**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  June
        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 August 1, 2007Common
                  Stock, par value $.625
              
              3,130,300
 
 
 
 **QNB
        CORP. AND SUBSIDIARY**
 
 **FORM
        10-Q**
 
 **QUARTER
        ENDED JUNE 30, 2007**
 
 **INDEX**
  **PART
        I - FINANCIAL INFORMATION**
 
 **PAGE****ITEM
                  1.**
              **CONSOLIDATED
                  FINANCIAL STATEMENTS (Unaudited)**
              1Consolidated
                        Statements of Income for Three and Six Months Ended June
                        30, 2007 and
                        2006
              1Consolidated
                        Balance Sheets at June 30, 2007 and December 31,
                        2006
              2Consolidated
                        Statements of Cash Flows for Six Months Ended June 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**
              37**ITEM
                  4.**
              **CONTROLS
                  AND PROCEDURES**
              37**PART
                  II - OTHER INFORMATION**
              38**ITEM
                  1.**
              **LEGAL
                  PROCEEDINGS**
              38**ITEM
                  1A.**
              **RISK
                  FACTORS**
              38**ITEM
                  2.**
              **UNREGISTERED
                  SALES OF EQUITY SECURITIES AND USE OF PROCEEDS**
              38**ITEM
                  3.**
              **DEFAULTS
                  UPON SENIOR SECURITIES**
              38**ITEM
                  4.**
              **SUBMISSIONS
                  OF MATTERS TO A VOTE OF SECURITY HOLDERS**
              38**ITEM
                  5.**
              **OTHER
                  INFORMATION**
              38**ITEM
                  6.**
              **EXHIBITS**
              39**SIGNATURES**
              40**CERTIFICATIONS**


*QNB
          Corp. and Subsidiary*
 CONSOLIDATED
          STATEMENTS OF INCOME
 
 (in
                    thousands, except share data)
                  (unaudited)Three
                    Months
                  Ended
                    June 30,
                
                Six
                    Months
                  Ended
                    June 30,2007
                
                2006
                
                2007
                
                2006**Interest
                    Income**
                
                $
                6,200
                
                $
                5,193
                
                $
                11,983
                
                $
                10,019Interest
                    and fees on loansInterest
                    and dividends on investment securities:Taxable
                
                
                2,046
                
                
                2,067
                
                
                4,266
                
                
                4,075Tax-exempt
                
                
                429
                
                
                467
                
                
                865
                
                
                987Interest
                    on federal funds sold
                
                
                *76*
                
                
                38
                
                
                117
                
                
                62Interest
                    on interest-bearing balances and other interest income
                
                
                59
                
                
                63
                
                
                119
                
                
                112Total
                    interest income
                
                
                8,810
                
                
                7,828
                
                
                17,350
                
                
                15,255**Interest
                    Expense**Interest
                    on depositsInterest-bearing
                    demand
                
                
                603
                
                
                531
                
                
                1,095
                
                
                970Money
                    market
                
                
                407
                
                
                386
                
                
                791
                
                
                643Savings
                
                
                46
                
                
                50
                
                
                90
                
                
                98Time
                
                
                2,058
                
                
                1,478
                
                
                3,975
                
                
                2,852Time
                    over $100,000
                
                
                707
                
                
                417
                
                
                1,366
                
                
                845Interest
                    on short-term borrowings
                
                
                164
                
                
                166
                
                
                390
                
                
                309Interest
                    on long-term debt
                
                
                373
                
                
                770
                
                
                1,092
                
                
                1,522Total
                    interest expense
                
                
                4,358
                
                
                3,798
                
                
                8,799
                
                
                7,239Net
                    interest income
                
                
                4,452
                
                
                4,030
                
                
                8,551
                
                
                8,016Provision
                    for loan losses
                
                
                150
                
                
                45
                
                
                225
                
                
                45Net
                    interest income after provision for loan losses
                
                
                4,302
                
                
                3,985
                
                
                8,326
                
                
                7,971**Non-Interest
                    Income**Fees
                    for services to customers
                
                
                467
                
                
                464
                
                
                891
                
                
                904ATM
                    and debit card income
                
                
                218
                
                
                195
                
                
                407
                
                
                379Income
                    on bank-owned life insurance
                
                
                61
                
                
                62
                
                
                125
                
                
                123Mortgage
                    servicing fees
                
                
                25
                
                
                25
                
                
                50
                
                
                48Net
                    gain on sale of loans
                
                
                7
                
                
                11
                
                
                28
                
                
                24Net
                    gain (loss) on investment securities available-for-sale
                
                
                29
                
                
                60
                
                
                (2,469
                )
                
                415Other
                    operating income
                
                
                129
                
                
                134
                
                
                236
                
                
                266Total
                    non-interest income
                
                
                936
                
                
                951
                
                
                (732
                )
                
                2,159**Non-Interest
                    Expense**Salaries
                    and employee benefits
                
                
                1,870
                
                
                1,814
                
                
                3,728
                
                
                3,619Net
                    occupancy expense
                
                
                289
                
                
                296
                
                
                600
                
                
                575Furniture
                    and equipment expense
                
                
                262
                
                
                255
                
                
                517
                
                
                486Marketing
                    expense
                
                
                167
                
                
                144
                
                
                323
                
                
                297Third
                    party services
                
                
                205
                
                
                196
                
                
                366
                
                
                365Telephone,
                    postage and supplies expense
                
                
                140
                
                
                136
                
                
                266
                
                
                276State
                    taxes
                
                
                122
                
                
                114
                
                
                245
                
                
                227Loss
                    on prepayment of Federal Home Loan Bank advances
                
                
                740
                
                
                **–**
                
                
                740
                
                
                **–**Other
                    expense
                
                
                357
                
                
                327
                
                
                689
                
                
                673Total
                    non-interest expense
                
                
                4,152
                
                
                3,282
                
                
                7,474
                
                
                6,518Income
                    before income taxes
                
                
                1,086
                
                
                1,654
                
                
                120
                
                
                3,612Provision
                    (beneft) for income taxes
                
                
                161
                
                
                352
                
                
                (352
                )
                
                632**Net
                    Income**
                
                $
                925
                
                $
                1,302
                
                $
                472
                
                $
                2,980**Earnings
                    Per Share - Basic**
                
                
                .30
                
                $
                .42
                
                $
                .15
                
                $
                .95**Earnings
                    Per Share - Diluted**
                
                $
                .29
                
                $
                .41
                
                $
                .15
                
                $
                .94**Cash
                    Dividends Per Share**
                
                $
                .22
                
                $
                .21
                
                $
                .44
                
                $
                .42
 
 *The
          accompanying notes are an integral part of the unaudited consolidated fnancial
          statements.*
 
 Form
              10-QPage 1
 *QNB
          Corp. and Subsidiary*
 
 CONSOLIDATED B ALANCE
              S H EETS
 (in thousands, exceptshare data)(unaudited)**June 30,**
                  **2007**
                
                **December31,**
                    **2006****Assets**Cash
                    and due from banks
                
                $
                11,696
                
                $
                12,439Federal
                    funds sold
                
                
                9,656
                
                
                11,664Total
                    cash and cash equivalents
                
                
                21,352
                
                
                24,103Investment
                    securitiesAvailable-for-sale
                    (cost $185,056 and $221,053)
                
                
                184,135
                
                
                219,818Held-to-maturity
                    (market value $4,193 and $5,168)
                
                
                4,099
                
                
                5,021Non-marketable
                    equity securities
                
                
                1,387
                
                
                3,465Loans
                    held-for-sale
                
                
                –
                
                
                170Total
                    loans, net of unearned costs
                
                
                376,065
                
                
                343,496Allowance
                    for loan losses
                
                
                (2,872
                )
                
                (2,729
                )Net
                    loans
                
                
                373,193
                
                
                340,767Bank-owned
                    life insurance
                
                
                8,465
                
                
                8,415Premises
                    and equipment, net
                
                
                6,424
                
                
                6,442Accrued
                    interest receivable
                
                
                3,060
                
                
                2,874Other
                    assets
                
                
                4,382
                
                
                3,464Total
                    assets
                
                $
                606,497
                
                $
                614,539**Liabilities**DepositsDemand,
                    non-interest bearing
                
                $
                52,202
                
                $
                50,740Interest-bearing
                    demand
                
                
                107,073
                
                
                98,164Money
                    market
                
                
                51,377
                
                
                51,856Savings
                
                
                46,748
                
                
                45,330Time
                
                
                186,442
                
                
                174,657Time
                    over $100,000
                
                
                58,799
                
                
                58,175Total
                    deposits
                
                
                502,641
                
                
                478,922Short-term
                    borrowings
                
                
                25,881
                
                
                30,113Long-term
                    debt
                
                
                25,000
                
                
                52,000Accrued
                    interest payable
                
                
                2,304
                
                
                2,240Other
                    liabilities
                
                
                866
                
                
                854Total
                    liabilities
                
                
                556,692
                
                
                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
                
                
                9,799
                
                
                9,707Retained
                    earnings
                
                
                40,085
                
                
                40,990Accumulated
                    other comprehensive loss, net
                
                
                (608
                )
                
                (815
                )Treasury
                    stock, at cost; 106,686 shares
                
                
                (1,494
                )
                
                (1,494
                )Total
                    shareholders' equity
                
                
                49,805
                
                
                50,410Total
                    liabilities and shareholders' equity
                
                $
                606,497
                
                $
                614,539
 
 Form
              10-Q
 Page
              2
 *QNB
            Corp. and Subsidiary*
 
 CONSOLIDATED
            STATEMENTS OF CASH FLOWS
 (in
                    thousands)
                  (unaudited)**Six
                    Months Ended June 30,**
                
                **2007**
                
                **2006****Operating
                    Activities**Net
                    income
                
                $
                472
                
                $
                2,980Adjustments
                    to reconcile net income to net cash provided by operating
                    activiesDepreciation
                    and amortization
                
                
                364
                
                
                346Provision
                    for loan losses
                
                
                225
                
                
                45Securities
                    loss (gain)
                
                
                2,469
                
                
                (415
                )Net
                    gain on sale of loans
                
                
                (28
                )
                
                (24
                )Loss
                    on disposal of premises and equipment
                
                
                1
                
                
                1Proceeds
                    from sales of residential mortgages
                
                
                2,253
                
                
                2,140Originations
                    of residential mortgages held-for-sale
                
                
                (2,101
                )
                
                (2,007
                )Income
                    on bank-owned life insurance
                
                
                (125
                )
                
                (123
                )Life
                    insurance proceeds (premiums) net
                
                
                75
                
                
                (5
                )Stock-based
                    compensation expense
                
                
                57
                
                
                58Deferred
                    income tax (benefit) provision
                
                
                (63
                )
                
