**SECURITIES
      AND EXCHANGE COMMISSION**


**WASHINGTON,
      DC 20549**




**FORM
        10-Q**





(Mark
      One)




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





For
      the
      quarterly period ended June
      30,
      2008


OR


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





For
      the
      transition period from __________________________ to __________________________





Commission
      file number 0-17706





QNB
      Corp.





(Exact
      Name of Registrant as Specified in Its Charter)





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





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





Not
      Applicable





Former
      Name, Former Address and Former Fiscal Year, if Changed Since Last
      Report.





Indicate
      by check mark whether the Registrant (1) has filed all reports required to
      be
      filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
      the
      preceding 12 months (or for such shorter period that the Registrant was required
      to file such reports), and (2) has been subject to such filing requirements
      for
      the past 90 days. Yes þ  No
o





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





Large
                accelerated filer o
            Accelerated
                filer þNon-accelerated
                filer o
            Smaller
                Reporting Company o





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





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





Class
            
            Outstanding
                at August 1, 2008Common
                Stock, par value $.625
            
            3,136,423





**QNB
      CORP. AND SUBSIDIARY**


**FORM
      10-Q**


**QUARTER
      ENDED JUNE 30, 2008**





**INDEX**





**PAGE****PART
                I - FINANCIAL INFORMATION****ITEM
                1.**
            **CONSOLIDATED
                FINANCIAL STATEMENTS (Unaudited)**Consolidated
                Balance Sheets at June 30, 2008 and December 31, 2007
            
            1Consolidated
                Statements of Income for the Three and Six Months Ended June 30,
                2008 and
                2007
            
            2Consolidated
                Statement of Shareholders’ Equity for the Six Months Ended June 30,
                2008
            
            3Consolidated
                Statements of Cash Flows for the Six Months Ended June 30, 2008 and
                2007
            
            4Notes
                to Consolidated Financial Statements
            
            5**ITEM
                2.**
            **MANAGEMENT'S
                DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
                OPERATIONS**
            
            15**ITEM
                3.**
            **QUANTITATIVE
                AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK**
            
            43**ITEM
                4.**
            **CONTROLS
                AND PROCEDURES**
            
            43**PART
                II - OTHER INFORMATION****ITEM
                1.**
            **LEGAL
                PROCEEDINGS**
            
            44**ITEM
                1A.**
            **RISK
                FACTORS**
            
            44**ITEM
                2.**
            **UNREGISTERED
                SALES OF EQUITY SECURITIES AND USE OF PROCEEDS**
            
            44**ITEM
                3.**
            **DEFAULTS
                UPON SENIOR SECURITIES**
            
            44**ITEM
                4.**
            **SUBMISSIONS
                OF MATTERS TO A VOTE OF SECURITY HOLDERS**
            
            44**ITEM
                5.**
            **OTHER
                INFORMATION**
            
            44**ITEM
                6.**
            **EXHIBITS**
            
            45**SIGNATURES****CERTIFICATIONS**







*QNB
        Corp. and Subsidiary*
 CONSOLIDATED
        BALANCE SHEETS
 
 (in
                  thousands, except share data)(unaudited)****
              ****
              **June
                  30,**
              ****
              **December
                  31,**
              ********
              ****
              **2008**
              ****
              **2007**
              ******Assets**Cash
                  and due from banks
              
              $
              18,169
              
              $
              14,322Federal
                  funds sold
              
              
              3,934
              
              
              -Total
                  cash and cash equivalents
              
              
              22,103
              
              
              14,322Investment
                  securitiesAvailable-for-sale
                  (amortized cost $204,454 and $189,273)
              
              
              203,102
              
              
              191,552Held-to-maturity
                  (fair value $4,069 and $4,122)
              
              
              3,979
              
              
              3,981Non-marketable
                  equity securities
              
              
              1,156
              
              
              954Loans
                  held-for-sale.
              
              
              274
              
              
              688Total
                  loans, net of unearned costs
              
              
              387,205
              
              
              381,016Allowance
                  for loan losses
              
              
              (3,473
              )
              
              (3,279
              )Net
                  loans
              
              
              383,732
              
              
              377,737Bank-owned
                  life insurance
              
              
              8,602
              
              
              8,651Premises
                  and equipment, net
              
              
              6,654
              
              
              6,728Accrued
                  interest receivable
              
              
              2,656
              
              
              2,742Other
                  assets
              
              
              4,222
              
              
              2,458Total
                  assets
              
              $
              636,480
              
              $
              609,813**Liabilities**DepositsDemand,
                  non-interest bearing
              
              $
              56,464
              
              $
              50,043Interest-bearing
                  demand
              
              
              97,470
              
              
              97,290Money
                  market
              
              
              46,457
              
              
              49,666Savings
              
              
              45,547
              
              
              42,075Time
              
              
              200,547
              
              
              190,461Time
                  of $100,000 or more
              
              
              74,131
              
              
              64,589Total
                  deposits
              
              
              520,616
              
              
              494,124Short-term
                  borrowings
              
              
              23,083
              
              
              33,990Long-term
                  debt
              
              
              35,000
              
              
              25,000Accrued
                  interest payable
              
              
              2,833
              
              
              2,344Other
                  liabilities
              
              
              2,639
              
              
              1,104Total
                  liabilities
              
              
              584,171
              
              
              556,562**Shareholders'
                  Equity**Common
                  stock, par value $.625 per share; authorized 10,000,000 shares;
                  3,243,109
                  and 3,241,390 shares issued; 3,136,423 and 3,134,704 shares
                  outstanding
              
              
              2,027
              
              
              2,026Surplus
              
              
              9,994
              
              
              9,933Retained
                  earnings
              
              
              42,674
              
              
              41,282Accumulated
                  other comprehensive (loss) income, net
              
              
              (892
              )
              
              1,504Treasury
                  stock, at cost; 106,686 shares
              
              
              (1,494
              )
              
              (1,494
              )Total
                  shareholders' equity
              
              
              52,309
              
              
              53,251Total
                  liabilities and shareholders' equity
              
              $
              636,480
              
              $
              609,813
 
 *The
        accompanying notes are an integral part of the unaudited consolidated financial
        statements.*
  -
            1
            -
 
 *QNB
        Corp. and Subsidiary*
 CONSOLIDATED
        STATEMENTS OF INCOME
 
 (in thousands, except share data)(unaudited)****
              **Three Months**
              ****
              **Six Months**
              ********
              ****
              **Ended June 30,**
              ****
              **Ended June 30,**
              ********
              ****
              **2008**
              ****
              **2007**
              ****
              **2008**
              ****
              **2007**
              ******Interest
                  Income**Interest
                  and fees on loans
              
              $
              6,221
              
              $
              6,200
              
              $
              12,394
              
              $
              11,983Interest
                  and dividends on investment securities:Taxable
              
              
              2,105
              
              
              2,046
              
              
              4,200
              
              
              4,266Tax-exempt
              
              
              457
              
              
              429
              
              
              919
              
              
              865Interest
                  on Federal funds sold
              
              
              40
              
              
              76
              
              
              82
              
              
              117Interest
                  on interest-bearing balances and other interest income
              
              
              15
              
              
              59
              
              
              33
              
              
              119Total
                  interest income
              
              
              8,838
              
              
              8,810
              
              
              17,628
              
              
              17,350**Interest
                  Expense**Interest
                  on depositsInterest-bearing
                  demand
              
              
              201
              
              
              603
              
              
              508
              
              
              1,095Money
                  market
              
              
              204
              
              
              407
              
              
              495
              
              
              791Savings
              
              
              43
              
              
              46
              
              
              85
              
              
              90Time
              
              
              2,081
              
              
              2,058
              
              
              4,291
              
              
              3,975Time
                  of $100,000 or more
              
              
              780
              
              
              707
              
              
              1,572
              
              
              1,366Interest
                  on short-term borrowings
              
              
              95
              
              
              164
              
              
              266
              
              
              390Interest
                  on long-term debt
              
              
              378
              
              
              373
              
              
              741
              
              
              1,092Total
                  interest expense
              
              
              3,782
              
              
              4,358
              
              
              7,958
              
              
              8,799Net
                  interest income
              
              
              5,056
              
              
              4,452
              
              
              9,670
              
              
              8,551Provision
                  for loan losses
              
              
              200
              
              
              150
              
              
              425
              
              
              225Net
                  interest income after provision for loan losses
              
              
              4,856
              
              
              4,302
              
              
              9,245
              
              
              8,326**Non-Interest
                  Income**Fees
                  for services to customers
              
              
              428
              
              
              467
              
              
              873
              
              
              891ATM
                  and debit card income
              
              
              242
              
              
              218
              
              
              461
              
              
              407Income
                  on bank-owned life insurance
              
              
              64
              
              
              67
              
              
              170
              
              
              131Mortgage
                  servicing fees
              
              
              21
              
              
              25
              
              
              41
              
              
              50Net
                  gain on sale of loans
              
              
              40
              
              
              7
              
              
              72
              
              
              28Net
                  (loss) gain on investment securities available-for-sale
              
              
              (118
              )
              
              29
              
              
              104
              
              
              (2,469
              )Other
                  operating income
              
              
              152
              
              
              123
              
              
              492
              
              
              230Total
                  non-interest income
              
              
              829
              
              
              936
              
              
              2,213
              
              
              (732
              )**Non-Interest
                  Expense**Salaries
                  and employee benefits
              
              
              1,955
              
              
              1,870
              
              
              3,926
              
              
              3,728Net
                  occupancy expense
              
              
              333
              
              
              289
              
              
              673
              
              
              600Furniture
                  and equipment expense
              
              
              286
              
              
              262
              
              
              575
              
              
              517Marketing
                  expense
              
              
              172
              
              
              167
              
              
              325
              
              
              323Third
                  party services
              
              
              205
              
              
              205
              
              
              393
              
              
              366Telephone,
                  postage and supplies expense
              
              
              143
              
              
              140
              
              
              304
              
              
              266State
                  taxes
              
              
              130
              
              
              122
              
              
              260
              
              
              245Loss
                  on prepayment of Federal Home Loan Bank advances
              
              
              -
              
              
              740
              
              
              -
              
              
              740Other
                  expense
              
              
              359
              
              
              357
              
              
              670
              
              
              689Total
                  non-interest expense
              
              
              3,583
              
              
              4,152
              
              
              7,126
              
              
              7,474Income
                  before income taxes
              
              
              2,102
              
              
              1,086
              
              
              4,332
              
              
              120Provision
                  (benefit) for income taxes
              
              
              496
              
              
              161
              
              
              1,016
              
              
              (352
              )**Net
                  Income**
              
              $
              1,606
              
              $
              925
              
              $
              3,316
              
              $
              472**Earnings
                  Per Share - Basic**
              
              $
              .51
              
              $
              .30
              
              $
              1.06
              
              $
              .15**Earnings
                  Per Share - Diluted**
              
              $
              .51
              
              $
              .29
              
              $
              1.05
              
              $
              .15**Cash
                  Dividends Per Share**
              
              $
              .23
              
              $
              .22
              
              $
              .46
              
              $
              .44
  *The
        accompanying notes are an integral part of the unaudited consolidated financial
        statements.*
  -
            2
            -
  *QNB
          Corp. and Subsidiary*
 CONSOLIDATED
            STATEMENT OF SHAREHOLDERS' EQUITY
 **Accumulated****Other****Number**
                
                
                
                **Comprehensive**(in thousands, except share data)
                
                **of Shares**
                
                **Comprehensive**
                
                **Income**
                
                **Common**
                
                
                
                **Retained**
                
                **Treasury**(unaudited)
                
                **Outstanding**
                
                **Income**
                
                **(Loss)**
                
                **Stock**
                
                **Surplus**
                
                **Earnings**
                
                **Stock**
                
                **Total**Balance,
                    December 31, 2007
                
                
                3,134,704
                
                
                
                
                $
                1,504
                
                $
                2,026
                
                $
                9,933
                
                $
                41,282
                
                $
                (1,494
                )
                $
                53,251Net
                    income
                
                
                —
                
                $
                3,316
                
                
                —
                
                
                —
                
                
                —
                
                
                3,316
                
                
                —
                
                
                3,316Other
                    comprehensive loss, net of taxesUnrealized
                    holding losses on investment securities available-for-sale
                
                
                —
                
                
                (2,327
                )Reclassification
                    adjustment for gains included in net income
                
                
                —
                
                
                (69
                )Other
                    comprehensive loss
                
                
                —
                
                
                (2,396
                )
                
                (2,396
                )
                
                —
                
                
                —
                
                
                —
                
                
                —
                
                
                (2,396
                )Comprehensive
                    income
                
                
                —
                
                $
                920
                
                
                —
                
                
                —
                
                
                —
                
                
                —
                
                
                —
                
                
                —Cash
                    dividends declared ($.46 per share)
                
                
                —
                
                
                
                
                
                —
                
                
                —
                
                
                —
                
                
                (1,443
                )
                
                —
                
                
                (1,443
                )Stock
                    issue - Employee stock purchase plan
                
                
                1,719
                
                
                
                
                
                —
                
                
                1
                
                
                31
                
                
                —
                
                
                —
                
                
                32Stock-based
                    compensation expense
                
                
                —
                
                
                
                
                
                —
                
                
                —
                
                
                30
                
                
                —
                
                
                —
                
                
                30Cumulative
                    effect of adoption of new accounting principle - accounting for
                    deferred
                    compensation aspects of split dollar life insurance arrangements
                    (EITF
                    06-4)
                
                
                —
                
                
                
                
                
                —
                
                
                —
                
                
                —
                
                
                (481
                )
                
                —
                
                
                (481
                )Balance,
                    June 30, 2008
                
                
                3,136,423
                
                
                
                
                $
                (892
                )
                $
                2,027
                
                $
                9,994
                
                $
                42,674
                
                $
                (1,494
                )
                $
                52,309
  *The
          accompanying notes are an integral part of the unaudited consolidated financial
          statements.*
  -
            3
            -
  *QNB
          Corp. and Subsidiary*
 CONSOLIDATED
          STATEMENTS OF CASH FLOWS
 (in thousands)(unaudited)**Six Months Ended June 30,**
                
                **2008**
                
                **2007****Operating
                    Activities**Net
                    income
                
                $
                3,316
                
                $
                472Adjustments
                    to reconcile net income to net cash provided by operating
                    activitiesDepreciation
                    and amortization
                
                
                414
                
                
                364Provision
                    for loan losses
                
                
                425
                
                
                225Securities
                    (gains) losses, net
                
                
                (104
                )
                
                2,469Gain
                    on sale of equity investment
                
                
                (175
                )
                
                -Net
                    (gain) loss on sale of repossessed assets
                
                
                (40
                )
                
                13Net
                    gain on sale of loans
                
                
                (72
                )
                
                (28
                )Loss
                    on disposal of premises and equipment
                
                
                3
                
                
                1Proceeds
                    from sales of residential mortgages
                
                
                7,048
                
                
                2,253Originations
                    of residential mortgages held-for-sale
                
                
                (6,615
                )
                
                (2,101
                )Income
                    on bank-owned life insurance
                
                
                (170
                )
                
                (131
                )Life
                    insurance premiums
                
                
                (5
                )
                
                (5
                )Stock-based
                    compensation expense
                
                
                30
                
                
                57Deferred
                    income tax (benefit) provision
                
                
                (82
                )
                
                (63
                )Net
                    increase (decrease) in income taxes payable
                
                
                123
                
                
                (728
                )Net
                    decrease (increase) in accrued interest receivable
                
