**SECURITIES
        AND EXCHANGE COMMISSION**
 **WASHINGTON,
        DC 20549**
  
 **FORM
        10-Q**
 
 (Mark
        One)
 x
              QUARTERLY
                  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
                  ACT OF
                  1934
 
 For
        the
        quarterly period ended  March
        31,
        2007
  OR
  o
              TRANSITION
                  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
                  ACT OF
                  1934
 
 For
        the
        transition period from ___________ to
        ___________
 
 Commission
        file number 0-17706
 
 QNB
        Corp.
 (Exact
        Name of Registrant as Specified in Its Charter)
 
 Pennsylvania
              23-2318082(State
                  or Other Jurisdiction of Incorporation or Organization)
              (I.R.S.
                  Employer Identification No.)
 
 15
                  North Third Street, Quakertown, PA
              18951-9005(Address
                  of Principal Executive Offices)
              (Zip
                  Code)
 
 Registrant's
        Telephone Number, Including Area Code (215)538-5600
 
 Not
        Applicable
 Former
        Name, Former Address and Former Fiscal Year, if Changed Since Last
        Report.
 
 Indicate
        by check mark whether the Registrant (1) has filed all reports required to
        be
        filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
        the
        preceding 12 months (or for such shorter period that the Registrant was required
        to file such reports), and (2) has been subject to such filing requirements
        for
        the past 90 days. Yes þ  No
o
 
 Indicate
        by check mark whether the Registrant is a large accelerated filer, an
        accelerated filer, or a non-accelerated filer. See definition of “accelerated
        filer and large accelerated filer” in Rule 12b-2 of the Exchange
        Act.
  Large
        accelerated filer o Accelerated
        filer þ  Non-accelerated
        filer o
 
 Indicate
        by check mark whether the Registrant is a shell company (as defined in Rule
        12b-2 of the Exchange Act).
 YesoNo
þ
 
 Indicate
        the number of shares outstanding of each of the issuer's classes of common
        stock, as of the latest practicable date.
 
 Class
              Outstanding
                  at May 1, 2007Common
                  Stock, par value $.625
              3,128,598
 
 
  **QNB
        CORP. AND SUBSIDIARY**
  **FORM
        10-Q**
 
 **QUARTER
        ENDED MARCH 31, 2007**
 
 **INDEX**
  **PAGE****PART
                  I - FINANCIAL INFORMATION****ITEM
                  1.**
              **CONSOLIDATED
                  FINANCIAL STATEMENTS (Unaudited)**Consolidated
                  Statements of Income for Three Months Ended March 31, 2007 and
                  2006
              
              1Consolidated
                  Balance Sheets at March 31, 2007 and December 31, 2006
              
              2Consolidated
                  Statements of Cash Flows for Three Months Ended March 31, 2007
                  and
                  2006
              
              3Notes
                  to Consolidated Financial Statements
              
              4**ITEM
                  2.**
              **MANAGEMENT'S
                  DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL
                  CONDITION**
              
              14**ITEM
                  3.**
              **QUANTITATIVE
                  AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK**
              
              35**ITEM
                  4.**
              **CONTROLS
                  AND PROCEDURES**
              
              35**PART
                  II - OTHER INFORMATION****ITEM
                  1.**
              **LEGAL
                  PROCEEDINGS**
              
              36**ITEM
                  1A.**
              **RISK
                  FACTORS**
              
              36**ITEM
                  2.**
              **UNREGISTERED
                  SALES OF EQUITY SECURITIES AND USE OF PROCEEDS**
              
              36**ITEM
                  3.**
              **DEFAULTS
                  UPON SENIOR SECURITIES**
              
              36**ITEM
                  4.**
              **SUBMISSIONS
                  OF MATTERS TO A VOTE OF SECURITY HOLDERS**
              
              36**ITEM
                  5.**
              **OTHER
                  INFORMATION**
              
              36**ITEM
                  6.**
              **EXHIBITS**
              
              36**SIGNATURES****CERTIFICATIONS**







*QNB
        Corp. and Subsidiary*
 
 CONSOLIDATED
        STATEMENTS OF INCOME
  **2007**
              
              **2006**(in
                  thousands, except share data)
                (unaudited)**Three
                  Months Ended March 31,****Interest
                  Income**Interest
                  and fees on loans
              
              $
              5,782
              
              $
              4,826Interest
                  and dividends on investment securities:Taxable
              
