**SECURITIES
        AND EXCHANGE COMMISSION**


**WASHINGTON,
      DC 20549**










**FORM
      10-Q**





(Mark
      One)




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




For
              the quarterly period ended
            March 31, 2006


OR




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





For
      the
      transition period from _______________________________ to ________________________________




Commission
      file number 0-17706




QNB Corp.(Exact Name of Registrant
              as
              Specified in Its Charter)




Pennsylvania
              
              23-2318082(State
                  or Other Jurisdiction of Incorporation or Organization)
              
              (I.R.S.
                  Employer Identification No.)
 
 15
                  North Third Street, Quakertown, PA
              
              18951-9005(Address
                  of Principal Executive Offices)
              
              (Zip
                  Code)
 
 Registrant’s
                  Telephone Number, Including Area Code
              
              (215)538-5600


Not
                  ApplicableFormer
                  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 May 1,
                2006Common
                Stock, par value
                $.625
            
            3,125,492








**QNB
      CORP. AND SUBSIDIARY**




**FORM
      10-Q**




**QUARTER
      ENDED MARCH 31, 2006**




**INDEX**





**PAGE****PART
                  I - FINANCIAL
                  INFORMATION****ITEM
                  1.**
              **CONSOLIDATED
                  FINANCIAL STATEMENTS (Unaudited)**Consolidated
                  Statements of Income for Three Months Ended March 31, 2006 and
                  2005
              1Consolidated
                  Balance Sheets at March 31, 2006 and December 31, 2005
              2Consolidated
                  Statements of Cash Flows for Three Months Ended March 31, 2006
                  and
                  2005
              3Notes
                  to Consolidated Financial Statements
              4**ITEM
                  2.**
              **MANAGEMENT**’**S
                  DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL
                  CONDITION**
              11**ITEM
                  3.**
              **QUANTITATIVE
                    AND QUALITATIVE DISCLOSURES ABOUT MARKET
                    RISK**
              31**ITEM
                  4.**
              **CONTROLS
                  AND PROCEDURES**
              31**PART
                  II - OTHER INFORMATION****ITEM
                  1.**
              **LEGAL
                  PROCEEDINGS**
              32**ITEM
                  1A.**
              **RISK
                  FACTORS**
              32**ITEM
                  2.**
              **UNREGISTERED
                  SALES OF EQUITY SECURITIES AND USE OF PROCEEDS**
              32**ITEM
                  3.**
              **DEFAULTS
                  UPON SENIOR SECURITIES**
              32**ITEM
                  4.**
              **SUBMISSIONS
                  OF MATTERS TO A VOTE OF SECURITY HOLDERS**
              32**ITEM
                  5.**
              **OTHER
                  INFORMATION**
              32**ITEM
                  6.**
              **EXHIBITS**
              32**SIGNATURES****CERTIFICATIONS**







*QNB
        Corp. and Subsidiary*
  CONSOLIDATED
        STATEMENTS OF INCOME


(in
                  thousands, except share data)(unaudited)**Three
                  Months Ended March 31,**
              
              **2006**
              
              **2005****Interest
                  Income**Interest
                  and fees on loans
              
              $
              4,826
              
              $
              3,891Interest
                  and dividends on investment securities:Taxable
              
              
              2,008
              
              
              2,256Tax-exempt
              
              
              520
              
              
              564Interest
                  on Federal funds sold
              
              
              24
              
              
              18Interest
                  on interest-bearing balances and other interest income
              
              
              49
              
              
              30Total
                  interest income
              
              
              7,427
              
              
              6,759**Interest
                  Expense**Interest
                  on depositsInterest-bearing
                  demand
              
              
              439
              
              
              197Money
                  market
              
              
              257
              
              
              252Savings
              
              
              48
              
              
              54Time
              
              
              1,374
              
              
              1,122Time
                  over $100,000
              
              
              428
              
              
              280Interest
                  on short-term borrowings
              
              
              143
              
              
              42Interest
                  on Federal Home Loan Bank advances
              
              
              752
              
              
              727Total
                  interest expense
              
              
              3,441
              
              
              2,674Net
                  interest income
              
              
              3,986
              
              
              4,085Provision
                  for loan losses
              
              
              —
              
              
              —Net
                  interest income after provision for loan losses
              
              
              3,986
              
              
              4,085**Non-Interest
                  Income**Fees
                  for services to customers
              
              
              440
              
              
              439ATM
                  and debit card income
              
              
              184
              
              
              159Income
                  on bank-owned life insurance
              
              
              61
              
              
              63Mortgage
                  servicing fees
              
              
              23
              
              
              24Net
                  gain on investment securities available-for-sale
              
              
              355
              
              
              613Net
                  gain on sale of loans
              
              
              13
              
              
              35Other
                  operating income
              
              
              132
              
              
              336Total
                  non-interest income
              
              
              1,208
              
              
              1,669**Non-Interest
                  Expense**Salaries
                  and employee benefits
              
              
              1,805
              
              
              1,837Net
                  occupancy expense
              
              
              279
              
              
              281Furniture
                  and equipment expense
              
              
              231
              
              
              282Marketing
                  expense
              
              
              153
              
              
              150Third
                  party services
              
              
              169
              
              
              141Telephone,
                  postage and supplies expense
              
              
              140
              
              
              123State
                  taxes
              
              
              113
              
              
              103Other
                  expense
              
              
              346
              
              
              319Total
                  non-interest expense
              
              
              3,236
              
              
              3,236Income
                  before income taxes
              
              
              1,958
              
              
              2,518Provision
                  for income taxes
              
              
              280
              
              
              599**Net
                  Income**
              
              $
              1,678
              
              $
              1,919**Earnings
                  Per Share - Basic**
              
              $
              .54
              
              $
              .62**Earnings
                  Per Share - Diluted**
              
              $
              .53
              
              $
              .60**Cash
                  Dividends Per Share**
              
              $
              .21
              
              $
              .195




*The
        accompanying notes are an integral part of the unaudited consolidated financial
        statements.*




Page
          1




*QNB
        Corp. and Subsidiary*
  CONSOLIDATED
        BALANCE SHEETS
 
 **(in
                  thousands)**
                **(unaudited)****March
                  31,**
                **2006**
              
              **December
                  31,**
                **2005****Assets**Cash
                  and due from banks
              
              $
              18,762
              
              $
              20,807Federal
                  funds sold
              
              
              7,434
              
              
              —Total
                  cash and cash equivalents
              
              
              26,196
              
              
              20,807Investment
                  securitiesAvailable-for-sale
                  (cost $212,185 and $235,187)
              
              
              208,531
              
              
              233,275Held-to-maturity
                  (market value $6,044 and $6,082)
              
              
              5,895
              
              
              5,897Non-marketable
                  equity securities
              
              
              3,733
              
              
              3,684Loans
                  held-for-sale
              
              
              125
              
              
              134Total
                  loans, net of unearned costs
              
              
              316,406
              
              
              301,349Allowance
                  for loan losses
              
              
              (2,506
              )
              
              (2,526
              )Net
                  loans
              
              
              313,900
              
              
              298,823Bank-owned
                  life insurance
              
              
              8,169
              
              
              8,103Premises
                  and equipment, net
              
              
              5,910
              
              
              5,400Accrued
                  interest receivable
              
              
              2,407
              
              
              2,572Other
                  assets
              
              
              4,325
              
              
              3,510Total
                  assets
              
              $
              579,191
              
              $
              582,205**Liabilities**DepositsDemand,
                  non-interest bearing
              
              $
              54,401
              
              $
              56,461Interest-bearing
                  demand
              
              
              96,092
              
              
              101,614Money
                  market
              
              
              51,211
              
              
              39,170Savings
              
              
              50,743
              
              
              50,296Time
              
              
              162,182
              
              
              160,213Time
                  over $100,000
              
              
              45,451
              
              
              50,916Total
                  deposits
              
              
              460,080
              
              
              458,670Short-term
                  borrowings
              
              
              14,693
              
              
              19,596Federal
                  Home Loan Bank advances
              
              
              55,000
              
              
              55,000Accrued
                  interest payable
              
              
              1,540
              
              
              1,512Other
                  liabilities
              
              
              1,000
              
              
              863Total
                  liabilities
              
              
              532,313
              
              
              535,641**Shareholders'
                  Equity**Common
                  stock, par value $.625 per share; authorized 10,000,000 shares;
                  3,232,178
                  and 3,210,762 shares issued; 3,125,492 and 3,104,076 shares
                  outstanding
              
              
              2,020
              
              
              2,007Surplus
              
              
              9,546
              
              
              9,117Retained
                  earnings
              
              
              39,218
              
              
              38,196Accumulated
                  other comprehensive loss, net
              
              
              (2,412
              )
              
              (1,262
              )Treasury
                  stock, at cost; 106,686 shares
              
              
              (1,494
              )
              
              (1,494
              )Total
                  shareholders' equity
              
              
              46,878
              
              
              46,564Total
                  liabilities and shareholders' equity
              
              $
              579,191
              
              $
              582,205
 
 *The
        accompanying notes are an integral part of the unaudited consolidated financial
        statements.*
  Page
              2




*QNB
        Corp. and Subsidiary*
 
 CONSOLIDATED
        STATEMENTS OF CASH FLOWS
  **(in
                  thousands)**
                **(unaudited)****Three
                  Months Ended March 31,**
              
