**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 September
      30, 2007




OR




o
            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
o





Indicate
      by check mark whether the Registrant is a large accelerated filer, an
      accelerated filer, or a non-accelerated filer. See definition of “accelerated
      filer and large accelerated filer” in Rule 12b-2 of the Exchange Act.




Large
      accelerated filer o Accelerated
      filer þ Non-accelerated
      filer o





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


Yes o 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 November 7, 2007Common
                  Stock, par value $.625
              3,133,100







**QNB
        CORP. AND SUBSIDIARY**
 
 **FORM
        10-Q**
 
 **QUARTER
        ENDED SEPTEMBER 30, 2007**
 
 **INDEX**




**PAGE****PART
                  I - FINANCIAL INFORMATION****ITEM
                  1.**
              
              **CONSOLIDATED
                  FINANCIAL STATEMENTS (Unaudited)**Consolidated
                  Statements of Income for Three and Nine Months Ended September
                  30, 2007
                  and 2006
              
              1Consolidated
                  Balance Sheets at September 30, 2007 and December 31, 2006
              
              2Consolidated
                  Statements of Cash Flows for Nine Months Ended September 30, 2007
                  and
                  2006
              
              3Notes
                  to Consolidated Financial Statements
              
              4**ITEM
                  2.**
              
              **MANAGEMENT'S
                  DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL
                  CONDITION**
              
              13**ITEM
                  3.**
              
              **QUANTITATIVE
                  AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK**
              
              40**ITEM
                  4.**
              
              **CONTROLS
                  AND PROCEDURES**
              
              40**PART
                  II - OTHER INFORMATION****ITEM
                  1.**
              
              **LEGAL
                  PROCEEDINGS**
              
              41**ITEM
                  1A.**
              
              **RISK
                  FACTORS**
              
              41**ITEM
                  2.**
              
              **UNREGISTERED
                  SALES OF EQUITY SECURITIES AND USE OF PROCEEDS**
              
              41**ITEM
                  3.**
              
              **DEFAULTS
                  UPON SENIOR SECURITIES**
              
              41**ITEM
                  4.**
              
              **SUBMISSIONS
                  OF MATTERS TO A VOTE OF SECURITY HOLDERS**
              
              41**ITEM
                  5.**
              
              **OTHER
                  INFORMATION**
              ****
              41****
              
              ****
              ****
              ******ITEM
                  6.**
              
              **EXHIBITS**
              
              41**SIGNATURES**
              
              
              
              42**CERTIFICATIONS**


*QNB
          Corp. and Subsidiary*
 
 CONSOLIDATED
          STATEMENTS OF INCOME
 
 (in
                    thousands, except share data)(unaudited)**Three
                    Months**
                
                **Nine
                    Months****Ended
                    September 30,**
                
                **Ended
                    September 30,****2007**
                
                **2006**
                
                **2007**
                
                **2006****Interest
                    Income**Interest
                    and fees on loans
                
                $
                6,272
                
                $
                5,471
                
                $
                18,255
                
                $
                15,490Interest
                    and dividends on investment securities:Taxable
                
                
                2,130
                
                
                2,151
                
                
                6,395
                
                
                6,226Tax-exempt
                
                
                426
                
                
                458
                
                
                1,291
                
                
                1,445Interest
                    on Federal funds sold
                
                
                173
                
                
                140
                
                
                290
                
                
                202Interest
                    on interest-bearing balances and other interest income
                
                
                39
                
                
                58
                
                
                159
                
                
                170Total
                    interest income
                
                
                9,040
                
                
                8,278
                
                
                26,390
                
                
                23,533**Interest
                    Expense**Interest
                    on depositsInterest-bearing
                    demand
                
                
                682
                
                
                696
                
                
                1,777
                
                
                1,666Money
                    market
                
                
                409
                
                
                425
                
                
                1,200
                
                
                1,068Savings
                
                
                44
                
                
                47
                
                
                134
                
                
                145Time
                
                
                2,171
                
                
                1,612
                
                
                6,146
                
                
                4,464Time
                    over $100,000
                
                
                723
                
                
                469
                
                
                2,089
                
                
                1,314Interest
                    on short-term borrowings
                
                
                200
                
                
                213
                
                
                590
                
                
                522Interest
                    on long-term debt
                
                
                306
                
                
                776
                
                
                1,398
                
                
                2,298Total
                    interest expense
                
                
                4,535
                
                
                4,238
                
                
                13,334
                
                
                11,477Net
                    interest income
                
                
                4,505
                
                
                4,040
                
                
                13,056
                
                
                12,056Provision
                    for loan losses
                
                
                150
                
                
                60
                
                
                375
                
                
                105Net
                    interest income after provision for loan losses
                
                
                4,355
                
                
                3,980
                
                
                12,681
                
                
                11,951**Non-Interest
                    Income**Fees
                    for services to customers
                
                
                469
                
                
                488
                
                
                1,360
                
                
                1,392ATM
                    and debit card income
                
                
                226
                
                
                196
                
                
                633
                
                
                575Income
                    on bank-owned life insurance
                
                
                64
                
                
                63
                
                
                189
                
                
                186Mortgage
                    servicing fees
                
                
                28
                
                
                26
                
                
                78
                
                
                74Net
                    gain (loss) on investment securities available-for-sale
                
                
                -
                
                
                196
                
                
                (2,469
                )
                
                611Net
                    gain on sale of loans
                
                
                50
                
                
                20
                
                
                78
                
                
                44Other
                    operating income
                
                
                152
                
                
                158
                
                
                388
                
                
                424Total
                    non-interest income
                
                
                989
                
                
                1,147
                
                
                257
                
                
                3,306**Non-Interest
                    Expense**Salaries
                    and employee benefits
                
                
                1,826
                
                
                1,820
                
                
                5,554
                
                
                5,439Net
                    occupancy expense
                
                
                311
                
                
                287
                
                
                911
                
                
                862Furniture
                    and equipment expense
                
                
                257
                
                
                269
                
                
                774
                
                
                755Marketing
                    expense
                
                
                156
                
                
                139
                
                
                480
                
                
                436Third
                    party services
                
                
                181
                
                
                164
                
                
                547
                
                
                529Telephone,
                    postage and supplies expense
                
                
                134
                
                
                120
                
                
                399
                
                
                396State
                    taxes
                
                
                122
                
                
                112
                
                
                366
                
                
                339Loss
                    on prepayment of Federal Home Loan Bank advances
                
                
                -
                
                
                -
                
                
                740
                
                
                -Other
                    expense
                
                
                340
                
                
                343
                
                
                1,030
                
                
                1,016Total
                    non-interest expense
                
                
                3,327
                
                
                3,254
                
                
                10,801
                
                
                9,772Income
                    before income taxes
                
                
                2,017
                
                
                1,873
                
                
                2,137
                
                
                5,485Provision
                    for income taxes
                
                
                463
                
                
                356
                
                
                111
                
                
                988**Net
                    Income**
                
                $
                1,554
                
                $
                1,517
                
                $
                2,026
                
                $
                4,497**Earnings
                    Per Share - Basic**
                
                $
                .50
                
                $
                .48
                
                $
                .65
                
                $
                1.44**Earnings
                    Per Share - Diluted**
                
                $
                .49
                
                $
                .48
                
                $
                .64
                
                $
                1.42**Cash
                    Dividends Per Share**
                
                $
                .22
                
                $
                .21
                
                $
                .66
                
                $
                .63
 *The
            accompanying notes are an integral part of the unaudited consolidated
            financial
            statements.*
  Page
            1
 *QNB
          Corp. and Subsidiary*
 CONSOLIDATED
          BALANCE SHEETS
 
 ****(in
                    thousands, except share data)(unaudited)**September
                  30,**
                
                **December
                  31,****2007**
                
                **2006****Assets**Cash
                    and due from banks
                
                $
                16,646
                
                $
                12,439Federal
                    funds sold
                
                
                -
                
                
                11,664Total
                    cash and cash equivalents
                
                
                16,646
                
                
                24,103Investment
                    securitiesAvailable-for-sale
                    (cost $187,096 and $221,053)
                
                
                187,968
                
                
                219,818Held-to-maturity
                    (fair value $4,214 and $5,168)
                
                
                4,097
                
                
                5,021Non-marketable
                    equity securities
                
                
                1,268
                
                
                3,465Loans
                    held-for-sale
                
                
                -
                
                
                170Total
                    loans, net of unearned costs
                
                
                367,054
                
                
                343,496Allowance
                    for loan losses
                
                
                (3,001
                )
                
                (2,729
                )Net
                    loans
                
                
                364,053
                
                
                340,767Bank-owned
                    life insurance
                
                
                8,545
                
                
                8,415Premises
                    and equipment, net
                
                
                6,508
                
                
                6,442Accrued
                    interest receivable
                
                
                3,088
                
                
                2,874Other
                    assets
                
                
                3,316
                
                
                3,464Total
                    assets
                
                $
                595,489
                
                $
                614,539**Liabilities**DepositsDemand,
                    non-interest bearing
                
                $
                54,432
                
                $
                50,740Interest-bearing
                    demand
                
                
                98,035
                
                
                98,164Money
                    market
                
                
                50,127
                
                
                51,856Savings
                
                
                43,211
                
                
                45,330Time
                
                
                187,869
                
                
                174,657Time
                    over $100,000
                
                
                60,865
                
                
                58,175Total
                    deposits
                
                
                494,539
                
                
                478,922Short-term
                    borrowings
                
                
                20,989
                
                
                30,113Long-term
                    debt
                
                
                25,000
                
                
                52,000Accrued
                    interest payable
                
                
                2,040
                
                
                2,240Other
                    liabilities
                
                
                1,048
                
                
                854Total
                    liabilities
                
                
                543,616
                
                
                564,129**Shareholders'
                    Equity**Common
                    stock, par value $.625 per share;authorized
                    10,000,000 shares; 3,236,986 and 3,235,284 shares issued;3,130,300
                    and 3,128,598 shares outstanding
                
                
                2,023
                
                
                2,022Surplus
                
                
                9,819
                
                
                9,707Retained
                    earnings
                
                
                40,950
                
                
                40,990Accumulated
                    other comprehensive income (loss), net
                
                
                575
                
                
                (815
                )Treasury
                    stock, at cost; 106,686 shares
                
                
                (1,494
                )
                
                (1,494
                )Total
                    shareholders' equity
                
                
                51,873
                
                
                50,410Total
                    liabilities and shareholders' equity
                
                $
                595,489
                
                $
                614,539
 *The
            accompanying notes are an integral part of the unaudited consolidated
            financial
            statements.*
  Page
            2
  *QNB
          Corp. and Subsidiary*
 CONSOLIDATED
          STATEMENTS OF CASH FLOWS
 
 (in
                    thousands)(unaudited)**Nine
                    Months Ended September 30,**
                
                **2007**
                
                **2006****Operating
                    Activities**Net
                    income
                
                $
                2,026
                
                $
                4,497Adjustments
                    to reconcile net income to net cash provided by operating
                    activitiesDepreciation
                    and amortization
                
                
                547
                
                
                539Provision
                    for loan losses
                
                
                375
                
                
                105Securities
                    losses (gains)
                
                
                2,469
                
                
                (611
                )Net
                    gain on sale of loans
                
                
                (78
                )
                
                (44
                )(Gain)
                    loss on sale of premises and equipment and repossessed
                    assets
                
                
                (1
                )
                
                1Proceeds
                    from sales of residential mortgages
                
                
                4,895
                
                
                3,048Originations
                    of residential mortgages held-for-sale
                
                
                (4,716
                )
                
                (2,976
                )Income
                    on bank-owned life insurance
                
                
                (189
                )
                
                (186
                )Life
                    insurance (premiums)/proceeds net
                
                
                59
                
                
                (21
                )Stock-based
                    compensation expense
                
                
                77
                
                
                86Deferred
                    income tax benefit
                
                
                (106
                )
                
                (1
                )Net
                    (increase) decrease in income taxes receivable
                
                
                (209
                )
                
                61Net
                    increase in accrued interest receivable
                
                
                (214
                )
                
                (493
                )Net
                    (accretion) amortization of premiums and discounts
                
                
                (27
                )
                
                419Net
                    (decrease) increase in accrued interest payable
                
                
                (200
                )
                
                526Increase
                    in other assets
                
                
                (293
                )
                
                (445
                )Increase
                    in other liabilities
                
                
                194
                
                
                103Net
                    cash provided by operating activities
                
                
                4,609
                
                
                4,608**Investing
                    Activities**Proceeds
                    from maturities and calls of investment securitiesavailable-for-sale
                
                
                23,769
                
                
                16,753held-to-maturity
                
                
                920
                
                
                -Proceeds
                    from sales of investment securitiesavailable-for-sale
                
