statements.





These
      consolidated financial statements should be read in conjunction with the audited
      consolidated financial statements and notes thereto included in QNB's
      200 7
      Annual
      Report incorporated in the Form 10-K. Operating results for the three-month
      period ended March 31, 2008 are not necessarily indicative of the results that
      may be expected for the year ending December 31, 2008.





The
      unaudited consolidated financial statements reflect all adjustments which,
      in
      the opinion of management, are necessary for a fair presentation of the results
      of operations for the interim periods and are of a normal and recurring nature.





Tabular
      information, other than share and per share data, is presented in thousands
      of
      dollars.





In
      preparing the consolidated financial statements, management is required to
      make
      estimates and assumptions that affect the reported amounts of assets and
      liabilities at the dates of the consolidated financial statements and the
      reported amounts of revenues and expenses during the reporting periods. Actual
      results could differ from such estimates.





**2.
      STOCK-BASED COMPENSATION** **AND
      SHAREHOLDERS’ EQUITY**





QNB
      sponsors stock-based compensation plans, administered by a committee, under
      which both qualified and non-qualified stock options may be granted periodically
      to certain employees. QNB accounts for all awards granted under stock-based
      compensation plans in accordance with Financial
      Accounting Standards Board (FASB) Statement No. 123R, *Share-Based
      Payment* (FASB
      No.
      123R). Compensation cost has been measured using the fair value of an award
      on
      the grant date and is recognized over the service period, which is usually
      the
      vesting period.





Stock-based
      compensation expense was approximately $14,000 and $32,000 for the three months
      ended March 31, 2008 and 2007, respectively. As
      of
      March 31, 2008, there was approximately $92,000 of unrecognized compensation
      cost related to unvested share-based compensation awards granted that is
      expected to be recognized over the next 33 months.





Options
      are granted to certain employees at prices equal to the market value of the
      stock on the date the options are granted. The
      1998
      Plan authorized the issuance of 220,500 shares. The time period during which
      any
      option is exercisable under the Plan is determined by the committee but shall
      not commence before the expiration of six months after the date of grant or
      continue beyond the expiration of ten years after the date the option is
      awarded. The granted options vest ratably over a three-year period. As of March
      31, 2008, there were 225,058 options granted, 9,994 options cancelled, 37,441
      options exercised and 177,623 options outstanding under this Plan. The 1998
      Plan
      expired on March 10, 2008, therefore no further options can be granted under
      this Plan.




Page
          5


**QNB
      CORP. AND SUBSIDIARY**





**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**


**MARCH
      31, 2008 AND 2007, AND DECEMBER 31, 2007**


**(Unaudited)**





**2.
      STOCK-BASED COMPENSATION** **AND
      SHAREHOLDERS’ EQUITY** **(Continued):**





The
      2005
      Plan authorizes the issuance of 200,000 shares. The terms of the 2005 Plan
      are
      identical to the 1998 Plan, except options expire five years after the grant
      date. As of March 31, 2008, there were 43,700 options granted and outstanding
      under this Plan. The 2005 Plan expires March 15, 2015.





The
      fair
      value of each option is amortized into compensation expense on a straight-line
      basis between the grant date for the option and each vesting date. QNB
      estimated the fair value of stock options on the date of the grant using the
      Black-Scholes option pricing model. The model requires the use of numerous
      assumptions, many of which are highly subjective in nature. The following
      assumptions were used in the option pricing model in determining the fair value
      of options granted during the three-months ended March 31:





2008
            
            2007Options
                grantedRisk-free
                interest rate
            
            
            3.00
            %
            
            4.74
            %Dividend
                yield
            
            
            3.64
            
            
            3.50Volatility
            
            
            18.46
            
            
            15.99Expected
                life
            
            
            5
                yrs.
            
            
            5
                yrs.





The
      risk-free interest rate was selected based upon yields of U.S. Treasury issues
      with a term equal to the expected life of the option being valued. Historical
      information was the primary basis for the selection of the expected dividend
      yield, expected volatility and expected lives of the options.





The
      fair
      market value of options granted in 2008 and 2007 was $2.63 and $3.57,
      respectively.





Stock
      option activity during the three months ended March 31, 2008 was as
      follows:


WeightedAverageWeighted
              
              Remaining
              
              AggregateNumber
                  of
              
              Average
              
              Contractual
              
              IntrinsicOptions
              
              Exercise
                  Price
              
              Term
                  (in yrs.)
              
              ValueOutstanding
                  at January 1, 2008
              
              
              203,923
              
              $
              20.56
              
              
              3.9Exercised
              
              
              -
              
              
              -Granted
              
              
              17,400
              
              
              21.00
              
              
              3.8
              
              $
              479Outstanding
                  at March 31, 2008
              
              
              221,323
              
              $
              20.60Exercisable
                  at March 31, 2008
              
              
              169,123
              
              $
              19.53
              
              
              3.7
              
              $
              479


On
      January 24, 2008, QNB announced that the Board of Directors authorized the
      repurchase of up to 50,000 shares of its common stock in open market or
      privately negotiated transactions. The repurchase authorization does not bear
      a
      termination date. QNB has not repurchased any shares to date under this
      authorization.


Page
          6


**QNB
        CORP. AND SUBSIDIARY**
 
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**
 **MARCH
        31, 2008 AND 2007, AND DECEMBER 31, 2007**
 **(Unaudited)**


**3.
      EARNINGS (LOSS) PER SHARE**





The
      following sets forth the computation of basic and diluted earnings (loss)
      per share:





For
                the Three Months
              Ended
                March 31,2008
            
            2007Numerator
                for basic and diluted earnings
              (loss)
                per share - net income (loss)
            
            $
            1,710
            
            $
            (453
            )Denominator
                for basic earnings per share-
              weighted
                average shares outstanding
            
            
            3,134,704
            
            
            3,128,598Effect
                of dilutive securities - employee
              stock
                options
            
            
            32,272
            
            
            -Denominator
                for diluted earnings per
              share-
                adjusted weighted average
              shares
                outstanding
            
            
            3,166,976
            
            
            3,128,598Earnings
                (loss) per share-basic
            
            $
            .55
            
            $
            (.14
            )Earnings
                (loss) per share-diluted
            
            $
            .54
            
            $
            (.14
            )





There
      were 87,100 stock options that were anti-dilutive for the three-month period
      ended March 31, 2008. These stock options were not included in the above
      calculation. For the three months ended March 31, 2007, the effect of dilutive
      securities related to stock options totaled 46,778 which, when added to the
      average basic shares outstanding totaling 3,128,598, would have resulted in
      average diluted shares outstanding totaling 3,175,376. However, in accordance
      with Statement of Financial Accounting Standards No. 128, *Earnings
      Per Share* ,
      due to
      QNB reporting a net loss for the three months ended March 31, 2007, including
      potential common shares in the denominator of a diluted per share computation
      would result in an anti-dilutive per share amount.


Page
          7


**QNB
        CORP. AND SUBSIDIARY**
 
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**
 **MARCH
        31, 2008 AND 2007, AND DECEMBER 31, 2007**
 **(Unaudited)**


**4.
      COMPREHENSIVE INCOME**





For
      QNB,
      the sole component of other comprehensive income is the unrealized holding
      gains
      and losses on available-for-sale investment securities.





The
      following shows the components and activity of comprehensive income during
      the
      three months ended March 31, 2008 and 2007:





For
                the Three MonthsEnded
                March 31,2008
            
            2007Unrealized
                holding gains arising during the period onsecurities
                available-for-sale (net of tax expense of$(394)
                and $(16), respectively)
            
            $
            766
            
            $
            29Reclassification
                adjustment for (gains) losses includedin
                net income (net of tax expense (tax benefit) of $75and
                $(849), respectively)
            
            
            (147
            )
            
            1,649Net
                change in unrealized gains during the period
            
            
            619
            
            
            1,678Accumulated
                other comprehensive income (loss), beginning of period
            
            
            1,504
            
            
            (815
            )Accumulated
                other comprehensive income, end of period
            
            $
            2,123
            
            $
            863Net
                income (loss)
            
            $
            1,710
            
            $
            (453
            )Other
                comprehensive income, net of tax:Unrealized
                holding gains arising during the period(net
                of tax expense of $(319) and $(865),respectively)
            
            
            619
            
            
            1,678Comprehensive
                income
            
            $
            2,329
            
            $
            1,225




Page
          8




**QNB
      CORP. AND SUBSIDIARY**





**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**


**MARCH
      31, 2008 AND 2007, AND DECEMBER 31, 2007**


**(Unaudited)**




**5.
      FAIR VALUE MEASUREMENTS**





In
      September 2006, the FASB issued FASB No. 157, *Fair
      Value Measurements* ,
      to
      provide consistency and comparability in determining fair value measurements
      and
      to provide for expanded disclosures about fair value measurements. The
      definition of fair value maintains the exchange price notion in earlier
      definitions of fair value but focuses on the exit price of the asset or
      liability. The exit price is the price that would be received to sell the asset
      or paid to transfer the liability adjusted for certain inherent risks and
      restrictions. Expanded disclosures are also required about the use of fair
      value
      to measure assets and liabilities.





The
      following table presents information about QNB’s assets measured at fair value
      on a recurring basis as of March 31, 2008 and indicates the fair value hierarchy
      of the valuation techniques utilized by QNB to determine such fair
      value:





**Quoted Prices**
              **in Active**
              **Markets for**
              **Identical Assets**
              **(Level 1)**
            
            **Significant Other**
              **Observable**
              **Inputs (Level 2)**
            
            **Balance as of**
              **March 31,**
              **2008**Securities
                available-for-sale
            
            $
            4,163
            
            $
            194,007
            
            $
            198,170





As
      required by FASB No. 157, each financial asset and liability must be identified
      as having been valued according to specified level of input, 1, 2 or 3. Level
      1
      inputs are quoted prices (unadjusted) in active markets for identical assets
      or
      liabilities that QNB has the ability to access at the measurement date. Fair
      values determined by Level 2 inputs utilize inputs other than quoted prices
      included in Level 1 that are observable for the asset, either directly or
      indirectly. Level 2 inputs include quoted prices for similar assets in active
      markets, and inputs other than quoted prices that are observable for the asset
      or liability.  Level 3 inputs are unobservable inputs for the asset, and
      include situations where there is little, if any, market activity for the asset
      or liability. In certain cases, the inputs used to measure fair value may fall
      into different levels of the fair value hierarchy. In such cases, the level
      in
      the fair value hierarchy, within which the fair value measurement in its
      entirety falls, has been determined based on the lowest level input that is
      significant to the fair value measurement in its entirety. QNB’s assessment of
      the significance of a particular input to the fair value measurement in its
      entirety requires judgment, and considers factors specific to the asset.





As
      of
      March 31, 2008, QNB did not have any assets measured at fair value on a
      nonrecurring basis. The measurement of fair value should be consistent with
      one
      of the following valuation techniques: market approach, income approach, and/or
      cost approach. The market approach uses prices and other relevant information
      generated by market transactions involving identical or comparable assets or
      liabilities (including a business). For example, valuation techniques consistent
      with the market approach often use market multiples derived from a set of
      comparables. Multiples might lie in ranges with a different multiple for each
      comparable. The selection of where within the range the appropriate multiple
      falls requires judgment, considering factors specific to the measurement
      (qualitative and quantitative). Valuation techniques consistent with the market
      approach include matrix pricing. Matrix pricing is a mathematical technique
      used
      principally to value debt securities without relying exclusively on quoted
      prices for the specific securities, but rather by relying on the securities’
relationship to other benchmark quoted securities. As of March 31, 2008, all
      of
      the financial assets measured at fair value utilized the market
      approach.


Page
          9


**QNB
        CORP. AND SUBSIDIARY**
 
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**
 **MARCH
        31, 2008 AND 2007, AND DECEMBER 31, 2007**
 **(Unaudited)**


**6.
      LOANS**





The
      following table presents loans by category as of March 31, 2008 and December
      31,
      2007:





March
                31,
              2008
            
            December
                31,
              2007Commercial
                and industrial
            
            $
            89,949
            
            $
            88,445Construction
            
            
            26,272
            
            
            23,959Agricultural
            
            
            -
            
            
            25Real
                estate-commercial
            
            
            129,010
            
            
            131,392Real
                estate-residential
            
            
            117,267
            
            
            119,172Consumer
            
            
            4,235
            
            
            4,442Indirect
                lease financing
            
            
            12,782
            
            
            13,431Total
                loans
            
            
            379,515
            
            
            380,866Deferred
                costs
            
            
            156
            
            
            150Total
                loans net of unearned costs
            
            $
            379,671
            
            $
            381,016




**7.
      INTANGIBLE ASSETS**





As
      a
      result of a purchase of deposits in 1997, QNB recorded a deposit premium of
      $511,000. This premium was being amortized, for book purposes, over ten years
      and was reviewed annually for impairment. The net deposit premium intangible
      was
      $0 at both March 31, 2008 and December 31, 2007. Amortization expense for core
      deposit intangibles was $0 and $13,000 for the three-month periods ended March
      31, 2008 and 2007, respectively.