                
                86
                
                
                (186
                )Amortization
                    of mortgage servicing rights and identifiable intangible
                    assets
                
                
                46
                
                
                63Net
                    amortization of premiums and discounts on investment
                    securities
                
                
                (140
                )
                
                (36
                )Net
                    increase in accrued interest payable
                
                
                489
                
                
                64Increase
                    in other assets
                
                
                (426
                )
                
                (278
                )Increase
                    in other liabilities
                
                
                15
                
                
                12Net
                    cash provided by operating activities
                
                
                4,166
                
                
                2,437**Investing
                    Activities**Proceeds
                    from maturities and calls of investment securitiesavailable-for-sale
                
                
                21,299
                
                
                16,423held-to-maturity
                
                
                -
                
                
                920Proceeds
                    from sales of investment securities available-for-sale
                
                
                3,752
                
                
                102,007Purchase
                    of investment securities available-for-sale
                
                
                (38,985
                )
                
                (84,864
                )Proceeds
                    from sale of equity investment
                
                
                175
                
                
                -Proceeds
                    from sales of non-marketable equity securities
                
                
                332
                
                
                2,154Purchase
                    of non-marketable equity securities
                
                
                (534
                )
                
                (76
                )Net
                    increase in loans
                
                
                (6,677
                )
                
                (32,673
                )Net
                    purchases of premises and equipment
                
                
                (343
                )
                
                (347
                )Redemption
                    of bank owned life insurance investment
                
                
                224
                
                
                86Proceeds
                    from sale of repossessed assets
                
                
                198
                
                
                36Net
                    cash (used) provided by investing activities
                
                
                (20,559
                )
                
                3,666**Financing
                    Activities**Net
                    increase in non-interest bearing deposits
                
                
                6,421
                
                
                1,462Net
                    increase in interest-bearing non-maturity deposits
                
                
                443
                
                
                9,848Net
                    increase in time deposits
                
                
                19,628
                
                
                12,409Repayment
                    of long-term debt
                
                
                -
                
                
                (52,000
                )Proceeds
                    from long-term debt
                
                
                10,000
                
                
                25,000Net
                    decrease in short-term borrowings
                
                
                (10,907
                )
                
                (4,232
                )Cash
                    dividends paid
                
                
                (1,443
                )
                
                (1,377
                )Proceeds
                    from issuance of common stock
                
                
                32
                
                
                36Net
                    cash provided (used) by financing activities
                
                
                24,174
                
                
                (8,854
                )Increase
                    (decrease) in cash and cash equivalents
                
                
                7,781
                
                
                (2,751
                )Cash
                    and cash equivalents at beginning of year
                
                
                14,322
                
                
                24,103Cash
                    and cash equivalents at end of period
                
                $
                22,103
                
                $
                21,352**Supplemental
                    Cash Flow Disclosures**Interest
                    paid
                
                $
                7,469
                
                $
                8,735Income
                    taxes paid
                
                
                975
                
                
                410Non-Cash
                    TransactionsChange
                    in net unrealized holding losses (gains), net of taxes, on investment
                    securities
                
                
                2,396
                
                
                207Transfer
                    of loans to repossessed assets
                
                
                257
                
                
                51Unsettled
                    trades to purchase securities
                
                
                1,001
                
                
                -
 *The
            accompanying notes are an integral part of the unaudited consolidated
            financial
            statements.*
  -
                4
                -




**QNB
      CORP. AND SUBSIDIARY**





**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**


**JUNE
      30, 2008 AND 2007, AND DECEMBER 31, 2007**


**(Unaudited)**





1.
      BASIS
      OF PRESENTATION





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





These
      consolidated financial statements should be read in conjunction with the audited
      consolidated financial statements and notes thereto included in QNB's 2007
      Annual Report incorporated in the Form 10-K. Operating results for the three
      and
      six-month periods ended June 30, 2008 are not necessarily indicative of the
      results that may be expected for the year ending December 31, 2008.





The
      unaudited consolidated financial statements reflect all adjustments which,
      in
      the opinion of management, are necessary for a fair presentation of the results
      of operations for the interim periods and are of a normal and recurring nature.
      Certain items in the 2007 consolidated financial statements have been
      reclassified to conform to the 2008 financial statement presentation format.





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





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





2.
      STOCK-BASED COMPENSATION





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





Stock-based
      compensation expense was approximately $17,000 and $24,000 for the three months
      ended June 30, 2008 and 2007, respectively, and $30,000 and $57,000 for the
      six
      months ended June 30, 2008 and 2007, respectively. As
      of
      June 30, 2008, there was approximately $78,000 of unrecognized compensation
      cost
      related to unvested share-based compensation awards granted that is expected
      to
      be recognized over the next three years.





Options
      are granted to certain employees at prices equal to the market value of the
      stock on the date the options are granted. The 1998 Plan authorizes the issuance
      of 220,500 shares. The time period during which any option is exercisable under
      the Plan is determined by the committee but shall not commence before the
      expiration of six months after the date of grant or continue beyond the
      expiration of ten years after the date the option is awarded. The granted
      options vest ratably over a three-year period. As of June 30, 2008, there were
      225,058 options granted, 9,994 options forfeited, 37,441 options exercised
      and
      177,623 options outstanding under this Plan. The 1998 Plan expired on March
      10,
      2008, therefore no further options can be granted under this Plan.


-
          5
          -


**QNB
      CORP. AND SUBSIDIARY**





**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**


**JUNE
      30, 2008 AND 2007, AND DECEMBER 31, 2007**


**(Unaudited)**





2.
      STOCK-BASED COMPENSATION (Continued):





The
      2005
      Plan authorizes the issuance of 200,000 shares. The terms of the 2005 Plan
      are
      identical to the 1998 Plan, except options expire five years after the grant
      date. As of June 30, 2008, there were 43,700 options granted and outstanding
      under this Plan. The 2005 Plan expires March 15, 2015.





The
      fair
      value of each option is amortized into compensation expense on a straight-line
      basis between the grant date for the option and each vesting date. QNB estimated
      the fair value of stock options on the date of the grant using the Black-Scholes
      option pricing model. The model requires the use of numerous assumptions, many
      of which are highly subjective in nature. The following assumptions were used
      in
      the option pricing model in determining the fair value of options granted during
      the six-months ended June 30:





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





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





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





Stock
      option activity during the six months ended June 30, 2008 is as
      follows:





Number
                of
              Options
            
            Weighted
              Average
              Exercise
              Price
            
            Weighted
              Average
              Remaining
              Contractual
              Term
                (in yrs.)
            
            Aggregate
              Intrinsic
              ValueOutstanding
                at January 1, 2008
            
            
            203,923
            
            $
            20.56
            
            
            3.9Exercised
            
            
            -
            
            
            -Granted
            
            
            17,400
            
            $
            21.00Outstanding
                at June 30, 2008
            
            
            221,323
            
            $
            20.60
            
            
            3.5
            
            $
            485Exercisable
                at June 30, 2008
            
            
            169,123
            
            $
            19.53
            
            
            3.5
            
            $
            485





3.
      SHARE
      REPURCHASE PLAN





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


-
          6
          -


**QNB
      CORP. AND SUBSIDIARY**





**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**


**JUNE
      30, 2008 AND 2007, AND DECEMBER 31, 2007**


**(Unaudited)**





4.
      EARNINGS PER SHARE





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





For
                the Three Months
            
            For
                the Six MonthsEnded
                June 30,
            
            Ended
                June 30,2008
            
            2007
            
            2008
            
            2007Numerator
                for basic and diluted earnings per share: net income
            
            $
            1,606
            
            $
            925
            
            $
            3,316
            
            $
            472Denominator
                for basic earnings per share: weighted average shares
                outstanding
            
            
            3,135,214
            
            
            3,129,159
            
            
            3,134,959
            
            
            3,128,880Effect
                of dilutive securities: employee stock options
            
            
            28,595
            
            
            42,718
            
            
            30,465
            
            
            44,782Denominator
                for diluted earnings per share: adjusted weighted average shares
                outstanding
            
            
            3,163,809
            
            
            3,171,877
            
            
            3,165,424
            
            
            3,173,662Earnings
                per share-basic
            
            $
            0.51
            
            $
            0.30
            
            $
            1.06
            
            $
            0.15Earnings
                per share-diluted
            
            $
            0.51
            
            $
            0.29
            
            $
            1.05
            
            $
            0.15





There
      were 87,100 stock options that were anti-dilutive for the three and six-month
      periods ended June 30, 2008 and 69,700 stock options that were anti-dilutive
      for
      the three and six-month periods ended June 30, 2007. These stock options were
      not included in the above calculation.


-
          7
          -


**QNB
      CORP. AND SUBSIDIARY**





**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**


**JUNE
      30, 2008 AND 2007, AND DECEMBER 31, 2007**


**(Unaudited)**





5.
      COMPREHENSIVE INCOME





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





The
      following shows the components and activity of comprehensive income (loss)
      during the periods ended June 30, 2008 and 2007:





For
                the Three Months
            
            For
                the Six MonthsEnded
                June 30,
            
            Ended
                June 30,2008
            
            2007
            
            2008
            
            2007Unrealized
                holding losses arising during the period on securities available-for-sale
                [net of tax benefit of $1,594, $748, $1,199 and $733, respectively]
            
            $
            (3,093
            )
            $
            (1,452
            )
            $
            (2,327
            )
            $
            (1,423
            )Reclassification
                adjustment for losses (gains) included in net income [net of (tax
                benefit)
                tax expense of $(40), $10, $35 and $(839), respectively]
            
            
            78
            
            
            (19
            )
            
            (69
            )
            
            1,630Net
                change in unrealized gains during the period
            
            
            (3,015
            )
            
            (1,471
            )
            
            (2,396
            )
            
            207Accumulated
                other comprehensive income (loss), beginning of period
            
            
            2,123
            
            
            863
            
            
            1,504
            
            
            (815
            )Accumulated
                other comprehensive loss, end of period
            
            $
            (892
            )
            $
            (608
            )
            $
            (892
            )
            $
            (608
            )Net
                income
            
            $
            1,606
            
            $
            925
            
            $
            3,316
            
            $
            472Other
                comprehensive (loss) income, net of tax:Unrealized
                holding (losses) gains arising during the period [net of tax benefit
                (tax
                expense) of $1,554, $758, $1,235 and $(106), respectively]
            
            
            (3,015
            )
            
            (1,471
            )
            
            (2,396
            )
            
            207Comprehensive
                (loss) income
            
            $
            (1,409
            )
            $
            (546
            )
            $
            920
            
            $
            679


-
          8
          -


**QNB
      CORP. AND SUBSIDIARY**





**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**


**JUNE
      30, 2008 AND 2007, AND DECEMBER 31, 2007**


**(Unaudited)**





6.
      FAIR
      VALUE MEASUREMENTS





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





As
      required by FASB No. 157, each financial asset and liability must be identified
      as having been valued according to specified level of input, 1, 2 or 3.





·
            Level
                1 – Inputs are quoted prices (unadjusted) in active markets for
                identical assets or liabilities that QNB has the ability to access
                at the
                measurement date.


·
            Level
                2 – Significant other observable inputs other than quoted prices
                included in Level 1 that are observable for the asset, either directly
                or
                indirectly. Level 2 inputs include quoted prices for similar assets
                in
                active markets, and inputs other than quoted prices that are observable
                for the asset or liability.


·
            Level
                3 – Significant unobservable inputs for the asset, and include
                situations where there is little, if any, market activity for the
                asset or
                liability.





In
      certain cases, the inputs used to measure fair value may fall into different
      levels of the fair value hierarchy. In such cases, the level in the fair value
      hierarchy, within which the fair value measurement in its entirety falls, has
      been determined based on the lowest level input that is significant to the
      fair
      value measurement in its entirety. QNB’s assessment of the significance of a
      particular input to the fair value measurement in its entirety requires
      judgment, and considers factors specific to the asset.





The
      measurement of fair value should be consistent with one of the following
      valuation techniques: market approach, income approach, and/or cost approach.
      The market approach uses prices and other relevant information generated by
      market transactions involving identical or comparable assets or liabilities
      (including a business). For example, valuation techniques consistent with the
      market approach often use market multiples derived from a set of comparables.
      Multiples might lie in ranges with a different multiple for each comparable.
      The
      selection of where within the range the appropriate multiple falls requires
      judgment, considering factors specific to the measurement (qualitative and
      quantitative). Valuation techniques consistent with the market approach include
      matrix pricing. Matrix pricing is a mathematical technique used principally
      to
      value debt securities without relying exclusively on quoted prices for the
      specific securities, but rather by relying on the security’s relationship to
      other benchmark quoted securities.




QNB
      used
      the following methods and significant assumptions to estimate the fair value
      of
      each type of financial instrument.




Securities
      available-for-sale: The fair
      value for securities available-for-sale are determined by quoted market prices
      (Level 1). For securities where quoted prices are not available, fair values
      are
      calculated based on market prices of similar securities (Level 2). For
      securities where quoted market prices of similar securities are not available,
      fair values are calculated using discounted cash flows or other market
      indicators (Level 3).




Loans
      held-for-sale: The fair
      value of loans held-for-sale is determined using quoted market prices for a
      similar asset. (Level 1).


-
          9
          -


**QNB
      CORP. AND SUBSIDIARY**





**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**


**JUNE
      30, 2008 AND 2007, AND DECEMBER 31, 2007**


**(Unaudited)**





6.
      FAIR
      VALUE MEASUREMENTS (Continued)





The
      following table presents information about QNB’s assets measured at fair value
      on a recurring and nonrecurring basis as of June 30, 2008 and indicates the
      fair
      value hierarchy of the valuation techniques utilized by QNB to determine such
      fair value:





**Quoted Prices**
              **in Active**
              **Markets for**
              **Identical**
              **Assets**
              **(Level 1)**
            
            **Significant**
              **Other**
              **Observable**
              **Input**
              **(Level 2)**
            
            **Significant**
              **Unobservable**
              **Inputs**
              **(Level 3)**
            
            **Balance as of**
              **June 30, 2008****Recurring
                basis:**Securities
                available-for-sale
            
            $
            3,828
            
            $
            195,693
            
            $
            3,581
            
            $
            203,102**Nonrecurring
                basis:**Loans
                held-for-sale
            
            
            274
            
            
            -
            
            
            -
            
            
            274





The
      table
      below presents a reconciliation of all assets measured at fair value on a
      recurring basis using significant unobservable inputs (Level 3) for the quarter
      ended June 30, 2008:





**Fair Value**
              **Measurements Using**
              **Significant**
              **Unobservable Inputs**
              **(Level 3)****Securities
                available-**
              **for-****sale**Beginning
                balance, April 1, 2008
            
            $
            -Transfers
                in and/or out of Level 3
            
            
            3,581Ending
                balance, June 30, 2008
            
            $
            3,581





Certain
      investment securities available-for-sale were measured using Level 3 inputs
      at
      June 30, 2008 because the pricing source used earlier in 2008 for these
      securities was no longer available. QNB calculated the fair value of these
      securities using discounted cash flow.





Loans
      held-for-sale that are measured at the lower of cost or fair value, were written
      down to fair value of $274,000 resulting in a valuation allowance of $1,000
      at
      June 30, 2008. A charge of $1,000 was included in earnings for the quarter
      ended
      June 30, 2008.