                
                102,007
                
                
                31,019Purchase
                    of investment securitiesavailable-for-sale
                
                
                (94,168
                )
                
                (27,560
                )Proceeds
                    from sales of non-marketable equity securities
                
                
                2,846
                
                
                1,690Purchase
                    of non-marketable equity securities
                
                
                (649
                )
                
                (1,481
                )Net
                    increase in loans
                
                
                (23,732
                )
                
                (30,505
                )Net
                    purchases of premises and equipment
                
                
                (614
                )
                
                (1,659
                )Proceeds
                    from sale of repossessed assets
                
                
                92
                
                
                9Net
                    cash provided (used) by investing activities
                
                
                10,471
                
                
                (11,734
                )**Financing
                    Activities**Net
                    increase (decrease) in non-interest bearing deposits
                
                
                3,692
                
                
                (4,807
                )Net
                    (decrease) increase in interest-bearing non-maturity
                    deposits
                
                
                (3,977
                )
                
                9,469Net
                    increase in time deposits
                
                
                15,902
                
                
                169Net
                    (decrease) increase in short-term borrowings
                
                
                (9,124
                )
                
                2,132Repayment
                    of long-term debt
                
                
                (52,000
                )
                
                -Proceeds
                    from issuance of long-term debt
                
                
                25,000
                
                
                -Tax
                    benefit from exercise of stock options
                
                
                -
                
                
                66Cash
                    dividends paid
                
                
                (2,066
                )
                
                (1,970
                )Proceeds
                    from issuance of common stock
                
                
                36
                
                
                383Net
                    cash (used) provided by financing activities
                
                
                (22,537
                )
                
                5,442Decrease
                    in cash and cash equivalents
                
                
                (7,457
                )
                
                (1,684
                )Cash
                    and cash equivalents at beginning of year
                
                
                24,103
                
                
                20,807Cash
                    and cash equivalents at end of period
                
                $
                16,646
                
                $
                19,123**Supplemental
                    Cash Flow Disclosures**Interest
                    paid
                
                $
                13,534
                
                $
                10,951Income
                    taxes paid
                
                
                410
                
                
                834Non-Cash
                    TransactionsChange
                    in net unrealized holding gains (losses), net of taxes, on
                    available-for-sale securities
                
                
                1,390
                
                
                15Transfer
                    of loans to repossessed assets
                
                
                103
                
                
                9
 *The
          accompanying notes are an integral part of the unaudited consolidated financial
          statements.*
  Page
            3


**QNB
        CORP. AND SUBSIDIARY**
 
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**
 **SEPTEMBER
        30, 2007 AND 2006, AND DECEMBER 31, 2006**
 **(Unaudited)**




1.
      BASIS
      OF PRESENTATION





The
      accompanying unaudited consolidated financial statements include the accounts
      of
      QNB Corp. (QNB) and its wholly-owned subsidiary, The Quakertown National Bank
      (the Bank). 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 2006
      Annual Report incorporated in the Form 10-K. Operating results for the three
      and
      nine-month periods ended September 30, 2007 are not necessarily indicative
      of
      the results that may be expected for the year ending December 31, 2007.





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.
      Certain items in the 2006 consolidated financial statements have been
      reclassified to conform to the 2007 financial statement presentation format.
      These reclassifications had no effect on net income. 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





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 $20,000 and $27,000 for the three months
      ended September 30, 2007 and 2006, respectively, and $77,000 and $86,000 for
      the
      nine months ended September 30, 2007 and 2006, respectively. As
      of
      September 30, 2007, there was approximately $80,000 of unrecognized compensation
      cost related to unvested share-based compensation awards granted that is
      expected to be recognized over the next 27 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 authorizes 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
      September 30, 2007, there were 225,058 options granted, 9,994 options cancelled,
      34,641 options exercised and 180,423 options outstanding under this Plan. 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 September 30, 2007, there were 26,300 options granted and
      outstanding under this Plan.




Page
          4




**QNB
      CORP. AND SUBSIDIARY**





**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**


**SEPTEMBER
      30, 2007 AND 2006, AND DECEMBER 31, 2006**


**(Unaudited)**


2.
      STOCK-BASED COMPENSATION (Continued):





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 and nine-months ended September
      30:


Options
                  granted
              
              2007
              
              2006Risk-free
                  interest rate
              
              
              4.74
              %
              
              4.27
              %Dividend
                  yield
              
              
              3.50
              
              
              3.23Volatility
              
              
              15.99
              
              
              13.28Expected
                  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 2007 and 2006 was $3.57 and $3.13,
      respectively.





Stock
      option activity during the nine months ended September 30, 2007 was as
      follows:


WeightedAverageWeighted
              
              Remaining
              
              AggregateNumber
                  of
              
              Average
              
              Contractual
              
              IntrinsicOptions
              
              Exercise
                  Price
              
              Term
                  (in yrs.)
              
              ValueOutstanding
                  at January 1, 2007
              
              
              189,323
              
              $
              20.14
              
              
              4.92Exercised
              
              
              -
              
              
              -Granted
              
              
              17,400
              
              
              25.15Outstanding
                  at September 30, 2007
              
              
              206,723
              
              $
              20.56
              
              
              4.19
              
              $
              1,224Exercisable
                  at September 30, 2007
              
              
              154,523
              
              $
              18.10
              
              
              3.92
              
              $
              1,224




Page
          5




**QNB
      CORP. AND SUBSIDIARY**





**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**


**SEPTEMBER
      30, 2007 AND 2006, AND DECEMBER 31, 2006**


**(Unaudited)**


3.
      EARNINGS PER SHARE





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





For
                the Three Months
              Ended
                September 30,
            
            For
                the Nine Months
              EndedSeptember
                30,2007
            
            2006
            
            2007
            
            2006Numerator
                for basic and diluted earningsper
                share-net income
            
            $
            1,554
            
            $
            1,517
            
            $
            2,026
            
            $
            4,497Denominator
                for basic earnings per share-weighted
                average shares outstanding
            
            
            3,130,300
            
            
            3,126,985
            
            
            3,129,359
            
            
            3,123,800Effect
                of dilutive securities-employeestock
                options
            
            
            45,871
            
            
            51,086
            
            
            45,152
            
            
            52,300Denominator
                for diluted earnings pershare-
                adjusted weighted averageshares
                outstanding
            
            
            3,176,171
            
            
            3,178,071
            
            
            3,174,511
            
            
            3,176,100Earnings
                per share-basic
            
            $
            .50
            
            $
            .48
            
            $
            .65
            
            $
            1.44Earnings
                per share-diluted
            
            $
            .49
            
            $
            .48
            
            $
            .64
            
            $
            1.42





There
      were 69,700 stock options that were anti-dilutive for the three-month and
      nine-month periods ended September 30, 2007. There were 52,300 and 34,900 stock
      options that were anti-dilutive for the three and nine month periods ended
      September 30, 2006, respectively. These stock options were not included in
      the
      above calculation.




Page
          6


**QNB
        CORP. AND SUBSIDIARY**
 
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**
 **SEPTEMBER
        30, 2007 AND 2006, AND DECEMBER 31, 2006**
 **(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
      periods ended September 30, 2007 and 2006:


For
                  the Three Months
              
              For
                  the Nine MonthsEnded
                  September 30,
              
              Ended
                  September 30,2007
              
              2006
              
              2007
              
              2006Unrealized
                  holding gains (losses) arising during the period on securities
                  available
                  for sale (net of (tax expense) tax benefit of $(609), $(1,222),
                  $124 and
                  $(215),respectively)
              
              $
              1,183
              
              $
              2,373
              
              $
              (240
              )
              $
              418Reclassification
                  adjustment for (gains)losses included in net income (net of tax
                  expense
                  (taxbenefit) of $0,$67, $(839) and $208, respectively)
              
              
              -
              
              
              (129
              )
              
              1,630
              
              
              (403
              )Net
                  change in unrealized gains during the period
              
              
              1,183
              
              
              2,244
              
              
              1,390
              
              
              15Accumulated
                  other comprehensive losses,beginning of period
              
              
              (608
              )
              
              (3,491
              )
              
              (815
              )
              
              (1,262
              )Accumulated
                  other comprehensive income (losses), end of period
              
              $
              575
              
              $
              (1,247
              )
              $
              575
              
              $
              (1,247
              )Net
                  income
              
              $
              1,554
              
              $
              1,517
              
              $
              2,026
              
              $
              4,497Other
                  comprehensive income, net of tax:Unrealized
                  holding gains arising during the period (net of tax expense of
                  $609,$1,155, $715 and $7, respectively)
              
              
              1,183
              
              
              2,244
              
              
              1,390
              
              
              15Comprehensive
                  income
              
              $
              2,737
              
              $
              3,761
              
              $
              3,416
              
              $
              4,512




Page
          7




**QNB
      CORP. AND SUBSIDIARY**





**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**


**SEPTEMBER
      30, 2007 AND 2006, AND DECEMBER 31, 2006**


**(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 September 30, 2007 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**
              **September
                30, 2007**Securities
                available-for-sale
            
            $
            4,818
            
            $
            183,150
            
            $
            187,968





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
      September 30, 2007, 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 September 30, 2007,
      all
      of the financial assets measured at fair value utilized the market
      approach.




Page
          8


**QNB
        CORP. AND SUBSIDIARY**
 
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**
 **SEPTEMBER
        30, 2007 AND 2006, AND DECEMBER 31, 2006**
 **(Unaudited)**


6.
      LOANS





The
      following table presents loans by category as of September 30, 2007 and December
      31, 2006:





September
                30,
              2007
            
            December
                31,
              2006Commercial
                and industrial
            
            $
            82,395
            
            $
            72,718Construction
            
            
            20,544
            
            
            10,503Real
                estate-commercial
            
            
            125,954
            
            
            118,166Real
                estate-residential
            
            
            119,666
            
            
            123,531Consumer
            
            
            4,791
            
            
            5,044Indirect
                lease financing
            
            
            13,570
            
            
            13,405Total
                loans
            
            
            366,920
            
            
            343,367Unearned
                costs
            
            
            134
            
            
            129Total
                loans net of unearned costs
            
            $
            367,054
            
            $
            343,496




7.
      INTANGIBLE ASSETS





As
      a
      result of a purchase of deposits in 1997, QNB recorded a deposit premium of
      $511,000. This premium is being amortized, for book purposes, over ten years
      and
      is reviewed annually for impairment. The net deposit premium intangible was
      $4,000 and $43,000 at September 30, 2007 and December 31, 2006, respectively.
      Amortization expense for core deposit intangibles was $12,000 for both
      three-month periods ended September 30, 2007 and 2006 and $38,000 for both
      nine-month periods ended September 30, 2007 and 2006.





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


September
                  30,
              
              December
                  31,2007
              
              2006Mortgage
                  servicing rights beginning balance
              
              $
              472
              
              $
              528Mortgage
                  servicing rights capitalized
              
              
              37
              
              
              31Mortgage
                  servicing rights amortized
              
              
              (51
              )
              
              (87
              )Fair
                  market value adjustments
              
              
              -
              
              
              -Mortgage
                  servicing rights ending balance
              
              $
              458
              
              $
              472Mortgage
                  loans serviced for others
              
              $
              69,498
              
              $
              70,816Amortization
                  expense of intangibles
              
              $
              89
              
              $
              138




Page
          9




**QNB
      CORP. AND SUBSIDIARY**





**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**


**SEPTEMBER
      30, 2007 AND 2006, AND DECEMBER 31, 2006**


**(Unaudited)**


7.
      INTANGIBLE ASSETS (Continued):





The
      annual estimated amortization expense of intangible assets for each of the
      five
      succeeding fiscal years is as follows:





**Estimated
      Amortization Expense**


For
                  the Year Ended 12/31/07
              
              $
              116For
                  the Year Ended 12/31/08
              
              
              87For
                  the Year Ended 12/31/09
              
              
              75For
                  the Year Ended 12/31/10
              
              
              61For
                  the Year Ended 12/31/11
              
              
              50





8.
      INCOME
      TAXES





In
      July
      2006, the Financial Accounting Standards Board (FASB) issued Interpretation
      No.
      48, *Accounting
      for Uncertainty in Income Taxes* (FIN
      48).  FIN 48 clarifies the accounting for uncertainty in income taxes
      recognized in an enterprise’s financial statements in accordance with FASB
      Statement No. 109, *Accounting
      for Income Taxes* . 
      FIN 48 is effective for fiscal years beginning after December 15, 2006. QNB
      adopted FIN 48 as of January 1, 2007. QNB has evaluated its tax positions
      as of January 1, 2007.  A tax position is recognized as a benefit only if
      it is “more likely than not” that the tax position would be sustained in a tax
      examination, with a tax examination being presumed to occur. The amount
      recognized is the largest amount of tax benefit that has more than a 50 percent
      likelihood of being realized on examination. For tax positions not meeting
      the
“more likely than not” test, no tax benefit is recorded. Under the
“more-likely-than-not” threshold guidelines, QNB believes no significant
      uncertain tax positions exist, either individually or in the aggregate, that
      would give rise to the non-recognition of an existing tax
      benefit. As
      of
      January 1, 2007, QNB had no material unrecognized tax benefits or accrued
      interest and penalties. QNB’s
      policy is to account for interest as a component of interest expense and
      penalties as a component of other expense. QNB and its subsidiary are subject
      to
      U.S. federal income tax as well as income tax of the Commonwealth of
      Pennsylvania. QNB is no longer subject to examination by U.S. Federal taxing
      authorities for years before 2003 and for all state income taxes through
      2003.