The
      following table reflects the components of mortgage servicing rights as of
      the
      periods indicated:





Three Months Ended
            
            Year EndedMarch 31,
            
            December 31,2008
            
            2007Mortgage
                servicing rights beginning balance
            
            $
            451
            
            $
            472Mortgage
                servicing rights capitalized
            
            
            25
            
            
            49Mortgage
                servicing rights amortized
            
            
            (23
            )
            
            (70
            )Fair
                market value adjustments
            
            
            -
            
            
            -Mortgage
                servicing rights ending balance
            
            $
            453
            
            $
            451Mortgage
                loans serviced for others
            
            $
            69,395
            
            $
            69,194Amortization
                expense of intangibles
            
            $
            23
            
            $
            113




Page
          10




**QNB
        CORP. AND SUBSIDIARY**
 
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**
 **MARCH
        31, 2008 AND 2007, AND DECEMBER 31, 2007**
 **(Unaudited)**


**7.
      INTANGIBLE ASSETS (Continued):**





The
      annual estimated amortization expense of mortgage servicing rights for each
      of
      the five succeeding fiscal years is as follows:





**Estimated
      Amortization Expense**





For
                the Year Ended 12/31/08
            
            $
            95For
                the Year Ended 12/31/09
            
            
            85For
                the Year Ended 12/31/10
            
            
            69For
                the Year Ended 12/31/11
            
            
            55For
                the Year Ended 12/31/12
            
            
            43





**8.
      RELATED PARTY TRANSACTIONS**





As
      of
      March 31, 2008, loans receivable from directors, principal officers, and their
      related interests totaled approximately $4,168,000. All of these transactions
      were made in the ordinary course of business on substantially the same terms,
      including interest rates and collateral, as those prevailing at the time for
      comparable transactions with other persons. Also, they did not involve a more
      than normal risk of collectibility or present any other unfavorable
      features.





**9.
      OFF-BALANCE-SHEET FINANCIAL INSTRUMENTS AND GUARANTEES**





QNB
      is a
      party to financial instruments with off-balance-sheet risk in the normal course
      of business to meet the financing needs of its customers. These financial
      instruments include commitments to extend credit and letters of credit. These
      instruments involve, to varying degrees, elements of credit and interest rate
      risk in excess of the amount recognized in the balance sheets. The Bank's
      exposure to credit loss in the event of nonperformance by the other party to
      the
      financial instrument for commitments to extend credit and letters of credit
      is
      represented by the contractual amount of those instruments. The Bank uses the
      same lending standards and policies in making commitments and conditional
      obligations as it does for on-balance sheet instruments. The activity is
      controlled through credit approvals, control limits and monitoring
      procedures.





A
      summary
      of the Bank's financial instrument commitments is as follows:





March
                31,
              2008
            
            December
                31,
              2007Commitments
                to extend credit and unused lines of credit
            
            $
            77,279
            
            $
            77,264Standby
                letters of credit
            
            
            2,982
            
            
            3,760$
            80,261
            
            $
            81,024




Page
          11




**QNB
        CORP. AND SUBSIDIARY**
 
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**
 **MARCH
        31, 2008 AND 2007, AND DECEMBER 31, 2007**
 **(Unaudited)**


**9.
      OFF-BALANCE-SHEET FINANCIAL INSTRUMENTS AND GUARANTEES
      (Continued)**





Commitments
      to extend credit are agreements to lend to a customer as long as there is no
      violation of any condition established in the commitment. Commitments generally
      have fixed expiration dates or other termination clauses and may require payment
      of a fee. Since some of the commitments are expected to expire without being
      drawn upon, the total commitment amount does not necessarily represent future
      cash requirements. QNB evaluates each customer's creditworthiness on a
      case-by-case basis. The amount of collateral obtained, if deemed necessary
      by
      QNB upon extension of credit, is based on management's credit evaluation of
      the
      customer and generally consists of real estate.





QNB
      does
      not issue any guarantees that would require liability recognition or disclosure,
      other than its standby letters of credit. Standby letters of credit written
      are
      conditional commitments issued to guarantee the performance of a customer to
      a
      third party. Generally, all letters of credit, when issued, have expiration
      dates within one year. The credit risk involved in issuing letters of credit
      is
      essentially the same as those that are involved in extending loan facilities
      to
      customers. The Bank, generally, holds collateral and/or personal guarantees
      supporting these commitments. Management believes that the proceeds obtained
      through a liquidation of collateral and the enforcement of guarantees would
      be
      sufficient to cover the potential amount of future payments required under
      the
      corresponding guarantees. The current amount of the liability as of March 31,
      2008 and December 31, 2007 for guarantees under standby letters of credit issued
      is not material.





**10.
      RECENT ACCOUNTING PRONOUNCEMENTS**





In
      September 2006, the FASB reached consensus on the guidance provided by Emerging
      Issues Task Force Issue 06-4 (EITF 06-4), *Accounting
      for Deferred Compensation and Postretirement Benefit Aspects of Endorsement
      Split-Dollar Life Insurance Arrangements* .
      The
      guidance is applicable to endorsement split dollar life insurance arrangements,
      whereby the employer owns and controls the insurance policy, that are associated
      with a postretirement benefit. EITF 06-4 requires that for a split-dollar life
      insurance arrangement within the scope of the Issue, an employer should
      recognize a liability for future benefits in accordance with FASB No. 106 (if,
      in substance, a postretirement benefit plan exists) or Accounting Principles
      Board Opinion No. 12 (if the arrangement is, in substance, an individual
      deferred compensation contract) based on the substantive agreement with the
      employee. EITF 06-4 is effective for fiscal years beginning after December
      15,
      2007. As a result of adopting this standard, QNB recorded a cumulative effect
      adjustment of $481,000 to retained earnings effective January 1, 2008. In
      addition, the expense recoded in the first quarter of 2008 was approximately
      $8,000.





In
      February 2007, the FASB issued SFAS No. 159, *The
      Fair Value Option for Financial Assets and Financial Liabilities-Including
      an
      amendment of FASB Statement No. 115* .
      SFAS
      No. 159 permits entities to choose to measure many financial instruments and
      certain other items at fair value. Unrealized gains and losses on items for
      which the fair value option has been elected will be recognized in earnings
      at
      each subsequent reporting date. SFAS No. 159 was effective for QNB on January
      1,
      2008. QNB did not elect to measure any items at fair value, therefore the
      adoption of SFAS No. 159 did not have an impact on our consolidated financial
      statements.


Page
          12




**QNB
        CORP. AND SUBSIDIARY**
 
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**
 **MARCH
        31, 2008 AND 2007, AND DECEMBER 31, 2007**
 **(Unaudited)**


**10.
      RECENT ACCOUNTING PRONOUNCEMENTS (Continued)**





In
      June
      2007, the Emerging Issues Task Force (“EITF”) issued EITF Issue No. 06-11, *Accounting
      for Income Tax Benefits of Dividends on Share-Based Payment
      Awards* .
      The
      Issue states that a realized income tax benefit from dividends or dividend
      equivalents that are charged to retained earnings and are paid to employees
      for
      equity classified nonvested equity shares, nonvested equity share units, and
      outstanding equity share options should be recognized as an increase to
      additional paid-in capital. The amount recognized in additional paid-in capital
      for the realized income tax benefit from dividends on those awards should be
      included in the pool of excess tax benefits available to absorb tax deficiencies
      on share-based payment awards. This Issue was effective for fiscal years
      beginning after December 15, 2007, and interim periods within those fiscal
      years. The adoption of EITF Issue No. 06-11 did not have a material impact
      on
      QNB’s consolidated financial statements.





FASB
      Statement No. 141(R) *Business
      Combinations* was
      issued in December of 2007. This Statement establishes principles and
      requirements for how the acquirer of a business recognizes and measures in
      its
      financial statements the identifiable assets acquired, the liabilities assumed,
      and any noncontrolling interest in the acquiree. The Statement also provides
      guidance for recognizing and measuring the goodwill acquired in the business
      combination and determines what information to disclose to enable users of
      the
      financial statements to evaluate the nature and financial effects of the
      business combination. The guidance will become effective as of the beginning
      of
      a corporation’s fiscal year beginning after December 15, 2008. This new
      pronouncement will impact QNB’s accounting for business combinations completed
      beginning January 1, 2009.





In
      December 2007, the FASB issued SFAS No. 160, *Noncontrolling
      Interests in Consolidated Financial Statements* .
      SFAS
      No. 160 amends ARB 51, *Consolidated
      Financial Statements* ,
      to
      establish accounting and reporting standards for the noncontrolling interest
      in
      a subsidiary and for the deconsolidation of a subsidiary. This statement
      clarifies that a noncontrolling interest in a subsidiary is an ownership
      interest in the consolidated entity that should be clearly reported as equity
      in
      the consolidated financial statements. Additionally, SFAS No. 160 requires
      that
      the amount of consolidated net income attributable to the parent and to the
      controlling interests be clearly identified and presented on the face of the
      consolidated statement of income. The provisions of this Statement are effective
      for fiscal years beginning on or after December 15, 2008, and earlier
      application is prohibited. Prospective application of this Statement is
      required, except for the presentation and disclosure requirements which must
      be
      applied retrospectively. QNB is currently assessing the potential impact SFAS
      No. 160 will have on the consolidated financial statements.





In
      February 2008, the FASB issued a FASB Staff Position (FSP) FAS 140-3, *Accounting
      for Transfers of Financial Assets and Repurchase Financing
      Transactions* .
      This
      FSP addresses the issue of whether or not these transactions should be viewed
      as
      two separate transactions or as one "linked" transaction. The FSP includes
      a
      "rebuttable presumption" that presumes linkage of the two transactions unless
      the presumption can be overcome by meeting certain criteria. The FSP will be
      effective for fiscal years beginning after November 15, 2008 and will apply
      only
      to original transfers made after that date; early adoption will not be allowed.
      The Company is currently evaluating the potential impact the new pronouncement
      will have on its consolidated financial statements.


Page
          13




**QNB
        CORP. AND SUBSIDIARY**
 
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**
 **MARCH
        31, 2008 AND 2007, AND DECEMBER 31, 2007**
 **(Unaudited)**


**10.
      RECENT ACCOUNTING PRONOUNCEMENTS (Continued)**





In
      March
      2008, the FASB issued Statement No. 161, *Disclosures
      about Derivative Instruments and Hedging Activities—an amendment of FASB
      Statement No. 133* (Statement 161).  Statement 161 requires entities that utilize
      derivative instruments to provide qualitative disclosures about their objectives
      and strategies for using such instruments, as well as any details of
      credit-risk-related contingent features contained within
      derivatives.  Statement 161 also requires entities to disclose
      additional information about the amounts and location of derivatives located
      within the financial statements, how the provisions of SFAS 133 has been
      applied, and the impact that hedges have on an entity’s financial position,
      financial performance, and cash flows.  Statement 161 is effective for
      fiscal years and interim periods beginning after November 15, 2008, with early
      application encouraged.  QNB is currently evaluating the potential
      impact the new pronouncement will have on its consolidated financial
      statements.





Staff
      Accounting Bulletin No. 109 (SAB 109), *Written
      Loan Commitments Recorded at Fair Value Through Earnings* expresses the views of the staff regarding written loan commitments that are
      accounted for at fair value through earnings under generally accepted accounting
      principles. To make the staff ’s views consistent with current authoritative
      accounting guidance, the SAB revises and rescinds portions of SAB No. 105, *Application
      of Accounting Principles to Loan Commitments* .
      Specifically, the SAB revises the SEC staff ’s views on incorporating expected
      net future cash flows related to loan servicing activities in the fair value
      measurement of a written loan commitment. The SAB retains the staff ’s views on
      incorporating expected net future cash flows related to internally-developed
      intangible assets in the fair value measurement of a written loan commitment.
      The staff expects registrants to apply the views in Question 1 of SAB 109 on
      a
      prospective basis to derivative loan commitments issued or modified in fiscal
      quarters beginning after December 15, 2007. SAB 109 did not have a material
      impact on the Company’s financial statements.





Staff
      Accounting Bulletin No. 110 (SAB 110) amends and replaces Question 6 of Section
      D.2 of Topic 14, *Share-Based
      Payment* ,
      of the
      Staff Accounting Bulletin series. Question 6 of Section D.2 of Topic 14
      expresses the views of the staff regarding the use of the “simplified” method in
      developing an estimate of expected term of “plain vanilla” share options and
      allows usage of the “simplified” method for share option grants prior to
      December 31, 2007. SAB 110 allows public companies which do not have
      historically sufficient experience to provide a reasonable estimate to continue
      use of the “simplified” method for estimating the expected term of “plain
      vanilla” share option grants after December 31, 2007. SAB 110 was effective
      January 1, 2008, and did not have a material impact on QNB’s financial
      statements.


Page
          14




**QNB
        CORP. AND SUBSIDIARY**
 
 **MANAGEMENT'S
        DISCUSSION AND ANALYSIS OF FINANCIAL**
 **CONDITION
        AND RESULTS OF OPERATIONS**
  **ITEM
        2.**  **MANAGEMENT'S
        DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
        OPERATIONS**





QNB
      Corp.
      (the Company) is a bank holding company headquartered in Quakertown,
      Pennsylvania. The Company, through its wholly-owned subsidiary, QNB Bank (the
      Bank), has been serving the residents and businesses of upper Bucks, northern
      Montgomery and southern Lehigh counties in Pennsylvania since 1877. The Bank
      is
      a locally managed community bank that provides a full range of commercial and
      retail banking and retail brokerage services. The consolidated entity is
      referred to herein as “QNB”.





Prior
      to
      December 28, 2007, the Bank was a national banking association organized in
      1877
      as The Quakertown National Bank. As The Quakertown National Bank it was
      chartered under the National Banking Act and was subject to Federal and state
      laws applicable to commercial banks. Effective December 28, 2007, the Bank
      became a Pennsylvania chartered commercial bank and changed its name to QNB
      Bank.





Tabular
      information presented throughout management’s discussion and analysis, other
      than share and per share data, is presented in thousands of dollars.