                51Net
                    (decrease) increase in income taxes payable
                
                
                (728
                )
                
                67Net
                    increase in accrued interest receivable
                
                
                (186
                )
                
                (152
                )Net
                    amortization of premiums and discounts
                
                
                27
                
                
                300Net
                    increase in accrued interest payable
                
                
                64
                
                
                294Increase
                    in other assets
                
                
                (229
                )
                
                (388
                )Increase
                    in other liabilities
                
                
                12
                
                
                12Net
                    cash provided by operating activities
                
                
                2,559
                
                
                3,180**Investing
                    Activities**Proceeds
                    from maturities and calls of investment securitiesavailable-for-sale
                
                
                16,423
                
                
                11,727held-to-maturity
                
                
                920
                
                
                –Proceeds
                    from sales of investment securitiesavailable-for-sale
                
                
                102,007
                
                
                25,422Purchase
                    of investment securitiesavailable-for-sale
                
                
                (84,864
                )
                
                (16,953
                )Proceeds
                    from sales of non-marketable equity securities
                
                
                2,154
                
                
                1,242Purchase
                    of non-marketable equity securities
                
                
                (76
                )
                
                (1,240
                )Net
                    increase in loans
                
                
                (32,673
                )
                
                (31,323
                )Net
                    purchases of premises and equipment
                
                
                (347
                )
                
                (1,405
                )Net
                    cash provided (used) by investing activities
                
                
                3,544
                
                
                (12,530
                )**Financing
                    Activities**Net
                    increase in non-interest bearing deposits
                
                
                1,462
                
                
                1,370Net
                    increase in interest-bearing non-maturity deposits
                
                
                9,848
                
                
                8,392Net
                    increase (decrease) in time deposits
                
                
                12,409
                
                
                (5,844
                )Repayment
                    of long-term debt
                
                
                (52,000
                )
                
                –Proceeds
                    from issuance of long-term debt
                
                
                25,000
                
                
                –Net
                    (decrease) increase in short-term borrowings
                
                
                (4,232
                )
                
                5,117Tax
                    benefit from exercise of stock options
                
                
                –
                
                
                67Cash
                    dividends paid
                
                
                (1,377
                )
                
                (1,313
                )Proceeds
                    from issuance of common stock
                
                
                36
                
                
                383Net
                    cash (used) provided by fnancing activities
                
                
                (8,854
                )
                
                8,172Decrease
                    in cash and cash equivalents
                
                
                (2,751
                )
                
                (1,178
                )Cash
                    and cash equivalents at beginning of year
                
                
                24,103
                
                
                20,807Cash
                    and cash equivalents at end of period
                
                $
                21,352
                
                $
                19,629**Supplemental
                    Cash Flow Disclosures**Interest
                    paid
                
                $
                8,735
                
                $
                6,945Income
                    taxes paid
                
                
                410
                
                
                431Non-Cash
                    TransactionsChange
                    in net unrealized holding losses, net of taxes, on investment
                    securities
                    available-for-sale
                
                
                207
                
                
                (2,229
                )Transfer
                    of loans to repossessed assets
                
                
                51
                
                
                9
  *The
            accompanying notes are an integral part of the unaudited consolidated
            financial
            statements.*
  Form
                  10-Q
 Page
                  3
  **QNB
        CORP. AND SUBSIDIARY**
 
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**
 **JUNE
        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
        six-month periods ended June 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.
        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
 
 At
        June
        30, 2007, QNB sponsored 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 $24,000 and $31,000 for the three
        months
        ended June 30, 2007 and 2006, respectively, and $57,000 and $58,000 for the
        six
        months ended June 30, 2007 and 2006, respectively. As
        of
        June 30, 2007, there was approximately $100,000 of unrecognized compensation
        cost related to unvested share-based compensation awards granted that is
        expected to be recognized over the next three years.
 
 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
        June
        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 June 30, 2007, there were 26,300 options granted and outstanding
        under this Plan.
  Form
            10-Q
 Page
            4
  **QNB
        CORP. AND SUBSIDIARY**
 
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**
 **JUNE
        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 six-months ended June 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 the first half of 2007 and 2006 was $3.57
        and
        $3.13, respectively.
 
 Stock
        option activity during the six months ended June 30, 2007 is as
        follows:
 
 Number
                  ofOptions
              
              WeightedAverageExercise
                  Price
              
              WeightedAverageRemainingContractualTerm
                  (in yrs.)
              
              AggregateIntrinsic
                ValueOutstanding
                  at January 1, 2007
              
              
              189,323
              
              $
              20.14
              
              
              4.92Exercised
              
              
              -
              
              
              -Granted
              
              
              17,400
              
              
              25.15Outstanding
                  at June 30, 2007
              
              
              206,723
              
              
              20.56
              
              
              4.44
              
              $
              1,005Exercisable
                  at June 30, 2007
              
              
              154,523
              
              
              18.10
              
              
              4.17
              
              $
              1,005
  Form
              10-Q
 Page
              5
  **QNB
        CORP. AND SUBSIDIARY**
 
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**
 **JUNE
        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 MonthsEnded
                  June 30,
              
              For
                  the Six MonthsEnded June 30,2007
              
              2006
              
              2007
              
              2006Numerator
                  for basic and diluted earningsper
                  share-net income
              
              $
              925
              
              $
              1,302
              
              $
              472
              
              $
              2,980Denominator
                  for basic earnings per share-weighted
                  average shares outstanding
              
              
              3,129,159
              
              
              3,125,968
              
              
              3,128,880
              
              
              3,122,182Effect
                  of dilutive securities-employeestock
                  options
              
              
              42,718
              
              
              53,428
              
              
              44,782
              
              
              52,964Denominator
                  for diluted earnings pershare-
                  adjusted weighted averageshares
                  outstanding
              
              
              3,171,877
              
              
              3,179,396
              
              
              3,173,662
              
              
              3,175,146Earnings
                  per share-basic
              
              $
              .30
              
              $
              .42
              
              $
              .15
              
              $
              .95Earnings
                  per share-diluted
              
              $
              .29
              
              $
              .41
              
              $
              .15
              
              $
              .94
 
 There
        were 69,700 stock options that were anti-dilutive for the three-month and
        six-month periods ended June 30, 2007 and 34,900 stock options that were
        anti-dilutive for the three and six-month periods ended June 30, 2006. These
        stock options were not included in the above calculation.
 
 Form
            10-Q
 Page
            6
 **QNB
          CORP. AND SUBSIDIARY**
 
 **NOTES
          TO CONSOLIDATED FINANCIAL STATEMENTS**
 **JUNE
          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 June 30, 2007 and 2006:
 
 For
                  the Three MonthsEnded
                  June 30,
              
              For
                  the Six MonthsEnded
                  June 30,2007
              
              2006
              
              2007
              
              2006Unrealized
                  holding losses arising during the period on securities available
                  for sale
                  (net of tax benefit of $748, $536, $732 and $1,007, respectively)
              
              $
              (1,452
              )
              $
              (1,039
              )
              $
              (1,423
              )
              $
              (1,955
              )Reclassification
                  adjustment for (gains) losses included in net income (net of tax
                  benefit
                  (tax expense) of $10, $20, $(839) and $141, respectively)
              
              
              (19
              )
              
              (40
              )
              
              1,630
              
              
              (274
              )Net
                  change in unrealized (losses) gains during the period
              
              
              (1,471
              )
              
              (1,079
              )
              
              207
              
              
              (2,229
              )Accumulated
                  other comprehensive gains (losses), beginning of period
              
              
              863
              
              
              (2,412
              )
              
              (815
              )
              
              (1,262
              )Accumulated
                  other comprehensive losses, end of period
              
              $
              (608
              )
              $
              (3,491
              )
              $
              (608
              )
              $
              (3,491
              )Net
                  income
              
              $
              925
              
              $
              1,302
              
              $
              472
              
              $
              2,980Other
                  comprehensive (loss) income, net of tax:Unrealized
                  holding (losses) gains arising during the period (net of tax benefit
                  (tax
                  expense) of $758, $556, $(107) and $1,148, respectively)
              
              
              (1,471
              )
              
              (1,079
              )
              
              207
              
              
              (2,229
              )Comprehensive
                  (loss) income
              
              $
              (546
              )
              $
              223
              
              $
              679
              
              $
              751
 
 Form
            10-Q
 Page
            7
 **QNB
          CORP. AND SUBSIDIARY**
 
 **NOTES
          TO CONSOLIDATED FINANCIAL STATEMENTS**
 **JUNE
          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 June 30, 2007 and indicates the fair value hierarchy
        of the valuation techniques utilized by QNB to determine such fair
        value:
 **Quoted
                  Pricesin ActiveMarkets forIdentical Assets(Level
                  1)**
              
              **Significant
                  OtherObservable**
                **Inputs
                  (Level 2)**
              
              **Balance
                  as of****June
                  30, 2007**Securities
                  available-for-sale
              
              $
              4,830
              
              $
              179,305
              
              $
              184,135
 
 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
        June 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 June 30, 2007, all
        of
        the financial assets measured at fair value utilized the market
        approach.
  Form
            10-Q
 Page
            8
 **QNB
          CORP. AND SUBSIDIARY**
 
 **NOTES
          TO CONSOLIDATED FINANCIAL STATEMENTS**
 **JUNE
          30, 2007 AND 2006, AND DECEMBER 31, 2006**
 **(Unaudited)**
  6.
        LOANS
 
 The
        following table presents loans by category as of June 30, 2007 and December
        31,
        2006:
 
 June
                  30,
                2007
              
              December
                  31,
                2006Commercial
                  and industrial
              
              $
              88,813
              
              $
              72,718Construction
              
              
              21,112
              
              
              10,503Real
                  estate-commercial
              
              
              124,990
              
              
              118,166Real
                  estate-residential
              
              
              121,921
              
              
              123,531Consumer
              
              
              5,148
              
              
              5,044Indirect
                  lease financing
              
              
              13,975
              
              
              13,405Total
                  loans
              
              
              375,959
              
              
              343,367Unearned
                  costs
              
              
              106
              
              
              129Total
                  loans net of unearned costs
              
              $
              376,065
              
              $
              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
        $17,000 and $43,000 at June 30, 2007 and December 31, 2006, respectively.
        Amortization expense for core deposit intangibles was $13,000 for both
        three-month periods ended June 30, 2007 and 2006 and $26,000 for both six-month
        periods ended June 30, 2007 and 2006.
 