-
          10
          -


**QNB
      CORP. AND SUBSIDIARY**





**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**


**JUNE
      30, 2008 AND 2007, AND DECEMBER 31, 2007**


**(Unaudited)**




7.
      LOANS





The
      following table presents loans by category as of June 30, 2008 and December
      31,
      2007:





June
                30,
              2008
            
            December
                31,
              2007Commercial
                and industrial
            
            $
            95,219
            
            $
            88,445Construction
            
            
            27,005
            
            
            23,959Agricultural
            
            
            -
            
            
            25Real
                estate-commercial
            
            
            128,631
            
            
            131,392Real
                estate-residential
            
            
            118,877
            
            
            119,172Consumer
            
            
            4,424
            
            
            4,442Indirect
                lease financing
            
            
            12,903
            
            
            13,431Total
                loans
            
            
            387,059
            
            
            380,866Net
                unearned costs (fees)
            
            
            146
            
            
            150Total
                loans, net
            
            $
            387,205
            
            $
            381,016





8.
      INTANGIBLE ASSETS





As
      a
      result of a purchase of deposits in 1997, QNB recorded a deposit premium of
      $511,000. This premium was being amortized, for book purposes, over ten years
      and was reviewed annually for impairment. The net deposit premium intangible
      was
      $0 at both June 30, 2008 and December 31, 2007, respectively. Amortization
      expense for core deposit intangibles was $0 and $13,000 for the three-month
      periods ended June 30, 2008 and 2007, respectively, and $0 and $26,000 for
      the
      six-month periods ended June 30, 2008 and 2007, respectively.





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





Six Months Ended
            
            Year EndedJune 30,
            
            December 31,2008
            
            2007Mortgage
                servicing rights beginning balance
            
            $
            451
            
            $
            472Mortgage
                servicing rights capitalized
            
            
            53
            
            
            49Mortgage
                servicing rights amortized
            
            
            (46
            )
            
            (70
            )Fair
                market value adjustments
            
            
            -
            
            
            -Mortgage
                servicing rights ending balance
            
            $
            458
            
            $
            451Mortgage
                loans serviced for others
            
            $
            70,214
            
            $
            69,194Amortization
                expense of intangibles
            
            $
            46
            
            $
            113


-
          11
          -


**QNB
      CORP. AND SUBSIDIARY**





**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**


**JUNE
      30, 2008 AND 2007, AND DECEMBER 31, 2007**


**(Unaudited)**





8.
      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 12/31/08
            
            $
            91For
                the Year Ended 12/31/09
            
            
            82For
                the Year Ended 12/31/10
            
            
            68For
                the Year Ended 12/31/11
            
            
            54For
                the Year Ended 12/31/12
            
            
            43





9.
      OFF-BALANCE-SHEET FINANCIAL INSTRUMENTS AND GUARANTEES





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





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





June
                30,
            
            December
                31,2008
            
            2007Commitments
                to extend credit and unused lines of credit
            
            $
            83,574
            
            $
            77,264Standby
                letters of credit
            
            
            2,745
            
            
            3,760$
            86,319
            
            $
            81,024





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


-
          12
          -




**QNB
      CORP. AND SUBSIDIARY**





**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**


**JUNE
      30, 2008 AND 2007, AND DECEMBER 31, 2007**


**(Unaudited)**





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





QNB
      does
      not issue any guarantees that would require liability recognition or disclosure,
      other than its standby letters of credit. Standby letters of credit written
      are
      conditional commitments issued to guarantee the performance of a customer to
      a
      third party. Generally, all letters of credit, when issued, have expiration
      dates within one year. The credit risk involved in issuing letters of credit
      is
      essentially the same as those that are involved in extending loan facilities
      to
      customers. The Bank, generally, holds collateral and/or personal guarantees
      supporting these commitments. Management believes that the proceeds obtained
      through a liquidation of collateral and the enforcement of guarantees would
      be
      sufficient to cover the potential amount of future payments required under
      the
      corresponding guarantees. The current amount of the liability as of June 30,
      2008 and December 31, 2007 for guarantees under standby letters of credit issued
      is not material.





10.
      RECENT ACCOUNTING PRONOUNCEMENTS





In
      September 2006, the FASB reached consensus on the guidance provided by Emerging
      Issues Task Force Issue 06-4 (EITF 06-4), *Accounting
      for Deferred Compensation and Postretirement Benefit Aspects of Endorsement
      Split-Dollar Life Insurance Arrangements* .
      The
      guidance is applicable to endorsement split dollar life insurance arrangements,
      whereby the employer owns and controls the insurance policy, that are associated
      with a postretirement benefit. EITF 06-4 requires that for a split-dollar life
      insurance arrangement within the scope of the Issue, an employer should
      recognize a liability for future benefits in accordance with FASB No. 106 (if,
      in substance, a postretirement benefit plan exists) or Accounting Principles
      Board Opinion No. 12 (if the arrangement is, in substance, an individual
      deferred compensation contract) based on the substantive agreement with the
      employee. EITF 06-4 is effective for fiscal years beginning after December
      15,
      2007. As a result of adopting this standard, QNB recorded a cumulative effect
      adjustment of $481,000 to retained earnings effective January 1, 2008. In
      addition, the expense recorded in the first six months of 2008 was approximately
      $20,000.





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





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


-
          13
          -


**QNB
      CORP. AND SUBSIDIARY**





**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**


**JUNE
      30, 2008 AND 2007, AND DECEMBER 31, 2007**


**(Unaudited)**





10 .
      RECENT
      ACCOUNTING PRONOUNCEMENTS (Continued)





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





In
      May
      2008, the FASB issued SFAS No. 162, *The
      Hierarchy of Generally Accepted Accounting Principles* .
      This
      Statement identifies the sources of accounting principles and the framework
      for
      selecting the principles used in the preparation of financial statements. This
      Statement is effective 60 days following the SEC’s approval of the Public
      Company Accounting Oversight Board amendments to AU Section 411, *The
      Meaning of Present Fairly in Conformity with Generally Accepted Accounting
      Principles* .
      QNB is
      currently evaluating the potential impact the new pronouncement will have on
      its
      consolidated financial statements.


-
          14
          -




**QNB
      CORP. AND SUBSIDIARY**




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


**CONDITION
      AND RESULTS OF OPERATIONS**




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




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





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





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





**Forward-Looking
      Statements**





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





Shareholders
      should note that many factors, some of which are discussed elsewhere in this
      document and in the documents that are incorporated by reference, could affect
      the future financial results of the Company and its subsidiary and could cause
      those results to differ materially from those expressed in the forward-looking
      statements contained or incorporated by reference in this document. These
      factors include, but are not limited, to the following:





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


·
            Credit
                risk;


·
            Operating,
                legal and regulatory risks;


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


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





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


-
          15
          -


**QNB
      CORP. AND SUBSIDIARY**




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


**CONDITION
      AND RESULTS OF OPERATIONS**





**Critical
      Accounting Policies and Estimates**





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





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





**Allowance
      for Loan Losses**





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





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





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


-
          16
          -





**QNB
      CORP. AND SUBSIDIARY**




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


**CONDITION
      AND RESULTS OF OPERATIONS**





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





**Allowance
      for Loan Losses (Continued)**


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





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





**Income
      Taxes**





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





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





Securities
      are evaluated periodically to determine whether a decline in their value is
      other-than-temporary. Management utilizes criteria such as the magnitude and
      duration of the decline, in addition to the reasons underlying the decline,
      to
      determine whether the loss in value is other-than-temporary. The term
“other-than-temporary” is not intended to indicate that the decline is
      permanent, but indicates that the prospects for a near-term recovery of value
      are not necessarily favorable, or that there is a lack of evidence to support
      realizable value equal to or greater than the carrying value of the investment.
      Once a decline in value is determined to be other-than-temporary, the value
      of
      the security is reduced, and a corresponding charge to earnings is recognized.
      QNB recorded an other-than-temporary impairment charge of $198,000 in the second
      quarter of 2008 related to several equity securities held by the Company. QNB
      recorded an other-than-temporary impairment charge of $2,758,000 as of March
      31,
      2007. These securities identified as impaired as of March 31, 2007 were
      subsequently sold in April 2007.





-
          17
          -





**QNB
      CORP. AND SUBSIDIARY**




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


**CONDITION
      AND RESULTS OF OPERATIONS**





**RESULTS
      OF OPERATIONS – OVERVIEW**





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





QNB
      reported net income for the second quarter of 2008 of $1,606,000, or $.51 per
      share on a diluted basis. These results compare to net income of $925,000,
      or
      $.29 per share on a diluted basis, for the same period in 2007. Net income
      for
      the first six months of 2008 was $3,316,000 compared to $472,000 for the first
      half of 2007. Diluted earnings per share was $1.05 and $.15 for the respective
      six-month periods ended June 30, 2008 and 2007. Net income for the first six
      months of 2008 represents record six-month performance for the
      Company.





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





An
      increase in the net interest margin combined with growth in earning assets
      resulted in net interest income increasing $604,000, or 13.6%, to $5,056,000
      for
      the three months ended June 30, 2008 compared to the same period in 2007. The
      net interest margin for the second quarter of 2008 was 3.67% compared to 3.40%
      for the second quarter of 2007. The cost of interest bearing liabilities was
      2.96% for the second quarter of 2008 compared with 3.56% for the second quarter
      of 2007. This decline in the cost of funds more than offset the decline in
      the
      yield on earning assets which decreased from 6.49% for the second quarter of
      2007 to 6.23% for the second quarter of 2008.





Average
      earning assets increased 5.0% to $594,690,000 for the second quarter of 2008
      compared to $566,154,000 for the second quarter of 2007, with average loans
      increasing 4.8% when comparing these same periods. The increase in average
      earning assets was primarily funded through deposit growth. Average total
      deposits increased $16,986,000, or 3.4%, when comparing the two quarters.





When
      comparing the six month periods net interest income increased $1,119,000, or
      13.1%. Contributing to this increase was a 31 basis point increase in the net
      interest margin and a 2.5% increase in average earning assets. The net interest
      margin was 3.57% for the first half of 2008 compared with 3.26% for the first
      half of 2007. Average loans increased 6.5% when comparing the six month
      periods.




-
          18
          -


**QNB
      CORP. AND SUBSIDIARY**




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


**CONDITION
      AND RESULTS OF OPERATIONS**





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





The
      U.S.
      economy continues to struggle as a result of high energy and food costs as
      well
      as instability in the financial markets. This has had a negative impact on
      both
      consumers and small businesses, resulting in a slight increase in loan
      charge-offs when comparing both the three and six month periods. These
      charge-offs have occurred primarily in the purchased lease portfolio. As a
      result of the slowdown in the economy and an increase in loan charge-offs,
      as
      well as the inherent risk related to loan growth, the provision for loan losses
      was increased in 2008 by $50,000 to $200,000 when comparing the three month
      periods and by $200,000 to $425,000 when comparing the six month periods.





Total
      non-performing loans, which represent loans on non-accrual status and loans
      past
      due more than 90 days, were $823,000, or .21% of total loans, at June 30, 2008
      compared with $887,000, or .24% of total loans, at June 30, 2007. This
      represents an improvement from the $1,557,000, or .41% of total loans, reported
      at March 31, 2008 as several loans that were on non-accrual status were
      paid-off. The allowance for loan losses of $3,473,000 represents .90% of total
      loans at June 30, 2008 compared to an allowance for loan losses of $2,872,000,
      or .76% of total loans, at June 30, 2007.





Total
      non-interest income for the second quarter of 2008 was $829,000, a decline
      from
      the $936,000 reported for the same period in 2007. The primary difference is
      related to activity in the investment securities portfolio. During the second
      quarter of 2008 net securities losses of $118,000 were recognized compared
      to
      net securities gains of $29,000 during the second quarter of 2007. For the
      six
      month period ended June 30, 2008, total non-interest income was $2,213,000.
      Positively impacting non-interest income for the first half of 2008 was the
      first quarter recognition of $230,000 of
      income
      as a result of the Visa initial public offering: a $175,000 gain related to
      the
      mandatory redemption of our shares of restricted common stock in Visa and
      $55,000 of income related to the reversal of liabilities recorded in the fourth
      quarter of 2007 to fund settlements of, or judgments in, indemnified litigation
      involving Visa. Total
      non-interest income, excluding the impact of the Visa items noted above, and
      securities gains of $104,000, would have been $1,879,000 for the first six
      months of 2008. This compares to total non-interest income of $1,737,000 for
      the
      first half of 2007, excluding the other-than-temporary impairment charge of
      $2,758,000 recorded in the first quarter of 2007 and realized gains of $289,000.





Total
      non-interest expense was $3,583,000 for the second quarter of 2008 compared
      to
      $4,152,000 for the second quarter of 2007, which included recognition of a
      $740,000 prepayment penalty on the FHLB advances. Excluding this charge total
      non-interest expense for the second quarter of 2007 would have been $3,412,000.
      For the six month period ended June 30, 2008, total non-interest expense was
      $7,126,000. This
      compares to total non-interest expense of $6,734,000 for the first half of
      2007,
      excluding the FHLB prepayment penalty. Higher
      personnel costs and net occupancy costs contributed to the increase in
      non-interest expense for both the three and six month periods. Salary and
      benefit expense increased $73,000, or 3.9%, when comparing the quarters and
      $178,000, or 4.8%, when comparing the six month periods. An accrual for
      incentive compensation contributed $51,000 and $102,000 of the increase when
      comparing the respective three and six month periods. Net occupancy and
      furniture and equipment expense increased $68,000 and $131,000 when comparing
      the three and six month periods reflecting an increase in depreciation expense,
      utility costs and maintenance expense.


-
          19
          -





**QNB
      CORP. AND SUBSIDIARY**




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


**CONDITION
      AND RESULTS OF OPERATIONS**





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





The
      prepayment of the FHLB advances resulted in the recognition of an after-tax
      charge of $488,000, or $.16 on a diluted basis, for the second quarter of 2007
      while the impairment charge resulted in a reduction of net income of $1,820,000,
      or $.57 on a diluted basis, for the first quarter of 2007. Net income, excluding
      the FHLB prepayment penalty, would have been $1,413,000, or $.45 per share
      on a
      diluted basis, for the three month period ended June 30, 2007. Excluding the
      impact of the impairment charge and the prepayment penalty, net income for
      the
      six month period ended June 30, 2007 would have been $2,780,000, or $.88 per
      share on a diluted basis.