**Forward-Looking
      Statements**





In
      addition to historical information, this document contains forward-looking
      statements. Forward-looking statements are typically identified by words or
      phrases such as “believe,” “expect,” “anticipate,” “intend,” “estimate,”
“project” and variations of such words and similar expressions, or future or
      conditional verbs such as “will,” “would,” “should,” “could,” “may” or similar
      expressions. The U.S. Private Securities Litigation Reform Act of 1995 provides
      safe harbor in regard to the inclusion of forward-looking statements in this
      document and documents incorporated by reference.





Shareholders
      should note that many factors, some of which are discussed elsewhere in this
      document and in the documents that are incorporated by reference, and including
      the risk factors identified in Item 1A of QNB’s 2007 Form 10-K, could affect the
      future financial results of the Company and its subsidiary and could cause
      those
      results to differ materially from those expressed in the forward-looking
      statements contained or incorporated by reference in this document. These
      factors include, but are not limited, to the following:


·
            Volatility
                in interest rates and shape of the yield
                curve;


·
            Increased
                credit risk;


·
            Operating,
                legal and regulatory risks;


·
            Economic,
                political and competitive forces affecting the Company’s line of business;
                and


·
            The
                risk that the analysis of these risks and forces could be incorrect,
                and/or that the strategies developed to address them could be
                unsuccessful.





QNB
      cautions that these forward-looking statements are subject to numerous
      assumptions, risks and uncertainties, all of which change over time, and QNB
      assumes no duty to update forward-looking statements. Management cautions
      readers not to place undue reliance on any forward-looking statements. These
      statements speak only as of the date made, and they advise readers that various
      factors, including those described above, could affect QNB’s financial
      performance and could cause actual results or circumstances for future periods
      to differ materially from those anticipated or projected. Except as required
      by
      law, QNB does not undertake, and specifically disclaims any obligation, to
      publicly release any revisions to any forward-looking statements to reflect
      the
      occurrence of anticipated or unanticipated events or circumstances after the
      date of such statements.




Page
          15




**QNB
        CORP. AND SUBSIDIARY**
 
 **MANAGEMENT'S
        DISCUSSION AND ANALYSIS OF FINANCIAL**
 **CONDITION
        AND RESULTS OF OPERATIONS**




**Critical
      Accounting Policies and Estimates**





Discussion
      and analysis of the financial condition and results of operations are based
      on
      the consolidated financial statements of QNB, which are prepared in accordance
      with U.S. generally accepted accounting principles (GAAP). The preparation
      of
      these consolidated financial statements requires QNB to make estimates and
      judgments that affect the reported amounts of assets, liabilities, revenues
      and
      expenses, and related disclosures of contingent assets and liabilities. QNB
      evaluates estimates on an on-going basis, including those related to the
      allowance for loan losses, non-accrual loans, other real estate owned,
      other-than-temporary investment impairments, intangible assets, stock option
      plans and income taxes. QNB bases its estimates on historical experience and
      various other factors and assumptions that are believed to be reasonable under
      the circumstances, the results of which form the basis for making judgments
      about the carrying values of assets and liabilities that are not readily
      apparent from other sources. Actual results may differ from these estimates
      under different assumptions or conditions.





QNB
      believes the following critical accounting policies affect its more significant
      judgments and estimates used in preparation of its consolidated financial
      statements: allowance for loan losses, income taxes and other-than-temporary
      investment security impairment. Each estimate is discussed below. The financial
      impact of each estimate is discussed in the applicable sections of Management’s
      Discussion and Analysis.





**Allowance
      for Loan Losses**





QNB
      considers that the determination of the allowance for loan losses involves
      a
      higher degree of judgment and complexity than its other significant accounting
      policies. The allowance for loan losses is calculated with the objective of
      maintaining a level believed by management to be sufficient to absorb probable
      known and inherent losses in the outstanding loan portfolio. The allowance
      is
      reduced by actual credit losses and is increased by the provision for loan
      losses and recoveries of previous losses. The provisions for loan losses are
      charged to earnings to maintain the total allowance for loan losses at a level
      considered necessary by management.





The
      allowance for loan losses is based on management’s continuous review and
      evaluation of the loan portfolio. The level of the allowance is determined
      by
      assigning specific reserves to individually identified problem credits and
      general reserves to all other loans. The portion of the allowance that is
      allocated to internally criticized and non-accrual loans is determined by
      estimating the inherent loss on each credit after giving consideration to the
      value of underlying collateral. The general reserves are based on the
      composition and risk characteristics of the loan portfolio, including the nature
      of the loan portfolio, credit concentration trends, historic and anticipated
      delinquency and loss experience, as well as other qualitative factors such
      as
      current economic trends.





Management
      emphasizes loan quality and close monitoring of potential problem credits.
      Credit risk identification and review processes are utilized in order to assess
      and monitor the degree of risk in the loan portfolio. QNB’s lending and loan
      administration staff are charged with reviewing the loan portfolio and
      identifying changes in the economy or in a borrower’s circumstances which may
      affect the ability to repay debt or the value of pledged collateral. A loan
      classification and review system exists that identifies those loans with a
      higher than normal risk of uncollectibility. Each commercial loan is assigned
      a
      grade based upon an assessment of the borrower’s financial capacity to service
      the debt and the presence and value of collateral for the loan. An independent
      loan review group tests risk assessments and evaluates the adequacy of the
      allowance for loan losses. Management meets monthly to review the credit quality
      of the loan portfolio and quarterly to review the allowance for loan
      losses.


Page
          16




**QNB
        CORP. AND SUBSIDIARY**
 
 **MANAGEMENT'S
        DISCUSSION AND ANALYSIS OF FINANCIAL**
 **CONDITION
        AND RESULTS OF OPERATIONS**




**Critical
      Accounting Policies and Estimates (Continued)**





**Allowance
      for Loan Losses** **(Continued)**


In
      addition, various regulatory agencies, as an integral part of their examination
      process, periodically review QNB’s allowance for loan losses. Such agencies may
      require QNB to recognize additions to the allowance based on their judgments
      about information available to them at the time of their
      examination.





Management
      believes that it uses the best information available to make determinations
      about the adequacy of the allowance and that it has established its existing
      allowance for loan losses in accordance with GAAP. If circumstances differ
      substantially from the assumptions used in making determinations, future
      adjustments to the allowance for loan losses may be necessary, and results
      of
      operations could be affected. Because future events affecting borrowers and
      collateral cannot be predicted with certainty, increases to the allowance may
      be
      necessary should the quality of any loans deteriorate as a result of the factors
      discussed above.





**Income
      Taxes**





QNB
      accounts for income taxes under the asset/liability method. Deferred tax assets
      and liabilities are recognized for the future tax consequences attributable
      to
      differences between the financial statement carrying amounts of existing assets
      and liabilities and their respective tax bases, as well as operating loss and
      tax credit carryforwards. Deferred tax assets and liabilities are measured
      using
      enacted tax rates expected to apply to taxable income in the years in which
      those temporary differences are expected to be recovered or settled. The effect
      on deferred tax assets and liabilities of a change in tax rates is recognized
      in
      income in the period that includes the enactment date. A valuation allowance
      is
      established against deferred tax assets when, in the judgment of management,
      it
      is more likely than not that such deferred tax assets will not become available.
      Because the judgment about the level of future taxable income is dependent
      to a
      great extent on matters that may, at least in part, be beyond QNB’s control, it
      is at least reasonably possible that management’s judgment about the need for a
      valuation allowance for deferred taxes could change in the near
      term.





**Other-than-Temporary
      Impairment of Investment Securities**





Securities
      are evaluated periodically to determine whether a decline in their value is
      other-than-temporary. Management utilizes criteria such as the magnitude and
      duration of the decline, in addition to the reasons underlying the decline,
      to
      determine whether the loss in value is other-than-temporary. The term
“other-than-temporary” is not intended to indicate that the decline is
      permanent, but indicates that the prospects for a near-term recovery of value
      are not necessarily favorable, or that there is a lack of evidence to support
      realizable value equal to or greater than the carrying value of the investment.
      Once a decline in value is determined to be other-than-temporary, the value
      of
      the security is reduced, and a corresponding charge to earnings is recognized.
      QNB recorded an other-than-temporary impairment charge of $2,758,000 as of
      March
      31, 2007. The securities identified as impaired were subsequently sold in April
      2007.


Page
          17




**QNB
        CORP. AND SUBSIDIARY**
 
 **MANAGEMENT'S
        DISCUSSION AND ANALYSIS OF FINANCIAL**
 **CONDITION
        AND RESULTS OF OPERATIONS**


**RESULTS
      OF OPERATIONS - OVERVIEW**





QNB
      earns
      its net income primarily through its subsidiary, QNB Bank. Net interest income,
      or the spread between the interest, dividends and fees earned on loans and
      investment securities and the expense incurred on deposits and other
      interest-bearing liabilities, is the primary source of operating income for
      QNB.
      QNB seeks to achieve sustainable and consistent earnings growth while
      maintaining adequate levels of capital and liquidity and limiting its exposure
      to credit and interest rate risk levels approved by the Board of Directors.
      Due
      to its limited geographic area, comprised principally of upper Bucks, southern
      Lehigh and northern Montgomery counties, growth is pursued through expansion
      of
      existing customer relationships and building new relationships by stressing
      a
      consistent ly
      high
      level of service at all points of contact.





QNB
      reported net income for the first quarter of 2008 of $1,710,000 ,
      or $.54
      per share on a diluted basis. These results compare to a net loss of $(453,000),
      or $(.14) per share on a diluted basis, for the first quarter of
      2007.





The
      results for the first quarter of 2008 continue to reflect the benefits of the
      restructuring transactions executed in April 2007 as well as the positive impact
      of an increase in loans. In April 2007, the Company decided to restructure
      its
      balance sheet by selling approximately $92,000,000 of lower yielding securities,
      that had been identified as other-than-temporarily impaired in the first quarter
      of 2007, and by prepaying $50,000,000 of higher costing Federal Home Loan Bank
      (FHLB) advances. The purpose of the restructuring transactions was to improve
      the Company’s net interest margin on a going-forward basis and to increase net
      interest income and net income.





Net
      interest income for the first quarter of 2008 was $4,614,000, a $516,000, or
      12.6%, increase from net interest income reported for the same period in 2007.
      The net interest margin for the first quarter of 2008 was 3.46% compared to
      3.11% for the first quarter of 2007. Also contributing to the increase in net
      interest income and the net interest margin was the change in mix of earning
      assets as higher yielding loans replaced lower yielding investment securities.
      Average total loans increased 8.3% when comparing the first quarter of 2008
      with
      the first quarter of 2007 while average investment securities decreased 13.1%
      when comparing the same periods.





Positively
      impacting net income for the first quarter of 2008 was the recognition of
      $230,000 of non-interest income as a result of the Visa initial public offering:
      a $175,000 gain related to the mandatory redemption of our shares of restricted
      common stock in Visa, which restricted common stock had been issued to financial
      institution members of Visa in contemplation of Visa’s March 2008 initial public
      offering, and $55,000 of income related to the reversal of liabilities recorded
      in the fourth quarter of 2007 to fund our estimated proportionate share of
      settlements of, or judgments in, indemnified litigation involving Visa. Total
      non-interest income, excluding the Visa items noted above, would have been
      $1,154,000 for the first quarter of 2008. This compares favorably to total
      non-interest income of $1,090,000 for the first quarter of 2007, excluding
      the
      other-than-temporary impairment charge of $2,758,000 recorded in the first
      quarter of 2007. This impairment charge resulted in a reduction of net income
      of
      $1,820,000, or $.57 per share on a diluted basis, for the first quarter of
      2007.





The
      slowdown in the U.S. economy has had a negative impact on both consumers and
      small businesses. This has resulted in an increase in both loan charge-offs
      and
      non-performing loans when comparing the two periods. As a result of these
      factors, as well as the inherent risk related to loan growth, the provision
      for
      loan losses was $225,000 for the first quarter of 2008. The provision for loan
      losses was $75,000 for the first quarter of 2007. Total non-performing loans,
      which represent loans on non-accrual status and loans past due more than 90
      days, were $1,557,000, or .41% of total loans at March 31, 2008 compared with
      $363,000, or .10% of total loans at March 31, 2007. The allowance for loan
      losses of $3,411,000 represents .90% of total loans
      at
      March 31, 2008 compared to an allowance for loan losses of $2,721,000, or .75%
      of total loans at March 31, 2007.


Page
          18




**QNB
        CORP. AND SUBSIDIARY**
 
 **MANAGEMENT'S
        DISCUSSION AND ANALYSIS OF FINANCIAL**
 **CONDITION
        AND RESULTS OF OPERATIONS**


**RESULTS
      OF OPERATIONS – OVERVIEW (Continued)**





Total
      non-interest expense was $3,543,000 for the first quarter of 2008, an increase
      of 6.7% compared to $3,322,000 for the first quarter of 2007. Salary and benefit
      expense increased $105,000, or 5.7%, to $1,963,000 for the first quarter of
      2008. An accrual for incentive compensation contributed $51,000 to the increase.
      Net occupancy and furniture and equipment expense increased $62,000 when
      comparing the two quarters reflecting an increase in depreciation expense and
      maintenance expense.





QNB
      operates in an attractive market for financial services but also a market with
      intense competition from other local community banks and regional and national
      financial institutions. QNB
      has
      been able to compete effectively with other financial institutions by
      emphasizing technology, including internet-banking and electronic bill pay,
      and
      customer service, including local decision-making on loans, the establishment
      of
      long-term customer relationships and customer loyalty, and products and services
      designed to address the specific needs of our customers.





These
      items noted in the foregoing overview, as well as others, will be discussed
      and
      analyzed more thoroughly in the next sections.