 The
        following table reflects the components of mortgage servicing rights as of
        the
        periods indicated:
 
 June
                  30,
                2007
              
              December
                  31,
                2006Mortgage
                  servicing rights beginning balance
              
              $
              472
              
              $
              528Mortgage
                  servicing rights capitalized
              
              
              17
              
              
              31Mortgage
                  servicing rights amortized
              
              
              (37
              )
              
              (87
              )Fair
                  market value adjustments
              
              
              -
              
              
              -Mortgage
                  servicing rights ending balance
              
              $
              452
              
              $
              472Mortgage
                  loans serviced for others
              
              $
              68,492
              
              $
              70,816Amortization
                  expense of intangibles
              
              $
              63
              
              $
              138
  Form
              10-Q
 Page
              9
  **QNB
        CORP. AND SUBSIDIARY**
 
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**
 **JUNE
        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
              
              $
              122For
                  the Year Ended 12/31/08
              
              
              78For
                  the Year Ended 12/31/09
              
              
              66For
                  the Year Ended 12/31/10
              
              
              54For
                  the Year Ended 12/31/11
              
              
              44
  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 a likelihood of
        being
        realized on examination of more than 50 percent. 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
        June 30, 2007, loans receivable from directors, principal officers, and their
        related interests totaled $4,191,000. 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.
 
 Form
            10-Q
 Page
            10
 
 **QNB
          CORP. AND SUBSIDIARY**
 
 **NOTES
          TO CONSOLIDATED FINANCIAL STATEMENTS**
 **JUNE
          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:
 
 June
                  30,
                2007
              
              December
                  31,
                2006Commitments
                  to extend credit and unused lines of credit
              
              $
              74,082
              
              $
              69,926Standby
                  letters of credit
              
              
              3,294
              
              
              3,422$
              77,376
              
              $
              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 contract. 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 credit worthiness 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 June
        30,
        2007 and December 31, 2006 for guarantees under standby letters of credit
        issued
        is not material.
 
 Form
            10-Q
 Page
            11
 **QNB
          CORP. AND SUBSIDIARY**
 
 **NOTES
          TO CONSOLIDATED FINANCIAL STATEMENTS**
 **JUNE
          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.
  Form
              10-Q
 Page
              12
 **QNB
          CORP. AND SUBSIDIARY**
 
 **MANAGEMENT'S
          DISCUSSION AND ANALYSIS OF RESULTS**
 **OF
          OPERATIONS AND FINANCIAL CONDITION**
  **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”.
 
 **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, 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.
 
 **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.
  Form
              10-Q
 Page
              13
 **QNB
          CORP. AND SUBSIDIARY**
 
 **MANAGEMENT'S
          DISCUSSION AND ANALYSIS OF RESULTS**
 **OF
          OPERATIONS AND FINANCIAL CONDITION**
 **Critical
        Accounting Policies and Estimates (Continued)**
 
 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.
 
 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.
  Form
              10-Q
 Page
              14
  **QNB
            CORP. AND SUBSIDIARY**
 
 **MANAGEMENT'S
            DISCUSSION AND ANALYSIS OF RESULTS**
 **OF
            OPERATIONS AND FINANCIAL CONDITION**
 **Critical
        Accounting Policies and Estimates (Continued)**
 
 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. These securities identified as impaired subsequently were sold
        in
        April 2007.
 
 Form
              10-Q
 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.
 
 QNB
        reported net income for the second quarter of 2007 of $925,000, or $.29 per
        common share on a diluted basis. These results compare to net income of
        $1,302,000, or $.41 per share on a diluted basis, for the same period in
        2006.
        Net income for the first six months of 2007 was $472,000 compared to $2,980,000
        for the first half of 2006. Diluted earnings per share was $.15 and $.94
        for the
        respective six-month periods ended June 30, 2007 and 2006.
 
 As
        previously reported, the results for the first and second quarters 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 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 FHLB prepayment penalty, net income would have been
        $1,413,000, or $.45 per share on a diluted basis, for the second quarter
        of
        2007. Excluding the impact of the impairment charge and the prepayment penalty,
        net income for the six month period ended June 30, 2007 would have been
        $2,780,000, or $.88 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. The reduction in the amount
        of borrowings and investments should also improve QNB’s return on
        assets.
 
 Net
        interest income for the second quarter of 2007 was $4,452,000, a $422,000,
        or
        10.5%, increase from net interest income reported for the same period in
        2006. The
        net
        interest margin for the second quarter of 2007 was 3.40%, compared to 3.18%
        for
        the second quarter of 2006 and 3.11% for the first quarter of 2007. For the
        six-month period net interest income increased $535,000, or 6.7% to $8,551,000,
        while the net interest margin increased four basis points to 3.26%. 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 offset the ongoing impact of the sustained flat to inverted
        yield curve and the highly competitive deposit and loan pricing environment.
  Form
              10-Q
 Page
              16
  **QNB
            CORP. AND SUBSIDIARY**
 
 **MANAGEMENT'S
            DISCUSSION AND ANALYSIS OF RESULTS**
 **OF
            OPERATIONS AND FINANCIAL CONDITION**
 **RESULTS
          OF OPERATIONS - OVERVIEW (Continued)**
 
 Second
        quarter and six-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 second quarter of 2007 and $225,000 for the six-month period. This
        provision compares to a provision for loan losses of $45,000 for the three
        and
        six-month periods ended June 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 $887,000, or
        .24%
        of total loans, at June 30, 2007 compared with $425,000, or .12% of total
        loans,
        at December 31, 2006 and $124,000, or .04% of total loans, at June 30, 2006.
        The
        increase in nonperforming loans since December 31, 2006, relates primarily
        to
        one loan for the purpose of commercial real estate investment which was placed
        on non-accrual status in the second quarter of 2007. QNB expects to collect
        all
        interest and principal on this loan. The allowance for loan losses of $2,872,000
        represents .76% of total loans at June 30, 2007 compared to an allowance
        for
        loan losses of $2,549,000 ,
        or .77%
        of total loans at June 30, 2006.
 
 Total
        non-interest income for the three months ended June 30, 2007 was $936,000,
        a
        $15,000, or 1.6%, decline from the $951,000 recorded during the second quarter
        of 2006. Gains on the sale of investment securities were $29,000 for the
        second
        quarter of 2007 compared with $60,000 for the same period in 2006, contributing
        to the decline in non-interest income. A $23,000 increase in ATM and debit
        card
        income partially offset the impact of lower securities gains.
 
 For
        the
        six-month period ended June 30, 2007 total non-interest income, excluding
        the
        $2,758,000 other-than temporary impairment charge, was $2,026,000. This
        represents a decline of $133,000, or 6.2%, from the $2,159,000 reported for
        the
        first six months of 2006. Net gains on the sale of investment securities
        were
        $126,000 less in 2007 than in 2006.
 
 Total
        non-interest expense, excluding the $740,000 prepayment penalty, was $3,412,000
        and $6,734,000 for the respective three and six-month periods ended June
        30,
        2007. This represents a $130,000, or 4.0%, increase for the three-month period
        and a $216,000, or 3.3% increase for the six-month period. Higher personnel
        costs and marketing expense were the primary factors for these
        increases.
 
 The
        balance sheet continued to experience strong growth in loans, with total
        loans
        increasing $43,415,000, or 13.1%, between June 30, 2006 and June 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 $40,053,000, or 8.7%, during the same period, with higher costing
        time
        deposits accounting for $39,956,000 of the increase.
 
 QNB
        operates in an attractive market for financial services but also a market
        with
        intense competition from other local community banks and regional and national
        financial institutions. QNB
        has
        been able to compete effectively with other financial institutions by
        emphasizing 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 as well as others will be explained more thoroughly in the next sections.
  Form
              10-Q
 Page
              17
 **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****June
                    30, 2007**
                
                **June
                    30, 2006****Average**
                
                **Average**
                
                
                
                **Average**
                
                **Average****Balance**
                
                **Rate**
                
                **Interest**
                
                **Balance**
                
                **Rate**
                
                **Interest****Assets**Federal
                    funds sold
                
                $
                5,827
                
                
                5.26
                %
                $
                76
                
                $
                3,136
                
                
                4.81
                %
                $
                38Investment
                    securities:U.S.
                    Treasury
                
                
                5,050
                
                
                4.73
                %
                
                60
                
                
                6,120
                
                
                3.73
                %
                
                57U.S.
                    Government agencies
                
                
                31,678
                
                
                5.54
                %
                
                438
                
                
                29,887
                
                
                4.76
                %
                
                355State
                    and municipal
                
                
                39,338
                
                
                6.61
                %
                
                650
                
                
                42,336
                
                
                6.69
                %
                
                708Mortgage-backed
                    and CMOs
                
                
                95,685
                
                
                5.32
                %
                
                1,273
                
                
                122,811
                
                
                4.29
                %
                
                1,317Other
                
                
                18,772
                
                
                6.01
                %
                
                282
                
                
                21,461
                
                
                6.41
                %
                
                344Total
                    investment securities
                
                
                190,523
                
                
                5.67
                %
                
                2,703
                
                
                222,615
                
                
                5.00
                %
                
                2,781Loans:Commercial
                    real estate
                
                
                166,375
                
                
                6.84
                %
                
                2,836
                
                
                142,524
                
                
                6.54
                %
                
                2,322Residential
                    real estate
                
                
                25,173
                
                
                5.88
                %
                
                370
                
                
                25,980
                
                
                5.88
                %
                
                382Home
                    equity loans
                
                
                69,340
                
                
                6.52
                %
                
                1,127
                
                
                66,696
                
                
                6.31
                %
                
                1,050Commercial
                    and industrial
                
                
                64,293
                
                
                7.33
                %
                
                1,174
                
                
                50,831
                
                
                7.17
                %
                
                908Indirect
                    lease financing
                
                
                13,592
                
                
                9.73
                %
                
                331
                
                
                8,704
                
                
                9.28
                %
                
                202Consumer
                    loans
                
                
                4,741
                
                
                10.61
                %
                
                125
                
                
                5,130
                
                
                9.23
                %
                
                118Tax-exempt
                    loans
                
                
                23,399
                
                
                6.15
                %
                
                359
                
                
                22,130
                
                
                5.78
                %
                
                319Total
                    loans, net of unearned*
                
                
                366,913
                
                
                6.91
                %
                
                6,322
                
                
                321,995
                
                
                6.60
                %
                
                5,301Other
                    earning assets
                
                
                2,891
                
                
                8.12
                %
                
                59
                
                
                4,548
                
                
                5.54
                %
                
                63Total
                    earning assets
                
                
                566,154
                
                
                6.49
                %
                
                9,160
                
                
                552,294
                
                
                5.94
                %
                
                8,183Cash
                    and due from banks
                
                
                11,384
                
                
                
                
                
                
                
                
                19,243Allowance
                    for loan losses
                
                
                (2,774
                )
                
                
                
                
                
                
                
                (2,524
                )Other
                    assets
                
                
                22,111
                
                
                
                
                
                
                
                
                20,155Total
                    assets
                
                $
                596,875
                
                
                