9.
      RELATED PARTY TRANSACTIONS





As
      of
      September 30, 2007, loans receivable from directors, principal officers, and
      their related interests totaled $4,161,000. 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.




Page
          10




**QNB
      CORP. AND SUBSIDIARY**





**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**


**SEPTEMBER
      30, 2007 AND 2006, AND DECEMBER 31, 2006**


**(Unaudited)**


10.
      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:





September
                30,
              2007
            
            December
                31,
              2006Commitments
                to extend credit and unused lines of credit
            
            $
            75,691
            
            $
            69,926Standby
                letters of credit
            
            
            3,658
            
            
            3,422$
            79,349
            
            $
            73,348





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 September
      30, 2007 and December 31, 2006 for guarantees under standby letters of credit
      issued is not material.




Page
          11




**QNB
      CORP. AND SUBSIDIARY**





**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**


**SEPTEMBER
      30, 2007 AND 2006, AND DECEMBER 31, 2006**


**(Unaudited)**


11.
      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 EITF
      06-4, 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. QNB is currently evaluating the impact the adoption of the
      standard will have on its results of operations and financial
      position.





In
      September 2006, the FASB reached consensus on the guidance provided by Emerging
      Issues Task Force Issue 06-5 (EITF 06-5), Accounting for Purchase of Life
      Insurance—Determining the Amount That Could Be Realized in Accordance with FASB
      Technical Bulletin No. 85-4, Accounting for Purchases of Life Insurance. EITF
      06-5 states that a policyholder should consider any additional amounts included
      in the contractual terms of the insurance policy other than the cash surrender
      value in determining the amount that could be realized under the insurance
      contract. EITF 06-5 also states that a policyholder should determine the amount
      that could be realized under the life insurance contract assuming the surrender
      of an individual-life by individual-life policy (or certificate by certificate
      in a group policy). EITF 06-5 is effective for fiscal years beginning after
      December 15, 2006. QNB adopted EITF 06-5 as of January 1, 2007. The adoption
      of
      the standard had no effect on QNB’s results of operations and financial
      position.





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 is
      effective for QNB January 1, 2008. QNB is evaluating the impact that the
      adoption of SFAS No. 159 will have on our consolidated financial
      statements.





In
      March
      2007, the FASB ratified Emerging Issues Task Force Issue No. 06-10 *Accounting
      for Collateral Assignment Split-Dollar Life Insurance
      Agreements* (EITF
      06-10). EITF 06-10 provides guidance for determining a liability for the
      postretirement benefit obligation as well as recognition and measurement of
      the
      associated asset on the basis of the terms of the collateral assignment
      agreement. EITF 06-10 is effective for fiscal years beginning after December
      15,
      2007. QNB is currently assessing the impact of EITF 06-10 on its consolidated
      financial position and results of operations.





In
      May
      2007, the FASB issued FASB Staff Position (“FSP”) FIN 48-1 “Definition of
      Settlement in FASB Interpretation No. 48” (FSP FIN 48-1). FSP FIN 48-1 provides
      guidance on how to determine whether a tax position is effectively settled
      for
      the purpose of recognizing previously unrecognized tax benefits. FSP FIN 48-1
      is
      effective retroactively to January 1, 2007. The implementation of this standard
      did not have a material impact on QNB’s consolidated financial position or
      results of operations.




Page
          12




**QNB
      CORP. AND SUBSIDIARY**





**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**


**SEPTEMBER
      30, 2007 AND 2006, AND DECEMBER 31, 2006**


**(Unaudited)**


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





QNB
      Corp.
      (the Company) is a bank holding company headquartered in Quakertown,
      Pennsylvania. The Company, through its wholly-owned subsidiary, The Quakertown
      National 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”.





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 the Company’s 2006 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
          13




**QNB
      CORP. AND SUBSIDIARY**





**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**


**SEPTEMBER
      30, 2007 AND 2006, AND DECEMBER 31, 2006**


**(Unaudited)**


**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
          14




**QNB
      CORP. AND SUBSIDIARY**





**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**


**SEPTEMBER
      30, 2007 AND 2006, AND DECEMBER 31, 2006**


**(Unaudited)**


**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
          15




**QNB
      CORP. AND SUBSIDIARY**





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


**OF
      OPERATIONS AND FINANCIAL CONDITION**


**RESULTS
      OF OPERATIONS - OVERVIEW**





QNB
      Corp.
      earns its net income primarily through its subsidiary, The Quakertown National
      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 high level of service at all points
      of
      contact.





Net
      income for the third quarter of 2007 was $1,554,000, or $.49 per share on a
      diluted basis. The net income for the third quarter of 2007 represents a 2.4%
      increase over net income of $1,517,000 reported for the same period in 2006.
      Earnings per share on a diluted basis was $.48 per share for the third quarter
      of 2006. Net income for the first nine months of 2007 was $2,026,000 compared
      to
      $4,497,000 for the first nine months of 2006. Diluted earnings per share was
      $.64 and $1.42 for the respective nine-month periods ended September 30, 2007
      and 2006.





As
      previously reported, the results for the nine month period of 2007 were impacted
      by the Company’s decision in April to restructure its balance sheet by prepaying
      $50,000,000 of higher costing Federal Home Loan Bank (FHLB) advances and by
      selling approximately $92,000,000 of lower yielding investment securities.
      The
      prepayment of the FHLB advances resulted in the recognition of an after-tax
      charge of $488,000 ($740,000 pre-tax), or $.16 per share on a diluted basis,
      in
      the second quarter. The investment securities sold had been identified as
      other-than-temporarily impaired in the first quarter of 2007. As a result of
      this classification, QNB recognized an after-tax charge of $1,820,000
      ($2,758,000 pre-tax), or $.57 per share on a diluted basis, in the first
      quarter. Excluding the impact of the impairment charge and the prepayment
      penalty, net income for the nine month period ended September 30, 2007 would
      have been $4,334,000, or $1.37 per share on a diluted basis.





The
      purposes of the balance sheet restructuring transactions were to improve the
      Company’s net interest margin on a going-forward basis, to increase net interest
      income and net income and improve the Company’s interest rate risk profile. The
      investment securities sold were yielding approximately 4.26% while the FHLB
      advances had a cost of 5.55%. The proceeds from the sale of these securities
      were used to purchase $63,524,000 in investment securities yielding 5.51%.
      QNB
      replaced half of the FHLB borrowings with a $25,000,000 repurchase agreement
      at
      a cost of 4.78%. By increasing the yield on the asset side and by reducing
      the
      cost on the liability side, QNB was able to improve its net interest margin
      and
      increase net interest income. From the interest rate risk perspective, the
      securities sold were primarily bonds that had significant prepayment risk in
      a
      declining interest rate environment, while the FHLB borrowings were largely
      comprised of convertible advances that would convert from a fixed-rate to a
      higher floating rate in a rising rate environment.





Net
      interest income for the third quarter of 2007 was $4,505,000, a $465,000, or
      11.5%, increase from net interest income reported for the same period in 2006. The
      net
      interest margin for the third quarter of 2007 was 3.36%, compared to 3.06%
      for
      the third quarter of 2006. For the nine-month period, net interest income
      increased $1,000,000, or 8.3%, to $13,056,000, while the net interest margin
      increased 13 basis points to 3.29%. The restructuring transaction, strong growth
      in both loans and deposits and the change in the mix of earning assets from
      investment securities to loans contributed to these improvements in net interest
      income and the net interest margin and helped overcome the impact of a highly
      competitive deposit and loan pricing environment and a shift in the deposit
      mix
      to higher cost time deposits.




Page
          16


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


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





Third
      quarter and nine-month results for 2007 were also impacted by an increase in
      the
      provision for loan losses. QNB added $150,000 to the provision for loan losses
      in the third quarter of 2007 and $375,000 for the nine-month period. This
      provision compares to a provision for loan losses of $60,000 and $105,000 for
      the respective three and nine-month periods ended September 30, 2006. The higher
      provision reflects the inherent risk related to loan growth, combined with
      an
      increase in nonperforming loans and charge-offs. Total nonperforming loans,
      which represent loans on non-accrual status or loans past due more than 90
      days,
      were $1,084,000, or .30% of total loans, at September 30, 2007 compared with
      $425,000, or .12% of total loans, at December 31, 2006 and $189,000, or .06%
      of
      total loans, at September 30, 2006. The majority of the nonperforming loans
      at
      September 30, 2007 are considered adequately secured by real estate collateral,
      and QNB expects to collect all interest and principal on these loans. The
      allowance for loan losses of $3,001,000 represents .82% of total loans at
      September 30, 2007 compared to an allowance for loan losses of $2,573,000,
      or
      .78% of total loans, at September 30, 2006.





Total
      non-interest income for the three months ended September 30, 2007 was $989,000,
      a $158,000 decline from the $1,147,000 recorded during the third quarter of
      2006. Accounting for this difference were gains on the sale of investment
      securities of $196,000 during the third quarter of 2006. There were no
      investment security gains recorded during the third quarter of 2007. A $30,000
      increase in the gain on sale of residential mortgages and a $30,000 increase
      in
      ATM and debit card income partially offset the impact of lower securities gains.





For
      the
      nine-month period ended September 30, 2007, total non-interest income, excluding
      the $2,758,000 other-than temporary impairment charge, was $3,015,000. This
      amount represents a decline of $291,000, or 8.8%, from the $3,306,000 reported
      for the first nine months of 2006. Excluding the impairment charge in the 2007
      period, net gains on the sale of investment securities were $322,000 less in
      2007 than in 2006.





Total
      non-interest expense increased $73,000, or 2.2%, to $3,327,000 for the three
      month period ended September 30, 2007 compared to the same period in 2006.
      Higher net occupancy costs and marketing expense were the primary factors for
      the increase. Despite the increase in non-interest expense, QNB’s efficiency
      ratio improved to 56.86% for the third quarter of 2007 from 58.76% for the
      third
      quarter of 2006.





Total
      non-interest expense, excluding the $740,000 prepayment penalty, was $10,061,000
      for the nine-month period ended September 30, 2007. This represents a $289,000,
      or 3.0%, increase for the nine-month period. Higher personnel costs, building
      related costs and marketing expense were the primary factors for these
      increases.





The
      provision for income taxes for the third quarter of 2007 increased $107,000
      to
      $463,000. The effective tax rate for the third quarters of 2007 and 2006 was
      23.0% and 19.0%, respectively. Positively impacting the provision for income
      taxes and net income during the third quarter of 2006 was the reversal of a
      portion of the tax valuation allowance related to the impairment of certain
      equity securities .
      QNB’s
      reversal of $78,000 of the tax valuation allowance, during the third quarter
      of
      2006, was a resulted from its ability to realize tax benefits due to realized
      capital gains and an increase in unrealized gains of certain equity securities.





For
      the
      nine month periods ended September 30, 2007 and 2006, the provision for income
      taxes was $111,000 and $988,000, respectively while the corresponding effective
      tax rates were 5.2% and 18.0%, respectively. Impacting the 2006 provision for
      income taxes was the reversal of $164,000 of the tax valuation allowance as
      discussed above. The lower effective tax rate for the nine-month period of
      2007
      is primarily the result of the charges related to the restructuring
      transactions, which reduced the amount of taxable income and as a result,
      tax-exempt income from loans and securities comprising a higher proportion
      of
      pre tax income.




Page
          17




**QNB
      CORP. AND SUBSIDIARY**





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


**OF
      OPERATIONS AND FINANCIAL CONDITION**


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





The
      balance sheet continued to experience strong growth in loans, with total loans
      increasing $35,254,000, or 10.6%, between September 30, 2006 and September
      30,
      2007. QNB’s successful loan growth was attributable to developing new
      relationships, as well as further cultivating existing relationships with small
      businesses in the communities served. On the funding side of the balance sheet,
      total deposits increased $31,038,000, or 6.7%, during the same period, with
      higher costing time deposits accounting for $37,436,000 of the increase. Both
      total loans and total deposits declined between June 30, 2007 and September
      30,
      2007, most of which represents seasonal activity of some customers.