Page
          19




**QNB
      CORP. AND SUBSIDIARY**





**MANAGEMENT'S
      DISCUSSION AND ANALYSIS OF FINANCIAL**


**CONDITION
      AND RESULTS OF OPERATIONS**


**Average
        Balances, Rate, and Interest Income and Expense Summary (** ***Tax-Equivalent
        Basis*** **)**
 
 **Three
                  Months Ended****March
                  31, 2008**
              
              **March
                  31, 2007****Average**
              
              **Average**
              
              
              
              **Average**
              
              **Average****Balance**
              
              **Rate**
              
              **Interest**
              
              **Balance**
              
              **Rate**
              
              **Interest****Assets**Federal
                  funds sold
              
              $
              5,832
              
              
              2.91
              %
              $
              42
              
              $
              3,098
              
              
              5.26
              %
              $
              40Investment
                  securities:U.S.
                  Treasury
              
              
              5,125
              
              
              4.12
              %
              
              52
              
              
              5,147
              
              
              4.70
              %
              
              60U.S.
                  Government agencies
              
              
              29,216
              
              
              5.55
              %
              
              405
              
              
              32,578
              
              
              5.53
              %
              
              450State
                  and municipal
              
              
              42,626
              
              
              6.56
              %
              
              700
              
              
              40,020
              
              
              6.61
              %
              
              661Mortgage-backed
                  and CMOs
              
              
              99,271
              
              
              5.59
              %
              
              1,387
              
              
              127,650
              
              
              4.51
              %
              
              1,439Other
              
              
              18,009
              
              
              5.72
              %
              
              258
              
              
              18,155
              
              
              6.13
              %
              
              278Total
                  investment securities
              
              
              194,247
              
              
              5.77
              %
              
              2,802
              
              
              223,550
              
              
              5.17
              %
              
              2,888Loans:Commercial
                  real estate
              
              
              177,897
              
              
              6.72
              %
              
              2,972
              
              
              157,103
              
              
              6.77
              %
              
              2,621Residential
                  real estate
              
              
              21,918
              
              
              6.00
              %
              
              329
              
              
              26,530
              
              
              5.92
              %
              
              393Home
                  equity loans
              
              
              68,301
              
              
              6.30
              %
              
              1,071
              
              
              69,369
              
              
              6.48
              %
              
              1,109Commercial
                  and industrial
              
              
              67,515
              
              
              6.63
              %
              
              1,113
              
              
              55,189
              
              
              7.41
              %
              
              1,008Indirect
                  lease financing
              
              
              13,036
              
              
              10.07
              %
              
              328
              
              
              13,327
              
              
              9.31
              %
              
              310Consumer
                  loans
              
              
              4,362
              
              
              10.64
              %
              
              115
              
              
              4,852
              
              
              10.05
              %
              
              120Tax-exempt
                  loans
              
              
              24,411
              
              
              6.13
              %
              
              372
              
              
              22,210
              
              
              6.13
              %
              
              336Total
                  loans, net of unearned income*
              
              
              377,440
              
              
              6.71
              %
              
              6,300
              
              
              348,580
              
              
              6.86
              %
              
              5,897Other
                  earning assets
              
              
              2,036
              
              
              3.69
              %
              
              18
              
              
              4,257
              
              
              5.83
              %
              
              61Total
                  earning assets
              
              
              579,555
              
              
              6.36
              %
              
              9,162
              
              
              579,485
              
              
              6.22
              %
              
              8,886Cash
                  and due from banks
              
              
              9,994
              
              
              
              
              
              
              
              
              10,856Allowance
                  for loan losses
              
              
              (3,292
              )
              
              
              
              
              
              
              
              (2,733
              )Other
                  assets
              
              
              21,614
              
              
              
              
              
              
              
              
              21,040Total
                  assets
              
              $
              607,871
              
              
              
              
              
              
              
              $
              608,648**Liabilities
                  and Shareholders' Equity**Interest-bearing
                  deposits:Interest-bearing
                  demand
              
              $
              91,333
              
              
              1.35
              %
              $
              307
              
              $
              92,994
              
              
              2.15
              %
              $
              492Money
                  market
              
              
              49,798
              
              
              2.35
              %
              
              291
              
              
              51,531
              
              
              3.02
              %
              
              384Savings
              
              
              42,596
              
              
              0.39
              %
              
              42
              
              
              45,640
              
              
              0.39
              %
              
              44Time
              
              
              194,909
              
              
              4.56
              %
              
              2,210
              
              
              178,467
              
              
              4.36
              %
              
              1,917Time
                  over $100,000
              
              
              68,026
              
              
              4.68
              %
              
              792
              
              
              57,182
              
              
              4.67
              %
              
              659Total
                  interest-bearing deposits
              
              
              446,662
              
              
              3.28
              %
              
              3,642
              
              
              425,814
              
              
              3.33
              %
              
              3,496Short-term
                  borrowings
              
              
              23,948
              
              
              2.87
              %
              
              171
              
              
              25,666
              
              
              3.56
              %
              
              225Long-term
                  debt
              
              
              33,132
              
              
              4.34
              %
              
              363
              
              
              51,911
              
              
              5.55
              %
              
              720Total
                  interest-bearing liabilities
              
              
              503,742
              
              
              3.33
              %
              
              4,176
              
              
              503,391
              
              
              3.58
              %
              
              4,441Non-interest-bearing
                  deposits
              
              
              47,840
              
              
              
              
              
              
              
              
              49,963Other
                  liabilities
              
              
              4,273
              
              
              
              
              
              
              
              
              3,512Shareholders'
                  equity
              
              
              52,016
              
              
              
              
              
              
              
              
              51,782Total
                  liabilities and shareholders' equity
              
              $
              607,871
              
              
              
              
              
              
              
              $
              608,648Net
                  interest rate spread
              
              
              
              
              
              3.03
              %
              
              
              
              
              
              
              
              2.64
              %Margin/net
                  interest income
              
              
              
              
              
              3.46
              %
              $
              4,986
              
              
              
              
              
              3.11
              %
              $
              4,445
 
 Tax-exempt
        securities and loans were adjusted to a tax-equivalent basis and are based
        on
        the marginal Federal corporate tax rate of
        34
        percent.
 Non-accrual
        loans are included in earning assets.
 *
        Includes loans held-for-sale


Page
          20


**QNB
        CORP. AND SUBSIDIARY**
 
 **MANAGEMENT'S
        DISCUSSION AND ANALYSIS OF FINANCIAL**
 **CONDITION
        AND RESULTS OF OPERATIONS**


**Rate/Volume
      Analysis.** The
      following table shows the fully taxable equivalent effect of changes in volumes
      and rates on interest income and interest expense. Changes in net interest
      income that could not be specifically identified as either a rate or volume
      change were allocated to changes in volume.


**Three
        Months Ended**
 **March
        31, 2008 compared**
 **to
        March 31, 2007**
 
 Total
              
              Due
                  to change in:Change
              
              Volume
              
              Rate**Interest
                  income:**Federal
                  funds sold
              
              $
              2
              
              $
              36
              
              $
              (34
              )Investment
                  securities:U.S.
                  Treasury
              
              
              (8
              )
              
              (1
              )
              
              (7
              )U.S.
                  Government agencies
              
              
              (45
              )
              
              (46
              )
              
              1State
                  and municipal
              
              
              39
              
              
              44
              
              
              (5
              )Mortgage-backed
                  and CMOs
              
              
              (52
              )
              
              (321
              )
              
              269Other
              
              
              (20
              )
              
              (2
              )
              
              (18
              )Loans:Commercial
                  real estate
              
              
              351
              
              
              372
              
              
              (21
              )Residential
                  real estate
              
              
              (64
              )
              
              (69
              )
              
              5Home
                  equity loans
              
              
              (38
              )
              
              (7
              )
              
              (31
              )Commercial
                  and industrial
              
              
              105
              
              
              235
              
              
              (130
              )Indirect
                  lease financing
              
              
              18
              
              
              (7
              )
              
              25Consumer
                  loans
              
              
              (5
              )
              
              (11
              )
              
              6Tax-exempt
                  loans
              
              
              36
              
              
              36
              
              
              -Other
                  earning assets
              
              
              (43
              )
              
              (32
              )
              
              (11
              )Total
                  interest income
              
              $
              276
              
              $
              227
              
              $
              49**Interest
                  expense:**Interest-bearing
                  demand
              
              $
              (185
              )
              $
              (5
              )
              $
              (180
              )Money
                  market
              
              
              (93
              )
              
              (11
              )
              
              (82
              )Savings
              
              
              (2
              )
              
              (2
              )
              
              -Time
              
              
              293
              
              
              194
              
              
              99Time
                  over $100,000
              
              
              133
              
              
              131
              
              
              2Short-term
                  borrowings
              
              
              (54
              )
              
              (13
              )
              
              (41
              )Long-term
                  debt
              
              
              (357
              )
              
              (257
              )
              
              (100
              )Total
                  interest expense
              
              $
              (265
              )
              $
              37
              
              $
              (302
              )**Net
                  interest income**
              
              $
              541
              ****
              $
              190
              ****
              $
              351


Page
          21


**QNB
      CORP. AND SUBSIDIARY**





**MANAGEMENT'S
      DISCUSSION AND ANALYSIS OF FINANCIAL**


**CONDITION
      AND RESULTS OF OPERATIONS**


**NET
      INTEREST INCOME**





The
      following table presents the adjustment to convert net interest income to net
      interest income on a fully taxable equivalent basis for the three month periods
      ended March 31, 2008 and 2007.





For the Three MonthsEnded March 31,2008
            
            2007Total
                interest income
            
            $
            8,790
            
            $
            8,539Total
                interest expense
            
            
            4,176
            
            
            4,441Net
                interest income
            
            
            4,614
            
            
            4,098Tax
                equivalent adjustment
            
            
            372
            
            
            347Net
                interest income (fully taxable equivalent)
            
            $
            4,986
            
            $
            4,445





Net
      interest income is the primary source of operating income for QNB. Net interest
      income is interest income, dividends, and fees on earning assets, less interest
      expense incurred on funding sources. Earning assets primarily include loans,
      investment securities and Federal funds sold. Sources used to fund these assets
      include deposits and borrowed funds. Net interest income is affected by changes
      in interest rates, the volume and mix of earning assets and interest-bearing
      liabilities, and the amount of earning assets funded by non-interest bearing
      deposits.





For
      purposes of this discussion, interest income and the average yield earned on
      loans and investment securities are adjusted to a tax-equivalent basis as
      detailed in the tables that appear on pages 20 and 21. This adjustment to
      interest income is made for analysis purposes only. Interest income is increased
      by the amount of savings of Federal income taxes, which QNB realizes by
      investing in certain tax-exempt state and municipal securities and by making
      loans to certain tax-exempt organizations. In this way, the ultimate economic
      impact of earnings from various assets can be more easily compared.




The
      net
      interest rate spread is the difference between average rates received on earning
      assets and average rates paid on interest-bearing liabilities, while the net
      interest rate margin, which includes interest-free sources of funds, is net
      interest income expressed as a percentage of average interest-earning
      assets.





Net
      interest income increased $516,000, or 12.6%, to $4,614,000 for the quarter
      ended March 31, 2008 as compared to the quarter ended March 31, 2007. On a
      tax-equivalent basis, net interest income increased by 12.2% from $4,445,000
      for
      the three months ended March 31, 2007 to $4,986,000 for the same period ended
      March 31, 2008. When comparing the first quarters of 2008 and 2007, the net
      interest margin increased to 3.46% from 3.11%, an improvement of 35 basis
      points. The increase in both net interest income and the net interest margin,
      when comparing the two quarters, reflects the benefits of the balance sheet
      restructuring transactions as well as the shift in earning assets from
      investment securities to higher yielding commercial loans.




Page
          22


**QNB
      CORP. AND SUBSIDIARY**





**MANAGEMENT'S
      DISCUSSION AND ANALYSIS OF FINANCIAL**


**CONDITION
      AND RESULTS OF OPERATIONS**


**NET
      INTEREST INCOME (Continued)**





QNB’s
      interest sensitivity position also contributed to the increase in net interest
      income and the net interest margin. QNB has a negative gap position in a
      one-year time frame, which results when the amount of interest rate sensitive
      liabilities (deposits and debt) exceeds interest rate sensitive assets (loans
      and investment securities). As a result of this position, QNB’s cost of
      interest-bearing liabilities has declined as the Federal Reserve
      Bank’s Open Market Committee (Fed) picked up the pace of reducing the Federal
      funds target rate in response to liquidity issues in the world’s financial
      markets, a nationwide housing slowdown and growing concerns of a possible
      recession. During January 2008, the Fed reduced the Federal
      funds target rate by 125 basis points and in March another 75 basis points
      bringing the target rate to 2.25% at March 31, 2008. The average Federal funds
      target rate for the first quarter of 2008 was 3.22% compared to 5.25% for the
      first quarter of 2007. In response to actions by the Fed, the Treasury yield
      curve has steepened since December 31, 2007 as short-term rates have declined
      more than longer term rates. The 2-year Treasury Note has declined 143 basis
      points since the end of the year to 1.62% at March 31, 2008, while the 10-year
      Treasury Note has declined 59 basis points over the same period to
      3.45%.





Total
      average earning assets were virtually unchanged when comparing the two quarters.
      However ,
      the mix
      of earning assets did change with average loans increasing $28,860,000 or 8.3%
      and average investment securities decreasing $29,303,000 or 13.1% when comparing
      the first quarter of 2008 to the same period in 2007. The decline in investment
      securities balances reflects both the growth in loans as well as the decision
      by
      management to reduce its leverage position by reducing the amount of long-term
      debt as part of the restructuring transaction. When comparing the first quarters
      of 2008 and 2007, average long-term debt declined by $18,779,000.