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





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


-
          20
          -


**QNB
          CORP. AND SUBSIDIARY**
  **MANAGEMENT’S
          DISCUSSION AND ANALYSIS OF FINANCIAL**
 **CONDITION
          AND RESULTS OF OPERATIONS**
 **Average
          Balances, Rate, and Interest Income and Expense Summary** ***(Tax-Equivalent
          Basis*** **)**
 **Three
                    Months Ended****June
                    30, 2008**
                
                **June
                    30, 2007****Average**
                  **Balance**
                
                **Average**
                  **Rate**
                
                **Interest**
                
                **Average**
                  **Balance**
                
                **Average**
                  **Rate**
                
                **Interest****Assets**Federal
                    funds sold
                
                $
                7,734
                
                
                2.07
                %
                $
                40
                
                $
                5,827
                
                
                5.26
                %
                $
                76Investment
                    securities:U.S.
                    Treasury
                
                
                5,024
                
                
                3.60
                %
                
                45
                
                
                5,050
                
                
                4.73
                %
                
                60U.S.
                    Government agencies
                
                
                30,376
                
                
                5.30
                %
                
                402
                
                
                31,678
                
                
                5.54
                %
                
                438State
                    and municipal
                
                
                42,386
                
                
                6.54
                %
                
                693
                
                
                39,338
                
                
                6.61
                %
                
                650Mortgage-backed
                    and CMOs
                
                
                104,072
                
                
                5.50
                %
                
                1,431
                
                
                95,685
                
                
                5.32
                %
                
                1,273Other
                
                
                18,058
                
                
                5.21
                %
                
                235
                
                
                18,772
                
                
                6.01
                %
                
                282Total
                    investment securities
                
                
                199,916
                
                
                5.61
                %
                
                2,806
                
                
                190,523
                
                
                5.67
                %
                
                2,703Loans:Commercial
                    real estate
                
                
                181,903
                
                
                6.98
                %
                
                3,157
                
                
                166,375
                
                
                6.84
                %
                
                2,836Residential
                    real estate
                
                
                21,839
                
                
                6.15
                %
                
                336
                
                
                25,173
                
                
                5.88
                %
                
                370Home
                    equity loans
                
                
                68,147
                
                
                5.82
                %
                
                986
                
                
                69,340
                
                
                6.52
                %
                
                1,127Commercial
                    and industrial
                
                
                71,129
                
                
                5.98
                %
                
                1,058
                
                
                64,293
                
                
                7.33
                %
                
                1,174Indirect
                    lease financing
                
                
                12,768
                
                
                9.73
                %
                
                311
                
                
                13,592
                
                
                9.73
                %
                
                331Consumer
                    loans
                
                
                4,425
                
                
                11.94
                %
                
                131
                
                
                4,741
                
                
                10.61
                %
                
                125Tax-exempt
                    loans
                
                
                24,341
                
                
                6.04
                %
                
                366
                
                
                23,399
                
                
                6.15
                %
                
                359Total
                    loans, net of unearned income*
                
                
                384,552
                
                
                6.64
                %
                
                6,345
                
                
                366,913
                
                
                6.91
                %
                
                6,322Other
                    earning assets
                
                
                2,488
                
                
                2.38
                %
                
                15
                
                
                2,891
                
                
                8.12
                %
                
                59Total
                    earning assets
                
                
                594,690
                
                
                6.23
                %
                
                9,206
                
                
                566,154
                
                
                6.49
                %
                
                9,160Cash
                    and due from banks
                
                
                10,247
                
                
                
                
                
                
                
                
                11,384Allowance
                    for loan losses
                
                
                (3,429
                )
                
                
                
                
                
                
                
                (2,774
                )Other
                    assets
                
                
                21,885
                
                
                
                
                
                
                
                
                22,111Total
                    assets
                
                $
                623,393
                
                
                
                
                
                
                
                $
                596,875**Liabilities
                    and Shareholders' Equity**Interest-bearing
                    deposits:Interest-bearing
                    demand
                
                $
                94,626
                
                
                0.85
                %
                
                201
                
                $
                101,812
                
                
                2.37
                %
                
                603Money
                    market
                
                
                48,495
                
                
                1.69
                %
                
                204
                
                
                52,250
                
                
                3.13
                %
                
                407Savings
                
                
                44,815
                
                
                0.39
                %
                
                43
                
                
                46,957
                
                
                0.39
                %
                
                46Time
                
                
                199,094
                
                
                4.20
                %
                
                2,081
                
                
                182,890
                
                
                4.51
                %
                
                2,058Time
                    over $100,000
                
                
                73,162
                
                
                4.29
                %
                
                780
                
                
                59,210
                
                
                4.79
                %
                
                707Total
                    interest-bearing deposits
                
                
                460,192
                
                
                2.89
                %
                
                3,309
                
                
                443,119
                
                
                3.46
                %
                
                3,821Short-term
                    borrowings
                
                
                18,604
                
                
                2.05
                %
                
                95
                
                
                18,466
                
                
                3.57
                %
                
                164Long-term
                    debt
                
                
                35,000
                
                
                4.26
                %
                
                378
                
                
                29,395
                
                
                5.01
                %
                
                373Total
                    interest-bearing liabilities
                
                
                513,796
                
                
                2.96
                %
                
                3,782
                
                
                490,980
                
                
                3.56
                %%
                
                4,358Non-interest-bearing
                    deposits
                
                
                51,898
                
                
                
                
                
                
                
                
                51,985Other
                    liabilities
                
                
                4,558
                
                
                
                
                
                
                
                
                3,632Shareholders'
                    equity
                
                
                53,141
                
                
                
                
                
                
                
                
                50,278Total
                    liabilities and shareholders' equity
                
                $
                623,393
                
                
                
                
                
                
                
                $
                596,875Net
                    interest rate spread
                
                
                
                
                
                3.27
                %
                
                
                
                
                
                
                
                2.93
                %Margin/net
                    interest income
                
                
                
                
                
                3.67
                %
                $
                5,424
                
                
                
                
                
                3.40
                %
                $
                4,802
  Tax-exempt
          securities and loans were adjusted to a tax-equivalent basis and are based
          on
          the marginal Federal corporate tax rate of 34 percent.
 Non-accrual
          loans are included in earning assets.
 *
          Includes loans held-for-sale
  -
            21
            -
  **QNB
          CORP. AND SUBSIDIARY**
  **MANAGEMENT’S
          DISCUSSION AND ANALYSIS OF FINANCIAL**
 **CONDITION
          AND RESULTS OF OPERATIONS**
 **Average
          Balances, Rate, and Interest Income and Expense Summary** ***(Tax-Equivalent
          Basis*** **)**
 **Six
                      Months Ended****June
                      30, 2008**
                  
                  **June
                      30, 2007****Average**
                    **Balance**
                  
                  **Average**
                    **Rate**
                  
                  **Interest**
                  
                  **Average**
                    **Balance**
                  
                  **Average**
                    **Rate**
                  
                  **Interest****Assets**Federal
                      funds sold
                  
                  $
                  6,783
                  
                  
                  2.43
                  %
                  $
                  82
                  
                  $
                  4,470
                  
                  
                  5.26
                  %
                  $
                  117Investment
                      securities:U.S.
                      Treasury
                  
                  
                  5,075
                  
                  
                  3.86
                  %
                  
                  97
                  
                  
                  5,098
                  
                  
                  4.71
                  %
                  
                  119U.S.
                      Government agencies
                  
                  
                  29,796
                  
                  
                  5.42
                  %
                  
                  807
                  
                  
                  32,126
                  
                  
                  5.53
                  %
                  
                  889State
                      and municipal
                  
                  
                  42,506
                  
                  
                  6.55
                  %
                  
                  1,393
                  
                  
                  39,677
                  
                  
                  6.61
                  %
                  
                  1,311Mortgage-backed
                      and CMOs
                  
                  
                  101,672
                  
                  
                  5.54
                  %
                  
                  2,818
                  
                  
                  111,579
                  
                  
                  4.86
                  %
                  
                  2,712Other
                  
                  
                  18,033
                  
                  
                  5.46
                  %
                  
                  493
                  
                  
                  18,466
                  
                  
                  6.07
                  %
                  
                  560Total
                      investment securities
                  
                  
                  197,082
                  
                  
                  5.69
                  %
                  
                  5,608
                  
                  
                  206,946
                  
                  
                  5.40
                  %
                  
                  5,591Loans:Commercial
                      real estate
                  
                  
                  179,900
                  
                  
                  6.87
                  %
                  
                  6,147
                  
                  
                  161,764
                  
                  
                  6.80
                  %
                  
                  5,457Residential
                      real estate
                  
                  
                  21,878
                  
                  
                  6.17
                  %
                  
                  675
                  
                  
                  25,848
                  
                  
                  5.90
                  %
                  
                  763Home
                      equity loans
                  
                  
                  68,224
                  
                  
                  5.98
                  %
                  
                  2,028
                  
                  
                  69,355
                  
                  
                  6.50
                  %
                  
                  2,236Commercial
                      and industrial
                  
                  
                  69,322
                  
                  
                  6.30
                  %
                  
                  2,171
                  
                  
                  59,766
                  
                  
                  7.36
                  %
                  
                  2,182Indirect
                      lease financing
                  
                  
                  12,902
                  
                  
                  9.91
                  %
                  
                  639
                  
                  
                  13,460
                  
                  
                  9.52
                  %
                  
                  641Consumer
                      loans
                  
                  
                  4,393
                  
                  
                  11.29
                  %
                  
                  247
                  
                  
                  4,796
                  
                  
                  10.32
                  %
                  
                  246Tax-exempt
                      loans
                  
                  
                  24,376
                  
                  
                  6.09
                  %
                  
                  738
                  
                  
                  22,808
                  
                  
                  6.14
                  %
                  
                  694Total
                      loans, net of unearned income*
                  
                  
                  380,995
                  
                  
                  6.67
                  %
                  
                  12,645
                  
                  
                  357,797
                  
                  
                  6.89
                  %
                  
                  12,219Other
                      earning assets
                  
                  
                  2,262
                  
                  
                  2.97
                  %
                  
                  33
                  
                  
                  3,570
                  
                  
                  6.75
                  %
                  
                  119Total
                      earning assets
                  
                  
                  587,122
                  
                  
                  6.29
                  %
                  
                  18,368
                  
                  
                  572,783
                  
                  
                  6.35
                  %
                  
                  18,046Cash
                      and due from banks
                  
                  
                  10,120
                  
                  
                  
                  
                  
                  
                  
                  
                  11,122Allowance
                      for loan losses
                  
                  
                  (3,360
                  )
                  
                  
                  
                  
                  
                  
                  
                  (2,754
                  )Other
                      assets
                  
                  
                  21,750
                  
                  
                  
                  
                  
                  
                  
                  
                  21,578Total
                      assets
                  
                  $
                  615,632
                  
                  
                  
                  
                  
                  
                  
                  $
                  602,729**Liabilities
                      and Shareholders' Equity**Interest-bearing
                      deposits:Interest-bearing
                      demand
                  
                  $
                  92,980
                  
                  
                  1.10
                  %
                  
                  508
                  
                  $
                  97,427
                  
                  
                  2.27
                  %
                  
                  1,095Money
                      market
                  
                  
                  49,147
                  
                  
                  2.03
                  %
                  
                  495
                  
                  
                  51,893
                  
                  
                  3.07
                  %
                  
                  791Savings
                  
                  
                  43,705
                  
                  
                  0.39
                  %
                  
                  85
                  
                  
                  46,302
                  
                  
                  0.39
                  %
                  
                  90Time
                  
                  
                  197,002
                  
                  
                  4.38
                  %
                  
                  4,291
                  
                  
                  180,691
                  
                  
                  4.44
                  %
                  
                  3,975Time
                      over $100,000
                  
                  
                  70,594
                  
                  
                  4.48
                  %
                  
                  1,572
                  
                  
                  58,202
                  
                  
                  4.73
                  %
                  
                  1,366Total
                      interest-bearing deposits
                  
                  
                  453,428
                  
                  
                  3.08
                  %
                  
                  6,951
                  
                  
                  434,515
                  
                  
                  3.40
                  %
                  
                  7,317Short-term
                      borrowings
                  
                  
                  21,276
                  
                  
                  2.51
                  %
                  
                  266
                  
                  
                  22,046
                  
                  
                  3.57
                  %
                  
                  390Long-term
                      debt
                  
                  
                  34,066
                  
                  
                  4.30
                  %
                  
                  741
                  
                  
                  40,591
                  
                  
                  5.35
                  %
                  
                  1,092Total
                      interest-bearing liabilities
                  
                  
                  508,770
                  
                  
                  3.15
                  %
                  
                  7,958
                  
                  
                  497,152
                  
                  
                  3.57
                  %
                  
                  8,799Non-interest-bearing
                      deposits
                  
                  
                  49,869
                  
                  
                  
                  
                  
                  
                  
                  
                  50,979Other
                      liabilities
                  
                  
                  4,415
                  
                  
                  
                  
                  
                  
                  
                  
                  3,572Shareholders'
                      equity
                  
                  
                  52,578
                  
                  
                  
                  
                  
                  
                  
                  
                  51,026Total
                        liabilities andshareholders' equity
                  
                  $
                  615,632
                  
                  
                  
                  
                  
                  
                  
                  $
                  602,729Net
                      interest rate spread
                  
                  
                  
                  
                  
                  3.14
                  %
                  
                  
                  
                  
                  
                  
                  
                  2.78
                  %Margin/net
                      interest income
                  
                  
                  
                  
                  
                  3.57
                  %
                  $
                  10,410
                  
                  
                  
                  
                  
                  3.26
                  %
                  $
                  9,247
  Tax-exempt
          securities and loans were adjusted to a tax-equivalent basis and are based
          on
          the marginal Federal corporate tax rate of 34 percent.
 Non-accrual
          loans are included in earning assets.
 *
          Includes loans held-for-sale
  -
            22
            -




**QNB
      CORP. AND SUBSIDIARY**





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


**CONDITION
      AND RESULTS OF OPERATIONS**




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


**Three Months Ended**
                **June 30, 2008 compared**
                **to June 30, 2007**
              
              **Six Months Ended**
                **June 30, 2008 compared**
                **to June 30, 2007**Total
              
              Due to change in:
              
              Total
              
              Due to change in:Change
              
              Volume
              
              Rate
              
              Change
              
              Volume
              
              Rate**Interest
                  income:**Federal
                  funds sold
              
              $
              (36
              )
              $
              25
              
              $
              (61
              )
              $
              (35
              )
              $
              60
              
              $
              (95
              )Investment
                  securities:U.S.
                  Treasury
              
              
              (15
              )
              
              (1
              )
              
              (14
              )
              
              (22
              )
              
              (1
              )
              
              (21
              )U.S.
                  Government agencies
              
              
              (36
              )
              
              (18
              )
              
              (18
              )
              
              (82
              )
              
              (65
              )
              
              (17
              )State
                  and municipal
              
              
              43
              
              
              50
              
              
              (7
              )
              
              82
              
              
              94
              
              
              (12
              )Mortgage-backed
                  and CMOs
              
              
              158
              
              
              112
              
              
              46
              
              
              106
              
              
              (241
              )
              
              347Other
              
              
              (47
              )
              
              (11
              )
              
              (36
              )
              
              (67
              )
              
              (13
              )
              
              (54
              )Loans:Commercial
                  real estate
              
              
              321
              
              
              256
              
              
              65
              
              
              690
              
              
              629
              
              
              61Residential
                  real estate
              
              
              (34
              )
              
              (49
              )
              
              15
              
              
              (88
              )
              
              (117
              )
              
              29Home
                  equity loans
              
              
              (141
              )
              
              (22
              )
              
              (119
              )
              
              (208
              )
              
              (30
              )
              
              (178
              )Commercial
                  and industrial
              
              
              (116
              )
              
              121
              
              
              (237
              )
              
              (11
              )
              
              356
              
              
              (367
              )Indirect
                  lease financing
              
              
              (20
              )
              
              (20
              )
              
              -
              
              
              (2
              )
              
              (27
              )
              
              25Consumer
                  loans
              
              
              6
              
              
              (9
              )
              
              15
              
              
              1
              
              
              (20
              )
              
              21Tax-exempt
                  loans
              
              
              7
              
              
              13
              
              
              (6
              )
              
              44
              
              
              50
              
              
              (6
              )Other
                  earning assets
              
              
              (44
              )
              
              (8
              )
              
              (36
              )
              
              (86
              )
              
              (43
              )
              
              (43
              )Total
                  interest income
              
              
              46
              
              
              439
              
              
              (393
              )
              
              322
              
              
              632
              
              
              (310
              )**Interest
                  expense:**Interest-bearing
                  demand
              
              
              (402
              )
              
              (44
              )
              
              (358
              )
              
              (587
              )
              
              (47
              )
              
              (540
              )Money
                  market
              
              
              (203
              )
              
              (30
              )
              
              (173
              )
              
              (296
              )
              
              (40
              )
              
              (256
              )Savings
              
              
              (3
              )
              
              (3
              )
              
              -
              
              
              (5
              )
              
              (5
              )
              
              -Time
              
              
              23
              
              
              176
              
              
              (153
              )
              
              316
              
              
              371
              
              
              (55
              )Time
                  over $100,000
              
              
              73
              
              
              165
              
              
              (92
              )
              
              206
              
              
              296
              
              
              (90
              )Short-term
                  borrowings
              
              
              (69
              )
              
              1
              
              
              (70
              )
              
              (124
              )
              
              (13
              )
              
              (111
              )Long-term
                  debt
              
              
              5
              
              
              71
              
              
              (66
              )
              
              (351
              )
              
              (170
              )
              
              (181
              )Total
                  interest expense
              
              
              (576
              )
              
              336
              
              
              (912
              )
              
              (841
              )
              
              392
              
              
              (1,233
              )**Net
                  interest income**
              
              $
              622
              
              $
              103
              
              $
              519
              
              $
              1,163
              
              $
              240
              
              $
              923


-
          23
          -


**QNB
      CORP. AND SUBSIDIARY**





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


**CONDITION
      AND RESULTS OF OPERATIONS**




**NET
      INTEREST INCOME**





The
      following table presents the adjustment to convert net interest income to net
      interest income on a fully taxable equivalent basis for the three- and six-month
      periods ended June 30, 2008 and 2007.