                
                
                
                
                $
                589,168**Liabilities
                    and Shareholders' Equity**Interest-bearing
                    deposits:Interest-bearing
                    demand
                
                $
                101,812
                
                
                2.37
                %
                $
                603
                
                $
                99,056
                
                
                2.15
                %
                $
                531Money
                    market
                
                
                52,250
                
                
                3.13
                %
                
                407
                
                
                52,655
                
                
                2.94
                %
                
                386Savings
                
                
                46,957
                
                
                0.39
                %
                
                46
                
                
                50,476
                
                
                0.39
                %
                
                50Time
                
                
                182,890
                
                
                4.51
                %
                
                2,058
                
                
                161,804
                
                
                3.66
                %
                
                1,478Time
                    over $100,000
                
                
                59,210
                
                
                4.79
                %
                
                707
                
                
                43,901
                
                
                3.81
                %
                
                417Total
                    interest-bearing deposits
                
                
                443,119
                
                
                3.46
                %
                
                3,821
                
                
                407,892
                
                
                2.81
                %
                
                2,862Short-term
                    borrowings
                
                
                18,466
                
                
                3.57
                %
                
                164
                
                
                18,914
                
                
                3.51
                %
                
                166Long-term
                    debt
                
                
                29,395
                
                
                5.08
                %
                
                373
                
                
                55,000
                
                
                5.62
                %
                
                770Total
                    interest-bearing liabilities
                
                
                490,980
                
                
                3.56
                %
                
                4,358
                
                
                481,806
                
                
                3.16
                %
                
                3,798Non-interest-bearing
                    deposits
                
                
                51,985
                
                
                
                
                
                
                
                
                54,790Other
                    liabilities
                
                
                3,632
                
                
                
                
                
                
                
                
                3,143Shareholders'
                    equity
                
                
                50,278
                
                
                
                
                
                
                
                
                49,429Total
                    liabilities and shareholders' equity
                
                $
                596,875
                
                
                
                
                
                
                
                $
                589,168Net
                    interest rate spread
                
                
                
                
                
                2.93
                %
                
                
                
                
                
                
                
                2.78
                %Margin/net
                    interest income
                
                
                
                
                
                3.40
                %
                $
                4,802
                
                
                
                
                
                3.18
                %
                $
                4,385
 
 Tax-exempt
          securities and loans were adjusted to a tax-equivalent basis and are based
          on
          the marginal Federal corporate tax rate rate
          of
          34 percent.
 Non-accrual
          loans are included in earning assets.
 *
          Includes loans held-for-sale
  Form
              10-QPage 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*** **)**
 
 **Six
                    Months Ended****June
                    30, 2007**
                
                **June
                    30, 2006****Average**
                
                **Average**
                
                
                
                **Average**
                
                **Average****Balance**
                
                **Rate**
                
                **Interest**
                
                **Balance**
                
                **Rate**
                
                **Interest****Assets**Federal
                    funds sold
                
                $
                4,470
                
                
                5.26
                %
                $
                117
                
                $
                2,635
                
                
                4.72
                %
                $
                62Investment
                    securities:U.S.
                    Treasury
                
                
                5,098
                
                
                4.71
                %
                
                119
                
                
                6,076
                
                
                3.48
                %
                
                105U.S.
                    Government agencies
                
                
                32,126
                
                
                5.53
                %
                
                889
                
                
                25,339
                
                
                4.51
                %
                
                572State
                    and municipal
                
                
                39,677
                
                
                6.61
                %
                
                1,311
                
                
                45,297
                
                
                6.61
                %
                
                1,497Mortgage-backed
                    and CMOs
                
                
                111,579
                
                
                4.86
                %
                
                2,712
                
                
                125,851
                
                
                4.28
                %
                
                2,692Other
                
                
                18,466
                
                
                6.07
                %
                
                560
                
                
                23,618
                
                
                6.19
                %
                
                731Total
                    investment securities
                
                
                206,946
                
                
                5.40
                %
                
                5,591
                
                
                226,181
                
                
                4.95
                %
                
                5,597Loans:Commercial
                    real estate
                
                
                161,764
                
                
                6.80
                %
                
                5,457
                
                
                138,874
                
                
                6.50
                %
                
                4,474Residential
                    real estate
                
                
                25,848
                
                
                5.90
                %
                
                763
                
                
                25,963
                
                
                5.85
                %
                
                759Home
                    equity loans
                
                
                69,355
                
                
                6.50
                %
                
                2,236
                
                
                65,236
                
                
                6.27
                %
                
                2,027Commercial
                    and industrial
                
                
                59,766
                
                
                7.36
                %
                
                2,182
                
                
                51,016
                
                
                7.02
                %
                
                1,775Indirect
                    lease financing
                
                
                13,460
                
                
                9.52
                %
                
                641
                
                
                7,975
                
                
                9.24
                %
                
                368Consumer
                    loans
                
                
                4,796
                
                
                10.32
                %
                
                246
                
                
                5,020
                
                
                9.12
                %
                
                227Tax-exempt
                    loans
                
                
                22,808
                
                
                6.14
                %
                
                694
                
                
                20,635
                
                
                5.76
                %
                
                589Total
                    loans, net of unearned*
                
                
                357,797
                
                
                6.89
                %
                
                12,219
                
                
                314,719
                
                
                6.55
                %
                
                10,219Other
                    earning assets
                
                
                3,570
                
                
                6.75
                %
                
                119
                
                
                4,567
                
                
                4.94
                %
                
                112Total
                    earning assets
                
                
                572,783
                
                
                6.35
                %
                
                18,046
                
                
                548,102
                
                
                5.88
                %
                
                15,990Cash
                    and due from banks
                
                
                11,122
                
                
                
                
                
                
                
                
                18,821Allowance
                    for loan losses
                
                
                (2,754
                )
                
                
                
                
                
                
                
                (2,519
                )Other
                    assets
                
                
                21,578
                
                
                
                
                
                
                
                
                19,694Total
                    assets
                
                $
                602,729
                
                
                
                
                
                
                
                $
                584,098**Liabilities
                    and Shareholders' Equity**Interest-bearing
                    deposits:Interest-bearing
                    demand
                
                $
                97,427
                
                
                2.27
                %
                $
                1,095
                
                $
                97,650
                
                
                2.00
                %
                $
                970Money
                    market
                
                
                51,893
                
                
                3.07
                %
                
                791
                
                
                47,964
                
                
                2.71
                %
                
                643Savings
                
                
                46,302
                
                
                0.39
                %
                
                90
                
                
                50,371
                
                
                0.39
                %
                
                98Time
                
                
                180,691
                
                
                4.44
                %
                
                3,975
                
                
                161,599
                
                
                3.56
                %
                
                2,852Time
                    over $100,000
                
                
                58,202
                
                
                4.73
                %
                
                1,366
                
                
                46,255
                
                
                3.68
                %
                
                845Total
                    interest-bearing deposits
                
                
                434,515
                
                
                3.40
                %
                
                7,317
                
                
                403,839
                
                
                2.70
                %
                
                5,408Short-term
                    borrowings
                
                
                22,046
                
                
                3.57
                %
                
                390
                
                
                19,106
                
                
                3.26
                %
                
                309Long-term
                    debt
                
                
                40,591
                
                
                5.43
                %
                
                1,092
                
                
                55,000
                
                
                5.58
                %
                
                1,522Total
                    interest-bearing liabilities
                
                
                497,152
                
                
                3.57
                %
                
                8,799
                
                
                477,945
                
                
                3.05
                %
                
                7,239Non-interest-bearing
                    deposits
                
                
                50,979
                
                
                
                
                
                
                
                
                54,227Other
                    liabilities
                
                
                3,572
                
                
                
                
                
                
                
                
                3,004Shareholders'
                    equity
                
                
                51,026
                
                
                
                
                
                
                
                
                48,922Total
                        liabilities and shareholders' equity
                
                $
                602,729
                
                
                
                
                
                
                
                $
                584,098Net
                    interest rate spread
                
                
                
                
                
                2.78
                %
                
                
                
                
                
                
                
                2.83
                %Margin/net
                    interest income
                
                
                
                
                
                3.26
                %
                $
                9,247
                
                
                
                
                
                3.22
                %
                $
                8,751
 
 Tax-exempt
          securities and loans were adjusted to a tax-equivalent basis and are based
          on
          the marginal Federal corporate tax rate rate
          of
          34 percent.
 Non-accrual
          loans are included in earning assets.
 *
          Includes loans held-for-sale
 
 Form
              10-QPage 19
 **QNB
            CORP. AND SUBSIDIARY**
  **MANAGEMENT'S
            DISCUSSION AND ANALYSIS OF RESULTS**
 **OF
            OPERATIONS AND FINANCIAL CONDITION**
 
 **Three
                      Months Ended**
                  ****
                  **Six
                      Months Ended**
                  ********
                  ****
                  **June
                      30, 2007 compared to**
                  ****
                  **June
                      30, 2007 compared to**
                  ********
                  ****
                  **June
                      30, 2006**
                  ****
                  **June
                      30, 2006**Total
                  ****
                  Due
                      to change in:
                  ****
                  Total
                  ****
                  Due
                      to change in:
                  ********
                  ****
                  Change
                  ****
                  Volume
                  ****
                  Rate
                  ****
                  Change
                  ****
                  Volume
                  ****
                  Rate**Interest
                    income:**Federal
                      funds sold
                  
                  $
                  38
                  
                  $
                  32
                  
                  $
                  6
                  
                  $
                  55
                  
                  $
                  43
                  
                  $
                  12Investment
                    securities:U.S.
                      Treasury
                  
                  
                  3
                  
                  
                  (10
                  )
                  
                  13
                  
                  
                  14
                  
                  
                  (17
                  )
                  
                  31U.S.
                      Government agencies
                  
                  
                  83
                  
                  
                  21
                  
                  
                  62
                  
                  
                  317
                  
                  
                  153
                  
                  
                  164State
                      and municipal
                  
                  
                  (58
                  )
                  
                  (50
                  )
                  
                  (8
                  )
                  
                  (186
                  )
                  
                  (186
                  )
                  
                  -Mortgage-backed
                      and CMOs
                  
                  
                  (44
                  )
                  
                  (291
                  )
                  
                  247
                  
                  
                  20
                  
                  
                  (305
                  )
                  
                  325Other
                  
                  
                  (62
                  )
                  
                  (43
                  )
                  
                  (19
                  )
                  
                  (171
                  )
                  
                  (160
                  )
                  
                  (11
                  )Loans:Commercial
                      real estate
                  
                  
                  514
                  
                  
                  389
                  
                  
                  125
                  
                  
                  983
                  
                  
                  737
                  
                  
                  246Residential
                      real estate
                  
                  
                  (12
                  )
                  