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
      competes with other financial institutions by emphasizing 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 as well as focusing on
      technology, including internet-banking and electronic bill pay.





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




Page
          18




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


**Average
        Balances, Rate, and Interest Income and Expense Summary (** ***Tax-Equivalent
        Basis*** **)**




**Three
                Months Ended****September
                30, 2007**
            
            **September
                30, 2006****Average**
                **Balance**
            
            **Average**
                **Rate**
            
            **Interest**
            
            **Average**
                **Balance**
            
            **Average**
                  **Rate**
            
            **Interest****Assets**Federal
                funds sold
            
            $
            13,435
            
            
            5.12
            %
            $
            173
            
            $
            10,570
            
            
            5.27
            %
            $
            140Investment
                securities:U.S.
                Treasury
            
            
            5,084
            
            
            4.76
            %
            
            61
            
            
            6,071
            
            
            4.35
            %
            
            67U.S.
                Government agencies
            
            
            34,636
            
            
            5.56
            %
            
            481
            
            
            36,587
            
            
            5.03
            %
            
            460State
                and municipal
            
            
            39,074
            
            
            6.60
            %
            
            645
            
            
            41,937
            
            
            6.62
            %
            
            694Mortgage-backed
                and CMOs
            
            
            94,130
            
            
            5.57
            %
            
            1,312
            
            
            119,239
            
            
            4.30
            %
            
            1,282Other
            
            
            19,092
            
            
            5.94
            %
            
            284
            
            
            21,278
            
            
            6.54
            %
            
            348Total
                investment securities
            
            
            192,016
            
            
            5.80
            %
            
            2,783
            
            
            225,112
            
            
            5.07
            %
            
            2,851Loans:Commercial
                real estate
            
            
            167,335
            
            
            6.85
            %
            
            2,889
            
            
            148,679
            
            
            6.66
            %
            
            2,497Residential
                real estate
            
            
            23,883
            
            
            6.00
            %
            
            358
            
            
            26,125
            
            
            5.92
            %
            
            387Home
                equity loans
            
            
            69,770
            
            
            6.54
            %
            
            1,150
            
            
            68,377
            
            
            6.40
            %
            
            1,103Commercial
                and industrial
            
            
            63,159
            
            
            7.35
            %
            
            1,170
            
            
            49,016
            
            
            7.26
            %
            
            897Indirect
                lease financing
            
            
            13,757
            
            
            9.48
            %
            
            326
            
            
            10,642
            
            
            9.23
            %
            
            246Consumer
                loans
            
            
            4,675
            
            
            10.54
            %
            
            124
            
            
            5,545
            
            
            9.31
            %
            
            130Tax-exempt
                loans
            
            
            24,819
            
            
            6.17
            %
            
            386
            
            
            21,347
            
            
            5.95
            %
            
            320Total
                loans, net of unearned*
            
            
            367,398
            
            
            6.91
            %
            
            6,403
            
            
            329,731
            
            
            6.71
            %
            
            5,580Other
                earning assets
            
            
            1,898
            
            
            8.19
            %
            
            39
            
            
            4,706
            
            
            4.90
            %
            
            58Total
                earning assets
            
            
            574,747
            
            
            6.49
            %
            
            9,398
            
            
            570,119
            
            
            6.00
            %
            
            8,629Cash
                and due from banks
            
            
            12,231
            
            
            
            
            
            
            
            
            14,087Allowance
                for loan losses
            
            
            (2,929
            )
            
            
            
            
            
            
            
            (2,555
            )Other
                assets
            
            
            21,936
            
            
            
            
            
            
            
            
            20,539Total
                assets
            
            $
            605,985
            
            
            
            
            
            
            
            $
            602,190**Liabilities
                and Shareholders' Equity**Interest-bearing
                deposits:Interest-bearing
                demand
            
            $
            106,920
            
            
            2.53
            %
            $
            682
            
            $
            105,227
            
            
            2.62
            %
            $
            696Money

                market
            
            
            52,624
            
            
            3.09
            %
            
            409
            
            
            54,154
            
            
            3.11
            %
            
            425Savings
            
            
            44,712
            
            
            0.39
            %
            
            44
            
            
            47,722
            
            
            0.39
            %
            
            47Time
            
            
            187,873
            
            
            4.59
            %
            
            2,171
            
            
            163,987
            
            
            3.90
            %
            
            1,612Time
                over $100,000
            
            
            60,093
            
            
            4.77
            %
            
            723
            
            
            44,775
            
            
            4.16
            %
            
            469Total
                interest-bearing deposits
            
            
            452,222
            
            
            3.54
            %
            
            4,029
            
            
            415,865
            
            
            3.10
            %
            
            3,249Short-term
                borrowings
            
            
            22,164
            
            
            3.57
            %
            
            200
            
            
            23,337
            
            
            3.62
            %
            
            213Long-term
                debt
            
            
            25,000
            
            
            4.85
            %
            
            306
            
            
            55,000
            
            
            5.60
            %
            
            776Total
                interest-bearing liabilities
            
            
            499,386
            
            
            3.60
            %
            
            4,535
            
            
            494,202
            
            
            3.40
            %
            
            4,238Non-interest-bearing
                deposits
            
            
            52,103
            
            
            
            
            
            
            
            
            54,383Other
                liabilities
            
            
            3,387
            
            
            
            
            
            
            
            
            3,420Shareholders'
                equity
            
            
            51,109
            
            
            
            
            
            
            
            
            50,185Total
                  liabilities andshareholders' equity
            
            $
            605,985
            
            
            
            
            
            
            
            $
            602,190Net
                interest rate spread
            
            
            
            
            
            2.89
            %
            
            
            
            
            
            
            
            2.60
            %Margin/net
                interest income
            
            
            
            
            
            3.36
            %
            $
            4,863
            
            
            
            
            
            3.06
            %
            $
            4,391


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
          19


**QNB
        CORP. AND SUBSIDIARY**
 
 **MANAGEMENT'S
        DISCUSSION AND ANALYSIS OF RESULTS**
 **OF
        OPERATIONS AND FINANCIAL CONDITION**
  **Average
          Balances, Rate, and Interest Income and Expense Summary (** ***Tax-Equivalent
          Basis*** **)**
  **Nine
                  Months Ended****September
                  30, 2007**
              
              **September
                  30, 2006****Average**
                  **Balance**
              
              **Average**
                  **Rate**
              
              **Interest**
              
              **Average**
                  **Balance**
              
              **Average**
                  **Rate**
              
              **Interest****Assets**Federal
                  funds sold
              
              $
              7,491
              
              
              5.17
              %
              $
              290
              
              $
              5,309
              
              
              5.09
              %
              $
              202Investment
                  securities:U.S.
                  Treasury
              
              
              5,093
              
              
              4.73
              %
              
              180
              
              
              6,075
              
              
              3.77
              %
              
              171U.S.
                  Government agencies
              
              
              32,971
              
              
              5.54
              %
              
              1,370
              
              
              29,129
              
              
              4.72
              %
              
              1,032State
                  and municipal
              
              
              39,474
              
              
              6.61
              %
              
              1,956
              
              
              44,165
              
              
              6.61
              %
              
              2,190Mortgage-backed
                  and CMOs
              
              
              105,699
              
              
              5.07
              %
              
              4,023
              
              
              123,623
              
              
              4.29
              %
              
              3,975Other
              
              
              18,677
              
              
              6.02
              %
              
              844
              
              
              22,829
              
              
              6.30
              %
              
              1,080Total
                  investment securities
              
              
              201,914
              
              
              5.53
              %
              
              8,373
              
              
              225,821
              
              
              4.99
              %
              
              8,448Loans:Commercial
                  real estate
              
              
              163,642
              
              
              6.82
              %
              
              8,346
              
              
              142,179
              
              
              6.56
              %
              
              6,971Residential
                  real estate
              
              
              25,185
              
              
              5.93
              %
              
              1,121
              
              
              26,017
              
              
              5.87
              %
              
              1,146Home
                  equity loans
              
              
              69,495
              
              
              6.51
              %
              
              3,386
              
              
              66,294
              
              
              6.31
              %
              
              3,131Commercial
                  and industrial
              
              
              60,910
              
              
              7.36
              %
              
              3,352
              
              
              50,342
              
              
              7.09
              %
              
              2,671Indirect
                  lease financing
              
              
              13,560
              
              
              9.51
              %
              
              967
              
              
              8,874
              
              
              9.23
              %
              
              614Consumer
                  loans
              
              
              4,755
              
              
              10.40
              %
              
              370
              
              
              5,197
              
              
              9.19
              %
              
              357Tax-exempt
                  loans
              
              
              23,486
              
              
              6.15
              %
              
              1,080
              
              
              20,875
              
              
              5.82
              %
              
              909Total
                  loans, net of unearned*
              
              
              361,033
              
              
              6.90
              %
              
              18,622
              
              
              319,778
              
              
              6.61
              %
              
              15,799Other
                  earning assets
              
              
              3,007
              
              
              7.03
              %
              
              159
              
              
              4,614
              
              
              4.92
              %
              
              170Total
                  earning assets
              
              
              573,445
              
              
              6.40
              %
              
              27,444
              
              
              555,522
              
              
              5.93
              %
              
              24,619Cash
                  and due from banks
              
              
              11,495
              
              
              
              
              
              
              
              
              17,225Allowance
                  for loan losses
              
              
              (2,813
              )
              
              
              
              
              
              
              
              (2,531
              )Other
                  assets
              
              
              21,699
              
              
              
              
              
              
              
              
              19,979Total
                  assets
              
              $
              603,826
              
              
              
              
              
              
              
              $
              590,195**Liabilities
                  and Shareholders' Equity**Interest-bearing
                  deposits:Interest-bearing
                  demand
              
              $
              100,626
              
              
              2.36
              %
              $
              1,777
              
              $
              100,204
              
              
              2.22
              %
              $
              1,666Money
                  market
              
              
              52,139
              
              
              3.08
              %
              
              1,200
              
              
              50,050
              
              
              2.85
              %
              
              1,068Savings
              
              
              45,767
              
              
              0.39
              %
              
              134
              
              
              49,478
              
              
              0.39
              %
              
              145Time
              
              
              183,111
              
              
              4.49
              %
              
              6,146
              
              
              162,404
              
              
              3.68
              %
              
              4,464Time
                  over $100,000
              
              
              58,839
              
              
              4.75
              %
              
              2,089
              
              
              45,756
              
              
              3.84
              %
              
              1,314Total
                  interest-bearing deposits
              
              
              440,482
              
              
              3.44
              %
              
              11,346
              
              
              407,892
              
              
              2.84
              %
              
              8,657Short-term
                  borrowings
              
              
              22,085
              
              
              3.57
              %
              
              590
              
              
              20,532
              
              
              3.40
              %
              
              522Long-term
                  debt
              
              
              35,337
              
              
              5.29
              %
              
              1,398
              
              
              55,000
              
              
              5.59
              %
              
              2,298Total
                  interest-bearing liabilities
              
              
              497,904
              
              
              3.58
              %
              
              13,334
              
              
              483,424
              
              
              3.17
              %
              
              11,477Non-interest-bearing
                  deposits
              
              
              51,358
              
              
              
              
              
              
              
              
              54,279Other
                  liabilities
              
              
              3,510
              
              
              
              
              
              
              
              
              3,144Shareholders'
                  equity
              
              
              51,054
              
              
              
              
              
              
              
              
              49,348Total
                  liabilities andshareholders'
                  equity
              
              $
              603,826
              
              
              
              
              
              
              
              $
              590,195Net
                  interest rate spread
              
              
              
              
              
              2.82
              %
              
              
              
              
              
              
              
              2.76
              %Margin/net
                  interest income
              
              
              
              
              
              3.29
              %
              $
              14,110
              
              
              
              
              
              3.16
              %
              $
              13,142
  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 RESULTS**


**OF
      OPERATIONS AND FINANCIAL CONDITION**


**Three
                  Months Ended**
                **September
                  30, 2007 compared**
                **to
                  September 30, 2006**
              
              **Nine
                  Months Ended**
                **September
                  30, 2007 compared**
                **to
                  September 30, 2006**Total
              
              Due
                  to change in:
              
              Total
              
              Due
                  to change in:Change
              
              Volume
              
              Rate
              
              Change
              
              Volume
              
              Rate**Interest
                  income:**Federal
                  funds sold
              
              $
              33
              
              $
              38
              
              $
              (5
              )
              $
              88
              
              $
              83
              
              $
              5Investment
                  securities:U.S.
                  Treasury
              
              
              (6
              )
              
              (11
              )
              
              5
              
              
              9
              
              
              (28
              )
              
              37U.S.
                  Government agencies
              
              
              21
              
              
              (24
              )
              
              45
              
              
              338
              
              
              137
              
              
              201State
                  and municipal
              
              
              (49
              )
              