For the Three Months
            
            For the Six MonthsEnded June 30,
            
            Ended June 30,2008
            
            2007
            
            2008
            
            2007Total
                interest income
            
            $
            8,838
            
            $
            8,810
            
            $
            17,628
            
            $
            17,350Total
                interest expense
            
            
            3,782
            
            
            4,358
            
            
            7,958
            
            
            8,799Net
                interest income
            
            
            5,056
            
            
            4,452
            
            
            9,670
            
            
            8,551Tax
                equivalent adjustment
            
            
            368
            
            
            350
            
            
            740
            
            
            696Net
                interest income (fully taxable equivalent)
            
            $
            5,424
            
            $
            4,802
            
            $
            10,410
            
            $
            9,247





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





For
      purposes of this discussion, interest income and the average yield earned on
      loans and investment securities are adjusted to a tax-equivalent basis as
      detailed in the tables that appear on pages 21 and 22. This adjustment to
      interest income is made for analysis purposes only. Interest income is increased
      by the amount of savings of Federal income taxes, which QNB realizes by
      investing in certain tax-exempt state and municipal securities and by making
      loans to certain tax-exempt organizations. In this way, the ultimate economic
      impact of earnings from various assets can be more easily compared.




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





Net
      interest income increased 13.6% to $5,056,000 for the quarter ended June 30,
      2008 as compared to $4,452,000 for the quarter ended June 30, 2007. On a
      tax-equivalent basis, net interest income increased by 13.0%, from $4,802,000
      for the three months ended June 30, 2007 to $5,424,000 for the same period
      ended
      June 30, 2008. When comparing the second quarters of 2008 and 2007, the net
      interest margin increased to 3.67% from 3.40%, an improvement of 27 basis
      points. The second quarter net interest margin also represents a 21 basis point
      increase from the 3.46% recorded in the first quarter of 2008. Included in
      net
      interest income for the second quarter of 2008 was the recognition of prepayment
      penalty income on a commercial loan that paid off early as well as the recovery
      of interest and late charges on three non-accrual loans that paid off during
      the
      quarter. These items totaled approximately $169,000 and contributed
      approximately 12 basis points to the net interest margin for the second quarter
      of 2008. Excluding these items the net interest margin for the second quarter
      of
      2008 would have been 3.55%.


-
          24
          -





**QNB
      CORP. AND SUBSIDIARY**





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


**CONDITION
      AND RESULTS OF OPERATIONS**





**NET
      INTEREST INCOME (Continued)**





The
      increase in net interest income reflects growth in average earning assets. Average
      earning assets increased $28,536,000, or 5.0%, with average loans increasing
      4.8% and average investment securities increasing 4.9% when comparing the second
      quarter of 2008 to the same period in 2007.





QNB’s
      interest sensitivity position also contributed to the increase in net interest
      income and the net interest margin. QNB has a negative gap position in a
      one-year time frame, which results when the amount of interest rate sensitive
      liabilities (deposits and debt) exceeds interest rate sensitive assets (loans
      and investment securities). As a result of this position, QNB’s cost of
      interest-bearing liabilities has declined to a greater degree than the yield
      on
      its earnings assets as the Federal Reserve
      Bank’s Open Market Committee (Fed) picked up the pace of reducing the Federal
      funds target rate in response to liquidity issues in the world’s financial
      markets, a nationwide housing slowdown and growing concerns of a possible
      recession. The Fed reduced the Federal
      funds target rate by 125 basis points in January, 75 basis points in March
      and
      another 25 basis points at the end of April bringing the target rate to its
      current rate of 2.00%. The Prime lending rate followed in step and was at 5.00%
      as of June 30, 2008. The average Federal funds target rate for the second
      quarter of 2008 was 2.08% compared to 5.25% for the second quarter of 2007.
      In
      response to actions by the Fed as well as other economic issues, the Treasury
      yield curve has steepened since December 31, 2007 as short-term rates have
      declined more than longer term rates. The 2-year Treasury note has declined
      42
      basis points since the end of the year to 2.63% at June 30, 2008, while the
      10-year Treasury note has declined 5 basis points over the same period to 3.99%.
      While steeper than at year-end, the yield curve did flatten during the second
      quarter of 2008 as inflation related to high energy and food costs became a
      concern. The 2-year Treasury note increased 101 basis points from March 30,
      2008
      to June 30, 2008 while the 10-year note increased 54 basis points over the
      same
      period.





The
      yield
      on earning assets on a tax-equivalent basis decreased 26 basis points from
      6.49%
      for the second quarter of 2007 to 6.23% for the second quarter of 2008.
      Excluding the $169,000 in nonrecurring loan items mentioned previously the
      yield
      on earning assets would have been 6.11%. Interest income on investment
      securities increased $103,000 when comparing the two quarters as the increase
      in
      balances offset the 6 basis point decrease in the average yield of the
      portfolio. The average yield on the investment portfolio was 5.61% for the
      second quarter of 2008 compared with 5.67% for the second quarter of 2007.
      The
      yield on the portfolio is anticipated to continue to decline as cash flow from
      the portfolio is reinvested at current market rates which are currently below
      the portfolio yield. In addition, the current economic conditions have led
      to
      slower loan growth resulting in excess deposits being invested in
      securities.





Income
      on
      loans increased $23,000 when comparing the two quarters, with the impact of
      increased balances offsetting the decline in the yield on the portfolio. The
      yield on loans decreased 27 basis points to 6.64% when comparing the second
      quarter of 2007 to the same period in 2008. Excluding the nonrecurring income
      items noted above, the yield on loans would have been 6.46% for the second
      quarter of 2008, a decline of 45 basis points from the 6.91% reported for the
      second quarter of 2007. The decline in the yield on the loan portfolio reflects
      the impact of lower interest rates, primarily on Prime rate loans. Reducing
      the
      impact of the decline in interest rates on loan yields through June 30, 2008
      is
      the structure of the loan portfolio, which has a significant portion of
      fixed-rate and adjustable-rate loans (with fixed-rate terms for three to ten
      years).


-
          25
          -


**QNB
      CORP. AND SUBSIDIARY**





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


**CONDITION
      AND RESULTS OF OPERATIONS**





**NET
      INTEREST INCOME (Continued)**





Most
      of
      the increase in loan income is attributable to commercial loans. Income on
      commercial real estate loans increased $321,000 with average balances increasing
      $15,528,000, or 9.3%. The yield on commercial real estate loans was 6.98% for
      the second quarter of 2008; however, excluding $166,000 of the nonrecurring
      income items it would have been 6.61%. This compares to a yield of 6.84% for
      the
      second quarter of 2007. Interest on commercial and industrial loans decreased
      $116,000 with the impact of the increase in average balances being offset by
      the
      impact of the decline in yield. Average commercial and industrial loans
      increased $6,836,000, or 10.6%, when comparing the two quarters, contributing
      an
      additional $121,000 in interest income. The average yield on these loans
      decreased 135 basis points to 5.98% resulting in a reduction in interest income
      of $237,000. The commercial and industrial loan category was impacted the most
      by the action by the Federal Reserve to lower interest rates since a large
      portion of this category of loans is indexed to the Prime rate.





Residential
      mortgage and home equity loan activity continues to be slow because of the
      issues in the residential real estate market. While QNB does not originate
      or
      hold sub-prime mortgages, or any of the other high-risk mortgage products,
      it
      has been impacted by the overall downturn in the residential housing market.
      The
      average balance of residential mortgages declined $3,334,000, or 13.2%, when
      comparing the two quarters while the average yield increased by 27 basis points.
      QNB sells most of the fixed rate loans it originates, especially in the low
      rate
      environment that currently exists. Average home equity loans decreased 1.7%
      to
      $68,147,000, while the yield on the home equity portfolio decreased 70 basis
      points to 5.82%. The demand for home equity loans has declined as home values
      have stabilized or fallen and homeowners have already borrowed against the
      equity in their homes. Included in the home equity portfolio are floating rate
      home equity lines tied to the Prime rate. These loans have contributed to the
      decline in the yield in the home equity portfolio.





Interest
      income on Federal funds sold decreased $36,000 when comparing the two quarters
      with the growth in average balances of $1,907,000 being offset by the 319 basis
      point decline in rate. The yield on Federal funds sold decreased from 5.26%
      for
      the second quarter of 2007 to 2.07% for the second quarter of 2008, reflecting
      the actions by the Fed, beginning in the third quarter of 2007, to reduce the
      Federal funds target rate.





For
      the
      most part, earning assets are funded by deposits, which increased when comparing
      the two quarters. Average
      deposits increased $16,986,000, or 3.4%, with the growth occurring in higher
      cost time deposits, which increased $30,156,000, or 12.5%. The average balance
      of all other categories of deposits declined when comparing the two quarters
      with average interest-bearing demand deposits declining $7,186,000, or 7.1%,
      and
      average money market accounts declining $3,755,000, or 7.2%. These types of
      accounts are sensitive to changes in interest rates and have been impacted
      the
      most by the decline in interest rates since a significant portion of these
      balances are indexed to the Federal funds rate.





While
      total interest income on a tax-equivalent basis increased $46,000 when comparing
      the second quarter of 2008 to the second quarter of 2007, total interest expense
      declined $576,000. Interest expense on total deposits decreased $511,000, while
      interest expense on borrowed funds decreased $65,000 when comparing the two
      quarters. The rate paid on interest-bearing liabilities decreased from 3.56%
      for
      the second quarter of 2007 to 2.96% for the second quarter of 2008. During
      this
      same period, the rate paid on interest-bearing deposits decreased from 3.46%
      to
      2.89%.


-
          26
          -


**QNB
      CORP. AND SUBSIDIARY**





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


**CONDITION
      AND RESULTS OF OPERATIONS**





**NET
      INTEREST INCOME (Continued)**





The
      decrease in interest expense on total deposits was primarily the result of
      volume and rate decreases on interest-bearing demand deposits and money market
      accounts as discussed above. Interest expense on interest-bearing demand
      deposits and money market accounts declined $402,000 and $203,000, respectively.
      The interest rate paid on interest-bearing demand accounts decreased from 2.37%
      for the second quarter of 2007 to .85% for the second quarter of 2008. Included
      in these accounts are municipal deposits whose rates are tied directly to the
      Federal funds rate. Municipal accounts comprised approximately 40.0% of total
      interest-bearing demand accounts for the second quarter of 2008. The yield
      on
      municipal accounts declined from 5.02% for the second quarter of 2007 to 1.90%
      for the second quarter of 2008. The interest rate paid on money market accounts
      was 3.13% for the second quarter of 2007 and 1.69% for the second quarter of
      2008, a decline of 144 basis points. Included in total money market balances
      is
      the Select money market account, a higher yielding money market product that
      pays a tiered rate based on account balances. QNB maintained a rate close to
      4.00% for balances over $75,000 for most of 2007. With the sharp decline in
      short-term interest rates during the first half of 2008, the rates paid on
      the
      Select money market account have declined as well.





When
      comparing the two quarters, interest expense on time deposits increased $96,000
      with an increase in balances contributing $341,000 in interest expense. This
      was
      partially offset by a decrease of $245,000 in interest expense resulting from
      lower rates. The average rate paid on time deposits decreased from 4.58% to
      4.23% when comparing the two periods.





Like
      fixed-rate loans and investment securities, time deposits reprice over time
      and,
      therefore, have less of an immediate impact on costs in either a rising or
      falling rate environment. Unlike loans and investment securities, however,
      the
      maturity and repricing characteristics of time deposits tend to be shorter.
      Approximately $235,447,000, or 85.7%, of time deposits at June 30, 2008 will
      reprice or mature over the next 12 months of which $156,650,000, or 66.5%,
      will
      mature or reprice before December 31, 2008.





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





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





Contributing
      to the decrease in total interest expense was a reduction in interest expense
      on
      short-term borrowings of $69,000. Short-term borrowings are primarily comprised
      of repurchase agreements (a sweep product for commercial customers). While
      not
      directly indexed to the Federal funds rate, the rate paid on these accounts
      moves closely with the Federal funds rate and as a result declined when
      comparing the two quarters. The average rate paid on short-term borrowings
      declined from 3.57% for the second quarter of 2007 to 2.05% for the second
      quarter of 2008.




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          27
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**QNB
      CORP. AND SUBSIDIARY**





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


**CONDITION
      AND RESULTS OF OPERATIONS**





**NET
      INTEREST INCOME (Continued)**





The
      average balance of long-term debt was $35,000,000 for the second quarter of
      2008
      compared with $29 ,395,000
      for the second quarter of 2007, while the average rate paid decreased to 4.26%
      from 5.01% when comparing the same periods. Two events contributed to the
      decline in the average rate paid on long-term debt: the April 2007 balance
      sheet
      restructuring in which QNB prepaid $50,000,000 of FHLB advances with a cost
      of
      5.55% and replaced half with a $25,000,000 repurchase agreement with a cost
      of
      4.78% and the borrowing by QNB in January 2008 of $10,000,000 from the FHLB
      at a
      cost of 2.97% for two years. At the time, this type of wholesale funding was
      a
      better alternative to higher costing time deposits and overnight funding.





For
      the
      six-month period ended June 30, 2008, net interest income increased $1,119,000,
      or 13.1%, to $9,670,000. On a tax-equivalent basis net interest income increased
      $1,163,000, or 12.6%. Average earning assets increased $14,339,000, or 2.5%,
      while the net interest margin increased 31 basis points. The net interest margin
      on a tax-equivalent basis was 3.57% for the six-month period ended June 30,
      2008
      compared with 3.26% for the same period in 2007. The improvement in net interest
      income and the net interest margin reflects the benefits of the 2007
      restructuring transactions as well as a decrease in the cost of interest-bearing
      liabilities resulting from the Company’s interest rate sensitivity position and
      the decline in the Federal funds rate and market interest rates.