              **2006**
              
              **2005****Operating
                  Activities**Net
                  income
              
              $
              1,678
              
              $
              1,919Adjustments
                  to reconcile net income to net cash provided by operating
                  activitiesDepreciation
                  and amortization
              
              
              161
              
              
              217Securities
                  gains
              
              
              (355
              )
              
              (613
              )Net
                  gain on sale of repossessed assets
              
              
              (2
              )
              
              (209
              )Proceeds
                  from sale of repossessed assets
              
              
              2
              
              
              209Net
                  gain on sale of loans
              
              
              (13
              )
              
              (35
              )Loss
                  on disposal of premises and equipment
              
              
              —
              
              
              1Proceeds
                  from sales of residential mortgages
              
              
              940
              
              
              1,905Originations
                  of residential mortgages held-for-sale
              
              
              (933
              )
              
              (2,087
              )Income
                  on bank-owned life insurance
              
              
              (61
              )
              
              (63
              )Life
                  insurance premiums, net
              
              
              (5
              )
              
              (5
              )Tax
                  benefit from exercise of stock options
              
              
              67
              
              
              —Stock-based
                  compensation expense
              
              
              27
              
              
              —Deferred
                  income tax provision
              
              
              27
              
              
              43Net
                  (decrease) increase in income taxes payable
              
              
              (170
              )
              
              397Net
                  decrease (increase) in accrued interest receivable
              
              
              165
              
              
              (370
              )Net
                  amortization of premiums and discounts
              
              
              161
              
              
              254Net
                  increase in accrued interest payable
              
              
              28
              
              
              41Increase
                  in other assets
              
              
              (111
              )
              
              (277
              )Increase
                  (decrease) in other liabilities
              
              
              137
              
              
              (670
              )Net
                  cash provided by operating activities
              
              
              1,743
              
              
              657**Investing
                  Activities**Proceeds
                  from maturities and calls of investment securities
                  available-for-sale
              
              
              4,804
              
              
              4,861Proceeds
                  from sales of investment securities available-for-sale
              
              
              25,163
              
              
              12,639Purchase
                  of investment securities available-for-sale
              
              
              (6,731
              )
              
              (19,745
              )Proceeds
                  from sales of non-marketable equity securities
              
              
              942
              
              
              422Purchase
                  of non-marketable equity securities
              
              
              (991
              )
              
              —Net
                  increase in loans
              
              
              (15,069
              )
              
              (1,456
              )Net
                  purchases of premises and equipment
              
              
              (671
              )
              
              (117
              )Net
                  cash provided (used) by investing activities
              
              
              7,447
              
              
              (3,396
              )**Financing
                  Activities**Net
                  (decrease) increase in non-interest bearing deposits
              
              
              (2,060
              )
              
              1,200Net
                  increase (decrease) in interest-bearing non-maturity
                  deposits
              
              
              6,966
              
              
              (667
              )Net
                  (decrease) increase in time deposits
              
              
              (3,496
              )
              
              2,049Net
                  decrease in short-term borrowings
              
              
              (4,903
              )
              
              (3,359
              )Cash
                  dividends paid
              
              
              (656
              )
              
              (604
              )Proceeds
                  from issuance of common stock
              
              
              348
              
              
              37Net
                  cash used by financing activites
              
              
              (3,801
              )
              
              (1,344
              )Increase
                  (decrease) in cash and cash equivalents
              
              
              5,389
              
              
              (4,083
              )Cash
                  and cash equivalents at beginning of year
              
              
              20,807
              
              
              22,185Cash
                  and cash equivalents at end of period
              
              $
              26,196
              
              $
              18,102**Supplemental
                  Cash Flow Disclosures**Interest
                  paid
              
              $
              3,413
              
              $
              2,633Income
                  taxes paid
              
              
              —
              
              
              125Non-Cash
                  TransactionsChange
                  in net unrealized holding gains, net of taxes, on investment
                  securities
              
              
              (1,150
              )
              
              (2,861
              )Transfer
                  of loans to repossessed assets
              
              
              9
              
              
              4
  *The
        accompanying notes are an integral part of the unaudited consolidated financial
        statements.*
  Page
              3


**QNB
      CORP. AND SUBSIDIARY**




**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**


**MARCH
      31, 2006 AND 2005, AND DECEMBER 31, 2005**


**(Unaudited)**





1.
      REPORTING AND ACCOUNTING POLICIES





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 2005
      Annual Report incorporated in the Form 10-K. Operating
      results for the three-month period ended March 31, 2006 are not necessarily
      indicative of the results that may be expected for the year ending December
      31,
      2006.





The
      unaudited consolidated financial statements reflect all adjustments, which
      in
      the opinion of management are necessary for a fair presentation of the results
      of 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.





**STOCK-BASED
      COMPENSATION**





QNB
      sponsors stock-based compensation plans, administered by a committee, under
      which incentive stock options may be granted periodically to certain employees.
      QNB accounted for all awards granted after January 1, 2002 under the “fair
      value” approach under Financial
      Accounting Standards Board (FASB) Statement No. 123, *Accounting
      for Stock-Based Compensation* .
      Effective January 1, 2006, QNB adopted FASB
      Statement No. 123 (revised 2004), *Share-Based
      Payment* (FASB
      No.
      123r), using the modified prospective application method. The modified
      prospective application method applies to new awards, to any outstanding
      liability awards, and to awards modified, repurchased, or cancelled after
      January 1, 2006. For all awards granted prior to January 1, 2006, unrecognized
      compensation cost, on the date of adoption, will be recognized as an expense
      in
      future periods. The results for prior periods have not been
      restated.





The
      adoption of FASB No. 123r reduced net income by approximately $27,000 for the
      three months ended March 31, 2006. The
      following table illustrates the effect on net income and earnings per share
      if
      QNB had applied the fair value recognition provisions to stock-based employee
      compensation during the period presented. For purposes of this pro forma
      disclosure, the value of the options is estimated using the Black-Scholes
      option-pricing model and amortized to expense over the options’ vesting
      period.


Form
          10-Q
 Page
          4





**QNB
      CORP. AND SUBSIDIARY**




**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**


**MARCH
      31, 2006 AND 2005, AND DECEMBER 31, 2005**


**(Unaudited)**





**March
                31, 2005**Net
                income, as reported
            
            $
            1,919Deduct:
              Total stock-based employee compensation
              expense
                determined under fair value based
              method
                for all awards, net of related tax effects
            
            
            25Pro
                forma net income
            
            $
            1,894Earnings
                per share
              Basic –
                as
                reported
            
            $
            .62Basic
                –  pro forma
            
            $
            .61Diluted
                – as reported
            
            $
            .60Diluted
                –
                pro
                forma
            
            $
            .60





As
      of
      March 31, 2006, there was approximately $173,000 of unrecognized compensation
      cost related to unvested share-based compensation awards granted. That cost
      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 March
      31, 2006, there were 180,458 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 March 31, 2006, there were 8,900 options outstanding under this
      Plan.





The
      fair
      value of each option is amortized into compensation expense on a straight-line
      basis between the grant date for the option and each vesting date. QNB
      estimated the fair value of stock options on the date of the grant using the
      Black-Scholes option pricing model. The model requires the use of numerous
      assumptions, many of which are highly subjective in nature. The following
      assumptions were used in the option pricing model in determining the fair value
      of options granted during the three months ended March 31, 2006:





**Options
                granted**
            ****
            **2004**
            
            **2006**
            
            **2004**Risk-free
                interest rate
            
            
            4.27
            %
            
            4.18
            %
            
            4.39
            %Dividend
                yield
            
            
            3.23
            
            
            2.40
            
            
            2.20Volatility
            
            
            13.28
            
            
            14.05
            
            
            13.61Expected
                life
            
            
            5
                yrs.
            
            
            10
                yrs.
            
            
            10
                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 quarter of 2006 and 2005 was $3.13
      and $6.46, respectively.


Form
          10-Q
 Page
          5





**QNB
      CORP. AND SUBSIDIARY**




**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**


**MARCH
      31, 2006 AND 2005, AND DECEMBER 31, 2005**


**(Unaudited)**





Stock
      option activity during the three months ended March 31, 2006 is as
      follows:





**Number
                of**
              **Options**
            ****
            **Weighted**
              **Average**
              **Exercise
                Price**
            ****
            **Weighted**
              **Average**
              **Remaining**
              **Contractual**
              **Term
                (in yrs.)**
            ****
            **Aggregate**
              **Intrinsic**
              **Value**
              **(in
                thousands)**Outstanding
                at January 1, 2006
            
            
            193,374
            
            $
            19.18
            
            
            5.93Exercised
            
            
            (21,416
            )
            
            16.27Granted
            
            
            17,400
            
            
            26.00Outstanding
                at March 31, 2006
            
            
            189,358
            
            
            20.13
            
            
            5.68
            
            $
            1,328Exercisable
                at March 31, 2006
            
            
            137,058
            
            
            16.16
            
            
            5.08
            
            $
            1,328





2.
      PER
      SHARE DATA





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





**For
                the Three Months Ended March 31,**2006
            
            **2005**Numerator
                for basic and diluted earnings per share-net income
            
            $
            1,678
            
            $
            1,919Denominator
                for basic earnings per share- weighted average shares
                outstanding
            
            
            3,118,353
            
            
            3,100,048Effect
                of dilutive securities-employee stock options
            
            
            52,490
            
            
            78,262Denominator
                for diluted earnings per share- adjusted weighted average shares
                outstanding
            
            
            3,170,843
            
            
            3,178,310Earnings
                per share-basic
            
            $
            54
            
            $
            62Earnings
                per share-diluted
            
            $
            53
            
            $
            60





There
      were 34,900 and 40,000 stock options that were anti-dilutive as of March 31,
      2006 and 2005, respectively. These stock options were not included in the above
      calculation.