              (48
              )
              
              (1
              )
              
              (234
              )
              
              (232
              )
              
              (2
              )Mortgage-backed
                  and CMOs
              
              
              30
              
              
              (269
              )
              
              299
              
              
              48
              
              
              (577
              )
              
              625Other
              
              
              (64
              )
              
              (35
              )
              
              (29
              )
              
              (236
              )
              
              (197
              )
              
              (39
              )Loans:Commercial
                  real estate
              
              
              392
              
              
              313
              
              
              79
              
              
              1,375
              
              
              1,052
              
              
              323Residential
                  real estate
              
              
              (29
              )
              
              (33
              )
              
              4
              
              
              (25
              )
              
              (37
              )
              
              12Home
                  equity loans
              
              
              47
              
              
              23
              
              
              24
              
              
              255
              
              
              152
              
              
              103Commercial
                  and industrial
              
              
              273
              
              
              258
              
              
              15
              
              
              681
              
              
              561
              
              
              120Indirect
                  lease financing
              
              
              80
              
              
              72
              
              
              8
              
              
              353
              
              
              324
              
              
              29Consumer
                  loans
              
              
              (6
              )
              
              (21
              )
              
              15
              
              
              13
              
              
              (30
              )
              
              43Tax-exempt
                  loans
              
              
              66
              
              
              52
              
              
              14
              
              
              171
              
              
              113
              
              
              58Other
                  earning assets
              
              
              (19
              )
              
              (35
              )
              
              16
              
              
              (11
              )
              
              (58
              )
              
              47Total
                  interest income
              
              $
              769
              
              $
              280
              
              $
              489
              
              $
              2,825
              
              $
              1,263
              
              $
              1,562**Interest
                  expense:**Interest-bearing
                  demand
              
              $
              (14
              )
              $
              11
              
              $
              (25
              )
              $
              111
              
              $
              7
              
              $
              104Money
                  market
              
              
              (16
              )
              
              (13
              )
              
              (3
              )
              
              132
              
              
              44
              
              
              88Savings
              
              
              (3
              )
              
              (3
              )
              
              -
              
              
              (11
              )
              
              (11
              )
              
              -Time
              
              
              559
              
              
              235
              
              
              324
              
              
              1,682
              
              
              569
              
              
              1,113Time
                  over $100,000
              
              
              254
              
              
              161
              
              
              93
              
              
              775
              
              
              376
              
              
              399Short-term
                  borrowings
              
              
              (13
              )
              
              (10
              )
              
              (3
              )
              
              68
              
              
              40
              
              
              28Long-term
                  debt
              
              
              (470
              )
              
              (423
              )
              
              (47
              )
              
              (900
              )
              
              (821
              )
              
              (79
              )Total
                  interest expense
              
              $
              297
              
              $
              (42
              )
              $
              339
              
              $
              1,857
              
              $
              204
              
              $
              1,653**Net
                  interest income**
              
              $
              472
              
              $
              322
              
              $
              150
              
              $
              968
              
              $
              1,059
              
              $
              (91
              )
  Page
            21
  **QNB
        CORP. AND SUBSIDIARY**
 
 **MANAGEMENT'S
        DISCUSSION AND ANALYSIS OF RESULTS**
 **OF
        OPERATIONS AND FINANCIAL CONDITION**
  **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 and nine-month
        periods ended September 30, 2007 and 2006.
  For
                  the Three Months
                  Ended
                    September 30,
              
              
              For
                    the Nine Months
                  Ended
                    September 30,2007
              
              
              2006
              
              
              2007
              
              
              2006Total
                  interest income
              
              $
              9,040
              
              $
              8,278
              
              $
              26,390
              
              $
              23,533Total
                  interest expense
              
              
              4,535
              
              
              4,238
              
              
              13,334
              
              
              11,477Net
                  interest income
              
              
              4,505
              
              
              4,040
              
              
              13,056
              
              
              12,056Tax
                  equivalent adjustment
              
              
              358
              
              
              351
              
              
              1,054
              
              
              1,086Net
                  interest income (fully taxable equivalent)
              
              $
              4,863
              
              $
              4,391
              
              $
              14,110
              
              $
              13,142


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 19 and 20. 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 11.5% to $4,505,000 for the quarter ended September
      30, 2007 as compared to $4,040,000 for the quarter ended September 30, 2006.
      On
      a tax-equivalent basis, net interest income increased by 10.7%, from $4,391,000
      for the three months ended September 30, 2006 to $4,863,000 for the same period
      ended September 30, 2007. When comparing the third quarters of 2007 and 2006,
      the net interest margin increased to 3.36% for the third quarter of 2007 from
      3.06% for the third quarter of 2006, an improvement of 30 basis points. The
      increase in both net interest income and the net interest margin, when comparing
      the third quarters of 2007 and 2006, 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. However, the third
      quarter net interest margin of 3.36% represents a four basis point decline
      from
      the 3.40% recorded in the second quarter of 2007. This decline is a result
      of
      the continued price competition for deposits, particularly time deposits and
      municipal deposits. The action by the Federal Reserve Bank (Fed) to reduce
      the
      target Federal
      funds rate by 50 basis points in September and another 25 basis points in
      October should result in lower deposit costs as deposits are generally priced
      off of short-term market interest rates.




Page
          22




**QNB
      CORP. AND SUBSIDIARY**





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


**OF
      OPERATIONS AND FINANCIAL CONDITION**


**NET
      INTEREST INCOME (Continued)**




Average
      earning assets increased .8%, with average loans increasing 11.4%, when
      comparing the third quarter of 2007 to the same period in 2006. Average
      investment securities decreased 14.7% when comparing these same periods. The
      decline in investment securities balances and the small growth in total average
      earning assets reflect the decision by management to reduce its leverage
      position by reducing the amount of long-term debt. When comparing the third
      quarters of 2007 and 2006, average long-term debt declined by $30,000,000 while
      average investment securities declined by $33,096,000.





The
      yield
      on earning assets on a tax-equivalent basis increased from 6.00% for the third
      quarter of 2006 to 6.49% for the third quarter of 2007. Interest income on
      investment securities decreased $68,000 when comparing the two quarters as
      a
      result of the reduction in balances. However, the average yield on the portfolio
      increased from 5.07% for the third quarter of 2006 to 5.80% for the third
      quarter of 2007. This increased yield reflects the benefits from the April
      transaction, as well as other purchase and sale transactions since September
      of
      2006 in which lower yielding securities were sold and the proceeds reinvested
      in
      higher yielding securities. QNB purchased very few securities in the normal
      course of business over the past year because of the strong growth in loans.
      Most of the improvement in yield in the total investment securities portfolio
      was in the U.S. Government Agency portfolio, where the yield increased from
      5.03% for the third quarter of 2006 to 5.56% for the third quarter of 2007,
      and
      the mortgage-backed securities, where the yield increased from 4.30% to 5.57%
      over the same period.





Interest
      income on loans increased $823,000 when comparing the two quarters, with
      increased balances being the greatest contributor. The yield on loans increased
      20 basis points, to 6.91%, when comparing the third quarter of 2007 to the
      third
      quarter of 2006. Significant factors limiting the increase in the portfolio
      yield was the shape of the yield curve over the past year as well as the strong
      competition for loans. Up until the past few months, the yield curve has been
      relatively flat or inverted, with short-term rates being higher than mid and
      longer-term rates. In addition, customers have preferred to lock in fixed-rate
      or adjustable-rate loans with fixed-rate terms for three to ten years over
      higher yielding floating-rate loans.





Most
      of
      the increase in loan income was in commercial loans. Income on commercial real
      estate loans increased $392,000 with average balances increasing 12.5% and
      contributing $313,000 of the increase in income. The yield on commercial real
      estate loans increased 19 basis points, to 6.85%, for the third quarter of
      2007.
      Interest on commercial and industrial loans increased $273,000, with the
      majority of the increase related to the 28.9% increase in average balances.
      The
      average yield on these loans increased nine basis points, to 7.35%. The
      commercial and industrial loan category will be most impacted 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 which was also reduced by 50
      basis points in the middle of September 2007 and another 25 basis points at
      the
      end of October 2007. The indirect lease financing portfolio contributed $80,000
      to the increase in total loan income with average balances increasing
      $3,115,000, or 29.3%. The yield on indirect leases was 9.48% for the third
      quarter of 2007, compared with 9.23% for the same period in 2006. An increase
      in
      prepayment and late charges contributed to the higher yield.




Page
          23




**QNB
      CORP. AND SUBSIDIARY**





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


**OF
      OPERATIONS AND FINANCIAL CONDITION**


**NET
      INTEREST INCOME (Continued)**





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 8.6% when comparing the two quarters
      while the average yield increased by eight basis points. Average home equity
      loans increased 2.0%, to $69,770,000, while the yield on the home equity
      portfolio increased 14 basis points, to 6.54%. 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.





Interest
      income on Federal funds sold increased $33,000 when comparing the two quarters
      with the growth in average balances of $2,865,000 offsetting the 15 basis point
      decline in rate. The yield on Federal funds sold decreased from 5.27% for the
      third quarter of 2006 to 5.12% for the third quarter of 2007, reflecting the
      50
      basis point cut in rate by the Fed in mid-September.





For
      the
      most part, earning assets are funded by deposits, which increased when comparing
      the two quarters. Average
      deposits increased $34,077,000, or 7.2%, with the growth occurring in higher
      cost time deposits, which increased $39,204,000, or 18.8%.





While
      total interest income on a tax-equivalent basis increased $769,000 when
      comparing the third quarter of 2007 to the third quarter of 2006, total interest
      expense increased $297,000. The rate paid on interest-bearing liabilities
      increased from 3.40% for the third quarter of 2006 to 3.60% for the third
      quarter of 2007, with the rate paid on interest-bearing deposits increasing
      from
      3.10% to 3.54% during this same period. The increase in interest expense and
      the
      average rate paid on deposits was primarily the result of an increase in average
      balances and rates paid on time deposits. Interest expense and the rate paid
      on
      time deposits increased the most because these accounts were more reactive
      to
      the changes in market interest rates and competition. Interest expense on time
      deposits increased $813,000, while the average rate paid on time deposits
      increased from 3.96% to 4.63% when comparing the two periods.





Like
      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 62.5% of time deposits at September 30, 2007 will reprice or
      mature over the next 12 months.





As
      mentioned previously, the competition for deposits, and especially time
      deposits, led to significantly higher rates paid on these products. 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 the turn in
      interest rates to the downside, the expectation would be for time deposit rates
      to fall; however, this reduction has not occurred as the competition is still
      offering high rate time deposits. There are still several local financial
      institutions with short-term time deposit promotions with yields exceeding
      5.00%. Given the short-term nature of QNB’s time deposit portfolio and the
      current rates being offered, it is likely that both the average rate paid and
      total interest expense on time deposits will continue to increase in the near
      term as lower costing time deposits are repriced higher.




Page
          24




**QNB
      CORP. AND SUBSIDIARY**





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


**OF
      OPERATIONS AND FINANCIAL CONDITION**


**NET
      INTEREST INCOME (Continued)**





Partially
      offsetting the increase in interest expense on deposits was a reduction in
      interest expense on long-term debt. As a result of the balance sheet
      restructuring and the maturity of $5,000,000 of floating rate FHLB borrowings,
      the average balance of long-term debt decreased from $55,000,000 for the third
      quarter of 2006 to $25,000,000 for the third quarter of 2007, while the average
      rate paid decreased from 5.60% to 4.85% when comparing the same periods,
      resulting in a reduction of interest expense of $470,000. While interest rates
      on deposits accounts have not declined to any great degree with the drop in
      treasury rates, rates on wholesale funding have declined. As a result, QNB
      may
      look to this type of funding as an alternative to higher costing time deposits
      and municipal deposits.





For
      the
      nine-month period ended September 30, 2007, net interest income increased
      $1,000,000, or 8.3%, to $13,056,000. On a tax-equivalent basis net interest
      income increased $968,000, or 7.4%. Average earning assets increased
      $17,923,000, or 3.2%, while the net interest margin increased 13 basis points.
      The net interest margin
      on
      a tax-equivalent basis was 3.29% for the nine-month period ended September
      30,
      2007 compared with 3.16% for the same period in 2006.





Total
      interest income on a tax-equivalent basis increased $2,825,000, from $24,619,000
      to $27,444,000, when comparing the nine-month periods ended September 30, 2006
      to September 30, 2007. The increase in interest income was fairly evenly split
      between the impact of increases in interest rates and the increase in volumes.
      Approximately $1,263,000 of the increase in interest income was related to
      volume, while $1,562,000 was due to higher rates. Similar to the analysis for
      the third quarter, the restructuring transaction, the growth in commercial
      loans
      and the shift in the mix of earning assets from investment securities to loans
      resulted in the increase in interest income. Average loans increased 12.9%,
      to
      $361,033,000, while average investment securities decreased 10.6%, to
      $201,914,000. The yield on earning assets increased from 5.93% to 6.40% when
      comparing the nine-month periods. The yield on loans increased from 6.61% to
      6.90% during this time, while the yield on investments increased from 4.99%
      to
      5.53% when comparing the nine-month periods.