                  (12
                  )
                  
                  -
                  
                  
                  4
                  
                  
                  (3
                  )
                  
                  7Home
                      equity loans
                  
                  
                  77
                  
                  
                  42
                  
                  
                  35
                  
                  
                  209
                  
                  
                  128
                  
                  
                  81Commercial
                      and industrial
                  
                  
                  266
                  
                  
                  241
                  
                  
                  25
                  
                  
                  407
                  
                  
                  305
                  
                  
                  102Indirect
                      lease financing
                  
                  
                  129
                  
                  
                  113
                  
                  
                  16
                  
                  
                  273
                  
                  
                  253
                  
                  
                  20Consumer
                      loans
                  
                  
                  7
                  
                  
                  (9
                  )
                  
                  16
                  
                  
                  19
                  
                  
                  (10
                  )
                  
                  29Tax-exempt
                      loans
                  
                  
                  40
                  
                  
                  18
                  
                  
                  22
                  
                  
                  105
                  
                  
                  62
                  
                  
                  43Other
                      earning assets
                  
                  
                  (4
                  )
                  
                  (23
                  )
                  
                  19
                  
                  
                  7
                  
                  
                  (24
                  )
                  
                  31Total
                      interest income
                  
                  
                  977
                  
                  
                  418
                  
                  
                  559
                  
                  
                  2,056
                  
                  
                  976
                  
                  
                  1,080**Interest
                    expense:**Interest-bearing
                      demand
                  
                  
                  72
                  
                  
                  16
                  
                  
                  56
                  
                  
                  125
                  
                  
                  (2
                  )
                  
                  127Money
                      market
                  
                  
                  21
                  
                  
                  (3
                  )
                  
                  24
                  
                  
                  148
                  
                  
                  53
                  
                  
                  95Savings
                  
                  
                  (4
                  )
                  
                  (4
                  )
                  
                  -
                  
                  
                  (8
                  )
                  
                  (8
                  )
                  
                  -Time
                  
                  
                  580
                  
                  
                  193
                  
                  
                  387
                  
                  
                  1,123
                  
                  
                  337
                  
                  
                  786Time
                      over $100,000
                  
                  
                  290
                  
                  
                  145
                  
                  
                  145
                  
                  
                  521
                  
                  
                  218
                  
                  
                  303Short-term
                      borrowings
                  
                  
                  (2
                  )
                  
                  (5
                  )
                  
                  3
                  
                  
                  81
                  
                  
                  48
                  
                  
                  33Long-term
                      debt
                  
                  
                  (397
                  )
                  
                  (358
                  )
                  
                  (39
                  )
                  
                  (430
                  )
                  
                  (399
                  )
                  
                  (31
                  )Total
                      interest expense
                  
                  
                  560
                  
                  
                  (16
                  )
                  
                  576
                  
                  
                  1,560
                  
                  
                  247
                  
                  
                  1,313**Net
                      interest income**
                  
                  $
                  417
                  
                  $
                  434
                  
                  $
                  (17
                  )
                  $
                  496
                  
                  $
                  729
                  
                  $
                  (233
                  )
 
 Form
                  10-Q
 Page
                20
  **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
            six-month
            periods ended June 30, 2007 and 2006.
 
 For
                      the Three Months
                  
                  For
                      the Six MonthsEnded
                      June 30,
                  
                  Ended
                      June 30,2007
                  
                  2006
                  
                  2007
                  
                  2006Total
                      interest income
                  
                  $
                  8,810
                  
                  $
                  7,828
                  
                  $
                  17,350
                  
                  $
                  15,255Total
                      interest expense
                  
                  
                  4,358
                  
                  
                  3,798
                  
                  
                  8,799
                  
                  
                  7,239Net
                      interest income
                  
                  
                  4,452
                  
                  
                  4,030
                  
                  
                  8,551
                  
                  
                  8,016Tax
                      equivalent adjustment
                  
                  
                  350
                  
                  
                  355
                  
                  
                  696
                  
                  
                  735Net
                      interest income (fully taxable equivalent)
                  
                  $
                  4,802
                  
                  $
                  4,385
                  
                  $
                  9,247
                  
                  $
                  8,751
 
 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 18 and 19. 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 10.5% to $4,452,000 for the quarter ended June
            30,
            2007 as compared to $4,030,000 for the quarter ended June 30, 2006. On
            a
            tax-equivalent basis, net interest income increased by 9.5%, from $4,385,000
            for
            the three months ended June 30, 2006 to $4,802,000 for the same period
            ended
            June 30, 2007. When comparing the second quarters of 2007 and 2006, the
            net
            interest margin improved by 22 basis points. The net interest margin
            increased
            to 3.40% for the second quarter of 2007 from 3.18% for the second quarter
            of
            2006. The second quarter net interest margin also represents a 29 basis
            point
            improvement from the 3.11% recorded in the first quarter of 2007. The
            increase
            in both net interest income and the net interest margin reflect the benefits
            of
            the balance sheet restructuring transactions as well as the shift in
            earning
            assets from investment securities to higher yielding commercial loans.
 
 Average
            earning assets increased 2.5 %,
            with
            average loans increasing 13.9% when comparing the second quarter of 2007
            to the
            same period in 2006. Average investment securities decreased 14.4% when
            comparing these same periods.
  Form
                  10-Q
 Page
                21
  **QNB
              CORP. AND SUBSIDIARY**
 
 **MANAGEMENT'S
              DISCUSSION AND ANALYSIS OF RESULTS**
 **OF
              OPERATIONS AND FINANCIAL CONDITION**
 
 **NET
              INTEREST INCOME (Continued)**
 
 The
              yield
              on earning assets on a tax-equivalent basis increased from 5.94% for
              the second
              quarter of 2006 to 6.49% for the second quarter of 2007. Interest income
              on
              investment securities decreased $78,000 when comparing the two quarters
              as a
              result of the reduction in balances. However, the average yield on
              the portfolio
              increased from 5.00% for the second quarter of 2006 to 5.67% for the
              second
              quarter of 2007. This increased yield reflects the benefits from the
              April
              transaction as well as other purchase and sale transactions since June
              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.
 
 Interest
              income on loans increased $1,021,000 when comparing the two quarters,
              with
              increased balances being the greatest contributor. The yield on loans
              increased
              31 basis points, to 6.91 %,
              when
              comparing the second quarter of 2007 to the second quarter of 2006.
              S ignificant
              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.
              The yield
              curve has been relatively flat or inverted, with short-term rates being
              higher
              than mid and longer-term rates for most of the past year. 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 $514,000 with average balances increasing 16.7%
              and
              contributing $389,000 of the increase in income. The yield on commercial
              real
              estate loans increased 30 basis points, to 6.84%, for the second quarter
              of
              2007. Interest on commercial and industrial loans increased $266,000
              with the
              majority of the increase related to the 26.5% increase in average balances.
              The
              average yield on these loans increased 16 basis points, to 7.33%. Growth
              in the
              indirect lease financing portfolio also contributed to the increase
              in total
              loan income. The yield on indirect leases was 9.73% for the second
              quarter of
              2007, compared with 9.28% for same period in 2006. An increase in prepayment
              income and late charges contributed to the higher yield.
 
 Residential
              mortgage and home equity loan activity has slowed over the past twelve
              months as
              the real estate market has softened. The average balance of residential
              mortgages declined 3.1% when comparing the two quarters while the average
              yield
              was 5.88% for both periods. Average home equity loans increased 4.0%,
              to
              $69,340,000, while the yield on the home equity portfolio increased
              21 basis
              points to 6.52%. The demand for home equity loans has diminished as
              home values
              have stabilized or fallen and homeowners have already borrowed against
              the
              equity in their homes. The increase in market interest rates has also
              slowed the
              activity in residential real estate lending.
 
 For
              the
              most part, earning assets are funded by deposits, which increased when
              comparing
              the two quarters. Average
              deposits increased $32,422,000, or 7.0%, with the growth occurring
              in higher
              cost time deposits, which increased $36,395,000, or 17.7%.
 
 While
              total interest income on a tax-equivalent basis increased $977,000
              when
              comparing the second quarter of 2007 to the second quarter of 2006,
              total
              interest expense increased $560,000. The rate paid on interest-bearing
              liabilities increased from 3.16 %
              for the
              second quarter of 2006 to 3.56% for the second quarter of 2007, with
              the rate
              paid on interest-bearing deposits increasing from 2.81% to 3.46% 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 as these accounts were more reactive to the changes
              in market
              interest rates and competition. Interest expense on time deposits increased
              $870,000, while the average rate paid on time deposits increased from
              3.70% to
              4.58% when comparing the two periods.
  Form
                    10-Q
 Page
                    22
  **QNB
              CORP. AND SUBSIDIARY**
 
 **MANAGEMENT'S
              DISCUSSION AND ANALYSIS OF RESULTS**
 **OF
              OPERATIONS AND FINANCIAL CONDITION**
 
 **NET
              INTEREST INCOME (Continued)**
 
 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, the
              maturity
              and repricing characteristics of time deposits tend to be shorter.
              With interest
              rates increasing over the past two years, customers have opted for
              shorter
              maturity time deposits. Approximately 68.5% of time deposits at June
              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 are looking for short maturity time deposits
              in
              anticipation of short-term rates continuing to increase. It was and
              still is
              very common to see time deposit promotions with maturities less than
              one year at
              yields above 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
              2007.
 
 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 as well as 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 second quarter of 2006 to $29,395,000 for the second quarter of
              2007, while
              the average rate paid decreased from 5.62 %
              to
              5.08% when comparing the same periods, resulting in a reduction of
              interest
              expense of $397,000.
 
 For
              the
              six-month period ended June 30, 2007, net interest income increased
              $535,000, or
              6.7%, to $8,551,000. On a tax-equivalent basis net interest income
              increased
              $496,000, or 5.7%. Average earning assets increased $24,681,000, or
              4.5%, while
              the net interest margin increased 4 basis points. The net interest
              margin on a
              tax-equivalent basis was 3.26% for the six-month period ended June
              30, 2007
              compared with 3.22% for the same period in 2006.
 
 Total
              interest income on a tax-equivalent basis increased $2,056,000, from
              $15,990,000
              to $18,046,000, when comparing the six-month periods ended June 30,
              2006 to June
              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
              $976,000 of the increase in interest income was related to volume,
              while
              $1,080,000 was due to higher rates. Similar to the analysis for the
              second
              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 13.7% to
              $357,797,000, while average investment securities decreased 8.5%, to
              $206,946,000. The yield on earning assets increased from 5.88% to 6.35%
              for the
              six-month periods. The yield on loans increased from 6.55% to 6.89%
              during this
              time, while the yield on investments increased from 4.95% to 5.40%
              when
              comparing the six-month periods.
 