Form
          10-Q
 Page
          6





**QNB
      CORP. AND SUBSIDIARY**




**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**


**MARCH
      31, 2006 AND 2005, AND DECEMBER 31, 2005**


**(Unaudited)**





3.
      COMPREHENSIVE INCOME





Comprehensive
      income is defined as the change in equity of a business entity during a period
      from transactions and other events and circumstances, excluding those resulting
      from investments by and distributions to owners. 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 March 31, 2006 and 2005 (net of the income tax effect):





**For
                the Three Months**
              **Ended
                March 31,**
            ********
            ****
            **2006**
            
            **2005**Unrealized
                holding losses arising during the period on securities held (net
                of taxes
                of $471 and $1,222, respectively)
            
            $
            (916
            )
            $
            (2,456
            )Reclassification
                adjustment for gains included in net income (net of taxes of $121
                and
                $208, respectively)
            
            
            (234
            )
            
            (405
            )Net
                change in unrealized losses during the period
            
            
            (1,150
            )
            
            (2,861
            )Unrealized
                holding (losses) gains, beginning of period
            
            
            (1,262
            )
            
            691Unrealized
                holding losses, end of period
            
            $
            (2,412
            )
            $
            (2,170
            )Net
                income
            
            $
            1,678
            
            $
            1,919Other
              comprehensive income, net of tax:Unrealized
                holding losses arising during the period (net of taxes of $592 and
                $1,430,
                respectively)
            
            
            (1,150
            )
            
            (2,861
            )Comprehensive
                income (loss)
            
            $
            528
            
            $
            (942
            )


Form
          10-Q
 Page
          7




**QNB
      CORP. AND SUBSIDIARY**





**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**


**MARCH
      31, 2006 AND 2005, AND DECEMBER 31, 2005**


**(Unaudited)**





4.
      LOANS





The
      following table presents loans by category as of March 31, 2006 and December
      31,
      2005:





March
                31,
              2006
            
            December
                31,
              2005Commercial
                and industrial
            
            $
            72,626
            
            $
            64,812Construction
            
            
            7,936
            
            
            7,229Real
                estate-commercial
            
            
            106,743
            
            
            104,793Real
                estate-residential
            
            
            116,427
            
            
            112,920Consumer
            
            
            4,864
            
            
            5,080Indirect
                lease financing
            
            
            7,710
            
            
            6,451Total
                loans
            
            
            316,306
            
            
            301,285Unearned
                costs
            
            
            100
            
            
            64Total
                loans net of unearned costs
            
            $
            316,406
            
            $
            301,349





5.
      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
      $81,000 and $94,000 at March 31, 2006 and December 31, 2005, respectively.
      Amortization expense for core deposit intangibles was $13,000 for both periods
      ended March 31, 2006 and 2005.





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





March
                  31,
                2006
            
            
            December
                  31,
                2005Mortgage
                servicing rights beginning balance
            
            $
            528
            
            $
            552Mortgage
                servicing rights capitalized
            
            
            7
            
            
            80Mortgage
                servicing rights amortized
            
            
            (25
            )
            
            (109
            )Fair
                market value adjustments
            
            
            —
            
            
            5Mortgage
                servicing rights ending balance
            
            $
            510
            
            $
            528Mortgage
                loans serviced for others
            
            $
            75,038
            
            $
            77,196Amortization
                expense of intangibles
            
            
            38
            
            
            160




From
          10-Q
 Page 8


**QNB
      CORP. AND SUBSIDIARY**




NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS


**MARCH
      31, 2006 AND 2005, AND DECEMBER 31, 2005**


**(Unaudited)**





5.
      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 12/31/06
            
            $
            148For
                the Year Ended 12/31/07
            
            
            130For
                the Year Ended 12/31/08
            
            
            73For
                the Year Ended 12/31/09
            
            
            61For
                the Year Ended 12/31/10
            
            
            50





6.
      RELATED PARTY TRANSACTIONS





As
      of
      March 31, 2006, amounts due from directors, principal officers, and their
      related interests totaled $4,157,000. 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.





On
      September 22, 2005, the Bank approved and entered into an agreement with Eugene
      T. Parzych, Inc. for the renovation of its property at 322 W. Broad Street,
      Quakertown, Pennsylvania to be used as additional office space. The cost of
      the
      renovations is expected to be approximately $1,000,000. The bids for this
      project were submitted through a formal bidding process and reviewed by the
      Board of Directors. Mr. Gary S. Parzych is the president of Eugene T. Parzych,
      Inc. and is also a director of QNB Corp. Management and the Board of Directors
      of QNB Corp. and the Bank believe this is an arms-length transaction. The
      total
      paid as of March 31, 2006 was $849,000.




From
          10-Q
 Page
          9




**QNB
      CORP. AND SUBSIDIARY**




**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**


**** **MARCH
      31, 2006 AND 2005, AND DECEMBER 31, 2005**


**(Unaudited)**





7.
        RECENT
        ACCOUNTING PRONOUNCEMENTS
  In
        February 2006, the FASB issued FASB No. 155, *Accounting
        for Certain Hybrid Instruments, as an amendment of FASB Statements No. 133
        and
        140* .
        FASB
        No. 155 allows financial instruments that have embedded derivatives to be
        accounted for as a whole (eliminating the need to bifurcate the derivative
        from
        its host) if the holder elects to account for the whole instrument on a fair
        value basis. This statement is effective for all financial instruments acquired
        or issued after the beginning of an entity’s first fiscal year that begins after
        September 15, 2006. The adoption of this standard is not expected to have
        a
        material effect on the QNB’s results of operations or financial
        position.
  In
        March
        2006, the FASB issued FASB No. 156, *Accounting
        for Servicing of Financial Assets* .
        This
        Statement, which is an amendment to FASB No. 140, will simplify the accounting
        for servicing assets and liabilities, such as those common with mortgage
        securitization activities. Specifically, FASB No. 156 addresses the recognition
        and measurement of separately recognized servicing assets and liabilities
        and
        provides an approach to simplify efforts to obtain hedge-like (offset)
        accounting. FASB No. 156 also clarifies when an obligation to service financial
        assets should be separately recognized as a servicing asset or a servicing
        liability, requires that a separately recognized servicing asset or servicing
        liability be initially
        measured at fair value, if practicable, and permits an entity with a separately
        recognized servicing asset or servicing liability to choose either of the
        amortization or fair value methods for subsequent measurement. The provisions
        of
        FASB No. 156 are effective as of the beginning of the first fiscal year that
        begins after September 15, 2006. The adoption of this standard is not expected
        to have a material effect on QNB’s results of operations or financial
        position.




From
          10-Q
 Page
          10


**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 Corporation) is a bank holding company headquartered in Quakertown,
      Pennsylvania. The Corporation, 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 Corporation 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:




·
              Operating,
                  legal and regulatory risks




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




·
            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


·
            Volatility
                in interest rates






·
              Increased
                  credit risk






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.




From
          10-Q
 Page
          11


**QNB
      CORP. AND SUBSIDIARY**





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


**OF
      OPERATIONS AND FINANCIAL CONDITION**




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





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





**Allowance
      for Loan Losses**





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





The
      allowance for loan losses is based on management’s continuing 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.




From
          10-Q
 Page
          12


**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. A
      valuation allowance of $71,000 existed as of March 31, 2006 to offset a portion
      of the tax benefits associated with certain impaired securities that management
      believes may not be realizable. 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 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.





From
          10-Q
 Page
          13


**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 to Board of Directors
      approved levels. 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 first quarter of 2006 of $1,678,000, or $.53 per
      common share on a diluted basis. This represents a 12.6 percent decrease from
      the $1,919,000, or $.60 per share diluted, for the same period in
      2005.





Two
      important measures of profitability in the banking industry are an institution's
      return on average assets and return on average shareholders' equity. Return
      on
      average assets and return on average shareholders' equity were 1.18 percent
      and
      14.06 percent, respectively, for the first quarter of 2006 compared with 1.34
      percent and 17.04 percent, respectively, for the first quarter of 2005.





QNB’s
      net
      interest income declined in the first quarter of 2006, to $3,986,000, as
      compared to $4,085,000 for the same quarter of 2005 due to the continued
      compression of the net interest margin, as well as a slight decrease in average
      earning assets. Funding costs of deposits and short-term borrowings increased
      to
      a greater degree than the rates earned on loans and investments. This difference
      was primarily the result of three factors: a highly competitive deposit and
      loan
      pricing environment, a sustained flat Treasury yield curve and the current
      structure of QNB’s balance sheet. The net interest margin declined 4 basis
      points to 3.26 percent from the first quarter of 2005 to the first quarter
      of
      2006. In addition, included in net interest income for the first quarter of
      2005
      was $40,000 of interest income recovered on non-accrual and previously charged
      off loans.