Total
      interest income on a tax-equivalent basis increased $322,000, from $18,046,000
      to $18,368,000, when comparing the six-month periods ended June 30, 2007 to
      June
      30, 2008. The increase in interest income was primarily a result of the growth
      in earning assets, particularly commercial loans. Approximately $632,000 of
      the
      increase in interest income was related to volume. Average loans increased
      6.5%
      to $380,995,000, with average commercial real estate loans increasing
      $18,136,000, or 11.2%, and average commercial and industrial loans increasing
      $9,556,000, or 16.0%, when comparing the six-month periods. Over this same
      period average investment securities decreased 4.8%, to $197,082,000. The
      positive impact of growth on interest income was partially offset by the impact
      of declining interest rates, which resulted in a $310,000 decline in interest
      income. The yield on earning assets decreased from 6.35% to 6.29% for the
      six-month periods with the yield on loans decreasing from 6.89% to 6.67% during
      this time. The yield on investments increased from 5.40% to 5.69% when comparing
      the six-month periods. The increase in the yield on the investment portfolio
      when comparing the six-month periods reflects the benefit of the restructuring
      transaction. Excluding the impact of the nonrecurring loan income during the
      second quarter of 2008 the yield on loans would have been 6.59%, the yield
      on
      earning assets would have been 6.23% and the net interest margin would have
      been
      3.51% for the six-month period ended June 30, 2008.





Total
      interest expense decreased $841,000, from $8,799,000 for the six-month period
      ended June 30, 2007 to $7,958,000, for the six-month period ended June 30,
      2008.
      Approximately $1,233,000 of the decrease in interest expense was a result of
      lower rates paid on deposits and borrowed funds. This was partially offset
      by an
      increase in interest expense of $392,000 resulting primarily from deposit
      growth. Interest expense on interest-bearing demand deposits declined $587,000,
      resulting from a $4,447,000, or 4.6%, decline in average balances and a 117
      basis point decline in the average rate paid. The interest rate paid on
      interest-bearing demand accounts decreased from 2.27% for the first half of
      2007
      to 1.10% for the first half of 2008. As mentioned previously a significant
      portion of these deposits are municipal deposits indexed to the Federal funds
      rate. Interest expense on money market accounts declined $296,000, resulting
      from a $2,746,000, or 5.3%, decline in average balances and a 104 basis point
      decline in the average rate paid. The interest rate paid on money market
      accounts decreased from 3.07% for the first half of 2007 to 2.03% for the first
      half of 2008.




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          28
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**QNB
      CORP. AND SUBSIDIARY**





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


**CONDITION
      AND RESULTS OF OPERATIONS**





**NET
      INTEREST INCOME (Continued)**





The
      growth in total deposits was centered in time deposits which increased
      $28,703,000, or 12.0%, when comparing the six-month periods. Interest expense
      on
      time deposits increased $522,000 with the impact of the increase in average
      balances contributing $667,000 to the increase in interest expense. The average
      rate paid on time deposits decreased 10 basis points to 4.41%, resulting in
      a
      reduction of interest expense of $145,000 when comparing the six-month periods.





Interest
      expense on short-term borrowings decreased $124,000 primarily as a result of
      a
      decline in the rates paid. The average rate paid decreased from 3.57% for the
      first half of 2007 to 2.51% for the first half of 2008. As a result of the
      payoff of higher costing FHLB advances and the use of the lower costing
      repurchase agreements and FHLB borrowings as discussed earlier, interest expense
      on long-term debt decreased $351,000 when comparing the six-month periods.
      The
      average outstanding balance decreased from $40,591,000 to $34,066,000 while
      the
      average rate paid decreased from 5.35% to 4.30%, respectively, when comparing
      these periods.





**PROVISION
      FOR LOAN LOSSES**





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





The
      determination of an appropriate level of the allowance for loan losses is based
      upon an analysis of the risk inherent in QNB's loan portfolio. Management uses
      various tools to assess the adequacy of the allowance for loan losses. One
      tool
      is a model that considers a numbers 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.





A
      slowdown in the local and regional economy, high energy and food prices and
      instability in financial markets has had a negative impact on both consumers
      and
      small businesses. These factors have contributed to an increase in the amount
      of
      loans charged-off, particularly in the purchased lease portfolio. The higher
      level of charged-off loans combined with the inherent risk related to loan
      growth contributed to management’s decision to increase the provision for loan
      losses in 2008 by $50,000 to $200,000 when comparing the three month periods
      and
      by $200,000 to $425,000 when comparing the six month periods ended June 30,
      2008
      and June 30, 2007. The need for a provision was determined by the analysis
      described above and resulted in an allowance for loan losses that management
      believes is adequate in relation to the estimate of known and inherent losses
      in
      the portfolio.




QNB
      had
      net charge-offs of $138,000 during the second quarter of 2008 compared with
      a
      net recovery of $1,000 during the second quarter of 2007. For the six-month
      periods ended June 30, 2008 and 2007 QNB had net charge-offs of $231,000 and
      $82,000, respectively. The net charge-offs in all the periods relate primarily
      to loans in the indirect lease financing portfolio.




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          29
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**QNB
      CORP. AND SUBSIDIARY**





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


**CONDITION
      AND RESULTS OF OPERATIONS**





**PROVISION
      FOR LOAN LOSSES (continued)**





Non-performing
      assets (non-accruing loans, loans past due 90 days or more, other real estate
      owned and other repossessed assets) amounted to .15% of total assets at both
      June 30, 2008 and 2007. These levels compare to .27% at December 31, 2007.
      QNB’s
      non-performing loans were .21% and .24% of total loans at June 30, 2008 and
      2007, respectively. This compares favorably with the 0.92% average of
      non-performing loans for Pennsylvania commercial banks with assets between
      $500
      million and $1 billion as reported by the FDIC using March 31, 2008 data.
      Included in non-performing loans are non-accrual loans of $625,000, $1,397,000
      and $645,000 at June 30, 2008, December 31, 2007, and June 30, 2007,
      respectively. Several non-accrual loans paid off during the second quarter
      of
      2008. The
      majority of the non-accrual loans at June 30, 2008 are in the indirect lease
      financing portfolio, are generally secured by equipment or vehicles and
      repossession of the collateral is in process. Loans past due 90 days or more
      and
      still accruing were $198,000, $218,000 and $242,000, respectively, at these
      same
      period-ends.





Delinquent
      loans include loans past due more than 30 days. Total delinquent loans at June
      30, 2008, December 31, 2007 and June 30, 2007 represent .61%, .98% and .73%
      of
      total loans, respectively. Total delinquent loans improved since March 31,
      2008
      when delinquent loans represented 1.08% of total loans. As of June 30, 2008,
      6.86% of the indirect lease portfolio was past due more than 30 days. This
      compares to 8.32% at December 31, 2007 and 4.70% at June 30, 2007. The
      delinquency as of March 31, 2008 in the indirect lease portfolio was 13.04%.
      The
      asset quality of the commercial loan portfolio, the largest component of total
      loans, representing approximately 72% of total loans, remained strong at June
      30, 2008. Total delinquent commercial loans were .22% of total commercial loans
      at June 30, 2008. This compares to .47% and .64% at December 31, 2007 and June
      30, 2007, respectively. Delinquent loans on one to four unit residential
      mortgages and home equity loans improved to .89% of balances at June 30, 2008
      compared with 1.37% at December 31, 2007.





QNB
      did
      not have any other real estate owned as of June 30, 2008, December 31, 2007
      or
      June 30, 2007. Repossessed assets consisting of equipment, automobiles and
      motorcycles were $104,000, $6,000 and $43,000 at these same respective
      dates.





There
      were no restructured loans as of June 30, 2008, December 31, 2007 or June 30,
      2007, respectively, as defined in FASB Statement No. 15, *Accounting
      by Debtors and Creditors for Troubled Debt Restructurings* ,
      that
      have not already been included in loans past due 90 days or more or non-accrual
      loans.





A
      loan is
      considered impaired, based on current information and events, if it is probable
      that QNB will be unable to collect the scheduled payments of principal or
      interest when due according to the contractual terms of the loan agreement.
      The
      measurement of impaired loans is generally based on the present value of
      expected future cash flows discounted at the historical effective interest
      rate,
      except that all collateral-dependent loans are measured for impairment based
      on
      the fair value of the collateral. At
      June
      30, 2008, December 31, 2007 and June 30, 2007, the recorded investment in loans
      for which impairment had been recognized in accordance with FASB Statement
      No.
      114, *Accounting
      by Creditors for Impairment of a Loan—an amendment of FASB Statements No. 5 and
      15* , totaled
      $283,000, $961,000 and $633,000, respectively, of which $181,000, $847,000
      and
      $633,000 respectively, required no specific allowance for loan losses. The
      recorded investment in impaired loans requiring a specific allowance for loan
      losses was $102,000, $114,000 and $0 at June 30, 2008, December 31, 2007 and
      June 30, 2007, respectively. At June 30, 2008, December 31, 2007 and June 30,
      2007 the related allowance for loan losses associated with these loans was
      $51,000, $57,000 and $0, respectively.




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          30
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**QNB
      CORP. AND SUBSIDIARY**





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


**CONDITION
      AND RESULTS OF OPERATIONS**





**PROVISION
      FOR LOAN LOSSES (Continued)**





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





The
      allowance for loan losses was $3,473,000, $3,279,000 and $2,872,000 at June
      30,
      2008, December 31, 2007 and June 30, 2007, respectively. The ratio of the
      allowance to total loans was .90%, .86% and .76% at the respective period end
      dates. The increase in the ratio reflects the increase in the provision for
      loan
      losses recorded during 2007 and the first half of 2008. The ratio, at .90%,
      is
      at a level that QNB management believes is presently adequate based on its
      analysis.





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





**NON-INTEREST
      INCOME**





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





Total
      non-interest income for the second quarter of 2008 was $829,000, a decline
      from
      the $936,000 reported for the same period in 2007. The primary difference is
      related to activity in the investment securities portfolio. During the second
      quarter of 2008 securities losses of $118,000 were recognized compared to
      securities gains of $29,000 during the second quarter of 2007. For the six-month
      period ending June 30, 2008 total non-interest income was $2,213,000 compared
      to
      a loss of $732,000 for the first half of 2007. Positively impacting non-interest
      income for the first half of 2008 was the first quarter recognition of $230,000 of
      income
      as a result of the Visa initial public offering comprised of a $175,000 gain
      related to the mandatory redemption of shares of restricted common stock in
      Visa
      and $55,000 of income related to the reversal of liabilities recorded in the
      fourth quarter of 2007 to fund settlements of, or judgments in, indemnified
      litigation involving Visa. Total
      non-interest income, excluding the impact of the Visa items noted above and
      securities gains of $104,000, would have been $1,879,000 for the first six
      months of 2008. This compares favorably to total non-interest income of
      $1,737,000 for the first half of 2007, excluding the other-than-temporary
      impairment charge of $2,758,000 recorded in the first quarter of 2007 and
      realized security gains of $289,000.





Fees
      for
      services to customers are primarily comprised of service charges on deposit
      accounts. These fees decreased $39,000, or 8.4%, to $428,000, when comparing
      the
      two quarters and decreased $18,000, or 2.0%, to $873,000, when comparing the
      six-month periods. Overdraft income decreased $40,000 for the three-month period
      and $23,000 for the six-month period. These variances are a result of volume
      fluctuations as the per item charge has remained the same. Fees on business
      checking accounts increased $6,000 for the three-month period and $11,000 for
      the six-month period. This increase reflects the impact of a lower earnings
      credit rate in the first half of 2008 as compared to the first half of 2007,
      resulting from the decline in short-term interest rates. These credits are
      applied against service charges incurred.




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          31
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**QNB
      CORP. AND SUBSIDIARY**





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


**CONDITION
      AND RESULTS OF OPERATIONS**





**NON-INTEREST
      INCOME (Continued)**





ATM
      and
      debit card income is primarily comprised of transaction income on debit and
      ATM
      cards and ATM surcharge income for the use of QNB ATM machines by non-QNB
      customers. ATM and debit card income was $242,000 for the second quarter of
      2008, an increase of $24,000, or 11.0%, from the amount recorded during the
      second quarter of 2007. Income from ATM and debit cards was $461,000 and
      $407,000 for the six months ended June 30, 2008 and 2007, respectively, an
      increase of 13.3%. Debit card income increased $15,000, or 9.6%, to $177,000,
      for the three-month period and $36,000, or 12.1%, to $331,000, for the six-month
      period. The increase in debit card income was a result of the increased reliance
      on the card as a means of paying for goods and services by both consumer and
      business cardholders. In addition, an increase in PIN-based transactions
      resulted in additional interchange income of $11,000 and $21,000, respectively,
      when comparing the respective three and six-month periods. During the third
      quarter of 2008, QNB introduced eRewards checking, a high yield checking account
      which requires a minimum of twelve debit card transactions to receive the high
      interest rate. This should result in an increase in debit card
      income.





Income
      on
      bank-owned life insurance represents the earnings and death benefits on life
      insurance policies in which the Bank is the beneficiary. Income on these
      policies was $64,000 and $67,000 for the three months ended June 30, 2008 and
      2007, respectively. For the six-month period, income on these policies increased
      $39,000, to $170,000. Life insurance benefits were $48,000 for the six-month
      period ended June 30, 2008 compared with $6,000 for the three and six-month
      periods in 2007. The insurance carriers reset the rates on these policies
      annually taking into consideration the interest rate environment as well as
      mortality costs. The existing policies have rate floors which minimize how
      low
      the earnings rate can go. Some of these policies are currently at their
      floor.





When
      QNB
      sells its residential mortgages in the secondary market, it retains servicing
      rights. A normal servicing fee is retained on all mortgage loans sold and
      serviced. QNB recognizes its rights to service financial assets that are
      retained in a transfer of assets in the form of a servicing asset. The servicing
      asset is amortized in proportion to and over the period of net servicing income
      or loss. On a quarterly basis, servicing assets are assessed for impairment
      based on their fair value. Mortgage servicing fees for the three-month periods
      ended June 30, 2008 and 2007 were $21,000 and $25,000, respectively. For the
      six-month periods ended June 30, 2008 and 2007 mortgage servicing fees were
      $41,000 and $50,000, respectively. There was no valuation allowance necessary
      in
      any of the periods. Amortization expense for the three-month periods ended
      June
      30, 2008 and 2007 was $23,000 and $18,000, respectively. For the respective
      six-month periods amortization expense was $46,000 and $37,000. Mortgage
      refinancing activity increased slightly during the first half of 2008 as
      residential mortgage rates declined in response to falling Treasury market
      rates. The increase in amortization expense reflects the increase in refinancing
      activity. The average balance of mortgages serviced for others was $70,085,000
      for the second quarter of 2008 compared to $68,990,000 for the second quarter
      of
      2007, an increase of 1.6%. The average balance of mortgages serviced was
      approximately $69,699,000 for the six-month period ended June 30, 2008 compared
      to $69,858,000 for the first six months of 2007, a decrease of .2%. The timing
      of mortgage payments and delinquencies also impacts the amount of servicing
      fees
      recorded.




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          32
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**QNB
      CORP. AND SUBSIDIARY**





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


**CONDITION
      AND RESULTS OF OPERATIONS**





**NON-INTEREST
      INCOME (Continued)**


The
        net
        gain on the sale of residential mortgage loans was $40,000 and $7,000 for
        the
        quarters ended June 30, 2008 and 2007, respectively, and $72,000 and $28,000
        for
        the respective six-month periods. Residential mortgage loans to be sold are
        identified at origination. The net gain on residential mortgage sales
        is
        directly related to the volume of mortgages sold and the timing of the sales
        relative to the interest rate environment. Included in the gains on the sale
        of
        residential mortgages for the three month periods were $28,000
        and $5,000, respectively, related to the recognition of mortgage servicing
        assets. These
        amounts were $53,000 and $17,000 for the six-months ended June 30, 2008 and
        2007, respectively. Proceeds from the sale of mortgages were $3,770,000 and
        $716,000 for the second quarter of 2008 and 2007, respectively. For the
        six-month periods, proceeds from the sale of residential mortgage loans amounted
        to $7,048,000 and $2,253,000, respectively. The increase in activity reflects
        some improvement in the residential mortgage market resulting from lower
        interest rates.