              
              2,353
              
              
              2,008Tax-exempt
              
              
              437
              
              
              520Interest
                  on federal funds sold
              
              
              40
              
              
              24Interest
                  on interest-bearing balances and other interest income
              
              
              61
              
              
              49Total
                  interest income
              
              
              8,673
              
              
              7,427**Interest
                  Expense**Interest
                  on depositsInterest-bearing
                  demand
              
              
              492
              
              
              439Money
                  market
              
              
              384
              
              
              257Savings
              
              
              44
              
              
              48Time
              
              
              1,917
              
              
              1,374Time
                  over $ 100,000
              
              
              659
              
              
              428Interest
                  on short-term borrowings
              
              
              225
              
              
              143Interest
                  on Federal Home Loan Bank advances
              
              
              720
              
              
              752Total
                  interest expense
              
              
              4,441
              
              
              3,441Net
                  interest income
              
              
              4,232
              
              
              3,986Provision
                  for loan losses
              
              
              75
              
              
              -Net
                  interest income after provision for loan losses
              
              
              4,157
              
              
              3,986**Non-Interest
                  Income**Fees
                  for services to customers
              
              
              424
              
              
              440ATM
                  and debit card income
              
              
              188
              
              
              184Income
                  on bank-owned life insurance
              
              
              64
              
              
              61Mortgage
                  servicing fees
              
              
              25
              
              
              23Net
                  gain on investment securities available-for-sale
              
              
              260
              
              
              355Net
                  gain on sale of loans
              
              
              21
              
              
              13Trading
                  account loss, securities
              
              
              (160
              )
              
              -Trading
                  account loss, borrowings
              
              
              (122
              )
              
              -Other
                  operating income
              
              
              108
              
              
              132Total
                  non-interest income
              
              
              808
              
              
              1,208**Non-Interest
                  Expense**Salaries
                  and employee benefits
              
              
              1,858
              
              
              1,805Net
                  occupancy expense
              
              
              312
              
              
              279Furniture
                  and equipment expense
              
              
              255
              
              
              231Marketing
                  expense
              
              
              156
              
              
              153Third
                  party services
              
              
              161
              
              
              169Telephone,
                  postage and supplies expense
              
              
              126
              
              
              140State
                  taxes
              
              
              122
              
              
              113Other
                  expense
              
              
              332
              
              
              346Total
                  non-interest expense
              
              
              3,322
              
              
              3,236Income
                  before income taxes
              
              
              1,643
              
              
              1,958Provision
                  for income taxes
              
              
              374
              
              
              280**Net
                  Income**
              
              $
              1,269
              
              $
              1,678**Earnings
                  Per Share - Basic**
              
              $
              .41
              
              $
              .54**Earnings
                  Per Share - Diluted**
              
              $
              .40
              
              $
              .53**Cash
                  Dividends Per Share**
              
              $
              .22
              
              $
              .21
 
 *The
        accompanying notes are an integral part of the unaudited consolidated financial
        statements.*
  Page
            1
   *QNB
                  Corp. and Subsidiary*CONSOLIDATED
                  BALANCE SHEETS
  **March
                    31,**
                
                **December
                    31,****2007**
                
                **2006**(in
                    thousands)
                  (unaudited)**Assets**Cash
                    and due from banks
                
                $
                12,427
                
                $
                12,439Federal
                    funds sold
                
                
                8,075
                
                
                11,664Total
                    cash and cash equivalents
                
                
                20,502
                
                
                24,103Investment
                    securitiesAvailable-for-sale
                    (cost $114,878 and $221,053)
                
                
                116,186
                
                
                219,818Held-for-trading
                
                
                90,685
                
                
                -Held-to-maturity
                    (market value $5,158 and $5,168)
                
                
                5,020
                
                
                5,021Non-marketable
                    equity securities
                
                
                3,311
                
                
                3,465Loans
                    held-for-sale
                
                
                85
                
                
                170Total
                    loans, net of unearned costs
                
                
                363,435
                
                
                343,496Allowance
                    for loan losses
                
                
                (2,721
                )
                
                (2,729
                )Net
                    loans
                
                
                360,714
                
                
                340,767Bank-owned
                    life insurance
                
                
                8,484
                
                
                8,415Premises
                    and equipment, net
                
                
                6,324
                
                
                6,442Accrued
                    interest receivable
                
                
                2,925
                
                
                2,874Other
                    assets
                
                
                5,029
                
                
                3,464Total
                    assets
                
                $
                619,265
                
                $
                614,539**Liabilities**DepositsDemand,
                    non-interest bearing
                