Non-interest
      income was $1,208,000 for the quarter ended March 31, 2006, a 27.6 percent
      decrease from the $1,669,000 recorded in 2005. The decline in non-interest
      income was primarily the result of non-core business activities that occurred
      in
      the first quarter of 2005. These activities included a $209,000 gain on the
      liquidation of the remaining assets relinquished by a borrower during the third
      quarter of 2004. In addition, the net gain on the sale of investment securities
      decreased $258,000, while the net gain on the sale of loans decreased $22,000,
      when comparing the first quarter of 2006 to the first quarter of
      2005.





Non-interest
      expense remained flat at $3,236,000 for the quarter ended March 31, 2006. Salary
      and benefit expense declined $32,000, to $1,805,000, for the quarter ended
      March
      31, 2006 primarily due to a decrease in the accrual for incentive compensation
      of $40,000 which was partially offset by the $27,000 expense related to the
      adoption of FASB No. 123r. Net occupancy and furniture and equipment expense
      declined by $53,000, when comparing the two quarters, due to declines in
      depreciation and amortization expense. The effective tax rate was 14.3 percent
      for the first quarter of 2006 compared to 23.8 percent for the first quarter
      of
      2005. During the first quarter of 2006, QNB was able to reverse $138,000 of
      the
      tax valuation allowance, established in 2005.




From
          10-Q
 Page
          14


**QNB
      CORP. AND SUBSIDIARY**





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


**OF
      OPERATIONS AND FINANCIAL CONDITION**





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





The
      balance sheet experienced strong growth in loans, with average loans increasing
      $39,901,000, when comparing the three months ended March 31, 2006 to March
      31,
      2005. 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. Also contributing to the loan growth
      was
      the new indirect lease financing line of business. This loan growth was achieved
      while maintaining excellent asset quality. No provision for loan losses was
      necessary during the quarter. On the funding side of the balance sheet, total
      average deposits decreased $13,667,000, or 2.9 percent. This is primarily a
      result of a decision not to aggressively seek to retain the short-term money
      market deposits of a school district by paying high short-term rates. With
      the
      flat yield curve, these funds would not have added significant incremental
      net
      interest income and would have further eroded the net interest
      margin.





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





These
      items as well as others will be explained more thoroughly in the next sections.


From
          10-Q
 Page
          15




**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******
            ****
            **March
                31, 2006**
            ****
            **March
                31, 2005**
            ******AverageBalance**
            
            
            **AverageRate**
            
            
            **Interest**
            
            
            **AverageBalance**
            
            
            **AverageRate**
            
            
            **Interest****Assets**Federal
                funds sold
            
            $
            2,129
            
            
            4.59
            %
            $
            24
            
            $
            2,902
            
            
            2.45
            %
            $
            18Investment
                securities:U.S.
                Treasury
            
            
            6,032
            
            
            3.22
            %
            
            48
            
            
            6,152
            
            
            2.05
            %
            
            31U.S.
                Government agencies
            
            
            20,740
            
            
            4.17
            %
            
            216
            
            
            47,876
            
            
            3.57
            %
            
            427State
                and municipal
            
            
            48,290
            
            
            6.53
            %
            
            788
            
            
            52,531
            
            
            6.51
            %
            
            854Mortgage-backed
                and CMOs
            
            
            128,925
            
            
            4.27
            %
            
            1,376
            
            
            135,198
            
            
            4.19
            %
            
            1,418Other
            
            
            25,799
            
            
            6.01
            %
            
            387
            
            
            29,874
            
            
            5.32
            %
            
            397Total
                investment securities
            
            
            229,786
            
            
            4.90
            %
            
            2,815
            
            
            271,631
            
            
            4.61
            %
            
            3,127Loans:Commercial
                real estate
            
            
            135,184
            
            
            6.45
            %
            
            2,152
            
            
            122,482
            
            
            6.01
            %
            
            1,816Residential
                real estate
            
            
            25,945
            
            
            5.81
            %
            
            377
            
            
            23,646
            
            
            5.92
            %
            
            350Home
                equity loans
            
            
            63,760
            
            
            6.22
            %
            
            977
            
            
            59,286
            
            
            5.76
            %
            
            842Commercial
                and industrial
            
            
            51,203
            
            
            6.87
            %
            
            867
            
            
            43,604
            
            
            6.08
            %
            
            653Indirect
                lease financing
            
            
            7,239
            
            
            9.33
            %
            
            167
            
            
            —
            
            
            0.00
            %
            
            —Consumer
                loans
            
            
            4,910
            
            
            8.99
            %
            
            109
            
            
            5,165
            
            
            9.09
            %
            
            116Tax-exempt
                loans
            
            
            19,123
            
            
            5.73
            %
            
            270
            
            
            13,280
            
            
            5.27
            %
            
            173Total
                loans, net of unearned*
            
            
            307,364
            
            
            6.49
            %
            
            4,919
            
            
            267,463
            
            
            5.99
            %
            
            3,950Other
                earning assets
            
            
            4,586
            
            
            4.33
            %
            
            49
            
            
            4,837
            
            
            2.48
            %
            
            30Total
                earning assets
            
            
            543,865
            
            
            5.82
            %
            
            7,807
            
            
            546,833
            
            
            5.28
            %
            
            7,125Cash
                and due from banks
            
            
            18,393
            
            
            
            
            
            
            
            
            18,248Allowance
                for loan losses
            
            
            (2,514
            )
            
            
            
            
            
            
            
            (2,607
            )Other
                assets
            
            
            19,227
            
            
            
            
            
            
            
            
            19,022Total
                assets
            
            $
            578,971
            
            
            
            
            
            
            
            $
            581,496**Liabilities
                and Shareholders’
                Equity**Interest-bearing
                deposits:Interest-bearing
                demand
            
            $
            96,228
            
            
            1.85
            %
            
            439
            
            $
            91,355
            
            
            0.87
            %
            
            197Money
                market
            
            
            43,222
            
            
            2.41
            %
            
            257
            
            
            63,398
            
            
            1.61
            %
            
            252Savings
            
            
            50,265
            
            
            0.39
            %
            
            48
            
            
            55,507
            
            
            0.39
            %
            
            54Time
            
            
            161,392
            
            
            3.45
            %
            
            1,374
            
            
            162,378
            
            
            2.80
            %
            
            1,122Time
                over $100,000
            
            
            48,635
            
            
            3.57
            %
            
            428
            
            
            41,850
            
            
            2.71
            %
            
            280Total
                interest-bearing deposits
            
            
            399,742
            
            
            2.58
            %
            
            2,546
            
            
            414,488
            
            
            1.86
            %
            
            1,905Short-term
                borrowings
            
            
            19,300
            
            
            3.01
            %
            
            143
            
            
            10,639
            
            
            1.61
            %
            
            42Federal
                Home Loan Bank advances
            
            
            55,000
            
            
            5.55
            %
            
            752
            
            
            55,000
            
            
            5.36
            %
            
            727Total
                interest-bearing liabilities
            
            
            474,042
            
            
            2.94
            %
            
            3,441
            
            
            480,127
            
            
            2.26
            %
            
            2,674Non-interest-bearing
                deposits
            
            
            53,658
            
            
            
            
            
            
            
            
            52,579Other
                liabilities
            
            
            2,862
            
            
            
            
            
            
            
            
            3,126Shareholders’
                equity
            
            
            48,409
            
            
            
            
            
            
            
            
            45,664Total
                  liabilities and shareholders’
                  equity
            
            $
            578,971
            
            
            
            
            
            
            
            $
            581,496Net
                interest rate spread
            
            
            
            
            
            2.88
            %
            
            
            
            
            
            
            
            3.02
            %Margin/net
                interest income
            
            
            
            
            
            3.26
            %
            
            4,366
            
            
            
            
            
            3.30
            %
            
            4,451




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-Q
 Page
              16




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


**Three Months
                      Ended****March 31, 2006
                    compared
                    to****March 31,
                  2005**
              ********
              ****
              
              ****
              **Due
                  to change in:**
              ******TotalChange**
              
              
              **Volume**
              
              
              **Rate****Interest
                  income:**Federal
                  funds sold
              
              
              6
              
              
              (5
              )
              
              11Investment
                  securities:U.S.
                  Treasury
              
              
              17
              
              
              (1
              )
              
              18U.S.
                  Government agencies
              
              
              (211
              )
              
              (242
              )
              
              31State
                  and municipal
              
              
              (66
              )
              
              (69
              )
              
              3Mortgage-backed
                  and CMOs
              
              
              (42
              )
              
              (66
              )
              
              24Other
              
              
              (10
              )
              
              (54
              )
              
              44Loans:Commercial
                  real estate
              
              
              336
              
              
              189
              
              
              147Residential
                  real estate
              
              
              27
              
              
              34
              
              
              (7
              )Home
                  equity loans
              
              
              135
              
              
              63
              
              
              72Commercial
                  and industrial
              
              
              214
              
              
              114
              
              
              100Indirect
                  lease financing
              
              
              167
              
              
              167
              
              
              —Consumer
                  loans
              
              
              (7
              )
              
              (6
              )
              