Total
      interest expense increased $1,857,000, from $11,477,000 for the nine-month
      period ended September 30, 2006, to $13,334,000 for the nine-month period ended
      September 30, 2007. Approximately $1,653,000 of the increase in interest expense
      resulted from higher interest rates. Interest expense on time deposits increased
      $2,457,000 with average balances increasing $33,790,000, or 16.2%, and
      contributing $945,000 to the increase in interest expense. The average rate
      paid
      on time deposits increased 83 basis points, to 4.55%, resulting in an additional
      $1,512,000 in interest expense.





Interest
      expense on demand accounts increased $111,000 with the rate paid on these
      accounts increasing 14 basis points. The higher rate paid on interest bearing
      demand accounts relates to the higher rate paid on municipal and school district
      deposits, most of which are indexed to the Federal funds rate. The average
      target Federal funds rate increased 37 basis points when comparing the nine
      month periods.





Interest
      expense on money market accounts increased $132,000, and the rate paid increased
      from 2.85% to 3.08% when comparing the first nine months of 2006 to the same
      period in 2007. Average money market balances increased $2,089,000, or 4.2%,
      when comparing the two periods. During 2006, the primary money market product
      offered was the Treasury Select product which was indexed to a percentage of
      the
      91-day Treasury bill rate based on balances in the account. The rate on this
      product increased as short-term interest rates increased. In addition, in
      response to competition, QNB promoted a 4.00% minimum rate on this product
      for
      new accounts with balances over $10,000 or for existing accounts with additional
      deposits of $5,000. This 4.00% promotional rate was offered for most of 2006
      and
      was above the calculated rate under the terms of this product. In 2007, the
      Treasury Select money market account was changed to the Select money market account,
      and the rate on this product is no longer indexed to the 91-day Treasury bill
      but is determined by QNB. However, because of the continued strong competition
      for these deposits, QNB has maintained a rate close to 4.00% for balances over
      $75,000.




Page
          25




**QNB
      CORP. AND SUBSIDIARY**





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


**OF
      OPERATIONS AND FINANCIAL CONDITION**


**NET
      INTEREST INCOME (Continued)**




Interest
      expense on short-term borrowings increased $68,000 both as a result of increases
      in rates paid and averages balances. The average rate paid increased from 3.40%
      for the first nine months of 2006 to 3.57% for the first nine months of 2007,
      while average balances increased $1,553,000, to $22,085,000. Repurchase
      agreements (a sweep product for commercial customers) increased $2,781,000
      on
      average when comparing the two periods, while Federal funds purchased decreased
      $1,310,000 during the same period.





The
      average rate paid on municipal and school district accounts, Select money market
      accounts and the commercial sweep accounts should decline in the fourth quarter
      of 2007 as a result of the action by the Fed to reduce its target Federal funds
      rate by 75 basis points. This should enable QNB to reduce the rate on these
      products, some of which are directly indexed to the Federal funds rate and
      some
      of which are at management’s discretion but subject to the competitive
      environment.





As
      a
      result of the payoff of the FHLB advances and the use of the lower cost
      repurchase agreements, interest expense on long-term debt decreased $900,000
      when comparing the nine-month periods. The average outstanding balance decreased
      from $55,000,000 to $35,337,000 while the average rate paid decreased from
      5.59%
      to 5.29%.





**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 recommended by the Office of the Comptroller of the Currency. This
      model 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 $150,000 and $60,000 provision for loan losses
      was
      necessary for the three-month periods ended September 30, 2007 and 2006,
      respectively. A $375,000 and $105,000 provision for loan losses was recorded
      for
      the nine-month periods ended September 30, 2007 and 2006, 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 reflects the inherent risk related to loan growth, combined
      with an increase in nonperforming loans and charge-offs.




Page
          26


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


**PROVISION
      FOR LOAN LOSSES (Continued)**





QNB
      had
      net charge-offs of $21,000 and $36,000 during the third quarters of 2007 and
      2006, respectively. For the nine-month periods ended September 30, 2007 and
      2006, QNB had net charge-offs of $103,000 and $58,000, respectively. The net
      charge-offs during the first nine months of 2007 related primarily to loans
      in
      the indirect lease financing portfolio and the consumer loan portfolio including
      overdrafts. The asset quality of the commercial loan portfolio remains
      strong.





Non-performing
      assets (non-accruing loans, loans past due 90 days or more, other real estate
      owned and other repossessed assets) amounted to .19% and .03% of total assets
      at
      September 30, 2007 and 2006, respectively. These levels compare to .08% at
      December 31, 2006. Non-accrual loans were $774,000, $416,000 and $117,000 at
      September 30, 2007, December 31, 2006 and September 30, 2006, respectively. Loans
      past due 90
      days
      or more and still accruing were $310,000, $9,000 and $72,000, at these same
      period-ends. The majority of the nonperforming loans at September 30, 2007
      are
      considered adequately secured by real estate collateral, and QNB expects to
      collect all interest and principal on these loans.





QNB
      did
      not have any other real estate owned as of September 30, 2007, December 31,
      2006
      or September 30, 2006. Repossessed assets consisting of equipment, automobiles
      and motorcycles were $54,000 and $41,000 at September 30, 2007 and December
      31,
      2006, respectively. There were no repossessed assets as of September 30,
      2006 .





There
      were no restructured loans as of September 30, 2007, December 31, 2006 or
      September 30, 2006, 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 $3,001,000 and $2,729,000 at September 30, 2007
      and December 31, 2006, respectively. The ratio of the allowance to total loans
      was .82% and .79% at the respective period end dates. The increase in the ratio
      reflects the increase in the provision for loan losses recorded during 2007.
      The
      ratio, at .82%, was at a level below peers but a ratio that QNB believed was
      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
      September 30, 2007, December 31, 2006 and September 30, 2006, 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
      $774,000, $403,000 and 117,000, respectively. The loans identified as impaired
      were collateral-dependent, with no valuation allowance necessary.





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 RESULTS**
 **OF
        OPERATIONS AND FINANCIAL CONDITION**


**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 the near term. 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,
      trading account gains and losses, and gains and losses on the sale of investment
      securities and residential mortgage loans.





Total
      non-interest income for the three months ended September 30, 2007 was $989,000,
      a $158,000 decline from the $1,147,000 recorded during the third quarter of
      2006. Accounting for this difference were gains on the sale of investment
      securities of $196,000 during the third quarter of 2006. There were no
      investment security gains recorded during the third quarter of 2007. For the
      nine-month period ended September 30, 2007, total non-interest income was
      $257,000. Excluding the other-than-temporary impairment charge of $2,758,000,
      total non-interest income was $3,015,000, a $291,000, or 8.8%, decline from
      the
      $3,306,000 reported for the first nine-months of 2006. Net gains on the sale
      of
      investment securities were $322,000 less in 2007 than in 2006.





Fees
      for
      services to customers are primarily comprised of service charges on deposit
      accounts. These fees decreased $19,000, or 3.9%, to $469,000, when comparing
      the
      two quarters and declined $32,000, or 2.3%, to $1,360,000, when comparing the
      nine-month periods. Overdraft income decreased $14,000 or 3.4% for the
      three-month period and $20,000, or 1.7%, for the nine-month period. These
      variances were a result of volume fluctuations as the item charge has remained
      the same. In addition, for the nine-month period, fees on business checking
      accounts declined $5,000. This decline reflects the impact of a higher earnings
      credit rate for the first nine months of 2007 as compared to the same period
      in
      2006. The higher earnings credit rate is a result of higher short-term interest
      rates in 2007 than in 2006. This credit is applied against balances to offset
      service charges incurred. The earnings credit rate will likely decline in the
      fourth quarter of 2007 as a result of the recent decline in short-term interest
      rates, which should result in an increase in business checking account
      fees.





ATM
      and
      debit card income is primarily comprised of income on debit cards and ATM
      surcharge income for the use of QNB ATM machines by non-QNB customers. ATM
      and
      debit card income was $226,000 for the third quarter of 2007, an increase of
      $30,000, or 15.3%, from the amount recorded during the third quarter of 2006.
      Income from ATM and debit cards was $633,000 and $575,000 for the nine months
      ended September 30, 2007 and 2006, respectively, an increase of 10.1%. Debit
      card income increased $25,000, or 17.6%, to $167,000, for the three-month period
      and $47,000, or 11.3%, to $463,000, for the nine-month period. The increase
      in
      debit card income is a result of the increased reliance on the card as a means
      of paying for goods and services by both consumer and business cardholders.
      In
      addition, an increase in PIN-based transactions resulted in additional
      interchange income of $5,000 and $15,000, respectively, when comparing the
      respective three and nine-month periods.




Page
          28




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


**NON-INTEREST
      INCOME (Continued)**





Income
      on
      bank-owned life insurance represents the earnings on life insurance policies
      in
      which the Bank is the owner and beneficiary. The earnings on these policies
      were
      $64,000 and $63,000 for the three months ended September 30, 200 7 and
      200 6 ,
      respectively. For the nine-month period, earnings on these policies in creased
      $3,000, to $ 189,000. The
      insurance carriers reset the rates on these policies annually taking into
      consideration the interest rate environment as well as mortality costs. The
      existing policies have rate floors which minimize how low the earnings rate
      can
      go. Some of these policies are currently at their floor.





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 rights 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. Servicing assets are assessed
      for impairment based on their fair value. Mortgage servicing fees were $28,000
      and $26,000 for the respective three-month periods ended September 30, 2007
      and
      2006. For the nine-month periods ended September 30, 2007 and 2006, mortgage
      servicing fees were $78,000 and $74,000, respectively. There was no valuation
      allowance necessary in any of the periods. Amortization expense, which reduces
      income, for the three-month periods ended September 30, 2007 and 2006 was
      $14,000 and $18,000, respectively. For the respective nine-month periods,
      amortization expense was $51,000 and $65,000. The higher amortization expense
      in
      2006 was a result of early payoffs of mortgage loans through refinancing. As
      mortgage interest rates increased in 2006 and early 2007, and the residential
      mortgage market softened, refinancing activity as well as origination activity
      slowed dramatically. The slowdown in mortgage activity has also had a negative
      impact on the average balance of mortgages sold and serviced as well as the
      fee
      income generated from these loans. The average balance of mortgages serviced
      for
      others was $68,534,000 for the third quarter of 2007 compared to $72,662,000
      for
      the third quarter of 2006, a decrease of 5.7%. The average balance of mortgages
      serviced was approximately $69,412,000 for the nine-month period ended September
      30, 2007, compared to $74,294,000 for the first nine months of 2006, a decrease
      of 6.6%. 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.





QNB
      had
      no securities gains or losses during the third quarter of 2007. QNB
      recorded a net gain on investment securities of $196,000 for the three-month
      period ended September 30, 2006. For the third quarter of 2006, gains on the
      sale of equity securities contributed $207,000, while the sale of fixed-income
      securities resulted in a loss of $11,000.





For
      the
      nine-months ended September 30, 2007, QNB recorded a net loss on investment
      securities of $2,469,000. Excluding the impairment loss of $2,758,000, net
      gains
      on the sale of investment securities were $289,000. This amount compares to
      $611,000 of securities gains for the first nine months of 2006. Included in
      the
      $289,000 of gains for 2007 were $260,000 of gains from the marketable equity
      portfolio and $29,000 in gains from the sale of debt securities. During the
      first quarter of 2007, QNB sold $11,680,000 of debt securities with an average
      yield of 5.46% to help fund loans with an average yield of 7.16%. This
      transaction also resulted in a $50,000 securities gain. In April 2007, when
      the
      previously impaired securities were sold, interest rates had increased since
      the
      end of March 2007, resulting in an additional loss of $21,000. Of the $611,000
      in gains recorded in 2006, $465,000 were from the equity portfolio and $146,000
      were from the fixed income debt portfolio. During
      the first quarter of
      2006,
      QNB entered into several liquidity transactions through the sale of investment
      securities to fund the strong growth in loans. In addition, in 2006 QNB sold
      its
      preferred stock holdings and recorded a gain of $451,000 on the carrying value
      of those issues that had previously been impaired and a $300,000 loss on one
      issue that was not impaired in 2005.