The
      yield
      on earning assets on a tax-equivalent basis increased from 6.22% for the first
      quarter of 2007 to 6.36% for the first quarter of 2008. Interest income on
      investment securities decreased $86,000 or 3.0%, when comparing the two
      quarters, primarily a result of the reduction in balances. However, the average
      yield on the portfolio increased from 5.17% for the first quarter of 2007 to
      5.77% for the first quarter of 2008. This increased yield reflects the benefits
      from the April 2007 restructuring transaction in which approximately $92,000,000
      of investment securities with a yield of approximately 4.26% were sold. Some
      of
      the proceeds from the sale of these securities were used to purchase $63,524,000
      of investment securities yielding 5.51%. Most of the improvement in yield in
      the
      total investment securities portfolio was in the mortgage-backed and CMO
      securities portfolios, where the yield increased from 4.51% for the first
      quarter of 2007 to 5.59% for the first quarter of 2008. The yield on the total
      investment securities portfolio will likely decline during the remainder of
      2008
      as cash flow from the portfolio is reinvested at lower interest rates resulting
      from the decline in Treasury rates noted above.





Interest
      income on loans increased $403,000 or 6.8% when comparing the two quarters,
      with
      the impact of increased balances more
      than
      offsetting the decline in the yield on the portfolio. The yield on loans
      decreased 15 basis points to 6.71% when comparing the first quarter of 2007
      to
      the first quarter of 2008. The decline in the yield on the loan portfolio
      reflects the impact of lower interest rates, primarily the Prime rate which
      moves in step with the Federal funds target rate. Limiting the impact of the
      decline in interest rates on loan yields through March 31, 2008 is the structure
      of the loan portfolio, which has a significant portion of fixed-rate and adjustable-rate loans (with fixed-rate terms for three to ten
      years). However, the yield on the portfolio will likely decline further as
      the
      adjustable-rate and floating-rate loans reprice.


Page
          23


**QNB
      CORP. AND SUBSIDIARY**





**MANAGEMENT'S
      DISCUSSION AND ANALYSIS OF FINANCIAL**


**CONDITION
      AND RESULTS OF OPERATIONS**


**NET
      INTEREST INCOME (Continued)**





Most
      of
      the increase in loan income is attributable to commercial loans. Income on
      commercial real estate loans increased $351,000 with average balances increasing
      $20,794,000 or 13.2%. Partially offsetting the benefit of the increase in the
      volume of commercial real estate loans was a slight decline in the yield on
      this
      portfolio. The yield on commercial real estate loans decreased 5 basis points
      to
      6.72% for the first quarter of 2008. Interest on commercial and industrial
      loans
      increased $105,000 with the increase in average balances more than offsetting
      the impact of the decline in yield. Average commercial and industrial loans
      increased $12,326,000 or 22.3% when comparing the two quarters, contributing
      an
      additional $235,000 in interest income. The average yield on these loans
      decreased 78 basis points to 6.63% resulting in a reduction in interest income
      of $130,000. The commercial and industrial loan category will be impacted most
      by the action by the Federal Reserve to lower interest rates since a large
      portion of this category of loans is indexed to the Prime rate. Tax-exempt
      loan
      income increased $36,000, a result of the 9.9% increase in average balances.
      The
      indirect lease financing portfolio contributed $18,000 to the increase in total
      loan income with an increase in yield providing the impetus. The yield on
      indirect leases was 10.07% for the first quarter of 2008, compared with 9.31%
      for the same period in 2007. Income associated with the early payoff of leases
      contributed to the higher yield for the first quarter of 2008.




Residential
      mortgage and home equity loan activity has slowed over the past twelve months
      as
      the real estate market has deteriorated. While QNB does not originate or hold
      sub-prime mortgages, or any of the other high-risk mortgage products, it has
      been impacted by the overall downturn in the residential housing market. The
      average balance of residential mortgages declined $4,612,000 or 17.4%, when
      comparing the two quarters while the average yield increased by eight basis
      points. QNB sells most of the fixed rate loans it originates, especially in
      the
      low rate environment that currently exists. Average home equity loans decreased
      1.5% to $68,301,000, while the yield on the home equity portfolio decreased
      18
      basis points to 6.30%. The demand for home equity loans has declined as home
      values have stabilized or fallen and homeowners have already borrowed against
      the equity in their homes. Included in the home equity portfolio are floating
      rate home equity lines tied to the Prime rate. These loans have contributed
      to
      the decline in the yield in the home equity portfolio.





Interest
      income on Federal funds sold increased $2,000 when comparing the two quarters
      with the growth in average balances of $2,734,000 offsetting the 235 basis
      point
      decline in rate. The yield on Federal funds sold decreased from 5.26% for the
      first quarter of 2007 to 2.91% for the first quarter of 2008, reflecting the
      actions by the Fed, beginning in the third quarter of 2007, to reduce the
      Federal funds target rate.





For
      the
      most part, earning assets are funded by deposits, which increased when comparing
      the two quarters. Average
      deposits increased $18,725,000, or 3.9%, with the growth occurring in higher
      cost time deposits, which increased $27,286,000, or 11.6%. The average balance
      of all other categories of deposits declined when comparing the two quarters.





While
      total interest income on a tax-equivalent basis increased $276,000 when
      comparing the first quarter of 2008 to the first quarter of 2007, total interest
      expense declined $265,000. Interest expense on total deposits increased
      $146,000, while interest expense on borrowed funds decreased $411,000 when
      comparing the two quarters. The rate paid on interest-bearing liabilities
      decreased from 3.58% for the first quarter of 2007 to 3.33% for the first
      quarter of 2008 .
      During
      this same period, the rate paid on interest-bearing deposits decreased from
      3.33% to 3.28%. The increase in interest expense on total deposits was primarily
      the result of volume and rate increases on time deposits. Interest expense
      on
      time deposits increased $426,000 with higher volumes accounting for $325,000
      of
      the increase and higher rates accounting for $101,000 of the increase. The
      average rate paid on time deposits increased from 4.43% to 4.59% when comparing
      the two periods.


Page
          24


**QNB
      CORP. AND SUBSIDIARY**





**MANAGEMENT'S
      DISCUSSION AND ANALYSIS OF FINANCIAL**


**CONDITION
      AND RESULTS OF OPERATIONS**


**NET
      INTEREST INCOME (Continued)**





L ike
      fixed-rate loans and investment securities, time deposits reprice over time
      and,
      therefore, have less of an immediate impact on costs in either a rising or
      falling rate environment. Unlike loans and investment securities, however,
      the
      maturity and repricing characteristics of time deposits tend to be shorter.
      Approximately $219,417,000 or 81.5%, of time deposits at March 31, 2008 will
      reprice or mature over the next 12 months.





The
      competition for deposits, especially time deposits, led to significantly higher
      rates being paid on these products in 2007. Like other financial institutions,
      QNB, as a result of consumer demand and the need to retain deposits, offered
      relatively short maturity time deposits at attractive rates. Most consumers
      were
      looking for short maturity time deposits in anticipation of short-term rates
      continuing to increase. With interest rates declining in the latter part of
      2007, the expectation was for time deposit rates to fall; however, this
      reduction was slow to occur as the competition was still offering high rate
      time
      deposits.





With
      the
      unprecedented move by the Fed during the first quarter of 2008, the rates on
      time deposits being offered did decline significantly. Given the short-term
      nature of QNB’s time deposit portfolio and the current rates being offered, it
      is likely that the average rate paid on time deposits should decline over the
      next few quarters as higher costing time deposits originated in 2007 are
      repriced lower. The key will be to retain these deposits at lower
      rates.





Partially
      offsetting the increase in interest expense on time deposits was a reduction
      in
      interest expense on interest-bearing demand deposits and money market accounts
      which declined $185,000 and $93,000, respectively. The interest rate paid on
      interest-bearing demand accounts decreased from 2.15% for the first quarter
      of
      2007 to 1.35% for the first quarter of 2008. Included in these accounts are
      municipal deposits whose rates are tied directly to the Federal funds rate.
      Municipal accounts comprise approximately 39.9% of total interest-bearing demand
      accounts. The yield on municipal accounts declined from 4.98% for the first
      quarter of 2007 to 3.15% for the first quarter of 2008. Interest expense and
      the
      rate paid on these accounts will decline further during the second quarter
      of
      2008 as a result of the actions by the Fed. The interest rate paid on money
      market accounts was 3.02% for the first quarter of 2007 and 2.35% for the first
      quarter of 2008, a decline of 67 basis points. Included in total money market
      balances is the Select money market account, a higher yielding money market
      product that pays a tiered rate based on account balances. QNB maintained a
      rate
      close to 4.00% for balances over $75,000 for most of 2007. With the sharp
      decline in short-term interest rates during the first quarter of 2008, the
      rates
      paid on the Select money market account have declined as well.





Offsetting
      the increase in interest expense on total deposits was a reduction in interest
      expense on short-term borrowings of $54,000 and long-term debt of $357,000.
      Short-term borrowings are primarily comprised of repurchase agreements (a sweep
      product for commercial customers). While not directly indexed to the Federal
      funds rate, the rate paid on these accounts move s
      closely
      with the Federal funds rate and as a result declined when comparing the two
      quarters. The average rate paid on short-term borrowings declined from 3.56%
      for
      the first quarter of 2007 to 2.97% for the first quarter of 2008. The average
      balance of short-term borrowings declined $1,718,000, or 6.7%, when comparing
      the two quarters.





The
      April
      2007 balance sheet restructuring was the primary reason for the decline in
      interest expense on long-term debt when comparing the two quarters. QNB prepaid
      $50,000,000 of FHLB advances with a cost of 5.55% and replaced half with a
      $25,000,000 repurchase agreement with a cost of 4.78%. In January 2008, QNB
      borrowed $10,000,000 from the FHLB at a cost of 2.97% for two years. At the
      time, this type of wholesale funding was a better alternative to higher costing
      time deposits and overnight funding. The average balance of long-term debt
      was
      $33,132,000 for the first quarter of 2008 compared with $51,911,000 for the
      first quarter of 2007, while the average rate paid decreased to 4.34% from
      5.55%
      when comparing the same periods.


Page
          25


**QNB
      CORP. AND SUBSIDIARY**





**MANAGEMENT'S
      DISCUSSION AND ANALYSIS OF FINANCIAL**


**CONDITION
      AND RESULTS OF OPERATIONS**





**PROVISION
      FOR LOAN LOSSES**





The
      provision for loan losses represents management's determination of the amount
      necessary to be charged to operations to maintain the allowance for loan losses
      at a level that represents management’s best estimate of the known and inherent
      losses in the existing loan portfolio. Actual loan losses, net of recoveries,
      serve to reduce the allowance.





The
      determination of an appropriate level of the allowance for loan losses is based
      upon an analysis of the risk inherent in QNB's loan portfolio. Management uses
      various tools to assess the adequacy of the allowance for loan losses. One
      tool
      is a model that considers a number of relevant factors including: historical
      loan loss experience, the assigned risk rating of the credit, current and
      projected credit-worthiness of the borrower, current value of the underlying
      collateral, levels of and trends in delinquencies and non-accrual loans, trends
      in volume and terms of loans, concentrations of credit, and national and local
      economic trends and conditions. This model is supplemented with another analysis
      that also incorporates QNB’s portfolio exposure to borrowers with large dollar
      concentration. Other tools include ratio analysis and peer group
      analysis.





QNB’s
      management determined that a $225,000 provision for loan losses was necessary
      for the three-month period ended March 31, 2008, compared to a provision for
      loan losses of $75,000 for the same period in 2007. respectively. The need
      for a
      provision was determined by the analysis described above and resulted in an
      allowance for loan losses that management believes is adequate in relation
      to
      the estimate of known and inherent losses in the portfolio. The
      higher provision in the first quarter of 2008 reflects an increase in
      non-performing assets and delinquent loans as well as the inherent risk related
      to loan growth. Non-performing
      assets (non-accruing loans, loans past due 90 days or more, other real estate
      owned and other repossessed assets) amounted to .26% and .07% of total assets
      at
      March 31, 2008 and 2007, respectively. These levels compare to .27% at December
      31, 2007. Delinquent loans include loans past due more than 30 days. Total
      delinquent loans at March 31, 2008, December 31, 2007 and March 31, 2007
      represent 1.08%, .98% and .71% of total loans, respectively. The increase in
      total delinquent loans is a result of higher delinquency in the indirect lease
      portfolio. As of March 31, 2008, 13.04% of the indirect lease portfolio was
      past
      due more than 30 days. This compares to 8.32% at December 31, 2007 and 4.89%
      at
      March 31, 2007. The delinquency as of April 30, 2008 was reduced to 8.21%.
      The
      asset quality of the commercial loan portfolio, the largest component of total
      loans, representing approximately 72% of total loans, remains strong. Total
      delinquent commercial loans were .48% of total commercial loans at March 31,
      2008. This compares to .47% and .50% at December 31, 2007 and March 31, 2007,
      respectively. Delinquent loans on one to four unit residential mortgages and
      home equity loans improved to 1.17% of balances at March 31, 2008 compared
      with
      1.37% at December 31, 2007. The
      increases in non-performing and delinquent loans reflect the slow-down in the
      local and regional economy as well as the impact of rising fuel costs.




QNB
      had
      net charge-offs of $93,000 and $83,000 during the first quarters of 2008 and
      2007, respectively. The net charge-offs during both periods relate primarily
      to
      loans in the indirect lease financing portfolio.