              (1
              )Tax-exempt
                  loans
              
              
              97
              
              
              75
              
              
              22Other
                  earning assets
              
              
              19
              
              
              (2
              )
              
              21Total
                  interest income
              
              
              682
              
              
              197
              
              
              485**Interest
                  expense:**Interest-bearing
                  demand
              
              
              242
              
              
              11
              
              
              231Money
                  market
              
              
              5
              
              
              (80
              )
              
              85Savings
              
              
              (6
              )
              
              (6
              )
              
              (0
              )Time
              
              
              252
              
              
              (7
              )
              
              259Time
                  over $100,000
              
              
              148
              
              
              45
              
              
              103Short-term
                  borrowings
              
              
              101
              
              
              34
              
              
              67Federal
                  Home Loan Bank advances
              
              
              25
              
              
              —
              
              
              25Total
                  interest expense
              
              
              767
              
              
              (3
              )
              
              770**Net
                  interest income**
              
              
              (85
              )
              
              200
              
              
              (285
              )






Form
          10-Q
 Page
          17




**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 periods ended
            March
            31, 2006 and 2005.




****
              ****
              **For
                  the Three Months**
                  **Ended March
                    31,**
              ********
              ****
              **2006**
              
              **2005**Total
                  interest income
              
              $
              7,427
              
              $
              6,759Total
                  interest expense
              
              
              3,441
              
              
              2,674Net
                  interest income
              
              
              3,986
              
              
              4,085Tax
                  equivalent adjustment
              
              
              380
              
              
              366Net
                  interest income (fully taxable equivalent)
              
              $
              4,366
              
              $
              4,451




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 for funding sources. Earning assets primarily include loans,
      investment securities and Federal funds sold. Sources used to fund these assets
      include deposits, borrowed funds and shareholders’ equity. 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 table that appears on page 16. 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 includes interest-free sources of funds.





Net
      interest income decreased 2.4 percent, to $3,986,000, for the quarter ended
      March 31, 2006 as compared to $4,085,000 for the quarter ended March 31, 2005.
      On a tax-equivalent basis, net interest income decreased by 1.9 percent, from
      $4,451,000 for the three months ended March 31, 2005 to $4,366,000 for the
      same
      period ended March 31, 2006. The decline in net interest income was primarily
      a
      result of a slightly lower net interest margin. When
      comparing the first quarters of 2006 and 2005, the net interest margin declined
      by 4 basis points. The net interest margin decreased to 3.26 percent for the
      first quarter of 2006 from 3.30 percent for the first quarter of
      2005.





Form
            10-Q
 Page
            18





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


**NET
      INTEREST INCOME (Continued)**





While
      average earning assets declined .5 percent, to $543,865,000 for the first
      quarter of 2006, the shift in composition of the assets from investment
      securities to loans provided additional interest income as loans, in general,
      earn more than investment securities. When comparing the two quarters, average
      loans increased $39,901,000, or 14.9 percent, and average investment securities
      decreased $41,845,000, or 15.4 percent. For the
      most part, earning assets are funded by deposits, which declined when comparing
      the two quarters. Average
      deposits decreased $13,667,000, or 2.9 percent, when comparing the first
      quarters of 2006 and 2005. A significant contributor to the decline in total deposits was the decision not
      to
      aggressively seek to retain the short-term deposits of a school district. Given
      the shape of the yield curve, these short-term deposits would have only provided
      a small spread and would have had a negative impact on the net interest
      margin.





As
      mentioned previously, the Federal Reserve Board continued to increase short-term
      rates by increasing the Federal funds rate twice by 25 basis points each time
      during the first quarter of 2006. Despite the significant increase in short-term
      interest rates over the past year, the long period of historically low interest
      rates has had an impact on the yield on earning assets and the rates paid on
      interest-bearing liabilities. While the yield on earning assets on a
      tax-equivalent basis has increased from 5.28 percent for the first quarter
      of
      2005 to 5.82 percent for the first quarter of 2006, the rate of increase was
      slowed because of the fixed-rate nature of the investment and loan portfolio
      as
      well as the price competition for loans.




Interest
      income on investment securities decreased $312,000 when comparing the two
      quarters, as the decline in balances offset the increase in the yield on the
      portfolio. The average yield increased from 4.61 percent for the first quarter
      of 2005 to 4.90 percent for the first quarter of 2006.





The
      yield
      on loans increased 50 basis points to 6.49 percent when comparing the first
      quarter of 2006 to the first quarter of 2005. The average prime rate when
      comparing these same periods increased 199 basis points, from 5.44 percent
      to
      7.43 percent. While QNB was positively impacted by the increases in the prime
      rate, the overall yield on the loan portfolio did not increase proportionately,
      since only a portion of the loan portfolio reprices immediately with changes
      in
      the prime rate. Also, the benefits from an increase in the prime rate were
      partially offset by the long period of historically low interest rates which
      resulted in the refinancing of residential mortgage, home equity and commercial
      loans into lower yielding fixed-rate loans.





While
      total interest income on a tax-equivalent basis increased $682,000 when
      comparing the first quarter of 2006 to the first quarter of 2005, total interest
      expense increased $767,000. The increase in interest expense was a result of
      an
      increase in interest rates paid on both deposits and short-term borrowings.
      The
      rate paid on interest-bearing liabilities increased from 2.26 percent for the
      first quarter of 2005 to 2.94 percent for the first quarter of 2006, with the
      rate paid on interest-bearing deposits increasing from 1.86 percent to 2.58
      percent during this same period. Interest expense and the rate paid on
      interest-bearing demand and time deposit accounts increased the most as these
      accounts were more reactive to the increase in market interest rates. Interest
      expense on interest-bearing demand accounts increased $242,000, and the rate
      paid increased from .87 percent to 1.85 percent when comparing the two quarters.
      Interest expense on money market accounts increased by only $5,000 as the 80
      basis point increase in the average rate paid was offset by lower average
      balances. Average money market balances decreased $20,176,000 when comparing
      the
      two quarters, a direct result of not retaining the school district deposits.
      The
      increase in the average rate on money market accounts is primarily the result
      of
      the majority of the remaining balances being indexed to a percentage of the
      91-day Treasury bill. This rate has increased as short-term interest rates
      have
      increased over the past year.





Form
            10-Q
 Page
            19




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





**NET
      INTEREST INCOME (Continued)**




Interest
      expense on time deposits increased $400,000, while the average rate paid on
      time
      deposits increased from 2.78 percent to 3.48 percent when comparing the two
      periods. Like fixed-rate loans and investment securities, time deposits reprice
      over time and, therefore, have less of an immediate impact on costs in either
      a
      rising or falling rate environment. Unlike loans and investment securities,
      the
      maturity and repricing characteristics tend to be shorter. This feature,
      combined with the strong rate competition for these deposits, has resulted
      in
      the increase in the yield on time deposits in 2006. Average time deposits
      increased $5,799,000, or 2.8 percent, when comparing the first quarter of 2006
      to the first quarter of 2005.




Interest
      expense on short-term borrowings increased $101,000 both as a result of an
      increase in balances and rates. The average rate paid increased from 1.61
      percent for the first quarter of 2005 to 3.01 percent for the first quarter
      of
      2006, while average balances increased $8,661,000 to $19,300,000.




Management
      expects the remainder of 2006 to be challenging with respect to net interest
      income and the net interest margin. It is anticipated that the Federal Reserve
      Board will increase short-term rates by at least another 25 basis points and
      that the yield curve will remain flat. Other economists are predicting the
      yield
      curve to steepen as inflation possibly becomes an issue. The extremely
      competitive environment for deposits is expected to continue, which could also
      have a negative impact on the net interest margin. The ability to continue
      to
      successfully increase loan balances should have a positive impact on the net
      interest margin and interest income, as loans tend to earn a higher yield than
      investment securities.




**PROVISION
      FOR LOAN LOSSES**




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




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




QNB’s
      management determined no provision for loan losses was necessary for either
      of
      the three-month periods ended March 31, 2006 or 2005 as the results of the
      analyses described above indicated an allowance for loan losses that was
      adequate in relation to the estimate of known and inherent losses in the
      portfolio. In addition, charge-offs and non-performing assets remain at low
      levels. QNB had net charge-offs of $20,000 and $6,000 during the first quarter
      of 2006 and 2005, respectively.




Non-performing
      assets (non-accruing loans, loans past due 90 days or more, other real estate
      owned and other repossessed assets) amounted to .002 percent and .01 percent
      of
      total assets at March 31, 2006 and 2005, respectively. These levels compare
      to
      .002 percent at December 31, 2005. There were no non-accrual loans at March
      31,
      2006, December 31, 2005 or March 31, 2005, respectively. QNB did not have any
      other real estate owned as of March 31, 2006, December 31, 2005 or March 31,
      2005. Repossessed assets consisting of automobiles and motorcycles were $9,000
      and $4,000 at March 31, 2006 and 2005, respectively. There were no repossessed
      assets at December 31, 2005.





Form
              10-Q
 Page
            20





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




**PROVISION
      FOR LOAN LOSSES (Continued)**





There
      were no restructured loans as of March 31, 2006, December 31, 2005 or March
      31,
      2005, as defined in FASB 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 $2,506,000 and $2,526,000 at March 31, 2006 and
      December 31, 2005, respectively. The ratio of the allowance to total loans
      was
      .79 percent and .84 percent at March 31, 2006 and December 31, 2005,
      respectively. While QNB believes that its allowance is adequate to cover losses
      in the loan portfolio, there remain inherent uncertainties regarding future
      economic events and their potential impact on asset quality.