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





For
      the
      three-months ended June 30, 2008, QNB recorded net securities losses of
      $118,000. This compares to net securities gains of $29,000 for the three-months
      ended June 30, 2007. Included in the results for the second quarter of 2008
      were
      net losses of $119,000 related to marketable equity securities owned by the
      Company and gains of $1,000 from the sale of corporate bonds by the Bank. At
      the
      end of June 2008, the Company identified several equity holdings as
      other-than-temporarily impaired and wrote down their value by $198,000. Included
      in the net gains for the second quarter of 2007 were gains related to activity
      in the marketable equity securities portfolio of the Company of $50,000 and
      additional losses of $21,000 on the sale of the debt securities in April 2007
      that were identified as impaired at March 31, 2007. The additional loss was
      a
      result of an increase in interest rates between the end of March and the sale
      date.





For
      the
      six-months ended June 30, 2008, QNB recorded a net gain on investment securities
      of $104,000. Included in this amount were gains on the sale of debt and equity
      securities of $67,000 and $235,000, respectively and the impairment charge
      of
      $198,000. For the six-months ended June 30, 2007, QNB recorded a net loss on
      investment securities of $2,469,000. Excluding the impairment loss of
      $2,758,000, gains on the sale of investment securities were $289,000. Included
      in the $289,000 of gains for 2007 were $260,000 of gains from the marketable
      equity portfolio. Net gains on the sale of debt securities for the first six
      months of 2007 were $29,000.





Other
      operating income was $152,000 for the second quarter of 2008, an increase of
      $29,000 when compared to the second quarter of 2007. Contributing to the
      increase were $40,000 of gains on the sale of repossessed assets, primarily
      equipment and vehicles related to the purchased lease portfolio. When
      repossessed the loans are written down through the allowance for loan losses
      to
      an estimated fair value less the cost to sell. Partially offsetting this
      additional income was a reduction of $16,000 in commissions and income related
      to an outsourced official check program. This income is derived from both the
      balances and interest rate earned. Both rate and volume have declined when
      comparing the two quarters.





For
      the
      six-month period ended June 30, 2008, other operating income was $492,000.
      Excluding the impact of the Visa transactions, other operating income was
      $262,000 for the first six months of 2008 compared to $230,000 for the first
      half of 2007, an increase of $32,000. Gains on the sale of repossessed assets
      were $40,000 for 2008 compared with a net loss of $13,000 for 2007. Partially
      offsetting this additional income was a $23,000 reduction in official check
      income when comparing the six-month periods.




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          33
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**QNB
        CORP. AND SUBSIDIARY**
 
 **MANAGEMENT’S
        DISCUSSION AND ANALYSIS OF FINANCIAL**
 **CONDITION
        AND RESULTS OF OPERATIONS**


**NON-INTEREST
      EXPENSE**





Non-interest
      expense is comprised of costs related to salaries and employee benefits, net
      occupancy, furniture and equipment, marketing, third party services and various
      other operating expenses. Total non-interest expense was $3,583,000 for the
      second quarter of 2008 compared to $4,152,000 for the second quarter of 2007,
      which included recognition of a $740,000 prepayment penalty on the FHLB
      advances. Excluding this charge total non-interest expense for the second
      quarter of 2007 would have been $3,412,000. For the six-month period ended
      June
      30, 2008 total non-interest expense was $7,126,000. This compares to total
      non-interest expense of $6,734,000 for the first half of 2007, excluding the
      FHLB prepayment penalty.





Salaries
      and benefits is the largest component of non-interest expense. Salaries and
      benefits expense increased $85,000, or 4.5%, to $1,955,000 for the quarter
      ended
      June 30, 2008 compared to the same quarter in 2007. Salary expense increased
      $70,000, or 4.7%, during the period to $1,573,000. Contributing to this increase
      was a $51,000 accrual for incentive compensation. Also, included in salary
      expense for the second quarter of 2008 and 2007, was $17,000 and $24,000,
      respectively in stock option compensation expense. Base salary expense increased
      by 3.1% when comparing the three-month periods. The number of full-time
      equivalent employees decreased by two when comparing the second quarter of
      2008
      and 2007. When comparing the two quarters, benefits expense increased by
      $15,000, or 4.1%, to $382,000. During the second quarter of 2008, QNB recorded
      an expense of $13,000 related to EITF 06-04, *Accounting
      for Deferred Compensation and Postretirement Benefit Aspects of Endorsement
      Split-Dollar Life Insurance* ,
      which
      was adopted January 1, 2008.





For
      the
      six-month period ended June 30, 2008, salaries and benefits expense increased
      $198,000, or 5.3%, to $3,926,000, compared to the same period in 2007. Salary
      expense increased by $157,000, or 5.2%, while benefits expense increased by
      $41,000, or 5.6%, when comparing the two periods. The accrual for incentive
      compensation in 2008 contributed $102,000 to the increase in salary expense.
      Stock compensation expense was $30,000 and $57,000, for the respective six-month
      periods ended June 30, 2008 and 2007. Base salary expense increased by 3.6%
      when
      comparing the six-month periods. The number of full-time equivalent employees
      decreased by two when comparing the first half of 2008 and 2007. Payroll tax
      expense and retirement plan expense increased by $12,000 and $7,000,
      respectively, when comparing the six-month periods. An increase in medical
      and
      dental premiums, net of employee contributions, accounted for $11,000 of the
      increase in total benefits expense. Also contributing to the increase in
      benefits expense was an expense of $20,000 related to the adoption of EITF
      06-04
      as discussed above.





Net
      occupancy expense increased $44,000 to $333,000, when comparing the second
      quarter of 2008 to the second quarter of 2007. For the six-month period, net
      occupancy expense increased $73,000, to $673,000. Contributing to the increase
      for the three-month period were higher costs related to building depreciation
      and leasehold improvements of $11,000, utilities costs of $11,000, branch rent
      of $12,000 and building repairs and maintenance of $7,000. For the six-month
      period building depreciation and leasehold improvements increased $22,000,
      utilities costs increased $14,000, branch rent increased $19,000 and building
      repairs and maintenance increased $16,000. Renovations to the main office
      contributed to the increase in depreciation expense. An increase in rates
      charged by utility companies accounted for the higher utility costs. The
      increase in branch rent relates to an increase in rent for the operations
      center’s parking facility and leases for the location of two ATM sites at a
      local shopping center.


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          34
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**QNB
      CORP. AND SUBSIDIARY**





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


**CONDITION
      AND RESULTS OF OPERATIONS**





**NON-INTEREST
      EXPENSE (Continued)**





Furniture
      and equipment expense increased $24,000, or 9.2%, to $286,000, when comparing
      the three-month periods ended June 30, 2008 and 2007 and increased $58,000,
      or
      11.2%, to $575,000, when comparing the six-month periods. Depreciation and
      amortization of furniture, equipment and software contributed $13,000 and
      $29,000 of the increase for the respective three and six month periods. New
      software related to branch deposit capture, electronic statements, document
      imaging and loan administration were installed during the past year. In
      addition, new furniture and equipment was purchased as part of the renovations
      to the Downtown office. Also contributing to the increase in furniture and
      equipment expense were higher costs associated with equipment maintenance of
      $4,000 and $11,000 for the respective three and six month periods as well as
      an
      increase in equipment rentals of $5,000 and $9,000 for the same
      periods. The
      increase in equipment rental expense relates to the two new ATMs noted
      above.





Third-party
      services are comprised of professional services, including legal, accounting
      and
      auditing and consulting services, as well as fees paid to outside vendors for
      support services of day-to-day operations. These support services include
      correspondent banking services, statement printing and mailing, investment
      security safekeeping and supply management services. Third-party services
      expense was $205,000 for both three month periods ended June 30, 2008 and 2007.
      For the six-month period, third party services increased $27,000 to $393,000.
      This increase related primarily to data conversion expenses for IT projects,
      increased fees for correspondent banking services, higher statement printing
      and
      mailing expenses and, to a lesser degree, new third-party service subscriptions
      for peer group information and employee benefits administration.  These
      increases offset a reduction in expenses paid to third-party consultants of
      approximately $12,000.





Telephone,
      postage and supplies expense increased $3,000 for the quarter, to $143,000,
      and
      $38,000 for the six-month period to $304,000. Most of the increase in this
      category was in supply costs, relating to the rebranding of QNB Bank. This
      included the purchase of new supplies including plastics for ATM and debit
      cards
      and obsolescence costs related to the Quakertown National Bank supplies.





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 $130,000 for the second quarter of
      2008, an increase of $8,000, and $260,000 for the six-month period, an increase
      of $15,000 compared to the same periods in 2007. This increase was a result
      of a
      higher shares tax resulting from an increase in the Bank’s equity.




Other
      operating expense was $371,000 for the three months ended June 30, 2008. This
      represents a 3.9% increase from the $357,000 reported for the three months
      ended
      June 30, 2007. Federal Deposit Insurance Corporation (F.D.I.C.) premiums
      increased $60,000 when comparing the two quarters. During 2007 QNB had a credit
      from prior year payments that was used to offset the premiums. This credit
      was
      completely utilized in early 2008. This was partially offset by a $24,000
      decrease in regulatory assessment costs, a savings resulting from the change
      in
      charter from a National bank to a State chartered bank. In addition, losses
      related to fraudulent check card transactions decreased by $20,000 when
      comparing the two periods. Amortization expense of core deposit intangibles
      was
      $0 for the second quarter of 2008 compared to $13,000 for the second quarter
      of
      2007. See Note 8 to the financial statements.


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          35
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**QNB
      CORP. AND SUBSIDIARY**





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


**CONDITION
      AND RESULTS OF OPERATIONS**





**NON-INTEREST
      EXPENSE (Continued)**





For
      the
      six-month periods ended June 30, 2008 and 2007 other expense was $690,000 and
      $689,000, respectively. Expense related to F.D.I.C. premiums increased $80,000
      when comparing the six-month periods. Expenses related to the checkcard program
      increased $15,000 when comparing the periods. These increases were partially
      offset by declines in regulatory expense of $49,000, amortization of core
      deposit intangible expense of $26,000 and fraudulent check card expense of
      $22,000.





**INCOME
      TAXES**





QNB
      utilizes an asset and liability approach for financial accounting and reporting
      of income taxes. As of June 30, 2008, QNB’s net deferred tax asset was
      $1,872,000. The primary components of deferred taxes are a deferred tax asset
      of
      $1,181,000 related to the allowance for loan losses, a deferred tax asset of
      $460,000 resulting from unrealized losses on available-for-sale securities
      and a
      deferred tax asset of $152,000 related to impaired securities. As of June 30,
      2007, QNB's net deferred tax asset was $1,261,000 comprised of deferred tax
      assets of $977,000 related to the allowance for loan losses and $313,000 related
      to unrealized losses on available-for-sale securities.





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





Applicable
      income taxes and effective tax rates were $496,000, or 23.6%, for the
      three-month period ended June 30, 2008, and $161,000, or 14.8%, for the same
      period in 2007. For the six-month period ended June 30, 2008 applicable income
      taxes and the effective tax rate were $1,016,000, or 23.5%. Applicable income
      taxes were a benefit of $352,000 for the six-month period ended June 30, 2007.
      The lower effective tax rate for the second quarter of 2007 and the tax benefit
      for the six-month period ended June 30, 2007 is a result of the restructuring
      transactions involving the sale of securities and the prepayment of FHLB
      advances.





**FINANCIAL
      CONDITION ANALYSIS**





The
      balance sheet analysis compares average balance sheet data for the six months
      ended June 30, 2008 and 2007, as well as the period ended balances as of June
      30, 2008 and December 31, 2007.





Average
      earning assets for the six-month period ended June 30, 2008 increased
      $14,339,000, or 2.5%, to $587,122,000 from $572,783,000 for the six months
      ended
      June 30, 2007. The slow growth in earning assets when comparing the six-month
      periods is primarily a result of management’s decision to reduce the amount of
      investment securities and long-term debt by paying down the debt with some
      of
      the proceeds from the investment securities sold as part of the restructuring
      transaction. The mix of earning assets changed when comparing the two periods.
      Average loans increased $23,198,000, or 6.5%, while average investments
      decreased $9,864,000, or 4.8%. Average Federal funds sold increased $2,313,000
      when comparing these same periods.


-
          36
          -


**QNB
      CORP. AND SUBSIDIARY**





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


**CONDITION
      AND RESULTS OF OPERATIONS**





**FINANCIAL
      CONDITION ANALYSIS (Continued)**





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





Total
      loans increased 3.0% between June 30, 2007 and June 30, 2008 and 1.6% since
      December 31, 2007. The slower rate of growth since June 30, 2007 as compared
      to
      the average rate of growth when comparing the six-month periods reflects the
      significant amount of loans originated during the first quarter of 2007 as
      well
      as the slowdown in growth in the local and regional economy over the past
      year.





Average
      total commercial loans increased $29,260,000 when comparing the first half
      of
      2008 to the first half of 2007. Most of the 12.0% growth in average commercial
      loans was in loans secured by real estate, either commercial or residential
      properties, which increased $18,136,000. Commercial and industrial loans
      represent commercial purpose loans that are either secured by collateral other
      than real estate or unsecured. Many of these loans are for operating lines
      of
      credit. Average commercial and industrial loans increased $9,556,000, or 16.0%,
      when comparing the six-month periods. Also contributing to the growth in total
      commercial loans was an increase in tax-exempt loans. Average tax-exempt loans
      increased $1,568,000, or 6.9%, when comparing the six-month
      periods.





Indirect
      lease financing receivables represent loans to small businesses that are
      collateralized by equipment. These loans tend to have higher risk
      characteristics but generally provide higher rates of return. These loans are
      originated by a third party and purchased by QNB based on criteria specified
      by
      QNB. The criteria include minimum credit scores of the borrower, term of the
      lease, type and age of equipment financed and geographic area. The geographic
      area primarily represents Pennsylvania and states contiguous to Pennsylvania.
      QNB is not the lessor and does not service these loans. Average indirect lease
      financing loans decreased $558,000, or 4.1%, when comparing the six-month
      periods. The slowing local and regional economy and an increase in delinquency
      rates have negatively impacted the volume of indirect lease financing
      receivables purchased over the past year.





Average
      residential mortgage loans decreased $3,970,000, or 15.4%, when comparing the
      first half of 2008 to the first half of 2007. The slowdown in the housing market
      and QNB’s decision to sell most originations of 1-4 family residential mortgages
      in the secondary market contributed to the decline in the residential mortgage
      loan portfolio.





The
      mix
      of deposits continued to be impacted by the reaction of customers to changes
      in
      interest rates on various products and by rates paid by the competition. Total
      average deposits increased $17,803,000, or 3.7%, to $503,297,000 for the first
      half of 2008 compared to the first half of 2007. Consistent with customers
      looking for the highest rate for the shortest term, the growth achieved in
      total
      average deposits was in time deposits which increased $28,703,000, or 12.0%,
      when comparing the same periods. Of this increase $12,392,000 was in time
      deposits over $100,000. Most of the growth in time deposits occurred in the
      maturity range of greater than 6 months through 15 months, which QNB promoted
      in
      response to customers’ preferences and competitors’ offerings.