Page
          26


**QNB
      CORP. AND SUBSIDIARY**





**MANAGEMENT'S
      DISCUSSION AND ANALYSIS OF FINANCIAL**


**CONDITION
      AND RESULTS OF OPERATIONS**


**PROVISION
      FOR LOAN LOSSES (Continued)**





Non-accrual
      loans were
      $1,418,000, $1,397,000 and $122,000 at March 31, 2008, December 31, 2007 and
      March 31, 2007, respectively. Loans past due 90 days or more and still accruing
      were $139,000, $218,000 and $241,000, respectively, at these same period-ends.
      The majority of the non-performing loans at
      March 31, 2008
      are considered adequately secured by real estate collateral and QNB expects
      to
      collect all interest and principal on these loans. Non-accrual loans in the
      indirect lease financing portfolio are generally secured by equipment or
      vehicles and repossession of the collateral is in process.





In
      April
      2008, $236,000 of loans reported as non-accrual loans as of March 31, 2008
      were
      paid off. In addition, a non-accrual construction loan with a balance of
      $469,000 at March 31, 2008 is under agreement of sale and QNB is expecting
      this
      loan to be paid off in May 2008.





QNB
      did
      not have any other real estate owned as of March 31, 2008, December 31, 2007
      or
      March 31, 2007. Repossessed assets consisting of equipment, automobiles and
      motorcycles were $37,000, $6,000 and $45,000 at March 31, 2008, December 31,
      2007 and March 31, 2007, respectively.





There
      were no restructured loans as of March 31, 2008, December 31, 2007 or March
      31,
      2007, respectively, as defined in FASB Statement No. 15, *Accounting
      by Debtors and Creditors for Troubled Debt Restructurings* ,
      that
      have not already been included in loans past due 90 days or more or non-accrual
      loans.





The
      allowance for loan losses was $3,411,000, $3,279,000 and $2,721,000 at March
      31,
      2008, December 31, 2007, and March 31, 2007, respectively. The ratio of the
      allowance to total loans was .90%, .86% and .75% at the respective period end
      dates. The increase in the ratio reflects the increase in the provision for
      loan
      losses recorded during 2007 and the first quarter of 2008. The ratio, at .90%,
      is at a level that QNB management believes is adequate based on its
      analysis.





A
      loan is
      considered impaired, based on current information and events, if it is probable
      that QNB will be unable to collect the scheduled payments of principal or
      interest when due according to the contractual terms of the loan agreement.
      The
      measurement of impaired loans is generally based on the present value of
      expected future cash flows discounted at the historical effective interest
      rate,
      except that all collateral-dependent loans are measured for impairment based
      on
      the fair value of the collateral. At
      March
      31, 2008, December 31, 2007 and March 31, 2007, the recorded investment in
      loans
      for which impairment had been recognized in accordance with FASB Statement
      No.
      114, *Accounting
      by Creditors for Impairment of a Loan—an amendment of FASB Statements No. 5 and
      15* , totaled
      $949,000, $961,000 and $109,000, respectively, of which $841,000, $847,000
      and
      $109,000, respectively required no specific allowance for loan losses. The
      recorded investment in impaired loans requiring a specific allowance for loan
      losses was $108,000, $114,000 and $0 at March 31, 2008, December 31, 2007 and
      March 31, 2007, respectively. At March 31, 2008, December 31, 2007 and March
      31,
      2007 the related allowance for loan losses associated with these loans was
      $54,000, $57,000 and $0, respectively. Most of the loans that have been
      identified as impaired, but for which a specific allowance has not been
      identified, are adequately collateralized.





Management,
      in determining the allowance for loan losses, makes significant estimates and
      assumptions. Consideration is given to a variety of factors in establishing
      these estimates, including current economic conditions, diversification of
      the
      loan portfolio, delinquency statistics, results of loan reviews, borrowers’
perceived financial and managerial strengths, the adequacy of underlying
      collateral if collateral dependent, or the present value of future cash flows.


Page
          27


**QNB
      CORP. AND SUBSIDIARY**





**MANAGEMENT'S
      DISCUSSION AND ANALYSIS OF FINANCIAL**


**CONDITION
      AND RESULTS OF OPERATIONS**


**PROVISION
      FOR LOAN LOSSES (Continued)**





Since
      the
      allowance for loan losses is dependent, to a great extent, on conditions that
      may be beyond QNB’s control, it is at least reasonably possible that
      management’s estimates of the allowance for loan losses and actual results could
      differ. In addition, various regulatory agencies, as an integral part of their
      examination process, periodically review QNB’s allowance for losses on loans.
      Such agencies may require QNB to recognize changes to the allowance based on
      their judgments about information available to them at the time of their
      examination.





**NON-INTEREST
      INCOME**





QNB,
      through its core banking business, generates various fees and service charges.
      Total non-interest income includes service charges on deposit accounts, ATM
      and
      check card income, income on bank-owned life insurance, mortgage servicing
      fees,
      gains and losses on the sale of investment securities, gains on the sale of
      residential mortgage loans and other fee income.





Total
      non-interest income for the first quarter of 2008 was $1,384,000 compared to
      a
      loss of $1,668,000 for the first quarter of 2007. Positively impacting net
      income for the first quarter of 2008 was the recognition of $230,000 of
      non-interest income as a result of the Visa initial public offering comprised
      of
      a $175,000 gain related to the mandatory redemption of shares of restricted
      common stock in Visa and $55,000 of income related to the reversal of
      liabilities recorded in the fourth quarter of 2007 to fund settlements of
      indemnified litigation involving Visa. Total non-interest income, excluding
      the
      Visa items, would have been $1,154,000 for the first quarter of 2008. This
      compares favorably to total non-interest income of $1,090,000 for the first
      quarter of 2007, excluding the other-than-temporary impairment charge of
      $2,758,000 recorded in the first quarter of 2007.





Fees
      for
      services to customers are primarily comprised of service charges on deposit
      accounts. These fees increased $21,000, or 5.0%, to $445,000 when comparing
      the
      three-month periods. Overdraft income increased $17,000 for the three-month
      period as a result of an increase in the volume of overdrafts, as the per item
      charge has remained the same. Fees on business checking accounts increased
      $5,000 for the three-month period. This increase reflects the impact of a lower
      earnings credit rate in the first quarter of 2008 as compared to the first
      quarter of 2007, resulting from the decline in short-term interest rates. These
      credits are applied against service charges incurred.





ATM
      and
      debit card income is primarily comprised of income on debit cards and ATM
      surcharge income for the use of QNB’s ATM machines by non-QNB customers. ATM and
      debit card income was $219,000 for the first quarter of 2008, an increase of
      $31,000, or 16.5%, from the amount recorded during the first quarter of 2007.
      Debit card income increased $20,000, or 15.2%, for the three-month period.
      In
      addition, an increase in PIN-based transactions resulted in additional
      interchange income of $10,000 when comparing the three-month periods.





Income
      on
      bank-owned life insurance represents the earnings on life insurance policies
      on
      which the Bank is the owner and beneficiary. The earnings on these policies
      were
      $58,000 and $64,000 for the three months ended March 31, 2008 and 2007,
      respectively. The insurance carriers reset the rates on these policies annually
      taking into consideration the interest rate environment as well as mortality
      costs. The lower income reflects the higher mortality costs that result as
      employees age. The existing policies have rate floors which minimize how low
      the
      earnings rate can go. Some of these policies are currently at their earnings
      floors.


Page
          28


**QNB
      CORP. AND SUBSIDIARY**





**MANAGEMENT'S
      DISCUSSION AND ANALYSIS OF FINANCIAL**


**CONDITION
      AND RESULTS OF OPERATIONS**


**NON-INTEREST
      INCOME (Continued)**





When
      QNB
      sells its residential mortgages in the secondary market, it retains servicing
      rights. A normal servicing fee is retained on all mortgage loans sold and
      serviced. QNB
      recognizes its obligation to service financial assets that are retained in
      a
      transfer of assets in the form of a servicing asset. The servicing asset is
      amortized in proportion to, and over, the period of net servicing income or
      loss. On a quarterly basis, servicing assets are assessed for impairment based
      on their fair value. Mortgage servicing fees for the three-month periods ended
      March 31, 2008 and 2007 were  $20,000
      and $25,000, respectively. There was no valuation allowance necessary in either
      period. Amortization expense related to the mortgage servicing asset for the
      three-month periods ended March 31, 2008 and 2007 was $23,000 and $19,000,
      respectively. Mortgage refinance activity increased slightly during the first
      quarter of 2008 as residential mortgage rates declined in response to falling
      Treasury market rates. The increase in amortization expense reflects the
      increase in refinancing activity. The average balance of mortgages serviced
      for
      others was $69,313,000 for the first quarter of 2008 compared to $70,735,000
      for
      the first quarter of 2007, a decrease of 2.0%. The timing of mortgage payments
      and delinquencies also impacts the amount of servicing fees
      recorded.





The
      fixed-income securities portfolio represents a significant portion of QNB’s
      earning assets and is also a primary tool in liquidity and asset/liability
      management. QNB actively manages its fixed income portfolio in an effort to
      take
      advantage of changes in the shape of the yield curve, changes in spread
      relationships in different sectors and for liquidity purposes, as needed. Management
      continually reviews strategies that will result in an increase in the yield
      or
      improvement in the structure of the investment portfolio.





For
      the
      three-months ended March 31, 2008 net gains on the sale of investment securities
      were $222,000. Included in these gains were $66,000 from the sale of debt
      securities by the Bank and $156,000 of gains from the sale of marketable equity
      securities by the Company. For the three-months ended March 31, 2007 QNB
      recorded a net loss on investment securities of $2,498,000. Excluding the
      impairment loss of $2,758,000, gains on the sale of investment securities were
      $260,000 for the first quarter of 2007. Included in the $260,000 of realized
      net
      securities gains for the three-month period ended March 31, 2007 were gains
      of
      $50,000 from the sale of debt securities by the Bank and $210,000 of gains
      related to activity in the marketable equity securities portfolio by the
      Company. During the first quarter of 2007, QNB sold $11,680,000 of securities
      with an average yield of 5.46% to help fund loans with an average yield of
      7.16%.





The
      net
      gain on the sale of residential mortgage loans was $32,000 and $21,000 for
      the
      quarters ended March 31, 2008 and 2007, respectively. Residential
      mortgage loans to be sold are identified at origination. The net gain on
      residential mortgage sales is directly related to the volume of mortgages sold
      and the timing of the sales relative to the interest rate environment. Included
      in the gains on the sale of residential mortgages in these periods were $25,000
      and $12,000, respectively, related to the recognition of mortgage servicing
      assets. Proceeds
      from the sale of residential mortgages were $3,278,000 and $1,537,000 for the
      first quarters of 2008 and 2007, respectively.





Other
      operating income was $388,000 for the first quarter of 2008. Excluding the
      impact of the Visa transactions, other operating income was $158,000 for the
      first quarter of 2008 compared to $108,000 for the first quarter of 2007. Also
      included in other operating income for the first quarter of 2008 were life
      insurance benefits of $48,000.


Page
          29


**QNB
      CORP. AND SUBSIDIARY**





**MANAGEMENT'S
      DISCUSSION AND ANALYSIS OF FINANCIAL**


**CONDITION
      AND RESULTS OF OPERATIONS**


**NON-INTEREST
      EXPENSE**





Non-interest
      expense is comprised of costs related to salaries and employee benefits, net
      occupancy, furniture and equipment, marketing, third party services and various
      other operating expenses. Total non-interest expense of $3,543,000 for the
      quarter ended March 31, 2008, an increase of $221,000, or 6.7%, from levels
      reported in the first quarter of 2007.





Salaries
      and benefits is the largest component of non-interest expense. Salaries and
      benefits expense increased $105,000, or 5.7%, to $1,963,000 for the quarter
      ended March 31, 2008 compared to the same quarter in 2007. Salary expense
      increased $87,000, or 5.9%, during the period to $1,568,000. The increase is
      comprised of a $51,000 accrual for incentive compensation and a 3.6% increase
      related to merit and promotional salary increases. Also, i ncluded
      in salary expense for the first quarter of 2008 and 2007, was $14,000 and
      $32,000, respectively, in stock option compensation expense. The
      number of full time-equivalent employees decreased by three when comparing
      the
      first quarter of 2008 and 2007. Comparing the two quarters, benefits expense
      increased $18,000, or 4.8%, to $395,000. An increase in medical and dental
      premiums, net of employee contributions, accounted for $15,000 of the increase
      in total benefits expense.





Net
      occupancy expense increased $28,000 to $340,000, when comparing the first
      quarter of 2008 to the first quarter of 2007. Contributing to the increase were higher costs related to building depreciation
      and leasehold improvements ($11,000), building repairs and maintenance ($9,000)
      and branch rent ($7,000). Renovations to the main office contributed to the
      increase in depreciation expense. The increase in branch rent relates to an
      increase in rent for the operation center’s parking facility and leases for the
      location of two ATM sites at a local shopping center.




Furniture
      and equipment expense increased $34,000 to $289,000, when comparing the two
      quarters. Furniture and equipment depreciation and software amortization expense
      contributed $16,000 of the increase. New software related to branch deposit
      capture, electronic statements, document imaging and loan administration were
      installed during the past year. Also contributing to the increase were higher
      costs associated with equipment maintenance of $7,000 and equipment rentals
      of
      $5,000. The increase in equipment rental expense relates to the two new ATMs
      noted above.





Third
      party services are comprised of professional services, including legal,
      accounting and auditing and consulting services, as well as fees paid to outside
      vendors for support services of day-to-day operations. These support services
      include correspondent banking services, statement printing and mailing,
      investment security safekeeping and supply management services. Third party
      services expense was $188,000 for the first quarter of 2008 compared to $161,000
      for the first quarter of 2007. Legal expense increased $11,000 when comparing
      the two quarters, primarily a result of an increase in loan collection costs.
      Accounting and auditing costs contributed $6,000 to the increase in third party
      service costs. Costs associated with the printing and mailing of statements
      increased $4,000.