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. There
      were no loans considered impaired at March 31, 2006 and March 31,
      2005.





Management,
      in determining the allowance for loan losses, makes significant estimates.
      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.





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 additions 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 is composed of service charges on deposit accounts,
      ATM and check card income, income on bank-owned life insurance, mortgage
      servicing fees, gains or losses on the sale of investment securities, gains
      on
      the sale of residential mortgage loans, and other miscellaneous fee income.





Total
      non-interest income decreased $461,000, or 27.6 percent, to $1,208,000 for
      the
      quarter ended March 31, 2006 when compared to March 31, 2005. Excluding gains
      on
      the sale of securities and loans, non-interest income decreased $181,000, or
      17.7 percent. As mentioned previously, included in non-interest income in the
      first quarter of 2005 was a gain of $209,000 on the liquidation of assets
      relinquished by a borrower. This item accounted for the decline in other
      operating income when comparing the two periods.





ATM
      and
      debit card income is primarily comprised of income on debit cards and ATM
      surcharge income for the use of QNB’s ATM machines by non-QNB customers. ATM and
      debit card income was $184,000 for the first quarter of 2006, an increase of
      $25,000, or 15.7 percent, from the amount recorded during the first quarter
      of
      2005. Debit card income increased $21,000, or 18.9 percent, for the three-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, as
      well as the fee received from VISA, resulted in additional interchange income
      of
      $7,000 when comparing the two quarters. Partially offsetting these positive
      variances was a reduction in ATM surcharge income of $2,000 between the two
      quarters. This decrease was a result of fewer transactions by non-QNB customers
      at QNB’s ATM machines.





Form
            10-Q
 Page
            21




**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
      of
      which the Bank is the beneficiary. The earnings on these policies were $61,000
      and $63,000 for the three months ended March 31, 2006 and 2005, respectively.
      The insurance carriers reset the rates on these policies annually. The decline
      in income is a result of a lower earnings rate resulting from the lower interest
      rate environment at the last reset date.





When
      QNB
      sells its residential mortgages in the secondary market, it retains servicing
      rights. A normal servicing fee is retained on all mortgage loans sold and
      serviced. QNB
      recognizes its obligation to service financial assets that are retained in
      a
      transfer of assets in the form of a servicing asset. The servicing asset is
      amortized in proportion to, and over, the period of net servicing income or
      loss. Servicing assets are assessed for impairment based on their fair value.
      Mortgage servicing fees for the three-month periods ended March 31, 2006 and
      2005 were  $23,000
      and $24,000, respectively. There was no valuation allowance necessary for the
      first quarter of 2006. Included in the first quarter of 2005 was a $5,000
      positive adjustment to the valuation allowance for impairment resulting from
      the
      increase in interest rates and the slowdown in mortgage prepayments in 2004.
      Amortization expense related to the mortgage servicing asset for the three-month
      periods ended March 31, 2006 and 2005 was $25,000 and $29,000, respectively.
      The
      average balance of mortgages serviced for others was $76,219,000 for the first
      quarter of 2006, compared to $78,392,000 for the first quarter of 2005, a
      decrease of 2.8 percent. 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
      will continue to look at strategies that will result in an increase in the
      yield
      or improvement in the structure of the investment portfolio.





For
      the
      three-months ended March 31, 2006 and 2005, QNB
      recorded net gains on investment securities of $355,000 and $613,000,
      respectively. Included
      in net securities gains for the thre e -month
      period ended March 31, 2006 were gains of $157,000 from the sale of debt and
      equity securities at the Bank and $198,000 of gains related to activity in
      the
      marketable equity securities portfolio at the Corporation. During the first
      quarter of 2006, QNB entered into several liquidity transactions through the
      sale of investment securities to fund the strong growth in loans. In addition,
      QNB sold the remaining agency preferred securities that had been determined,
      during the second quarter of 2005, to be other than temporarily impaired. A
      gain
      of $151,000 was recorded on the sale of these securities. The gains
      recorded during the first quarter of 2005 represent $270,000 related to the
      sale
      of fixed income securities at the Bank and $343,000 related to sales from the
      equity portfolio at the Corporation.





The
      net
      gain on the sale of loans was $13,000 and $35,000 for the quarters ended March
      31, 2006 and 2005, respectively. Residential
      mortgage loans to be sold are identified at origination. The net gain on
      residential mortgage sales is directly related to the volume of mortgages sold
      and the timing of the sales relative to the interest rate environment. The
      net
      gain on the sale of residential mortgage loans has declined as a result of
      the
      increase in interest rates over the past year. The increase in interest rates
      has reduced both the volume of origination and sales activity and the amount
      of
      gains recorded at the time of sale. Included in the gains on the sale of
      residential mortgages in these periods were $7,000 and $14,000, respectively
      related to the recognition of mortgage servicing assets. Proceeds
      from the sale of residential mortgages were $940,000 and $1,905,000 for the
      first quarter of 2006 and 2005, respectively.





Form
              10-Q
 Page
            22





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


**NON-INTEREST
      INCOME (Continued)**





Financial
      service organizations, including QNB, are challenged to demonstrate that they
      can generate an increased contribution to revenue from non-interest sources.
      QNB
      will continue to analyze other opportunities and products that could enhance
      its
      fee-based businesses.





**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 for both quarters ended
      March 31, 2006 and 2005 was $3,236,000.





Salaries
      and benefits is the largest component of non-interest expense. Salaries and
      benefits expense decreased $32,000, or 1.7 percent, to $1,805,000 for the
      quarter ended March 31, 2006 compared to the same quarter in 2005. Salary
      expense decreased $41,000, or 2.8 percent, during the period to $1,426,000
      while
      benefits expense increased $9,000, or 2.4 percent, to $379,000. Included in
      salary expense for the three months ended March 31, 2005 was an accrual of
      $40,000 related to the incentive compensation plan .
      There
      has been no accrual for 2006. Included in salary expense for the first quarter
      of 2006 was $27,000 in stock option expense associated with the adoption of
      FASB
      123r. Excluding
      both the impact of the accrual for the incentive compensation plan and the
      stock
      option expense, salary expense decreased 2.0 percent when comparing the
      three-month periods. Merit and promotional increases were offset by a decrease
      in the number of employees. The number of full time-equivalent employees
      decreased by seven when comparing the first quarter of 2006 and
      2005.





Furniture
      and equipment expense decreased $51,000, to $231,000, when comparing the two
      quarters. Decreases in depreciation and amortization expense were the primary
      contributors to the decrease in furniture and equipment expense. Items
      associated with the bank’s core computer system acquired in 2000 became fully
      depreciated in 2005. Some hardware associated with the system will be replaced
      during the second quarter of 2006.





Marketing
      expense increased $3,000, to $153,000, for the quarter ended March 31, 2006.
      Advertising expense increased $18,000 when comparing the two quarters as QNB
      increased its use of billboards and television for product advertising.
      Donations decreased $30,000 when comparing the three-month periods, as the
      first
      quarter of 2005 included several one-time contributions for special projects.
      QNB contributes to not-for-profit organizations, clubs and community events
      in
      the local communities it serves.





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 $169,000 for the first quarter of 2006 compared to $141,000
      for the first quarter of 2005. The increase in expense is primarily related
      to
      the use of consultants for special projects and increases in legal and internal
      and external auditing fees.





Form
              10-Q
 Page
            23




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


**NON-INTEREST
      EXPENSE (Continued)**





Telephone,
      postage and supplies expense increased $17,000 to $140,000 for the quarter
      ended
      March 31, 2006. Postage expense increased $7,000 as a result of an increase
      in
      both the volume of mailings as well as the cost per mailing as the U.S. Postal
      service raised rates effective January 2006. Supplies expense increased $14,000
      when comparing the two quarters. Contributing to this increase were costs for
      ATM cards and costs related to supplies for the new lending center scheduled
      to
      open during the second quarter of 2006.





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 $113,000 for the first quarter of
      2006,
      an increase of $10,000 compared to the same period in 2005. This increase was
      a
      result of a higher Shares Tax resulting from an increase in the Bank’s
      equity.





**INCOME
      TAXES**





QNB
      utilizes an asset and liability approach for financial accounting and reporting
      of income taxes. As of March 31, 2006, QNB's net deferred tax asset was
      $1,917,000. The primary components of deferred taxes were a deferred tax asset
      of $770,000 relating to the allowance for loan losses and a deferred tax asset
      of $1,243,000 resulting from the FASB No.115 adjustment for available-for-sale
      investment securities. As of March 31, 2005, QNB's net deferred tax asset was
      $1,119,000. A deferred tax asset of $715,000 related to the allowance for loan
      losses and a deferred tax asset of $560,000 resulting from the FASB No. 115
      adjustment for available-for-sale investment securities.