-
          37
          -




**QNB
      CORP. AND SUBSIDIARY**





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


**CONDITION
      AND RESULTS OF OPERATIONS**





**FINANCIAL
      CONDITION ANALYSIS (Continued)**





The
      average balances of all other deposits types declined when comparing the first
      six months of 2008 to the same period in 2007. Average non-interest bearing
      and
      interest bearing demand accounts declined by 2.2% and 4.6%, respectively.
      Average money market account balances decreased 5.3% and average savings
      accounts decreased 5.6% when comparing the periods.





Average
      long-term debt decreased from $40,591,000 for the first half of 2007 to
      $34,066,000 for the first half of 2008. The reduction in average debt reflects
      the net $25,000,000 impact of the April 2007 restructuring transaction,
      partially offset by the borrowing of $10,000,000 from the FHLB in January
      2008.





Total
      assets at June 30, 2008 were $636,480,000, compared with $609,813,000 at
      December 31, 2007, an increase of 4.4%. Most of the growth in total assets
      since
      December 31, 2007 was in investment securities which increased $11,548,000
      and
      loans which increased $5,775,000. Cash and due from banks and Federal funds
      sold
      increased in total $7,781,000 since December 31, 2007. Other assets increased
      by
      $1,764,000, primarily an increase in deferred tax assets resulting from the
      change in unrealized gains and losses in the available-for-sale investment
      portfolio.




On
      the
      liability side, total deposits increased by $26,492,000, or 5.4%, since
      year-end. Time deposits continued to be the product of choice, increasing
      $19,628,000 since December 31, 2007 with time deposits of $100,000 or more
      increasing $9,542,000. Non-interest bearing demand accounts increased $6,421,000
      while interest bearing demand increased slightly to $97,470,000. These deposits
      can be volatile depending on the timing of deposits and withdrawals. Money
      market accounts declined $3,209,000 to $46,457,000 at June 30, 2008 while
      savings accounts increased $3,472,000 from December 31, 2007 to $45,547,000
      at
      June 30, 2008.





In
      July
      2008, QNB introduced eRewards checking, a high rate checking account paying
      4.01% interest on balances up to $25,000. In order to receive this rate a
      customer must receive an electronic statement, have one direct deposit or other
      ACH transaction and perform at least 12 check card transactions during a one
      month period. It is anticipated that this account will result in the movement
      of
      balances from lower yielding products to this product but will also result
      in
      obtaining new customers and additional deposits of existing
      customers.





When
      comparing December 31, 2007 to June 30, 2008, short-term borrowing declined
      from
      $33,990,000 to $23,083,000. Commercial sweep accounts recorded as repurchase
      agreements declined by $6,982,000 to $22,482,000 at June 30, 2008 and Federal
      funds purchased declined by $3,926,000 to $0 at June 30, 2008. Some of the
      decline in the commercial sweep accounts is a result of funds being moved to
      higher paying time deposit accounts over $100,000, as these offered higher
      rates
      than the sweep product.





**LIQUIDITY**





Liquidity
      represents an institution’s ability to generate cash or otherwise obtain funds
      at reasonable rates to satisfy commitments to borrowers and demands of
      depositors. QNB manages its mix of cash, Federal funds sold and investment
      securities in order to match the volatility, seasonality, interest sensitivity
      and growth trends of its loans and deposits. Liquidity is provided from asset
      sources through maturities and repayments of loans and investment securities.
      The portfolio of investment securities classified as available-for-sale and
      QNB's policy of selling certain residential mortgage originations in the
      secondary market also provide sources of liquidity. Additional sources of
      liquidity are provided by the Bank’s membership in the Federal Home Loan
      Bank of Pittsburgh (FHLB) and two unsecured Federal funds lines granted by
      correspondent banks totaling $21,000,000. At June 30, 2008, the Bank has a
      maximum borrowing capacity with the FHLB of approximately $173,626,000. At
      June
      30, 2008, QNB had $10,000,000 of outstanding borrowings under the FHLB credit
      facility.


-
          38
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**QNB
      CORP. AND SUBSIDIARY**





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


**CONDITION
      AND RESULTS OF OPERATIONS**





**LIQUIDITY
      (Continued)**





Cash
      and
      due from banks, Federal funds sold, available-for-sale securities and loans
      held-for-sale totaled $225,479,000 and $206,562,000 at June 30, 2008 and
      December 31, 2007, respectively. The increase in liquid sources is primarily
      the
      result of an increase of the available-for-sale securities portfolio. These
      sources should be adequate to meet normal fluctuations in loan demand and
      deposit withdrawals. During the first quarter of 2008, QNB used its Federal
      funds line to prefund the purchase of investment securities in anticipation
      of
      declining interest rates and to fund seasonal deposit withdrawals. The maximum
      balance of Federal funds purchased during the first half of 2008 was
      $14,617,000. The Federal funds purchase line was paid down with $10,000,000
      of
      borrowings from the FHLB with a rate of 2.97% and a two year maturity. During
      the first quarter of 2007, QNB used its Federal funds lines to help temporarily
      fund loan growth. Average Federal funds purchased were $9,000 for the second
      quarter of 2008 and $1,111,000 for the first six months of 2008. These levels
      compared to $440,000 and $708,000 for the same periods in 2007. At June 30,
      2008, QNB had no Federal funds purchased.





Approximately
      $96,955,000 and $107,750,000 of available-for-sale securities at June 30, 2008
      and December 31, 2007, respectively, were pledged as collateral for repurchase
      agreements and deposits of public funds. The decrease in the amount of pledged
      securities when comparing June 30, 2008 to December 31, 2007 is a result of
      a
      decrease in repurchase agreement balances (commercial sweep accounts). In
      addition, under terms of its agreement with the FHLB, QNB maintains otherwise
      unencumbered qualifying assets (principally 1-4 family residential mortgage
      loans and U.S. Government and agency notes, bonds, and mortgage-backed
      securities) in the amount of at least as much as its advances from the FHLB.
      As
      mentioned above, QNB had $10,000,000 of outstanding borrowings under the FHLB
      credit facility at June 30, 2008.





**CAPITAL
      ADEQUACY**





A
      strong
      capital position is fundamental to support continued growth and profitability
      and to serve the needs of depositors. QNB's shareholders' equity at June 30,
      2008 was $52,309,000, or 8.21% of total assets, compared to shareholders' equity
      of $53,251,000, or 8.73% of total assets, at December 31, 2007. Shareholders’
equity at June 30, 2008 included a negative adjustment of $892,000 related
      to
      unrealized holding losses, net of taxes, on investment securities
      available-for-sale while shareholders’ equity at December 31, 2007 included a
      positive adjustment of $1,504,000 related to unrealized holding gains, net
      of
      taxes, on investment securities available-for-sale. Without the FASB No. 115
      available-for-sale adjustments, shareholders' equity to total assets would
      have
      been 8.36% and 8.49% at June 30, 2008 and December 31, 2007, respectively.
      The
      adoption of EITF 06-04, *Accounting
      for Deferred Compensation and Postretirement Benefit Aspects of Endorsement
      Split-Dollar Life Insurance Arrangements* on
      January 1, 2008 resulted in the recognition of a cumulative effect adjustment
      to
      retained earnings of $481,000.





Shareholders'
      equity averaged $52,578,000 for the first six months of 2008 and $51,299,000
      during all of 2007, an increase of 2.5%. The ratio of average total equity
      to
      average total assets increased to 8.54% for the first half of 2008 compared
      to
      8.51% for all of 2007.


-
          39
          -


**QNB
      CORP. AND SUBSIDIARY**





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


**CONDITION
      AND RESULTS OF OPERATIONS**





**CAPITAL
      ADEQUACY (Continued)**





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





The
      minimum regulatory capital ratios are 4.00% for Tier I, 8.00% for the total
      risk-based capital and 4.00% for leverage. Under the requirements, QNB had
      a
      Tier I capital ratio of 11.97% and 12.25%, a total risk-based ratio of 12.76%
      and 13.06% and a leverage ratio of 8.50% and 8.64% at June 30, 2008 and December
      31, 2007, respectively.





The
      Federal Deposit Insurance Corporation Improvement Act of 1991 established five
      capital level designations ranging from "well capitalized" to "critically
      undercapitalized." At June 30, 2008 and December 31, 2007, QNB met the "well
      capitalized" criteria which requires minimum Tier I and total risk-based capital
      ratios of 6.00% and 10.00%, respectively, and a leverage ratio of
      5.00%.





**INTEREST
      RATE SENSITIVITY**





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





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





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




-
          40
          -




**QNB
      CORP. AND SUBSIDIARY**





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


**CONDITION
      AND RESULTS OF OPERATIONS**





**INTEREST
      RATE SENSITIVITY (Continued)**





QNB
      primarily focuses on the management of the one-year interest rate sensitivity
      gap. At June 30, 2008, interest-earning assets scheduled to mature or likely
      to
      be called, repriced or repaid in one year were $245,931,000. Interest-sensitive
      liabilities scheduled to mature or reprice within one year were $364,774,000.
      The one-year cumulative gap, which reflects QNB’s interest sensitivity over a
      period of time, was a negative $118,843,000 at June 30, 2008. The cumulative
      one-year gap equals -19.5% of total rate sensitive assets. This gap position
      compares to a negative gap position of $129,740,000, or -22.2%, of total rate
      sensitive assets, at December 31, 2007. The negative gap position is primarily
      the result of customers’ preference for keeping time deposit maturities short
      while interest rates were increasing 2007. This preference was met as banks,
      including the Bank, tended to offer the highest yielding time deposits in the
      maturity range of six months through 15 months. At June 30, 2008, $235,447,000,
      or 85.7%, of total time deposits were scheduled to reprice or mature in the
      next
      twelve months compared to $199,383,000, or 78.2%, of total time deposits at
      December 31, 2007. Also contributing to the negative gap position are the
      municipal accounts which are indexed to the Federal funds rate and the Select
      money market product, while not indexed directly with the Federal funds rate,
      moves closely with changes in that rate. On the liability side the increase
      in
      short maturity time deposits between December 31, 2007 and June 30, 2008 was
      offset by a $6,982,000 decline in commercial sweep accounts and a $3,926,000
      decline in Federal funds purchased, both reported in short-term borrowings.
      On
      the asset side, the amount of assets maturing or repricing increased by
      $35,128,000 from December 31, 2007 to June 30, 2008. Investment securities
      and
      loans, that reprice or mature in the next twelve months, increased by $5,609,000
      and $25,358,000, respectively when comparing the same two time periods. With
      the
      decline in interest rates in 2008, QNB’s cost of funds should decline as the
      maturing time deposits reprice at lower rates. The challenge will be to retain
      these deposits given the competitive environment. In this lower interest rate
      environment, the repricing characteristics of investments and loans will likely
      shorten as prepayment speeds increase resulting in more funds being invested
      at
      lower yields.





QNB
      also
      uses a simulation model to assess the impact of changes in interest rates on
      net
      interest income. The model reflects management’s assumptions related to asset
      yields and rates paid on liabilities, deposit sensitivity, and the size,
      composition and maturity or repricing characteristics of the balance sheet.
      The
      assumptions are based on what management believes at that time to be the most
      likely interest rate environment. Management also evaluates the impact of higher
      and lower interest rates by simulating the impact on net interest income of
      changing rates. While management performs rate shocks of 100, 200 and 300 basis
      points, it believes, that given the level of interest rates at June 30, 2008,
      that it is unlikely that interest rates would decline by 300 basis points.
      The
      simulation results can be found in the chart on page 42.





Net
      interest income declines in a falling rate environment. This result reflects
      the
      hypothetical interest rate floors on interest-bearing transaction accounts,
      regular money market accounts and savings accounts. In addition, in a lower
      rate
      environment, the cash flow or repricing characteristics from both the loan
      and
      investment portfolios would increase and be reinvested at lower rates. Loan
      customers would either refinance their fixed rate loans at lower rates or
      request rate reductions on their existing loans. The decline in net income
      as
      rates fall are inconsistent with the gap analysis and identify some of the
      weaknesses of gap analysis which does not take into consideration the magnitude
      of the rate change on different instruments, the timing of the rate change,
      or
      interest rate floors.





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.




-
          41
          -




**QNB
      CORP. AND SUBSIDIARY**





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


**CONDITION
      AND RESULTS OF OPERATIONS**





**INTEREST
      RATE SENSITIVITY (Continued)**





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





The
      nature of QNB’s current operation is such that it is not subject to foreign
      currency exchange or commodity price risk. At June 30, 2008, QNB did not have
      any hedging transactions in place such as interest rate swaps, caps or floors.





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





Change in Interest Rates
            
            Net Interest
              Income
            
            Dollar
              Change
            
            %
              Change+300
                Basis Points
            
            $
            20,088
            
            $
            (109
            )
            
            (.54
            )%+200
                Basis Points
            
            
            20,202
            
            
            5
            
            
            (.02
            )+100
                Basis Points
            
            
            20,285
            
            
            88
            
            
            (.44
            )FLAT
                RATE
            
            
            20,197
            
            
            -
            
            
            --100
                Basis Points
            
            
            19,719
            
            
            (478
            )
            
            (2.37
            )-200
                Basis Points
            
            
            18,588
            
            
            (1,609
            )
            
            (7.97
            )


-
          42
          -


**QNB
      CORP. AND SUBSIDIARY**





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


**CONDITION
      AND RESULTS OF OPERATIONS**




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





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





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





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


-
          43
          -





**QNB
      CORP. AND SUBSIDIARY**





**PART
      II. OTHER INFORMATION**





**JUNE
      30, 2008**


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


None.





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


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





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


None.





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


None.





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




Submission
      of Matters to Vote of Security Holders




The
      2008
      Annual Meeting (the Meeting) of the shareholders of QNB Corp. (the Registrant)
      was held on May 20, 2008. A Notice of the Meeting was mailed to shareholders
      of
      record as of April 7, 2008 on or about April 21, 2008, together with proxy
      solicitation materials prepared in accordance with Section 14(a) of the
      Securities Exchange Act of 1934, as amended, and the regulations promulgated
      thereunder.





The
      Meeting was held for the following purposes:


(1)  To
      elect
      four (4) Directors





There
      was
      no solicitation in opposition to the nominees of the Board of Directors for
      election to the Board of Directors and all such nominees were elected. The
      number of votes cast for or withheld for each of the nominees for election
      to
      the Board of Directors was as follows:





Nominee
            
            For
            
            WithholdKenneth
                F. Brown, Jr.
            
            
            2,550,513
            
            
            18,332Anna
                Mae Papso
            
            
            2,528,430
            
            
            40,415Henry
                L. Rosenberger
            
            
            2,514,441
            
            
            54,404Edgar
                L. Stauffer
            
            
            2,514,221
            
            
            54,624





The
      continuing directors of the Registrant are:


Thomas
      J.
      Bisko, Dennis Helf, G. Arden Link, Charles M. Meredith, III, Gary S. Parzych,
      Bonnie L. Rankin, Henry L. Rosenberger, and Edgar L. Stauffer





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


None.


-
          44
          -


**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




-
          45
          -


**SIGNATURES**





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


QNB
                  Corp.Date:
              August 8, 2008
              
              By:/s/
                  Thomas J. BiskoThomas
                  J. BiskoPresident/CEODate:
              August 8, 2008
              
              By:/s/
                  Bret H. KrevolinBret
                  H. KrevolinChief
                  Financial Officer