Page
          29




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


**NON-INTEREST
      INCOME (Continued)**




The
      net
      gain on the sale of residential mortgage loans was $50,000 and $20,000 for
      the
      quarters ended September 30, 2007 and 2006, respectively, and $78,000 and
      $44,000 for the respective nine-month periods. 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. The
      larger gain in the third quarter of 2007 reflects an increase in the amount
      of
      loans sold as well as the positive impact of selling mortgages when interest
      rates are declining. Included in the gains on the sale
      of
      residential mortgages for the three month periods were $20,000 and $7,000,
      respectively, related to the recognition of mortgage servicing
      assets. These
      amounts were $37,000 and $23,000 for the nine-months ended September 30, 2007
      and 2006, respectively. Proceeds from the sale of mortgages were $2,642,000
      and
      $908,000 for the third quarter of 2007 and 2006, respectively. For the
      nine-month periods, proceeds from the sale of residential mortgage loans
      amounted to $4,895,000 and $3,048,000, respectively. These modest amounts again
      reflect the slowdown in the residential mortgage market that has occurred since
      the refinancing boom that took place when interest rates reached historically
      low levels.





Other
      operating income decreased $6,000, to $152,000, when comparing the third quarter
      of 2007 to the third quarter of 2006. Retail brokerage income and title
      insurance income declined $17,000 and $8,000, respectively, when comparing
      the
      two periods. QNB changed its Raymond James relationship from an independent
      branch employing a branch manager to a third party revenue sharing arrangement.
      The decline in title insurance income reflects the slowdown in the residential
      mortgage market. Partially offsetting these reductions in income were gains
      on
      the sale of repossessed assets of $16,000 and $4,000 in fees collected for
      cashing checks for non-QNB customers. This fee was instituted in 2007.





For
      the
      nine-month period ended September 30, 2007, other operating income was $388,000,
      a $36,000 reduction from the amount reported for 2006. The reduction in retail
      brokerage income, when comparing the two periods, was $50,000. In addition,
      title insurance income declined $6,000, and income from the sale of checks
      declined $7,000. Partially offsetting these declines were $13,000 in fees
      collected for cashing checks for non-QNB customers and an $8,000 increase in
      income from processing merchant transactions.





**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 $3,327,000 for the
      quarter ended September 30, 2007 represented an increase of $73,000, or 2.2%,
      from levels reported in the third quarter of 2006. Total non-interest expense
      for the nine months ended September 30, 2007, excluding the $740,000 prepayment
      penalty, was $10,061,000, an increase of $289,000, or 3.0%, over 2006 levels.




Page
          30


**QNB
      CORP. AND SUBSIDIARY**





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


**OF
      OPERATIONS AND FINANCIAL CONDITION**




**NON-INTEREST
      EXPENSE (Continued)**





Salaries
      and benefits is the largest component of non-interest expense. Salaries and
      benefits expense increased $6,000, or .3%, to $1,826,000 for the quarter ended
      September 30, 2007 compared to the same quarter in 2006. Salary expense
      increased $9,000, or .6%, during the period to $1,496,000, while benefits
      expense decreased $3,000, or .9%, to $330,000. Included in salary expense for
      the third quarter of 2007 and 2006, respectively was $20,000 and $27,000 in
      stock option compensation expense. The relatively small increase in salary
      expense reflects the impact of having three fewer full-time equivalent employees
      in the third quarter of 2007 compared to the third quarter of 2006, which offset
      a large part of the merit increases. These positions were primarily open officer
      level positions that have subsequently been filled. The decrease in benefits
      expense is net of a number of items including a $5,000 reduction in medical
      and
      dental premiums, reflecting a reduction in the number of people insured as
      well
      as the shift by employees to lower cost plans. Retirement plan expense and
      workers’ compensation premium expense decreased $3,000 and $4,000, respectively
      while tuition reimbursement and payroll tax expense increased $6,000 and $3,000,
      respectively when comparing the two quarters.





For
      the
      nine-month period ended September 30, 2007, salaries and benefits expense
      increased $115,000, or 2.1%, to $5,554,000, compared to the same period in
      2006.
      Salary expense increased by $112,000, or 2.6%, while benefits expense increased
      by $3,000, or .2%, when comparing the two periods. Payroll tax expense,
      retirement plan expense and tuition reimbursement increased by $14,000, $6,000
      and $9,000, respectively, when comparing the nine-month periods. These increases
      were offset by a $20,000 reduction in medical and dental premiums and a $7,000
      reduction in workers’ compensation premiums.





Net
      occupancy expense increased $24,000, or 8.4%, to $311,000, when comparing the
      third quarter of 2007 to the third quarter of 2006. A $22,000 increase in branch
      rent expense accounted for most of the increase in net occupancy when comparing
      the three-month periods. Half of this increase relates to an increase in rent
      for the operation center’s parking facility. In addition, there was an increase
      in common area maintenance charges at some leased locations, an increase in
      rent
      at one branch location and leases for two new ATMs at a local shopping center.
      Building repairs and maintenance contributed $9,000 to the increase when
      comparing the two quarters, most of which is timing related as the expense
      for
      the nine-month period declined $6,000, or 2.6%. Partially offsetting these
      increases were lower insurance costs and higher rental income.





For
      the
      nine-month period, net occupancy expense increased $49,000, or 5.7%, to $911,000
      with branch rent expense and depreciation expense accounting for $41,000 and
      $14,000 of the increase. In addition, utilities expense increased $8,000 when
      comparing the nine-month periods. Some of the increase in depreciation and
      utilities costs related to the renovations and opening of the commercial loan
      center in June 2006, thereby having nine months of costs in 2007 compared to
      four months in 2006. The increase in branch rent relates to the items described
      above. Partially offsetting these increases were a reduction in insurance
      expense of $6,000 and repairs and maintenance expense of $6,000. In addition,
      rental income, which is netted against other occupancy expenses, increased
      as a
      result of renting space in the commercial loan center to a local
      merchant.





Furniture
      and equipment expense decreased $12,000, or 4.5%, to $257,000, when comparing
      the three-month periods ended September 30, 2007 and 2006 but increased $19,000,
      or 2.5%, to $774,000, when comparing the nine-month periods. The decrease when
      comparing the three-month periods is primarily the result of an $11,000 decrease
      in depreciation expense. The decline in depreciation expense is the result
      of
      computer equipment becoming fully depreciated in the first half of 2007. In
      addition, there was $9,000 in expense related to the commercial loan center
      in
      the third quarter of 2006. Partially offsetting these savings was a $3,000
      increase in equipment maintenance and a $5,000 increase in equipment rentals.
      The increase in equipment rent expense relates to the two new ATMs put in
      service.




Page
          31


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




**NON-INTEREST
      EXPENSE (Continued)**





For
      the
      nine-month period, an increase in equipment maintenance costs, including both
      repairs and maintenance contracts, accounts for $22,000 of the increase.
      Equipment rental expense increased $5,000, as noted, and depreciation on
      equipment increased $12,000 when comparing the nine-month periods. The increase
      in depreciation expense relates to the commercial loan center less the impact
      of
      the computer equipment in the third quarter. Partially offsetting these
      increases was a reduction of software amortization of $19,000 for the nine
      month
      period as certain items became fully expensed by December 31, 2006. Some of
      these savings have been reduced as new software for the credit review function
      and eStatements were put in service in June 2007.




Marketing
      expense increased $17,000, to $156,000, for the quarter ended September 30,
      2007
      and $44,000, to $480,000, for the nine-month period. Increases in advertising
      contributed $4,000 and $20,000, respectively, to the increases in marketing
      expense for the respective three and nine-month periods. QNB made a strategic
      decision to increase its visibility in the communities it serves, particularly
      to businesses, through the use of billboards,
      television advertising and promotional giveaways to increase both product and
      brand recognition. During these same periods public relations costs increased
      $9,000 and $34,000, respectively, and sales promotion costs increased $9,000
      and
      $16,000, respectively. The increase in public relations costs for the quarter
      relate to the bi-annual employee family picnic. For the nine month period,
      newsletters to our kids club and teenage customers, sponsorships of some
      community events and the family picnic account for the increase. The increase
      in
      sales promotion costs for the quarter is the result of a home equity gift card
      promotion which was implemented in an effort to increase origination activity.
      For the nine-month period, in addition to the home equity gift card promotion,
      QNB began offering gifts as part of a free checking promotion. This promotion
      started in the fourth quarter of 2006.





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 $181,000 for the third quarter of 2007 compared to $164,000
      for the third quarter of 2006. This increase related primarily to higher legal,
      third party loan collection and internet banking costs. For the nine-month
      period, third party service expense increased $18,000, or 3.4%, to $547,000.
      Higher internet banking and loan collection costs contributed to this
      increase.





Telephone,
      postage and supplies expense increased $14,000 for the quarter, to $134,000,
      but
      only $3,000 for the nine-month period, to $399,000. Supplies expense increased
      $8,000 when comparing the three-month periods, but decreased $1,000 when
      comparing the nine-month periods. These variances relate to the timing of the
      costs for the purchase of debit and ATM cards. These cards were purchased in
      the
      first quarter of 2006 and the third quarter of 2007. Postage expense increased
      $4,000 for both the three and nine-month periods, primarily a result of the
      increase in rates by the U.S. postal service in May 2007.





State
      tax
      expense represents the payment 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 $122,000 for the third quarter of
      2007,
      an increase of $10,000, and $366,000 for the nine-month period, an increase
      of
      $27,000 compared to the same period in 2006. These increases were the result
      of
      a higher shares tax resulting from an increase in the Bank’s
      equity.




Page
          32




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


**INCOME
      TAXES**





QNB
      utilizes an asset and liability approach for financial accounting and reporting
      of income taxes. As of September 30, 2007, QNB’s net deferred tax asset was
      $695,000. The primary components of deferred taxes are a deferred tax asset
      of
      $1,020,000 relating to the allowance for loan losses and a deferred tax
      liability of $297,000 resulting from the FASB No. 115 adjustment for available
      for sale securities. As of September 30, 2006, QNB's net deferred tax asset
      was
      $1,346,000, comprised of deferred tax assets of $847,000 related to the
      allowance for loan losses and $642,000 as a result of the FASB No. 115
      adjustment for 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. A valuation allowance of $209,000 existed as of December 31, 2005
      to
      offset a portion
      of the tax benefits associated with certain impaired securities that management
      believed may not be realizable. During 2006, QNB was able to recognize tax
      benefits due to realized and unrealized capital gains which
      allowed for the reversal of $164,000 of the valuation allowance. 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 effective tax rates were $463,000, or 23.0%, for the
      three-month period ended September 30, 2007, and $356,000, or 19.0%, for the
      same period in 2006. The lower effective tax rate for the third quarter of
      2006
      is a result of the reversal of approximately $78,000 of the valuation allowance
      established in 2005. For
      the
      nine month periods ended September 30, 2007 and 2006, the provision for income
      taxes was $111,000 and $988,000, respectively, while the corresponding effective
      tax rates were 5.2% and 18.0%, respectively. Impacting the 2006 provision for
      income taxes was the reversal of $164,000 of the tax valuation allowance as
      discussed above. The low effective tax rate for the nine-month period of 2007
      is
      primarily the result of the charges related to the restructuring transactions
      which reduced the amount of taxable income and as a result, tax-exempt income
      from loans and securities comprising a higher proportion of pre tax
      income.





**FINANCIAL
      CONDITION ANALYSIS**





The
      balance sheet analysis compares average balance sheet data for the nine months
      ended September 30, 2007 and 2006, as well as the period ended balances as
      of
      September 30, 2007 and December 31, 2006.





Average
      earning assets for the nine-month period ended September 30, 2007 increased
      $17,923,000, or 3.2%, to $573,445,000 from $555,522,000 for the nine months
      ended September 30, 2006. Average loans increased $41,255,000, or 12.9%, while
      average investments decreased $23,907,000, or 10.6%. Average Federal funds
      sold
      increased $2,182,000 when comparing these same periods. The growth in average
      loans during the past year was funded primarily through an increase in deposits
      and proceeds from the sale or maturity of investment securities.




Page
          33




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


**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
      excellent 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 10.6% between September 30, 2006 and September 30, 2007 and
      6.9%
      since December 31, 2006. This loan growth was achieved despite the extremely
      competitive environment for commercial loans and the slowdown in residential
      mortgage and home equity loan markets. A key financial ratio is the loan to
      deposit ratio. With the continued strong growth in loans, this ratio improved
      to
      74.2% at September 30, 2007 compared with 71.7% at December 31, 2006 and 71.6%
      at September 30, 2006. The slower growth rate from December 31, 2006 through
      September 30, 2007 reflects some seasonality in commercial borrowings as well
      as
      a reduction in commercial loan demand resulting from a slowing economy. Total
      loans at September 30, 2007 were $367,054,000 compared to $376,065,000 at June
      30, 2007, with $6,000,000 of the decline related to seasonal borrowing needs
      of
      one customer.