The
      realizability of deferred tax assets is dependent upon a variety of factors
      including the generation of future taxable income, the existence of taxes paid
      and recoverable, the reversal of deferred tax liabilities and tax planning
      strategies. A valuation allowance of $209,000 was established as of December
      31,
      2005 to offset a portion of the tax benefits associated with certain impaired
      securities that management believed may not be realizable. Approximately
      $138,000 of this valuation allowance was reversed during the first quarter
      of
      2006 as a result of the ability to realize tax benefits associated with certain
      impaired securities. 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 $280,000, or 14.3 percent, for the
      three-month period ended March 31, 2006 and $599,000, or 23.8 percent, for
      the
      same period in 2005. The lower effective tax rate in the first quarter of 2006
      is primarily a result of the reversal of a portion of the tax valuation
      allowance discussed above. Excluding the reversal of the tax valuation
      allowance, the effective tax rate would have been 21.3 percent for the
      three-month period ended March 31, 2006. A higher proportion of tax free income
      to pretax income in the first quarter of 2006 as compared to the first quarter
      of 2005 also contributed to the lower effective tax rate.





Form
            10-Q
 Page
            24




**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 three months
      ended March 31, 2006 and 2005, as well as the period ended balances as of March
      31, 2006 and December 31, 2005.





QNB’s
      primary functions and responsibilities are to accept deposits and to make 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. Once again,
      QNB has been successful in achieving strong growth in total loans, while at
      the
      same time maintaining excellent asset quality.





Average
      earning assets for the three-month period ended March 31, 2006 decreased
      $2,968,000, or .5 percent, to $543,865,000 from $546,833,000 for the three
      months ended March 31, 2005. Average loans increased $39,901,000, or 14.9
      percent, while average investments decreased $41,845,000, or 15.4 percent.
      Average Federal funds sold decreased $773,000 when comparing these same periods.
      The growth in average loans during the past year was funded primarily through
      the reduction of the investment portfolio.





Total
      loans have increased 17.2 percent between March 31, 2006 and March 31, 2005
      and
      5.0 percent since December 31, 2005. This loan growth was achieved despite
      the
      extremely competitive environment for both commercial and consumer loans.
      Continued loan growth remains one of the primary goals of QNB in
      2006.





Average
      total commercial loans and average indirect lease financing loans increased
      $26,144,000 and $7,239,000, respectively, when comparing the first three months
      of 2006 to the first three months of 2005, while average home equity loans
      and
      residential mortgage loans increased $4,474,000 and $2,299,000, respectively.
      During this same time frame, average consumer loans decreased $255,000. Most
      of
      the growth in average commercial loans is in loans secured by real estate,
      either commercial or residential properties, which increased $12,702,000. Of
      this increase $10,347,000, or 81.5 percent, are adjustable rate loans. These
      loans could have a fixed rate for a period of time, such as three or five years,
      before the rate adjusts. Most of the growth in the commercial and industrial
      category represents loans with fixed interest rates. Given the significant
      increase in the prime rate over the past year and a half and the possibility
      of
      further rate increases combined with the flat shape of the yield curve,
      customers are requesting to lock in a fixed rate versus a rate floating with
      prime. Also contributing to the growth in total commercial loans was an increase
      in tax-exempt loans. QNB continues to be successful in competing to loans for
      schools and municipalities. Average tax-exempt loans increased $5,843,000 when
      comparing the two quarters.





The
      7.5
      percent increase in average home equity loans reflects their continued
      popularity with consumers, especially those refinancing existing residential
      mortgage loans, because they have lower origination costs than residential
      mortgage loans. When comparing average balances, most of the growth in home
      equity loans in the past year has been in the fixed-rate home equity term loan.
      This product became more attractive to consumers as the prime rate rose during
      2005 and led many to refinance their floating-rate lines into fixed-rate home
      equity loans.





Total
      average deposits decreased $13,667,000, or 2.9 percent, to $453,400,000 for
      the
      first quarter of 2006 compared to the first quarter of 2005. Money market
      account balances decreased $20,176,000 on average. The decrease in money market
      balances reflects the decision not to aggressively seek to retain the short-term
      deposits of a school district by paying high short-term rates. With the flat
      yield curve, these funds would not have added significant incremental net
      interest income and would have further eroded the net interest margin. The
      decline in money market accounts was partially offset by growth in average
      interest-bearing demand and time deposits, which increased $4,873,000 and
      $5,799,000, respectively, when comparing the two quarters.





Form
            10-Q
 Page
            25





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




**FINANCIAL
      CONDITION ANALYSIS (Continued)**





Increasing
      time deposit balances continues to be a challenge because of the extreme rate
      competition for such deposits, particularly with maturities between eight months
      through two years. Matching or beating competitors’ rates could have a negative
      impact on the net interest margin.





Average
      savings accounts decreased $5,242,000, or 9.4 percent. The decline in savings
      deposits can be attributed to consumers starting to move these funds into higher
      yielding money market accounts and time deposits, as well as to the equity
      markets.





QNB
      used
      short-term borrowings including overnight borrowings and repurchase agreements
      to help fund the loan growth and decline in deposits. Total average short-term
      borrowings increased $8,661,000 when comparing the two quarters with repurchase
      agreements, a sweep product for commercial accounts, increasing
      $5,957,000.





Total
      assets at March 31, 2005 were $579,191,000, compared with $582,205,000 at
      December 31, 2005, a decrease of .5 percent. The composition of the asset side
      of the balance sheet shifted from year-end with total loans and Federal funds
      sold increasing $15,057,000 and $7,434,000, respectively, between December
      31,
      2005 and March 31, 2006. In contrast, total investment securities declined
      by
      $24,746,000 between these dates. On the liability side, total deposits increased
      by $1,410,000 or .3 percent, since year-end. The composition of the deposits
      changed slightly as declines in non-interest bearing and interest-bearing demand
      accounts and time deposits was offset by growth in money market accounts.
      Treasury Select Money Market balances increased $12,375,000 between December
      31,
      2005 and March 31, 2006. This account is a variable-rate product indexed to
      a
      percentage of the 91-day Treasury bill. With the increase in short-term interest
      rates this product offers an attractive rate relative to savings and interest
      checking products.





Short-term
      borrowings decreased $4,903,000 between December 31, 2005 and March 31, 2006,
      as
      repurchase agreement balances declined and QNB paid off its overnight
      borrowings.





At
      March
      31, 2005, the fair value of investment securities available-for-sale was
      $208,531,000, or $3,654,000 below the amortized cost of $212,185,000. This
      compares to a fair value of $233,275,000, or $1,912,000 below the amortized
      cost
      of $235,187,000, at December 31, 2005. An unrealized holding loss, net of taxes,
      of $2,412,000 was recorded as a decrease to shareholders’ equity at March 31,
      2006, while an unrealized holding loss of $1,262,000 was recorded as a decrease
      to shareholders' equity at December 31, 2005. The increase in interest rates
      since December 31, 2005 has contributed to the further decline in the market
      value of the investment portfolio.





The
      available-for-sale portfolio had a weighted average maturity of approximately
      4
      years, 6 months at March 31, 2006 and 4 years, 5 months at December 31, 2005.
      The weighted average tax-equivalent yield was 4.95 percent and 4.87 percent
      at March 31, 2006 and December 31, 2005. The weighted average maturity is based
      on the stated contractual maturity or likely call date of all securities except
      for mortgage-backed securities and collateralized mortgage obligations (CMOs),
      which are based on estimated average life. The maturity of the portfolio could
      be shorter if interest rates would decline and prepayments on mortgage-backed
      securities and CMOs increased or if more securities are called. However, the
      estimated average life could be longer if rates were to increase and principal
      payments on mortgage-backed securities and CMOs would slow or bonds anticipated
      to be called are not called. The interest rate sensitivity analysis reflects
      the
      repricing term of the securities portfolio based upon estimated call dates
      and
      anticipated cash flows assuming an unchanged as well as a shocked interest
      rate
      environment.


Form
              10-Q
 Page
              26


**QNB
      CORP. AND SUBSIDIARY**





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


**OF
      OPERATIONS AND FINANCIAL CONDITION**





**FINANCIAL
      CONDITION ANALYSIS (Continued)**





Investment
      securities held-to-maturity are reported at amortized cost. The held-to-maturity
      portfolio is comprised solely of tax-exempt municipal securities. As of March
      31, 2006 and December 31, 2005, QNB had securities classified as
      held-to-maturity with an amortized cost of $5,895,000 and $5,897,000 and a
      market value of $6,044,000 and $6,082,000, respectively. The held-to-maturity
      portfolio had a weighted average maturity of approximately 4 years, 1 month
      at
      March 31, 2006 and 3 years, 10 months at December 31, 2005. The weighted average
      tax-equivalent yield was 6.80 percent at March 31, 2006 and 6.78 percent at
      December 31, 2005.





**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, investment
      securities and loans 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, net interest income and fee income. The portfolio of investment
      securities 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 a $10,000,000 unsecured Federal
      funds line granted by a correspondent bank. The
      Bank
      has a maximum borrowing capacity with the FHLB of approximately $242,204,000.
      At
      March 31, 2006, QNB’s outstanding borrowings under the FHLB credit facilities
      totaled $55,000,000.