                $
                53,943
                
                $
                50,740Interest-bearing
                    demand
                
                
                96,949
                
                
                98,164Money
                    market
                
                
                52,153
                
                
                51,856Savings
                
                
                47,264
                
                
                45,330Time
                
                
                180,050
                
                
                174,657Time
                    over $100,000
                
                
                60,808
                
                
                58,175Total
                    deposits
                
                
                491,167
                
                
                478,922Short-term
                    borrowings
                
                
                23,238
                
                
                30,113Federal
                    Home Loan Bank advances (2007 at fair value)
                
                
                50,927
                
                
                52,000Accrued
                    interest payable
                
                
                2,300
                
                
                2,240Other
                    liabilities
                
                
                1,266
                
                
                854Total
                    liabilities
                
                
                568,898
                
                
                564,129**Shareholders'
                    Equity**Common
                    stock, par value $.625 per share;authorized
                    10,000,000 shares; 3,235,284 shares issued;3,128,598
                    shares outstanding
                
                
                2,022
                
                
                2,022Surplus
                
                
                9,740
                
                
                9,707Retained
                    earnings
                
                
                39,236
                
                
                40,990Accumulated
                    other comprehensive gain (loss), net
                
                
                863
                
                
                (815
                )Treasury
                    stock, at cost; 106,686 shares
                
                
                (1,494
                )
                
                (1,494
                )Total
                    shareholders' equity
                
                
                50,367
                
                
                50,410Total
                    liabilities and shareholders' equity
                
                $
                619,265
                
                $
                614,539
  *The
        accompanying notes are an integral part of the unaudited consolidated financial
        statements.*
  Page 2
 
 *QNB
                  Corp. and Subsidiary*CONSOLIDATED
                  STATEMENTS OF CASH FLOWS
  **2007**
              
              **2006**(in
                  thousands,
                (unaudited)**Three
                  Months Ended March 31,****Operating
                  Activities**Net
                  income
              
              $
              1,269
              
              $
              1,678Adjustments
                  to reconcile net income to net cash provided by operating
                  activitiesDepreciation
                  and amortization
              
              
              175
              
              
              161Provision
                  for loan losses
              
              
              75
              
              
              -Securities
                  gains, net
              
              
              (260
              )
              
              (355
              )Trading
                  account securities, net
              
              
              160
              
              
              -Trading
                  account borrowings, net
              
              
              122
              
              
              -Net
                  gain on sale of loans
              
              
              (21
              )
              
              (13
              )Proceeds
                  from sales of residential mortgages
              
              
              1,537
              
              
              940Originations
                  of residential mortgages held-for-sale
              
              
              (1,466
              )
              
              (933
              )Income
                  on bank-owned life insurance
              
              
              (64
              )
              
              (61
              )Life
                  insurance premiums, net
              
              
              (5
              )
              
              (5
              )Stock-based
                  compensation expense
              
              
              33
              
              
              27Deferred
                  income tax (benefit) provision
              
              
              (101
              )
              
              27Net
                  increase (decrease) in income taxes payable
              
              
              445
              
              
              (170
              )Net
                  (increase) decrease in accrued interest receivable
              
              
              (51
              )
              
              165Net
                  (accretion) amortization of premiums and discounts
              
              
              (49
              )
              
              161Net
                  increase in accrued interest payable
              
              
              60
              
              
              28Increase
                  in other assets
              
              
              (1,277
              )
              
              (111
              )Increase
                  in other liabilities
              
              
              144
              
              
              137Net
                  cash provided by operating activities
              
              
              726
              
              
              1,676**Investing
                  Activities**Proceeds
                  from maturities and calls of investment securitiesavailable-for-sale
              
              
              4,185
              
              
              4,804held-for-trading
              
              
              4,249
              
              
              -Proceeds
                  from sales of investment securitiesavailable-for-sale
              
              
              12,638
              
              
              25,163Purchase
                  of investment securitiesavailable-for-sale
              
              
              (8,132
              )
              
              (6,731
              )Proceeds
                  from sales of non-marketable equity securities
              
              
              154
              
              
              942Purchase
                  of non-marketable equity securities
              
              
              -
              
              
              (991
              )Net
                  increase in loans
              
              
              (20,046
              )
              