Average
      total commercial loans increased $34,642,000 when comparing the first nine
      months of 2007 to the first nine months of 2006. Most of the 16.2% growth in
      average commercial loans was in loans secured by real estate, either commercial
      or residential properties, which increased $21,463,000. Commercial and
      industrial loans represent commercial purpose loans that are either secured
      by
      collateral other than real estate or unsecured. Many of these loans are for
      operating lines of credit. Average commercial and industrial loans increased
      $10,568,000, or 21.0%, when comparing the nine-month periods. 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 $2,611,000, or 12.5%, when comparing the
      nine-month periods.





Indirect
      lease financing receivables represent loans to small businesses that are
      collateralized by equipment. 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
      states contiguous to Pennsylvania. QNB is not the lessor and does not service
      these loans. Average indirect lease financing loans increased $4,686,000 when
      comparing the nine-month periods.





Average
      home equity loans increased $3,201,000, while average residential mortgage
      loans
      declined $832,000 when comparing the two nine month periods. The 4.8% increase
      in average home equity loans represents a reduction in the double digit growth
      that was achieved over the past few years and, along with the lack of activity
      in the first lien residential mortgage market, reflects the softening that
      has
      occurred in the housing market.





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.
      Interest rates on time deposits and money market accounts continued to show
      the
      greatest sensitivity. Most customers appear to be looking for the highest rate
      for the shortest term.




Page
          34
 **QNB
          CORP. AND SUBSIDIARY**
 
 **MANAGEMENT'S
          DISCUSSION AND ANALYSIS OF RESULTS**
 **OF
          OPERATIONS AND FINANCIAL CONDITION**


**FINANCIAL
      CONDITION ANALYSIS (Continued)**





Total
      average deposits increased $29,669,000, or 6.4%, to $491,840,000, for the nine
      months of 2007 compared to the first nine months of 2006. Consistent with
      customers looking for the highest rate for the shortest term, most of the growth
      achieved was in time deposits which increased $33,790,000 when comparing the
      average for the two periods. Most of the growth in time deposits occurred from
      the end of the third quarter of 2006 through the end of the second quarter
      of
      2007 and in the maturity range of greater than 6 months through 15 months,
      which
      QNB promoted heavily in response to customers’ preferences and competitors’
offerings. Average time deposits over $100,000 contributed $13,083,000 to the
      total growth in average time deposits when comparing the nine-month periods.
      Continuing to increase time deposits will be a challenge because of the strong
      rate competition that still exists despite the decline in short-term treasury
      rates. Some large financial institutions, as a result of the turmoil in the
      credit markets, are having difficulty acquiring wholesale funding, especially
      in
      the commercial paper market. As a result, they are paying higher rates on
      deposits to attract retail funding which is resulting in other financial
      institutions paying higher rates to attract or retain deposits. Matching or
      beating competitors’ rates could have a negative impact on the net interest
      margin.





Money
      market account balances increased $2,089,000, or 4.2%, on average. The increase
      in money market balances was primarily the result of a 4.00% money market
      promotion offered during most of 2006. This promotion was used to compete with
      other local financial institutions and internet banks offering attractive rates
      on money market balances. QNB has maintained a 4.00% money market rate on
      accounts with balances over $75,000 during the first nine months of 2007.





Average
      savings accounts declined $3,711,000, or 7.5%, when comparing the nine-month
      periods as customers migrated from lower paying savings accounts to higher
      paying money market accounts and short-term time deposits.





Average
      non-interest-bearing deposits declined $2,921,000, or 5.4%, when comparing
      the
      nine-month periods. These deposits are primarily comprised of business checking
      accounts and are volatile, depending on the timing of deposits and withdrawals.
      In addition, business customers are migrating to sweep accounts that transfer
      excess balances not used to cover daily activity to interest bearing accounts.
      This migration will result in an increase in the cost of funds as the use of
      this product increases.





As
      a
      result of the maturity and payoff of the $55,000,000 of FHLB advances and their
      replacement with only $25,000,000 of repurchase agreements, the average
      outstanding balance of long-term debt decreased from $55,000,000 for the
      nine-months ended September 30, 2006 to $35,337,000 for the nine-months ended
      September 30, 2007.





Total
      assets at September 30, 2007 were $595,489,000, compared with $614,539,000
      at
      December 31, 2006, a decrease of 3.1%. The April 2007 restructuring transaction
      had a significant impact on the composition of the balance sheet, as did the
      growth in loans and deposits. The composition of the asset side of the balance
      sheet shifted from year-end with total loans increasing $23,558,000 between
      December 31, 2006 and September 30, 2007. In contrast, total investment
      securities declined by $32,774,000 between these dates. The proceeds from the
      investment portfolio were used to fund loan growth as well as pay off
      $27,000,000 in long-term debt. As a result of repaying the FHLB advances, QNB’s
      equity investment in the FHLB, included in non-marketable equity securities,
      was
      reduced by $2,197,000 when comparing December 31, 2006 to September 30, 2007.




Page
          35




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


**FINANCIAL
      CONDITION ANALYSIS (Continued)**





On
      the
      liability side, partially offsetting the reduction in long-term debt was a
      $15,617,000, or 3.3%, increase in total deposits since year-end. Growth in
      time
      deposits and non-interest bearing demand accounts contributed $15,902,000 and
      $3,692,000, respectively, of the increase in total deposits since year-end.
      As
      mentioned previously, non-interest bearing and interest-bearing demand accounts
      can be volatile depending on the timing of deposits and withdrawals. Partially
      offsetting these increases were a decline in money market balances and savings
      account balances of $1,729,000 and $2,119,000, respectively. Short-term
      borrowings decreased $9,124,000 between December 31, 2006 and September 30,
      2007. Included in this category are repurchase agreements, a sweep account
      for
      commercial customers, which declined $9,553,000 from December 31, 2006 to
      September 30, 2007. One customer’s balance declined by approximately
      $11,081,000, with most of these funds being moved to time deposits in
      2007.





**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 deposit funds. 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. The Bank has a maximum borrowing capacity with the FHLB
      of
      approximately $185,746,000. At September 30, 2007, QNB had no outstanding
      borrowings under the FHLB credit facility.





Cash
      and
      due from banks, Federal funds sold, available-for-sale securities and loans
      held-for-sale totaled $204,614,000 and $244,091,000 at September 30, 2007 and
      December 31, 2006, respectively. The decrease in liquid sources is primarily
      the
      result of the reduction of the available-for-sale securities portfolio caused
      by
      the repayment of the FHLB borrowings and the growth in the loan portfolio.
      While
      reduced, these sources should be adequate to meet normal fluctuations in loan
      demand and deposit withdrawals. During the first nine months of 2006 and 2007,
      QNB used its Federal funds lines minimally to help temporarily fund loan growth
      and seasonal deposit withdrawals. Average Federal funds purchased were $482,000
      for the first nine months of 2007. This level compared to $1,792,000 for the
      same period in 2006. As of September 30, 2007, QNB had a balance of $429,000
      in
      Federal funds purchased.





Approximately
      $119,493,000 and $75,793,000 of available-for-sale securities at September
      30,
      2007 and December 31, 2006, respectively, were pledged as collateral for
      repurchase agreements and deposits of public funds. The increase in the amount
      of pledged securities when comparing September 30, 2007 to December 31, 2006
      reflects the collateral required to secure the $25,000,000 repurchase agreement
      reported as long-term debt as well as the seasonal increase in municipal and
      school district deposits. 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 no outstanding borrowings
      under the FHLB credit facility.





Page
          36




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


**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 September
      30, 2007 was $51,873,000, or 8.71% of total assets, compared to shareholders'
      equity of $50,410,000, or 8.20% of total assets, at December 31, 2006.
      Shareholders’ equity at September 30, 2007 included a positive adjustment of
      $575,000 related to unrealized holding gains, net of taxes, on investment
      securities available-for-sale while shareholders’ equity at December 31, 2006
      included a negative adjustment of $815,000 related to unrealized holding losses,
      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 8.61% and 8.34% at September 30, 2007 and December 31, 2006,
      respectively. The increase in this ratio is primarily a function of the
      reduction in total assets from $614,539,000 at December 31, 2006 to $595,489,000
      at September 30, 2007.





Shareholders'
      equity averaged $51,054,000 for the first nine months of 2007 and $49,760,000
      for the year ended December 31, 2006, an increase of 2.6%. The ratio of average
      total equity to average total assets increased to 8.46% for the first nine
      months of 2007 compared to 8.37% for all of 2006.





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.





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
      12.40% and 13.15%, a total risk-based ratio of 13.18% and 13.91% and a leverage
      ratio of 8.46% and 8.42% at September 30, 2007 and December 31, 2006,
      respectively. The decline in the Tier I and total risk-based capital ratios
      were
      the result of the impact of the securities loss and prepayment penalty on net
      income and retained earnings as well as the increase in risk weighted assets,
      resulting principally from a shift in assets from investment securities to
      loans.





The
      Federal Deposit Insurance Corporation Improvement Act of 1991 established five
      capital level designations ranging from "well capitalized" to "critically
      undercapitalized." At September 30, 2007 and December 31, 2006, 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.




Page
          37


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


**INTEREST
      RATE SENSITIVITY (Continued)**





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. Savings
      accounts, including passbook, statement savings, money market, and
      interest-bearing demand accounts do not have a stated maturity or repricing
      terms and can be withdrawn or repriced at any time. These characteristics 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.





QNB
      primarily focuses on the management of the one-year interest rate sensitivity
      gap. At September 30, 2007, interest-earning assets scheduled to mature or
      likely to be called, repriced or repaid in one year were $180,642,000.
      Interest-sensitive liabilities scheduled to mature or reprice within one year
      were $288,857,000. The one-year cumulative gap, which reflects QNB’s interest
      sensitivity over a period of time, was a negative $108,215,000 at September
      30,
      2007. The cumulative one-year gap equals -19.04% of total rate sensitive assets.
      This gap position compares to a negative gap position of $109,544,000, or
      -18.44%, of total rate sensitive assets, at December 31, 2006.





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 what management believes at that time to be the most
      likely interest rate environment. 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 September 30,
      2007, it is unlikely that interest rates would decline by 300 basis points.
      The
      simulation results can be found in the chart on page 39.





The
      results from the simulation model are consistent with the results implied by
      the
      GAP model. 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 portfolio and the increased expense associated with higher
      costing deposits and short-term borrowings. Net interest income increases if
      rates were to decline by 100 or 200 basis points. However, the rate of increase
      in net interest income slows and is not as great as the rate of decline in
      interest income with rising rates reflecting the hypothetical interest rate
      floors on interest-bearing transaction accounts, regular money market accounts
      and savings accounts. Interest rates on these products do not have the ability
      to decline to the degree that rates on earning assets can.





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.




Page
          38


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




**INTEREST
      RATE SENSITIVITY (Continued)**





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 September 30, 2007, 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
            
            $
            15,640
            
            $
            (1,948
            )
            
            (11.08
            )%+200
                Basis Points
            
            
            16,211
            
            
            (1,377
            )
            
            (7.83
            )+100
                Basis Points
            
            
            16,885
            
            
            (703
            )
            
            (4.00
            )FLAT
                RATE
            
            
            17,588
            
            
            -
            
            
            --100
                Basis Points
            
            
            17,805
            
            
            217
            
            
            1.23-200
                Basis Points
            
            
            17,765
            
            
            177
            
            
            1.01-300
                Basis Points
            
            
            17,311
            
            
            (277
            )
            
            (1.57
            )




Page
          39





**QNB
      CORP. AND SUBSIDIARY**





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


**OF
      OPERATIONS AND FINANCIAL CONDITION**


**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 controls over financial reporting or other
      factors that have materially affected, or are reasonably likely to materially
      affect, these controls during the prior fiscal quarter covered by this
      report.




Page
          40




**QNB
      CORP. AND SUBSIDIARY**





**PART
      II. OTHER INFORMATION**





**SEPTEMBER
      30, 2007**


Item
                  1.
              
              Legal
                  ProceedingsNone.Item
                  1A.
              
              Risk
                  FactorsThere
                  were no material changes to the Risk Factors described in Item
                  1A in QNB’s
                  AnnualReport
                  on Form 10-K for the period ended December 31, 2006.Item
                  2.
              
              Unregistered
                  Sales of Equity Securities and Use of ProceedsNone.Item
                  3.
              
              Default
                  Upon Senior SecuritiesNone.Item
                  4.
              
              Submission
                  of Matters to Vote of Security HoldersNoneItem
                  5.
              
              Other
                  InformationNone.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
          41




**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:November 9, 2007
            By:
            /s/
              Thomas J. BiskoThomas
                J. Bisko
              President/CEO


Date:November 9, 2007
            By:
            /s/ Bret H. KrevolinBret
                H. Krevolin
              Chief Financial
                Officer





Page
          42