 Total
              interest expense increased $1,560,000, from $7,239,000 for the six-month
              period
              ended June 30, 2006 to $8,799,000, for the six-month period ended June
              30, 2007.
              Approximately $1,313,000 of the increase in interest expense was a
              result of
              higher interest rates. Interest expense on time deposits increased
              $1,644,000
              with average balances increasing $31,039,000 or 14.9% and contributing
              $555,000
              to the increase in interest expense. The average rate paid on time
              deposits
              increased 92 basis points to 4.51%, resulting in an additional $1,089,000
              in
              interest expense.
  Form
                    10-Q
 Page
                    23
 
 **QNB
              CORP. AND SUBSIDIARY**
 
 **MANAGEMENT'S
              DISCUSSION AND ANALYSIS OF RESULTS**
 **OF
              OPERATIONS AND FINANCIAL CONDITION**
 
 **NET
              INTEREST INCOME (Continued)**
 
 Interest
              expense on demand accounts increased $125,000 with the rate paid on
              these
              accounts increasing 27 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
              Federal funds rate increased 59 basis points when comparing the six
              month
              periods.
 
 Interest
              expense on money market accounts increased $148,000, and the rate paid
              increased
              from 2.71 %
              to
              3.07% when comparing the first six months of 2006 to the same period
              in 2007.
              Average money market balances increased $3,929,000 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.
 
 Interest
              expense on short-term borrowings increased $81,000 both as a result
              of increases
              in rates paid and averages balances. The average rate paid increased
              from 3.26%
              for the first half of 2006 to 3.57% for the first half of 2007, while
              average
              balances increased $2,940,000, to $22,046,000. Repurchase agreements
              (a sweep
              product for commercial customers) increased $4,416,000 on average when
              comparing
              the two periods, while Federal funds purchased decreased $1,600,000
              during the
              same period.
 
 As
              a
              result of the payoff of the FHLB advances and the use of the lower
              costing
              repurchase agreements, interest expense on long-term debt decreased
              $430,000
              when comparing the six-month periods. The average outstanding balance
              decreased
              from $55,000,000 to $40,591,000 while the average rate paid decreased
              from 5.58%
              to 5.43%. The impact from this transaction will continue to benefit
              net interest
              income growth on a year-to-date basis for the remainder of 2007.
 
 **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.
  Form
                    10-Q
 Page
                    24
  **QNB
              CORP. AND SUBSIDIARY**
 
 **MANAGEMENT'S
              DISCUSSION AND ANALYSIS OF RESULTS**
 **OF
              OPERATIONS AND FINANCIAL CONDITION**
 
 **PROVISION
              FOR LOAN LOSSES (Continued)**
 
 QNB’s
              management determined that a $150,000 and $45,000 provision for loan
              losses was
              necessary for the three-month periods ended June 30, 2007 and 2006,
              respectively. A $225,000 and $45,000 provision for loan losses was
              recorded for
              the six-month periods ended June 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.
  QNB
              had a
              net recovery of $1,000 during the second quarter of 2007 and net charge-offs
              of
              $2,000 during the second quarter of 2006. For the six-month periods
              ended June
              30, 2007 and 2006 QNB had net charge-offs of $82,000 and $22,000, respectively.
              The net charge-offs during the first half of 2007 related primarily
              to loans in
              the indirect lease financing portfolio. 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 .15% and .02% of total
              assets at
              June 30, 2007 and 2006, respectively. These levels compare to .08%
              at December
              31, 2006. Non-accrual loans were $645,000 and $416,000 at June 30,
              2007 and
              December 31, 2006, respectively. There were no non-accrual loans at
              June 30,
              2006. Loans
              past due 90 days or more and still accruing were $242,000 and $124,000,
              at June
              30, 2007 and 2006, respectively. The increase in nonperforming loans
              since
              December 31, 2006, relates primarily to one loan for the purpose of
              commercial
              real estate investment which was placed on non-accrual status in the
              second
              quarter of 2007. QNB expects to collect all interest and principal
              on this
              loan.
 
 QNB
              did
              not have any other real estate owned as of June 30, 2007, December
              31, 2006 or
              June 30, 2006. Repossessed assets consisting of equipment, automobiles
              and
              motorcycles were $43,000 and $41,000 at June 30, 2007 and December
              31, 2006,
              respectively. There were no repossessed assets as of June 30, 2006 .
 
 There
              were no restructured loans as of June 30, 2007, December 31, 2006 or
              June 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 $2,872,000 and $2,729,000 at June 30,
              2007 and
              December 31, 2006, respectively. The ratio of the allowance to total
              loans was
              .76% and .79% at the respective period end dates. The decrease in the
              ratio was
              a result of the strong growth in the loan portfolio. The ratio, at
              .76% 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
              June
              30, 2007 and December 31, 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
              $633,000 and $403,000, respectively. The loans identified as impaired
              were
              collateral-dependent, with no valuation allowance necessary. There
              were no loans
              considered impaired at June 30, 2006.
 
 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.
 
 Form
                    10-Q
 Page
                    25
  **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 was $936,000 for the second quarter of 2007, a
              decrease of
              $15,000, or 1.6%, from the second quarter of 2006. For the six-month
              period
              ended June 30, 2007 total non-interest income was a loss of $732,000.
              Excluding
              the other-than-temporary impairment charge of $2,758,000, total non-interest
              income was $2,026,000, a $133,000, or 6.2%, decline from the $2,159,000
              reported
              for the first half of 2006. A decline in realized gains on the sale
              of
              investment securities was the primary reason for the decline in non-interest
              income in both the three and six month periods.
  Fees
              for
              services to customers are primarily comprised of service charges on
              deposit
              accounts. These fees increased $3,000, or .7%, to $467,000, when comparing
              the
              two quarters but declined $13,000, or 1.4%, to $891,000, when comparing
              the
              six-month periods. Overdraft income increased $4,000 for the three-month
              period,
              but declined $7,000 for the six-month period. These variances are a
              result of
              volume fluctuations as the item charge has remained the same. In addition,
              for
              the six-month period, fees on business checking accounts declined $4,000.
              This
              decline reflects the impact of a higher earnings credit rate for the
              first half
              of 2007 as compared to the first half of 2006. The higher earnings
              credit rate
              is a result of the increases in short-term interest rates. This credit
              is
              applied against balances to offset service charges incurred.
 
 ATM
              and
              debit card income is primarily comprised of income on debit cards and
              ATM
              surcharge income for the use of QNB ATM machines by non-QNB customers.
              ATM and
              debit card income was $218,000 for the second quarter of 2007, an increase
              of
              $23,000, or 11.8 %,
              from
              the amount recorded during the second quarter of 2006. Income from
              ATM and debit
              cards was $407,000 and $379,000 for the six months ended June 30, 2007
              and 2006,
              respectively, an increase of 7.4%. Debit card income increased $20,000,
              or
              14.0%, to $161,000, for the three-month period and $22,000, or 8.0%,
              to
              $295,000, for the six-month period. The increase in debit card income
              was 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
              $4,000 and
              $9,000, respectively, when comparing the respective three and six-month
              periods.
              Partially offsetting these positive variances was a reduction in ATM
              surcharge
              income of $1,000 and $2,000, respectively, for the three and six-month
              periods.
              The proliferation of ATM machines, as well as the ability to get cash
              back
              during a PIN-based transaction, has likely contributed to the decline
              in the
              number of transactions by non-QNB customers at QNB’s ATM machines.
  Form
                    10-Q
 Page
                    26
 **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 beneficiary. The earnings on these policies were
              $6 1 ,000
              and
              $6 2 ,000
              for
              the three months ended June 30, 200 7 and
              200 6 ,
              respectively. For the six-month period, earnings on these policies in creased
              $ 2 ,000,
              to $ 12 5 ,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 $25,000 for both three-month periods ended June
              30, 2007 and
              2006. For the six-month periods ended June 30, 2007 and 2006 mortgage
              servicing
              fees were $50,000 and $48,000, respectively. There was no valuation
              allowance
              necessary in any of the periods. Amortization expense for the three-month
              periods ended June 30, 2007 and 2006 was $18,000 and $22,000, respectively.
              For
              the respective six-month periods amortization expense was $37,000 and
              $47,000.
              The higher amortization expense in 2006 was a result of early payoffs
              of
              mortgage loans through refinancing. As mortgage interest rates have
              increased
              and the residential mortgage market has softened refinancing activity
              as well as
              origination activity has 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 $68,990,000 for the second
              quarter
              of 2007 compared to $74,041,000 for the second quarter of 2006, a decrease
              of
              6.8%. The average balance of mortgages serviced was approximately $69,858,000
              for the six-month period ended June 30, 2007, compared to $75,124,000
              for the
              first six months of 2006, a decrease of 7.0%. The timing of mortgage
              payments
              and delinquencies also impacts the amount of servicing fees recorded.
 
 The
              fixed
              income securities portfolio represents a significant portion of QNB’s earning
              assets and is also a primary tool in liquidity and asset/liability
              management.
              QNB actively manages its fixed income portfolio in an effort to take
              advantage
              of changes in the shape of the yield curve, changes in spread relationships
              in
              different sectors and for liquidity purposes, as needed. Management
              continually reviews strategies that will result in an increase in the
              yield or
              improvement in the structure of the investment portfolio.
 
 Net
              securities gains were $29,000 and $60,000 for the three months ended
              June 30,
              2007 and 2006, respectively. Included in the gains for the second quarter
              of
              2007 were gains related to activity in the marketable equity securities
              portfolio of the Company of $50,000. All the gains recorded in the
              second
              quarter of 2006 were related to activity in this portfolio. 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.
 
 For
              the
              six-months ended June 30, 2007, QNB recorded a net loss on investment
              securities
              of $2,469,000. Excluding the impairment loss of $2,758,000, gains on
              the sale of
              investment securities were $289,000. This gain compares to $415,000
              for the
              first six months of 2006. Included in the $289,000 of gains for 2007
              were
              $260,000 of gains from the marketable equity portfolio. This gain compares
              to
              gains of $257,000 from this portfolio in 2006. Net gains on the sale
              of debt
              securities for the first six months of 2007 were $30,000. During the
              first
              quarter of 2007, QNB sold $11,680,000 of securities with an average
              yield of
              5.46% to help fund loans with an average yield of 7.16%. This transaction
              also
              resulted in a $50,000 securities gain. Net gains on the sale of debt
              securities
              for the first six months of 2006 were $157,000. 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.
  Form
                    10-Q
 Page
                    27
  **QNB
                CORP. AND SUBSIDIARY**
 
 **MANAGEMENT'S
                DISCUSSION AND ANALYSIS OF RESULTS**
 **OF
                OPERATIONS AND FINANCIAL CONDITION**
  **NON-INTEREST
              INCOME (Continued)**
 
 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.
 