Telephone,
      postage and supplies expense increased $35,000 to $161,000, when comparing
      the
      three-month periods. An increase in supplies expense accounted for the entire
      increase. Most of the increase in supply costs relates to the rebranding of
      QNB
      Bank. This included the purchase of new supplies including plastics for ATM
      and
      debit cards and obsolescence costs related to Quakertown National Bank
      supplies.


Page
          30


**QNB
      CORP. AND SUBSIDIARY**





**MANAGEMENT'S
      DISCUSSION AND ANALYSIS OF FINANCIAL**


**CONDITION
      AND RESULTS OF OPERATIONS**


**NON-INTEREST
      EXPENSE (Continued)**





State
      tax
      expense represents the accrual of the Pennsylvania shares tax, which is based
      on
      the equity of the Bank, Pennsylvania sales and use tax and the Pennsylvania
      capital stock tax. State tax expense was $130,000 for the first quarter of
      2008,
      an increase of $8,000 compared to the same period in 2007. This increase was
      a
      result of a higher shares tax resulting from an increase in the Bank’s
      equity.





Other
      expense decreased $13,000 to $319,000 for the first quarter of 2008.
      Amortization expense of core deposit intangibles was $0 for the first quarter
      of
      2008 and $13,000 for the first quarter of 2007. See Note 7 to the financial
      statements. Federal Deposit Insurance Corporation (F.D.I.C.) premiums increased
      $20,000 when comparing the two quarters. This was offset by a $24,000 decrease
      in regulatory assessment costs, a savings resulting from the change in charter
      from a National bank to a State chartered bank.





**INCOME
      TAXES**





QNB
      utilizes an asset and liability approach for financial accounting and reporting
      of income taxes. As of March 31, 2008, QNB’s net deferred tax asset was
      $262,000. The primary components of deferred taxes are a deferred tax asset
      of
      $1,160,000 relating to the allowance for loan losses and a deferred tax
      liability of $1,094,000 resulting from the unrealized
      gains on available for sale securities. As of March 31, 2007, QNB's net deferred
      tax asset was $1,382,000, comprised of deferred tax assets of $925,000 related
      to the allowance for loan losses and a deferred tax asset of $938,000 related
      to
      impaired securities. This asset was partially offset by a deferred tax liability
      of $445,000 resulting from the unrealized gains on available-for-sale
      securities.





The
      realizability of deferred tax assets is dependent upon a variety of factors,
      including the generation of future taxable income, the existence of taxes paid
      and recoverable, the reversal of deferred tax liabilities and tax planning
      strategies. Based upon these and other factors, management believes it is more
      likely than not that QNB will realize the benefits of these remaining deferred
      tax assets. The net deferred tax asset is included in other assets on the
      consolidated balance sheet.





Applicable
      income taxes and the
      effective tax rate were $520,000, or 23.3%, for the three-month period ended
      March 31, 2008. Applicable income taxes were a benefit of $514,000 for the
      three-month period ended March 31, 2007.





**FINANCIAL
      CONDITION ANALYSIS**





The
      following balance sheet analysis compares average balance sheet data for the
      three months ended March 31, 2008 and 2007, as well as the period ended balances
      as of March 31, 2008 and December 31, 2007.





Average
      earning assets for the three-month period ended March 31, 2008 increased
      $70,000, or 0.01%, to $579,555,000 from $579,485,000 for the three months ended
      March 31, 2007. The lack of growth in earning assets when comparing the two
      quarters is primarily a result of management’s decision to reduce the amount of
      investment securities and long-term debt by paying down the debt with some
      of
      the proceeds from the investment securities sold as part of the restructuring
      transaction. Despite the lack of growth in average earning assets, the mix
      of
      earning assets changed considerably when comparing the two quarters. Average
      loans increased $28,860,000, or 8.3%, while average investments decreased
      $29,303,000, or 13.1%. Average Federal funds sold increased $2,734,000 when
      comparing these same periods. The reduction in long-term debt was offset by
      growth in average deposits.


Page
          31


**QNB
      CORP. AND SUBSIDIARY**





**MANAGEMENT'S
      DISCUSSION AND ANALYSIS OF FINANCIAL**


**CONDITION
      AND RESULTS OF OPERATIONS**


**FINANCIAL
      CONDITION ANALYSIS (Continued)**





QNB’s
      primary business is accepting deposits and making loans to meet the credit
      needs
      of the communities it serves. Loans are the most significant component of
      earning assets and growth in loans to small businesses and residents of these
      communities has been a primary focus of QNB. QNB has been successful in
      achieving strong growth in total loans, while at the same time maintaining
      asset
      quality. Inherent within the lending function is the evaluation and acceptance
      of credit risk and interest rate risk. QNB manages credit risk associated with
      its lending activities through portfolio diversification, underwriting policies
      and procedures and loan monitoring practices.





Total
      loans increased 4.5% between March 31, 2007 and March 31, 2008 but decreased
      0.4% since December 31, 2007. The slower rate of growth since March 31, 2007
      as
      compared to the average rate of growth when comparing the quarters reflects
      the
      amount of loans originated during the first quarter of 2007. The decline in
      total loans since December 31, 2007 reflects the slowdown in growth in the
      local
      and regional economy as well as some seasonality in the portfolio. Total loans
      at December 31, 2007 included a $6,000,000 loan to one customer that was secured
      by cash and was only outstanding for about a week.





Average
      total commercial loans increased $35,321,000 when comparing the first three
      months of 2008 to the first three months of 2007. Most of the 15.1% growth
      in
      average commercial loans was in loans secured by real estate, either commercial
      or residential properties, which increased $20,794,000. Commercial and
      industrial loans increased $12,326,000 when comparing the average balances
      for
      the two quarters. This growth was centered in variable rate or adjustable rate
      loans. Also contributing to the growth in total commercial loans was an increase
      in tax-exempt loans. QNB continues to be successful in competing for loans
      to
      schools and municipalities. Average tax-exempt loans increased $2,201,000,
      or
      9.9%, when comparing the three-month periods.





Indirect
      lease financing receivables represent loans to small businesses that are
      collateralized by equipment. These loans tend to have higher risk
      characteristics but generally provide higher rates of return. These loans are
      originated by a third party and purchased by QNB based on criteria specified
      by
      QNB. The criteria include minimum credit scores of the borrower, term of the
      lease, type and age of equipment financed and geographic area. The geographic
      area primarily represents Pennsylvania and states contiguous to Pennsylvania.
      QNB is not the lessor and does not service these loans. Average indirect lease
      financing loans decreased $291,000 when comparing the three-month periods.
      The
      slowing local and regional economy and an increase in delinquency rates have
      negatively impacted the volume of indirect lease financing receivables purchased
      over the past year.





Average
      residential mortgage loans decreased $4,612,000 when comparing the first three
      months of 2008 to the first three months of 2007. The slowdown in the housing
      market and QNB’s decision to sell most originations of 1-4 family residential
      mortgages in the secondary market contributed to the decline in the residential
      mortgage loan portfolio.





The
      mix
      of deposits continued to be impacted by the reaction of customers to changes
      in
      interest rates on various products and by rates paid by the competition. Total
      average deposits increased $18,725,000, or 3.9%, to $494,502,000 for the first
      quarter of 2008 compared to the first quarter of 2007. Consistent with customers
      looking for the highest rate for the shortest term, the growth achieved in
      total
      average deposits was in time deposits which increased $27,286,000, or 11.6%,
      when comparing the same periods. Most of the growth in time deposits occurred
      in
      the maturity range of greater than 6 months through 15 months, which QNB
      promoted in response to customers’ preferences and competitors’ offerings.


Page
          32


**QNB
      CORP. AND SUBSIDIARY**





**MANAGEMENT'S
      DISCUSSION AND ANALYSIS OF FINANCIAL**


**CONDITION
      AND RESULTS OF OPERATIONS**


**FINANCIAL
      CONDITION ANALYSIS (Continued)**





The
      average balances of all other deposits types declined when comparing the first
      quarter of 2008 to the same period in 2007. Average non-interest bearing and
      interest bearing demand accounts declined by 4.2% and 1.8%, respectively.
      Average money market account balances decreased 3.4% and average savings
      accounts decreased 6.7% when comparing the two quarters.





Average
      long-term debt decreased from $51,911,000 for the first quarter of 2007 to
      $33,132,000 for the first quarter of 2008. The reduction in average debt
      reflects the net $25,000,000 impact of the April 2007 restructuring
      transaction, partially offset by the borrowing of $10,000,000 from the FHLB in January
      2008.





Total
      assets at March 31, 2008 were $617,873,000 compared with $609,813,000 at
      December 31, 2007, an increase of 1.3%. Most of the growth in total assets
      since
      December 31, 2007 was in investment securities, which increased
      $6,617,000.





On
      the
      liability side, total deposits increased by $11,168,000, or 2.3%, since
      year-end. Time deposits continued to be the product of choice, increasing
      $14,155,000 since December 31, 2007 with time deposits of $100,000 or more
      increasing $7,248,000. Non-interest bearing demand accounts increased $3,396,000
      while interest bearing demand accounts declined $7,302,000. These deposits
      can
      be volatile depending on the timing of deposits and withdrawals. The decrease
      in
      interest-bearing demand accounts was centered in municipal deposits which
      declined by $5,128,000. These accounts, especially the school district accounts,
      have some seasonality to them, increasing when taxes are collected in late
      summer and declining during the course of the school year as expenses are paid.
      Savings accounts increased $2,442,000 from December 31, 2007 to $44,517,000
      at
      March 31, 2008.





When
      comparing December 31, 2007 to March 31, 2008, short-term borrowing declined
      from $33,990,000 to $18,736,000. Commercial sweep accounts recorded as
      repurchase agreements declined by $11,328,000 to $18,136,000 at March 31, 2008
      and Federal funds purchased declined by $3,926,000 to $0 at March 31, 2008.
      Some
      of the decline in the commercial sweep accounts is a result of funds being
      moved
      to higher paying time deposit accounts over $100,000, as these offered higher
      rates than the sweep product.





**LIQUIDITY**





Liquidity
      represents an institution’s ability to generate cash or otherwise obtain funds
      at reasonable rates to satisfy commitments to borrowers and demands of
      depositors. QNB manages its mix of cash, Federal funds sold and investment
      securities in order to match the volatility, seasonality, interest sensitivity
      and growth trends of its loans and deposits. Liquidity is provided from asset
      sources through maturities and repayments of loans and investment securities.
      The portfolio of investment securities classified as available-for-sale and
      QNB's policy of selling certain residential mortgage originations in the
      secondary market also provide sources of liquidity. Additional sources of
      liquidity are provided by the Bank’s membership in the Federal Home Loan Bank of
      Pittsburgh (FHLB) and two unsecured Federal funds lines granted by correspondent
      banks totaling $21,000,000. At March 31, 2008, the Bank had a maximum borrowing
      capacity with the FHLB of approximately $153,589,000. At March 31, 2008, QNB
      had
      $10,000,000 of outstanding borrowings under the FHLB credit facility.


Page
          33


**QNB
      CORP. AND SUBSIDIARY**





**MANAGEMENT'S
      DISCUSSION AND ANALYSIS OF FINANCIAL**


**CONDITION
      AND RESULTS OF OPERATIONS**


**LIQUIDITY
      (Continued)**





Cash
      and
      due from banks, Federal funds sold, available-for-sale securities and loans
      held-for-sale totaled $216,101,000 and $206,562,000 at March 31, 2008 and
      December 31, 2007, respectively. The increase in liquidity sources is primarily
      the result of an increase of the available-for-sale securities portfolio. These
      sources should be adequate to meet normal fluctuations in loan demand and
      deposit withdrawals. During the first quarter of 2008, QNB used its Federal
      funds line to prefund the purchase of investment securities in anticipation
      of
      declining interest rates and to fund seasonal deposit withdrawals. The maximum
      balance of Federal funds purchased during the quarter was $14,617,000. The
      Federal funds purchase line was paid down with $10,000,000 of borrowings from
      the FHLB with a rate of 2.97% and a two year maturity. During the first quarter
      of 2007, QNB used its Federal funds lines to help temporarily fund loan growth.
      Average Federal funds purchased were $2,213,000 for the first quarter of 2008
      and $979,000 for the first quarter of 2007. At March 31, 2008, QNB had no
      Federal funds purchased.





Approximately
      $96,422,000 and $107,750,000 of available-for-sale securities at March 31,
      2008
      and December 31, 2007, respectively, were pledged as collateral for repurchase
      agreements and deposits of public funds. The decrease in the amount of pledged
      securities when comparing March 31, 2008 to December 31, 2007 is a result in
      a
      decrease in repurchase agreement balances (commercial sweep accounts) and
      municipal deposit balances. In addition, under terms of its agreement with
      the
      FHLB, QNB maintains otherwise unencumbered qualifying assets (principally 1-4
      family residential mortgage loans and U.S. Government and agency notes, bonds,
      and mortgage-backed securities) in the amount of at least as much as its
      advances from the FHLB. As mentioned above, QNB had $10,000,000 of outstanding
      borrowings under the FHLB credit facility at March 31, 2008.