Cash
      and
      due from banks, Federal funds sold, available-for-sale securities and loans
      held-for-sale totaled $234,852,000 and $254,216,000 at March 31, 2006 and
      December 31, 2005, respectively. These sources should be adequate to meet normal
      fluctuations in loan demand and or deposit withdrawals. During
      the first quarter of 2006, QNB used both its Federal funds line and overnight
      borrowings with the FHLB to help temporarily fund deposit withdrawals and loan
      growth. QNB entered into several investment sales transactions during the first
      quarter of 2006 for the purpose of providing liquidity. Average total overnight
      borrowings were $3,222,000 for the first quarter of 2006. This level compared
      to
      $425,000 for the same period in 2005. At March 31, 2006, QNB had no overnight
      borrowings with either the FHLB or its correspondent.





Approximately
      $69,933,000 and $68,917,000 of available-for-sale securities at March 31, 2006
      and December 31, 2005, 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.





**CAPITAL
      ADEQUACY**





A
      strong
      capital position is fundamental to support continued growth and profitability,
      to serve the needs of depositors, and to yield an attractive return for
      shareholders. QNB's shareholders' equity at March 31, 2006 was $46,878,000,
      or
      8.09 percent of total assets, compared to shareholders' equity of $46,564,000,
      or 8.00 percent, at December 31, 2005. Shareholders’ equity at March 31, 2006
      included a negative adjustment of $2,412,000 related to unrealized holding
      losses, net of taxes, on investment securities available-for-sale, while
      shareholders' equity at December 31, 2005 included a negative adjustment of
      $1,262,000. Without these adjustments, shareholders' equity to total assets
      would have been 8.51 percent and 8.21 percent at March 31, 2006 and December
      31,
      2005, respectively. The
      increase in the ratio was a result of the rate of capital  retention
      exceeding the rate of asset growth. Total assets decreased .5
      percent between December 31, 2005 and March 31, 2006, while shareholders’
equity, excluding the net unrealized holding gains and losses, increased 3.1
      percent.




Form
          10-Q
 Page
          27




**QNB
      CORP. AND SUBSIDIARY**





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


**OF
      OPERATIONS AND FINANCIAL CONDITION**




CAPITAL
      ADEQUACY (Continued)




Shareholders'
      equity averaged $48,409,000 for the first three months of 2006 and $46,580,000
      during all of 2005, an increase of 3.9 percent. The ratio of average total
      equity to average total assets increased to 8.36 percent for the first quarter
      of 2006, compared to 7.98 percent for all of 2005.





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 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 average assets.





The
      minimum regulatory capital ratios are 4.00 percent for Tier I, 8.00 percent
      for
      the total risk-based capital and 4.00 percent for leverage. Based on the
      requirements, QNB had a Tier I capital ratio of 13.33 percent and 13.04 percent,
      a total risk-based ratio of 14.05 percent and 13.77 percent and a leverage
      ratio
      of 8.50 percent and 8.15 percent at March 31, 2006 and December 31, 2005,
      respectively.





The
      Federal Deposit Insurance Corporation Improvement Act of 1991 established five
      capital level designations ranging from "well capitalized" to "critically
      undercapitalized." At March 31, 2006 and December 31, 2005, QNB met the "well
      capitalized" criteria which requires minimum Tier I and total risk-based capital
      ratios of 6.00 percent and 10.00 percent, respectively, and a leverage ratio
      of
      5.00 percent.





**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. The Asset/Liability Management
      Committee (ALCO) is responsible for managing interest rate risk and for
      evaluating the impact of changing interest rate conditions on net interest
      income.





Gap
      analysis measures the difference between volumes of rate-sensitive assets and
      liabilities and quantifies these repricing differences for various time
      intervals. Static gap analysis describes interest rate sensitivity at a point
      in
      time. However, it alone does not accurately measure the magnitude of changes
      in
      net interest income because changes in interest rates do not impact all
      categories of assets and liabilities equally or simultaneously. Interest rate
      sensitivity analysis also involves assumptions on certain categories of assets
      and deposits. For purposes of interest rate sensitivity analysis, assets and
      liabilities are stated at their contractual maturity, estimated likely call
      date, or earliest repricing opportunity. Mortgage-backed securities, CMOs and
      amortizing loans are scheduled based on their anticipated cash flow. Savings
      accounts, including passbook, statement savings, money market, and
      interest-bearing demand accounts, do not have stated maturities or repricing
      terms and can be withdrawn or repriced at any time. This may impact QNB’s margin
      if more expensive alternative sources of deposits are required to fund loans
      or
      deposit runoff. Management projects the repricing characteristics of these
      accounts based on historical performance and assumptions that it believes
      reflect their rate sensitivity. The Treasury Select Indexed Money Market account
      reprices monthly, based on a percentage of the average of the 91-day Treasury
      bill.


Form
          10-Q
 Page
          28




**QNB
      CORP. AND SUBSIDIARY**





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


**OF
      OPERATIONS AND FINANCIAL CONDITION**




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 March 31, 2006, interest-earning assets scheduled to mature or likely
      to
      be called, repriced or repaid in one year were $181,163,000. Interest-sensitive
      liabilities scheduled to mature or reprice within one year were $263,706,000.
      The one-year cumulative gap, which reflects QNB’s interest sensitivity over a
      period of time, was a negative $82,543,000 at March 31, 2006. The cumulative
      one-year gap equals -14.9 percent of total rate sensitive assets. This compares
      to a negative gap position of $39,123,000, or -7.04 percent, of total rate
      sensitive assets, at December 31, 2005. The increase in the negative gap
      position in the one-year time frame is a result of the increase in the amount
      of
      time deposits maturing or repricing in less than one year. At March 31, 2006
      $137,006,000, or 66.0 percent, of total time deposits was scheduled to reprice
      or mature in the next twelve months. This compares to $95,840,000, or 45.4
      percent, of total time deposits at December 31, 2005. In addition, balances
      in
      the Treasury Select Money Market account increased by $12,375,000 during the
      first quarter. Both of these events reflect consumers desire to invest in
      shorter term investments whose rate could increase if market rates continue
      to
      increase.





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, given the level of interest rates at March 31, 2006, it
      is
      unlikely that interest rates would decline by 300 basis points. The simulation
      results can be found in the chart on page 30.




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 cost funding sources.
      The decline in net interest income, if rates decline, reflects the 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. These results are
      inconsistent with the gap analysis and identify some of the weaknesses of gap
      analysis which does not take into consideration the magnitude of the rate change
      on different instruments or the timing of the rate change.





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 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.


Form
          10-Q
 Page
          29




**QNB
      CORP. AND SUBSIDIARY**





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


**OF
      OPERATIONS AND FINANCIAL CONDITION**




The
      nature of QNB’s current operation is such that it is not subject to foreign
      currency exchange or commodity price risk. Additionally, neither the Corporation
      nor the Bank owns trading assets. At March 31, 2006, 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**
            ****
            **Percent
                Change**+300
                Basis Points
            
            $
            14,288
            
            $
            (1,498
            )
            
            (9.49
            )%+200
                Basis Points
            
            
            14,811
            
            
            (975
            )
            
            (6.18
            )+100
                Basis Points
            
            
            15,567
            
            
            (219
            )
            
            (1.39
            )FLAT
                RATE
            
            
            15,786
            
            
            —
            
            
            —-100
                Basis Points
            
            
            15,683
            
            
            (103
            )
            
            (.65
            )-200
                Basis Points
            
            
            14,821
            
            
            (965
            )
            
            (6.11
            )


Form
          10-Q
 Page
          30




**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 herein 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
          31





**QNB
      CORP. AND SUBSIDIARY**




**PART
      II. OTHER INFORMATION**




**MARCH
      31, 2006**


Item
                  1.
              Legal
                  ProceedingsNone.Item
                  1A.
              Risk
                FactorsThere
                  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,
                  2005.Item
                  2.
              Unregistered
                  Sales of Equity Securities and Use of ProceedsNone.Item
                  3.
              Default
                  Upon Senior SecuritiesNone.Item
                  4.
              Submission
                  of Matters to Vote of Security HoldersNone.Item
                  5.
              Other
                  InformationNone.Item
                  6.
              Exhibits
  Exhibit
                    3(i)
                
                Articles
                    of Incorporation of Registrant, as amended. (Incorporated by
                    reference to
                    Exhibit 3(i) of Registrants Form DEF 14-A filed with the Commission
                    on
                    April 15, 2005).Exhibit
                    3(ii)
                
                Bylaws
                    of Registrant, as amended. (Incorporated by reference to Exhibit
                    3(ii) of
                    Registrants Form 8-K filed with the Commission on January 23,
                    2006).Exhibit
                    11
                
                Statement
                    Re: Computation of Earnings Per Share. (Included in Part I, Item
                    I,
                    hereof.)Exhibit
                    31.1
                
                Section
                    302 Certification of President and CEOExhibit
                    31.2
                
                Section
                    302 Certification of Chief Financial OfficerExhibit
                    32.1
                
                Section
                    906 Certification of President and CEOExhibit
                    32.2
                
                Section
                    906 Certification of Chief Financial
                    Officer




From
          10-Q
 Page
          32





**SIGNATURES**




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





QNB
              Corp.Date: May
              10, 2006
            By:
            /s/
              Thomas J. BiskoThomas
              J. BiskoPresident/CEO


Date: May
              10, 2006
            By:
            /s/
              Bret
              H. KrevolinBret
              H. KrevolinChief
              Financial Officer




From
          10-Q
 Page
          33