 The
              net
              gain on the sale of residential mortgage loans was $7,000 and $11,000
              for the
              quarters ended June 30, 2007 and 2006, respectively, and $28,000 and
              $24,000 for
              the respective six-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. Included in the gains on
              the sale of
              residential mortgages for the three month periods were $5,000 and $9,000,
              respectively related to the recognition of mortgage servicing assets.
              These
              amounts were $17,000 and $16,000 for the six-months ended June 30,
              2007 and
              2006, respectively. Proceeds from the sale of mortgages were $716,000
              and
              $1,200,000 for the second quarter of 2007 and 2006, respectively. For
              the
              six-month periods, proceeds from the sale of residential mortgage loans
              amounted
              to $2,253,000 and $2,140,000, 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 $5,000, to $129,000, when comparing the
              second
              quarter of 2007 to the second quarter of 2006. Retail brokerage income
              contributed $15,000 to this decline. QNB changed its Raymond James
              relationship
              from an independent branch employing a branch manager to a third party
              revenue
              sharing arrangement. Partially offsetting this decline were $4,000
              in fees
              collected for cashing checks for non-QNB customers. This fee was instituted
              in
              2007. Also helping offset the lower retail brokerage fees were title
              insurance
              income and tax-exempt life insurance proceeds.
 
 For
              the
              six-month period ended June 30, 2007, other operating income was $236,000,
              a
              $30,000 reduction from the amount reported for 2006. The reduction
              in retail
              brokerage income accounts when comparing the two periods was $33,000.
              In
              addition, losses on the sale of repossessed assets increased $13,000
              when
              comparing the first six months of 2007 to the first six months of 2006.
              Partially offsetting these declines were $9,000 in fees collected for
              cashing
              checks for non-QNB customers and a $6,000 increase in merchant
              income.
 
 **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 was $4,152,000
              for the
              quarter ended June 30, 2007. Excluding the prepayment penalty on the
              FHLB
              borrowings total non-interest expense was $3,412,000, an increase of
              $130,000,
              or 4.0%, from levels reported in the second quarter of 2006. Total
              non-interest
              expense for the six months ended June 30, 2007, excluding the prepayment
              penalty
              discussed above, was $6,734,000, an increase of $216,000, or 3.3%,
              over 2006
              levels.
 
 Salaries
              and benefits is the largest component of non-interest expense. Salaries
              and
              benefits expense increased $56,000, or 3.1%, to $1,870,000 for the
              quarter ended
              June 30, 2007 compared to the same quarter in 2006. Salary expense
              increased
              $48,000, or 3.3%, during the period to $1,503,000, while benefits expense
              increased $8,000, or 2.2%, to $367,000. Included in salary expense
              for the
              second quarter of 2007 and 2006, respectively was $24,000 and $31,000
              in stock
              option compensation expense. Excluding the impact of the stock option
              expense,
              salary expense increased 3.9% when comparing the three-month periods.
              Merit and
              promotional increases account for the increase in salary expense. The
              increase
              in benefits expense is a result  of higher payroll taxes and retirement
              plan expense partially offset by a slight reduction in medical premiums.
              The
              increase in payroll taxes and retirement plan expense is primarily
              related to
              the increase in salary expense while the reduction in medical premiums
              reflects
              a reduction in the number of people insured as well as the shift by
              employees to
              lower cost plans.
  Form
                    10-Q
 Page
                    28
 **QNB
                  CORP. AND SUBSIDIARY**
 
 **MANAGEMENT'S
                  DISCUSSION AND ANALYSIS OF RESULTS**
 **OF
                  OPERATIONS AND FINANCIAL CONDITION**
  **NON-INTEREST
              EXPENSE (Continued)**
 
 For
              the
              six-month period ended June 30, 2007, salaries and benefits expense
              increased
              $109,000, to $3,728,000, compared to the same period in 2006. Salary
              expense
              increased by $103,000, or 3.6%, while benefits expense increased by
              $6,000, or
              .8%, when comparing the two periods. Payroll tax expense and retirement
              plan
              expense increased by $12,000 and $10,000, respectively, when comparing
              the
              six-month periods. These increases were offset by a $15,000 reduction
              in medical
              and dental premiums.
 
 Net
              occupancy expense decreased $7,000 to $289,000, when comparing the
              second
              quarter of 2007 to the second quarter of 2006. For the six-month period,
              net
              occupancy expense increased $25,000 ,
              to
              $600,000. For the three and six-month periods building repair and maintenance
              costs declined $20,000 and $15,000, respectively. Offsetting these
              savings were
              increases in depreciation expense of $7,000 and $14,000, respectively,
              and
              increases in building rental cost of $4,000 and $19,000, respectively.
              In
              addition, for the six-month period utility costs increased $9,000.
              Some of the
              increase in depreciation and utilities costs related to the renovations
              and
              opening of the commercial loan center in June 2006. The increase in
              branch rent
              primarily related to higher common area maintenance charges at leased
              locations
              and an increase in rent at one location.
 
 Furniture
              and equipment expense increased $7,000, or 2.7%, to $262,000, when
              comparing the
              three-month periods ended June 30, 2007 and 2006 and increased $31,000,
              or 6.4%,
              to $517,000, when comparing the six-month periods. An increase in equipment
              maintenance costs, both repairs and maintenance contracts, accounts
              for the
              increase when comparing the three-month periods and $19,000 of the
              total
              increase when comparing the six-month periods.
 
 Marketing
              expense increased $23,000 to $167,000, for the quarter ended June 30,
              2007 and
              $26,000 to $323,000, for the six-month period. Increases in advertising
              contributed $8,000 and $17,000, respectively, to the increases in marketing
              expense for the respective three and six-month periods. During these
              same
              periods public relations costs increased $14,000 and $25,000, respectively.
              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.
  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 $205,000 for the second quarter of 2007 compared
              to
              $196,000 for the second quarter of 2006. This increase related to higher
              outsourced internal audit and external audit fees as well as the use
              of
              consultants for an ATM project and for employee recruitment.
 
 Telephone,
              postage and supplies expense increased $4,000 for the quarter, to $140,000,
              but
              declined $10,000 for the six-month period, to $266,000. Supplies expense
              increased $4,000 when comparing the three-month periods, but declined
              $9,000
              when comparing the six-month periods. The decrease in expense for the
              six-month
              period was a result of higher costs in the first quarter of 2006 for
              the
              production of ATM and debit cards and costs related to supplies for
              the loan
              center.
  Form
                    10-Q
 Page
                    29
  **QNB
                CORP. AND SUBSIDIARY**
 
 **MANAGEMENT'S
                DISCUSSION AND ANALYSIS OF RESULTS**
 **OF
                OPERATIONS AND FINANCIAL CONDITION**
  **NON-INTEREST
                EXPENSE (Continued)**
 
 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 second quarter
              of
              2007, an increase of $8,000 and $245,000 for the six-month period,
              an increase
              of $18,000 compared to the same period in 2006. This increase was a
              result of a
              higher shares tax resulting from an increase in the Bank’s equity.
  Other
              operating expense was $357,000 for the three months ended June 30,
              2007. This
              represents a 9.2% increase from the $327,000 reported for the three
              months ended
              June 30, 2006. Losses related to fraudulent check card transactions
              increased
              $20,000 when comparing the two periods. In addition, fees paid to members
              of the
              Board of Directors for attending meetings increased $11,000. This increase
              relates to an increase in both the meeting fee as well as the number
              of meetings
              held.
 
 **INCOME
              TAXES**
 
 QNB
              utilizes an asset and liability approach for financial accounting and
              reporting
              of income taxes. As of June
              30,
              2007, QNB’s net deferred tax asset was $1,261,000. The primary components of
              deferred taxes are a deferred tax asset of $977,000 relating to the
              allowance
              for loan losses and a deferred tax asset of $313,000 resulting from
              the FASB No.
              115 adjustment for available for sale securities. As of June 30, 2006,
              QNB ’s
              net
              deferred tax asset was $2,450,000 comprised of deferred tax assets
              of $812,000
              related to the allowance for loan losses and $1,798,000 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 $124,000 existed as of June 30,
              2006 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 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 $161,000, or 14.8%, for the
              three-month period ended June 30, 2007, and $352,000, or 21.3%, for
              the same
              period in 2006. For the six-month period ended June 30, 2007 applicable
              income
              taxes were a $352,000 benefit. For the same period in 2006 income taxes
              were
              $632,000 and the effective tax rate was 17.5%. The lower effective
              tax rate for
              the second quarter of 2007 and the tax benefit for the six-month period
              ended
              June 30, 2007 is a result of the restructuring transactions involving
              the sale
              of securities and the prepayment of FHLB advances. The low effective
              tax rate
              for the six months ended June 30, 2006 reflected the reversal of approximately
              $85,000 of the valuation allowance established in 2005.
 
 Form
                    10-Q
 Page
                    30
 
 **QNB
                CORP. AND SUBSIDIARY**
 
 **MANAGEMENT'S
                DISCUSSION AND ANALYSIS OF RESULTS**
 **OF
                OPERATIONS AND FINANCIAL CONDITION**
 **FINANCIAL
              CONDITION ANALYSIS**
 
 The
              balance sheet analysis compares average balance sheet data for the
              six months
              ended June 30, 2007 and 2006, as well as the period ended balances
              as of June
              30, 2007 and December 31, 2006.
 
 Average
              earning assets for the six-month period ended June 30, 2007 increased
              $24,681,000, or 4.5%, to $572,783,000 from $548,102,000 for the six
              months ended
              June 30, 2006. Average loans increased $43,078,000, or 13.7%, while
              average
              investments decreased $19,235,000, or 8.5%. Average Federal funds sold
              increased
              $1,835,000 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.
 
 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 have increased 13.1 %
              between
              June 30, 2006 and June 30, 2007 and 9.5% 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 74.8% at June 30, 2007 compared
              with
              71.7% at December 31, 2006 and 71.9% at June 30, 2006.
 
 Average
              total commercial loans increased $33,813,000 when comparing the first
              half of
              2007 to the first half of 2006. Most of the 16.1% growth in average
              commercial
              loans was in loans secured by real estate, either commercial or residential
              properties, which increased $22,890,000. Of this increase $20,690,000,
              or 90.4%,
              were adjustable-rate loans. While adjustable, most of these loans have
              a fixed
              rate for a period of time, from one year to ten years, before the rate
              adjusts.
              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 $8,750,000, or 17.2%, when comparing the six-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 $2,173,000,
              or
              10.5%, when comparing the six-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 $5,485,000
              when
              comparing the six-month periods. QNB has experienced an increase in
              the amount
              of charge-offs and delinquency in these types of loans over the past
              year. As a
              result, QNB has slowed the acquisition of indirect lease financing
              receivables
              in 2007.
 