**CAPITAL
      ADEQUACY**





A
      strong
      capital position is fundamental to support continued growth and profitability
      and to serve the needs of depositors. QNB's shareholders' equity at March 31,
      2008 was $54,392,000, or 8.80% of total assets, compared to shareholders' equity
      of $53,251,000, or 8.73% of total assets, at December 31, 2007. Shareholders’
equity at March 31, 2008 included a positive adjustment of $2,123,000 related
      to
      unrealized holding gains, net of taxes, on investment securities
      available-for-sale while shareholders’ equity at December 31, 2007 included a
      positive adjustment of $1,504,000 related to unrealized holding gains, net
      of
      taxes, on investment securities available-for-sale. Without the FASB No. 115
      available-for-sale adjustments, shareholders' equity to total assets would
      have
      been 8.46% and 8.49% at March 31, 2008 and December 31, 2007, respectively.
      The
      adoption of EITF 06-04, *Accounting
      for Deferred Compensation and Postretirement Benefit Aspects of Endorsement
      Split-Dollar Life Insurance Arrangements* on
      January 1, 2008 resulted in the recognition of a cumulative effect adjustment
      to
      retained earnings of $481,000.





Shareholders'
      equity averaged $52,016,000 for the first three months of 2008 and $51,299,000
      for the year ended December 31, 2007, an increase of 1.4%. The ratio of average
      total equity to average total assets increased to 8.56% for the first three
      months of 2008 compared to 8.51% for all of 2007.





QNB
      is
      subject to various regulatory capital requirements as issued by Federal
      regulatory authorities. Regulatory capital is defined in terms of Tier I capital
      (shareholders’ equity excluding unrealized gains or losses on available-for-sale
      securities and disallowed intangible assets), Tier II capital, which includes
      the allowance for loan losses and a portion of the unrealized gains on equity
      securities, and total capital (Tier I plus Tier II). Risk-based capital ratios
      are expressed as a percentage of risk-weighted assets. Risk-weighted assets
      are
      determined by assigning various weights to all assets and off-balance sheet
      arrangements, such as****letters
      of credit and loan commitments, based on associated risk. Regulators have also
      adopted minimum Tier I leverage ratio standards, which measure the ratio of
      Tier
      I capital to total quarterly average assets.


Page
          34


**QNB
        CORP. AND SUBSIDIARY**
 
 **MANAGEMENT'S
        DISCUSSION AND ANALYSIS OF FINANCIAL**
 **CONDITION
        AND RESULTS OF OPERATIONS**


**CAPITAL
      ADEQUACY (Continued)**





The
      minimum regulatory capital ratios are 4.00% for Tier I, 8.00% for the total
      risk-based capital and 4.00% for leverage. QNB had a Tier I capital ratio of
      12.18% and 12.25%, a total risk-based ratio of 12.97% and 13.06% and a leverage
      ratio of 8.59% and 8.64% at March 31, 2008 and December 31, 2007, respectively.





The
      Federal Deposit Insurance Corporation Improvement Act of 1991 established five
      capital level designations ranging from "well capitalized" to "critically
      undercapitalized." At March 31, 2008 and December 31, 2007, QNB met the "well
      capitalized" criteria which requires minimum Tier I and total risk-based capital
      ratios of 6.00% and 10.00%, respectively, and a leverage ratio of
      5.00%.





**INTEREST
      RATE SENSITIVITY**





Since
      the
      assets and liabilities of QNB have diverse repricing characteristics that
      influence net interest income, management analyzes interest sensitivity through
      the use of gap analysis and simulation models. Interest rate sensitivity
      management seeks to minimize the effect of interest rate changes on net interest
      margins and interest rate spreads and to provide growth in net interest income
      through periods of changing interest rates. QNB’s Asset/Liability Management
      Committee (ALCO) is responsible for managing interest rate risk and for
      evaluating the impact of changing interest rate conditions on net interest
      income.





Gap
      analysis measures the difference between volumes of rate-sensitive assets and
      liabilities and quantifies these repricing differences for various time
      intervals. Static gap analysis describes interest rate sensitivity at a


point
      in
      time. However, it alone does not accurately measure the magnitude of changes
      in
      net interest income because changes in interest rates do not impact all
      categories of assets and liabilities equally or simultaneously. Interest rate
      sensitivity analysis also involves assumptions on certain categories of assets
      and deposits. For purposes of interest rate sensitivity analysis, assets and
      liabilities are stated at their contractual maturity, estimated likely call
      date, or earliest repricing opportunity. Mortgage-backed securities, CMOs and
      amortizing loans are scheduled based on their anticipated cash flow.
      Interest-bearing demand accounts, money market accounts and savings accounts
      do
      not have stated maturities or repricing terms and can be withdrawn or repriced
      at any time. This may impact QNB’s margin if more expensive alternative sources
      of deposits are required to fund loans or deposit runoff. Management projects
      the repricing characteristics of these accounts based on historical performance
      and assumptions that it believes reflect their rate sensitivity.





A
      positive gap results when the amount of interest rate sensitive assets exceeds
      interest rate sensitive liabilities. A negative gap results when the amount
      of
      interest rate sensitive liabilities exceeds interest rate sensitive
      assets.


Page
          35


**QNB
      CORP. AND SUBSIDIARY**





**MANAGEMENT'S
      DISCUSSION AND ANALYSIS OF FINANCIAL**


**CONDITION
      AND RESULTS OF OPERATIONS**


**INTEREST
      RATE SENSITIVITY (Continued)**





QNB
      primarily focuses on the management of the one-year interest rate sensitivity
      gap. At March 31, 2008, interest-earning assets scheduled to mature or likely
      to
      be called, repriced or repaid in one year were $219,935,000. Interest-sensitive
      liabilities scheduled to mature or reprice within one year were $339,355,000.
      The one-year cumulative gap, which reflects QNB’s interest sensitivity over a
      period of time, was a negative $119,420,000 at March 31, 2008. The cumulative
      one-year gap equals -20.2% of total rate sensitive assets. This gap position
      compares to a negative gap position of $129,740,000, or -22.2%, of total rate
      sensitive assets, at December 31, 2007. The negative gap position is primarily
      the result of customers’ preference for keeping time deposit maturities short
      while interest rates were increasing during 2006 and 2007. This preference
      was
      met as banks, including the Bank, tended to offer the highest yielding time
      deposits in the maturity range of six months through 15 months. At March 31,
      2008, $219,417,000, or 81.5%, of total time deposits were scheduled to reprice
      or mature in the next twelve months compared to $199,383,000, or 78.2%, of
      total
      time deposits at December 31, 2007. Also contributing to the negative gap
      position are the municipal accounts which are indexed to the Federal funds
      rate
      and the Select money market product, while not indexed directly with the Federal
      funds rate, moves closely with changes in that rate. On the liability side
      the
      increase in short maturity time deposits between December 31, 2007 and March
      31,
      2008 was offset by a $11,328,000 decline in commercial sweep accounts and a
      $3,926,000 decline in Federal funds purchased, both reported in short-term
      borrowings and a $5,128,000 decline in municipal balances. On the asset side,
      the amount of assets maturing or repricing increased by $9,132,000 from December
      31, 2007 to March 31, 2008. Loans that reprice or mature in the next twelve
      months increased by $10,052,000 when comparing the same two time periods. With
      the sharp decline in interest rates in 2008, QNB’s cost of funds should decline
      as the maturing time deposits reprice at lower rates. The challenge will be
      to
      retain these deposits given the competitive environment. In this lower interest
      rate environment, the repricing characteristics of investments and loans will
      likely shorten as prepayment speeds increase resulting in more funds being
      invested at lower yields.





QNB
      also
      uses a simulation model to assess the impact of changes in interest rates on
      net
      interest income. The model reflects management’s assumptions related to asset
      yields and rates paid on liabilities, deposit sensitivity, and the size,
      composition and maturity or repricing characteristics of the balance sheet.
      The
      assumptions are based on the interest rate environment at period end. Management
      also evaluates the impact of higher and lower interest rates by simulating
      the
      impact on net interest income of changing rates. While management performs
      rate
      shocks of 100, 200 and 300 basis points, it believes that, given the level
      of
      interest rates at March 31, 2008, it is unlikely that interest rates would
      decline by 200 or 300 basis points. The simulation results can be found in
      the
      chart on page 37.





The
      decline in net interest income in a rising rate environment is consistent with
      the gap analysis and reflects the fixed-rate nature of the investment and loan
      portfolios and the increased expense associated with short-term time deposits
      which would increase in rate as they matured and the municipal accounts and
      Select money market accounts which would likely reprice as the Federal funds
      rate increased. An increase in rates paid on short-term borrowings would also
      negatively impact net interest income in a rising rate environment. Net interest
      income declines in a falling rate environment This result reflects the
      hypothetical interest rate floors on interest-bearing transaction accounts,
      regular money market accounts and savings accounts. In addition, in a lower
      rate
      environment, the cash flow or repricing characteristics from both the loan
      and
      investment portfolios would increase and be reinvested at lower rates. Loan
      customers would either refinance their fixed rate loans at lower rates or
      request rate reductions on their existing loans. The decline in net income
      as
      rates fall are inconsistent with the gap analysis and identify some of the
      weaknesses of gap analysis which does not take into consideration the magnitude
      of the rate change on different instruments, the timing of the rate change,
      or
      interest rate floors.


Page
          36


**QNB
      CORP. AND SUBSIDIARY**





**MANAGEMENT'S
      DISCUSSION AND ANALYSIS OF FINANCIAL**


**CONDITION
      AND RESULTS OF OPERATIONS**


**INTEREST
      RATE SENSITIVITY (Continued)**





Actual
      results may differ from simulated results due to various factors including
      time,
      magnitude and frequency of interest rate changes, the relationship or spread
      between various rates, loan pricing and deposit sensitivity, and asset/liability
      strategies.





Management
      believes that the assumptions utilized in evaluating the vulnerability of QNB’s
      net interest income to changes in interest rates approximate actual experience.
      However, the interest rate sensitivity of QNB’s assets and liabilities, as well
      as the estimated effect of changes in interest rates on net interest income,
      could vary substantially if different assumptions are used or actual experience
      differs from the experience on which the assumptions were based.





The
      nature of QNB’s current operation is such that it is not subject to foreign
      currency exchange or commodity price risk. At March 31, 2008, QNB did not have
      any hedging transactions in place such as interest rate swaps, caps or floors.





The
      table
      below summarizes estimated changes in net interest income over a twelve-month
      period, under alternative interest rate scenarios.





Change in Interest Rates
            
            Net Interest
              Income
            
            Dollar Change
            
            % Change+300
                Basis Points
            
            $
            19,032
            
            $
            (513
            )
            
            (2.62
            )%+200
                Basis Points
            
            
            19,303
            
            
            (242
            )
            
            (1.24
            )+100
                Basis Points
            
            
            19,466
            
            
            (79
            )
            
            (0.40
            )FLAT
                RATE
            
            
            19,545
            
            
            -
            
            
            --100
                Basis Points
            
            
            19,082
            
            
            (463
            )
            
            (2.37
            )-200
                Basis Points
            
            
            18,408
            
            
            (1,137
            )
            
            (5.82
            )




Page
          37


**QNB
      CORP. AND SUBSIDIARY**





**MANAGEMENT'S
      DISCUSSION AND ANALYSIS OF FINANCIAL**


**CONDITION
      AND RESULTS OF OPERATIONS**


**ITEM 3.**
              **QUANTITATIVE
                  AND QUALITATIVE DISCLOSURE ABOUT MARKET
                  RISK.**





The
      information required in response to this item is set forth in Item 2,
      above.





**ITEM 4.**
              **CONTROLS
                  AND PROCEDURES**





We
      maintain a system of controls and procedures designed to provide reasonable
      assurance as to the reliability of the consolidated financial statements and
      other disclosures included in this report, as well as to safeguard assets from
      unauthorized use or disposition. We evaluated the effectiveness of the design
      and operation of our disclosure controls and procedures under the supervision
      and with the participation of management, including our Chief Executive Officer
      and Chief Financial Officer. Based upon that evaluation, our Chief Executive
      Officer and Chief Financial Officer concluded that our disclosure controls
      and
      procedures are effective as of the end of the period covered by this report.
      No
      changes were made to our internal control over financial reporting during the
      fiscal quarter covered by this report that have materially affected, or are
      reasonably likely to materially affect, our internal control over financial
      reporting.


Page
          38


**QNB
      CORP. AND SUBSIDIARY**




**PART
      II. OTHER INFORMATION**




**MARCH
      31, 2008**





**Item
                1.**
              **Legal
                  Proceedings**




None.





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




There
      were no material changes to the Risk Factors described in Item 1A in QNB’s
      Annual  Report
      on
      Form 10-K for the period ended December 31, 2007.





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




None.





**Item
              3.**
            **Default
                Upon Senior Securities**




None.





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




None.





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




None.





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




Exhibit
                3(i)
            
            Articles
                of Incorporation of Registrant, as amended. (Incorporated by reference
                to
                Exhibit 3(i) of Registrants Form DEF 14-A filed with the Commission
                on
                April 15, 2005).Exhibit
                3(ii)
            
            Bylaws
                of Registrant, as amended. (Incorporated by reference to Exhibit
                3(ii) of
                Registrants Form 8-K filed with the Commission on January 23,
                2006).Exhibit
                11
            
            Statement
                Re: Computation of Earnings Per Share. (Included in Part I, Item
                I,
                hereof.)Exhibit
                31.1
            
            Section
                302 Certification of President and CEOExhibit
                31.2
            
            Section
                302 Certification of Chief Financial OfficerExhibit
                32.1
            
            Section
                906 Certification of President and CEOExhibit
                32.2
            
            Section
                906 Certification of Chief Financial
                Officer




Page
          39


**SIGNATURES**





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





QNB
                Corp.Date:
            May
                12, 2008
            
            By:/s/
                Thomas J. BiskoThomas
                J. BiskoPresident/CEODate:
            May
                12, 2008
            
            By:/s/
                Bret H. KrevolinBret
                H. KrevolinChief
                Financial Officer