 Average
              home equity loans increased $4,119,000, while average residential mortgage
              loans
              declined $115,000 when comparing the first half of 2007 to the first
              half of
              2006. The 6.3% 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.
  Form
                    10-Q
 Page
                    31
  **QNB
                CORP. AND SUBSIDIARY**
 
 **MANAGEMENT'S
                DISCUSSION AND ANALYSIS OF RESULTS**
 **OF
                OPERATIONS AND FINANCIAL CONDITION**
 **FINANCIAL
              CONDITION ANALYSIS (Continued)**
 
 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.
 
 Total
              average deposits increased $27,428,000, or 6.0%, to $485,494,000, for
              the first
              half of 2007 compared to the first half of 2006. Consistent with customers
              looking for the highest rate for the shortest term, most of the growth
              achieved
              was in time deposits which, on average, increased $31,039,000 when
              comparing the
              two periods. Most of the growth in time deposits occurred over the
              last three
              quarters 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 $11,947,000
              to the
              total growth in average time deposits when comparing the six-month
              periods.
              Continuing to increase time deposits will be a challenge because of
              the strong
              rate competition. Matching or beating competitors’ rates could have a negative
              impact on the net interest margin.
 
 Money
              market account balances increased $3,929,000, or 8.2%, 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
              the 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 2007.
 
 Average
              savings accounts declined $4,069,000, or 8.1%, when comparing the six-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 $3,248,000, or 6.0%, when comparing
              the
              six-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
              six-months ended June 30, 2006 to $40,591,000 for the six-months ended
              June 30,
              2007.
 
 Total
              assets at June 30, 2006 were $606,497,000, compared with $614,539,000
              at
              December 31, 2006, a decrease of 1.3%. 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 $32,569,000
              between
              December 31, 2006 and June 30, 2007. In contrast, total investment
              securities
              declined by $36,605,000 between these dates. The proceeds from the
              investment
              portfolio were used to fund loan growth as well as payoff $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 $2,078,000 when comparing December 31, 2006 to June 30,
              2007.
              Other  assets
              increased $918,000 from December 2006 to June 2007 with most of the
              change
              resulting from a $728,000 increase in Federal income taxes
              receivable.
  Form
                    10-Q
 Page
                    32
  **QNB
                CORP. AND SUBSIDIARY**
 
 **MANAGEMENT'S
                DISCUSSION AND ANALYSIS OF RESULTS**
 **OF
                OPERATIONS AND FINANCIAL CONDITION**
 
 **FINANCIAL
              CONDITION ANALYSIS (Continued)**
  On
              the
              liability side, offsetting the reduction in long-term debt was a $23,719,000,
              or
              5.0%, increase in total deposits since year-end. Growth in time deposits
              and
              interest-bearing demand accounts contributed $12,409,000 and $8,909,000,
              respectively, of the increase in total deposits since year-end. Non-interest
              bearing demand accounts increased $1,462,000 between December 31, 2006
              and June
              30, 2007. As mentioned previously, non-interest bearing and interest-bearing
              demand accounts can be volatile depending on the timing of deposits
              and
              withdrawals. Short-term borrowings decreased $4,232,000 between December
              31,
              2006 and June 30, 2007, as business sweep accounts classified as repurchase
              agreements declined.
  **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 $255,277,000. At June 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 $205,487,000 and $244,091,000 at June 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 half of 2006 and 2007,
              QNB used
              its Federal funds lines to help temporarily fund loan growth. Average
              Federal
              funds purchased were $708,000 for the first half of 2007. This level
              compared to
              $2,308,000 for the same period in 2006.
 
 Approximately
              $112,753,000 and $75,793,000 of available-for-sale securities at June
              30, 2007
              and December 31, 2006, respectively, were pledged as collateral for
              repurchase
              agreements and deposits of public funds. 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.
 
 Form
                    10-Q
 Page
                    33
 **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 June 30, 2007 was $49,805,000, or 8.21% of total assets,
              compared to shareholders’ equity of $50,410,000, or 8.20% of total assets, at
              December 31, 2006. Shareholders’ equity at June 30, 2007 and December 31, 2006
              included negative adjustments of $608,000 and $815,000, respectively,
              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 8.31% and 8.34% at June 30,
              2007 and December 31, 2006, respectively.
 
 Shareholders’
              equity averaged $51,026,000 for the first six months of 2007 and $49,760,000
              during all of 2006, an increase of 2.5%. The ratio of average total
              equity to
              average total assets increased to 8.47% for the first half 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.
              Under the
              requirements, QNB had a Tier I capital ratio of 12.20% and 13.15%,
              a total
              risk-based ratio of 12.94% and 13.91% and a leverage ratio of 8.44%
              and 8.42% at
              June 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 June 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.
 
  Form
                    10-Q
 Page
                    34
  **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 June 30, 2007, interest-earning assets scheduled to mature
              or likely to
              be called, repriced or repaid in one year were $191,093,000. Interest-sensitive
              liabilities scheduled to mature or reprice within one year were $313,160,000.
              The one-year cumulative gap, which reflects QNB’s interest sensitivity over a
              period of time, was a negative $122,067,000 at June 30, 2007. The cumulative
              one-year gap equals -20.90% 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.
 
 The
              increase in the negative gap position in the one-year time frame was
              a result of
              changes in the repricing and maturity structure of both the assets
              and
              liabilities. On the asset side, the amount of assets maturing or repricing
              declined by $1,023,000 from December 31, 2006 to June 30, 2007. This
              decrease
              was primarily caused by the extension of the average life of the investment
              portfolio resulting from an increase in market interest rates since
              December 31,
              2006 as well as a result of the bonds traded as part of the restructuring
              transaction. QNB sold mortgage-backed securities and CMO’s that had shorter
              average lives and that had significant prepayment risk in a declining
              interest
              rate environment. QNB purchased mortgage-backed securities and CMO’s with longer
              average lives than what was sold, but that did not prepay significantly
              if rates
              declined or also that did not extend significantly if rates increased.
              Partially
              offsetting this was some shortening of the maturity and repricing
              characteristics of the loan portfolio. On the liability side, the amount
              of
              liabilities maturing or repricing increased by $11,500,000 since December
              31,
              2007. An $11,466,000 increase in municipal interest-bearing demand
              deposits
              accounts for most of this change. At June 30, 2007, $167,887,000, or
              68.5%, of
              total time deposits was scheduled to reprice or mature in the next
              twelve
              months. This level compares to $161,358,000, or 69.3%, of total time
              deposits 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 June
              30, 2007,
              that it is unlikely that interest rates would decline by 300 basis
              points. The
              simulation results can be found in the chart on page 36.
  Form
                    10-Q
 Page
                    35
  **QNB
                CORP. AND SUBSIDIARY**
 
 **MANAGEMENT'S
                DISCUSSION AND ANALYSIS OF RESULTS**
 **OF
                OPERATIONS AND FINANCIAL CONDITION**
  **INTEREST
              RATE SENSITIVITY** **(Continued)**
 
 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.
 
 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 June 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
                    
                    $
                    14,548
                    
                    $
                    (3,823
                    )
                    
                    (20.87
                    )%+200
                        Basis Points
                    
                    
                    16,948
                    
                    
                    (1,423
                    )
                    
                    (7.75
                    )+100
                        Basis Points
                    
                    
                    17,679
                    
                    
                    (692
                    )
                    
                    (3.77
                    )FLAT
                        RATE
                    
                    
                    18,371
                    
                    
                    -
                    
                    
                    --100
                        Basis Points
                    
                    
                    18,800
                    
                    
                    429
                    
                    
                    2.34-200
                        Basis Points
                    
                    
                    18,995
                    
                    
                    624
                    
                    
                    3.40-300
                        Basis Points
                    
                    
                    18,587
                    
                    
                    216
                    
                    
                    1.18
  Form
                    10-Q
 Page
                    36
  **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.
 
 Form
                    10-Q
 Page
                    37
  **QNB
              CORP. AND SUBSIDIARY**
 
 **PART
              II. OTHER INFORMATION**
 
 **JUNE
              30, 2007**
 
 Item
              1 Legal
              Proceedings
 None.
  Item
              1A. Risk
              Factors
 There
              were no material changes to the Risk Factors described in Item 1A in
              QNB’s
              Annual  Report
              on
              Form 10-K for the period ended December 31, 2006.
  Item
              2.  Unregistered
              Sales of Equity Securities and Use of Proceeds
 None.
  Item
              3.  Default
              Upon Senior Securities
 None.
  Item
              4.  Submission
              of Matters to Vote of Security Holders
 The
              2007
              Annual Meeting (the Meeting) of the shareholders of QNB Corp. (the
              Registrant)
              was held on May 15, 2007. A Notice of the Meeting was mailed to shareholders
              of
              record as of April 2, 2007 on or about April 17, 2007, together with
              proxy
              solicitation materials prepared in accordance with Section 14(a) of
              the
              Securities Exchange Act of 1934, as amended, and the regulations promulgated
              thereunder.
 
 The
              Meeting was held for the following purposes:
 (1) To
              elect
              three (3) Directors
 
 There
              was
              no solicitation in opposition to the nominees of the Board of Directors
              for
              election to the Board of Directors and all such nominees were elected.
              The
              number of votes cast for or withheld for each of the nominees for election
              to
              the Board of Directors was as follows:
 
 Nominee
                    
                    For
                    
                    WithholdCharles
                        M. Meredith, III
                    
                    2,425,418
                    
                    107,428Gary
                        S. Parzych
                    
                    2,446,252
                    
                    86,594Bonnie
                        L. Rankin
                    
                    2,432,782
                    
                    100,064
  The
              continuing directors of the Registrant are:
 Thomas
              J.
              Bisko, Dennis Helf, G. Arden Link, Kenneth F. Brown, Anna Mae Papso,
              Henry L.
              Rosenberger, and Edgar L. Stauffer
 
 Item
              5. Other
              Information
 None.
 
 Form
                    10-Q
 Page
                    38
 
 
 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
  Form
                    10-Q
 Page
                    39
 
 **SIGNATURES**
 
 Pursuant
              to the requirements of the Securities Exchange Act of 1934, the Registrant
              has
              duly caused this Report to be signed on its behalf by the undersigned,
              thereunto
              duly authorized.
 
 QNB
                        Corp.Date:
                        August 9, 2007
                    
                    By:/s/
                        Thomas J. BiskoThomas
                        J. BiskoPresident/CEODate:
                        August 9, 2007
                    
                    By:/s/
                        Bret H. KrevolinBret
                        H. KrevolinChief
                        Financial Officer
  Form
                    10-Q
 Page
                    40