              (15,069
              )Net
                  purchases of premises and equipment
              
              
              (57
              )
              
              (671
              )Net
                  cash (used) provided by investing activities
              
              
              (7,009
              )
              
              7,447**Financing
                  Activities**Net
                  increase (decrease) in non-interest bearing deposits
              
              
              3,203
              
              
              (2,060
              )Net
                  increase in interest-bearing non-maturity deposits
              
              
              1,016
              
              
              6,966Net
                  increase (decrease) in time deposits
              
              
              8,026
              
              
              (3,496
              )Net
                  decrease in short-term borrowings
              
              
              (6,875
              )
              
              (4,903
              )Repayment
                  of Federal Home Loan Bank advances
              
              
              (2,000
              )
              
              -Tax
                  benefit from exercise of stock options
              
              
              -
              
              
              67Cash
                  dividends paid
              
              
              (688
              )
              
              (656
              )Proceeds
                  from issuance of common stock
              
              
              -
              
              
              348Net
                  cash provided (used) by financing activites
              
              
              2,682
              
              
              (3,734
              )(Decrease)
                  increase in cash and cash equivalents
              
              
              (3,601
              )
              
              5,389Cash
                  and cash equivalents at beginning of year
              
              
              24,103
              
              
              20,807Cash
                  and cash equivalents at end of period
              
              $
              20,502
              
              $
              26,196**Supplemental
                  Cash Flow Disclosures**Interest
                  paid
              
              $
              4,381
              
              $
              3,413Income
                  taxes paid
              
              
              -
              
              
              -Non-Cash
                  TransactionsTransfer
                  of securities from available-for-sale to held-for-trading
              
              
              97,744
              
              
              -Change
                  in net unrealized holding gains, net of taxes, on investment
                  securities
              
              
              (125
              )
              
              (1,150
              )Cumulative
                  effect of an accounting change, net of taxes
              
              
              (2,335
              )
              
              -Transfer
                  of loans to repossessed assets
              
              
              48
              
              
              9
 
 *The
        accompanying notes are an integral part of the unaudited consolidated financial
        statements.*
  Page
            3




**QNB
      CORP. AND SUBSIDIARY**





**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**


**MARCH
      31, 2007 AND 2006, AND DECEMBER 31, 2006**


**(Unaudited)**





1.
      BASIS
      OF PRESENTATION





The
      accompanying unaudited consolidated financial statements include the accounts
      of
      QNB Corp. (QNB) and its wholly-owned subsidiary, The Quakertown National Bank
      (the Bank). All significant intercompany accounts and transactions are
      eliminated in the consolidated financial statements.





These
      consolidated financial statements should be read in conjunction with the audited
      consolidated financial statements and notes thereto included in QNB's 2006
      Annual Report incorporated in the Form 10-K. Operating
      results for the three-month period ended March 31, 2007 are not necessarily
      indicative of the results that may be expected for the year ending December
      31,
      2007.





The
      unaudited consolidated financial statements reflect all adjustments, which
      in
      the opinion of management are necessary for a fair presentation of the results
      of the interim periods and are of a normal and recurring nature. Tabular
      information, other than share and per share data, is presented in thousands
      of
      dollars.





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





2.
      STOCK-BASED COMPENSATION





At
      March
      31, 2007, QNB sponsored stock-based compensation plans, administered by a
      committee, under which both qualified and non-qualified stock options may be
      granted periodically to certain employees. QNB accounts for all awards granted
      under stock-based compensation plans in accordance with Financial
      Accounting Standards Board (FASB) Statement No. 123R, *Share-Based
      Payment* (FASB
      No.
      123R). Compensation cost has been measured using the fair value of an award
      on
      the grant date and is recognized over the service period, which is usually
      the
      vesting period.





Stock-based
      compensation expense was approximately $33,000 and $27,000 for the three months
      ended March 31, 2007 and 2006, respectively. As
      of
      March 31, 2007, there was approximately $121,000 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 March
      31, 2007, there were 180,423 options outstanding under this Plan. The 2005
      Plan
      authorizes the issuance of 200,000 shares. The terms of the 2005 Plan are
      identical to the 1998 Plan, except options expire five years after the grant
      date. As of March 31, 2007, there were 26,300 options outstanding under this
      Plan.





Page
            4




**QNB
      CORP. AND SUBSIDIARY**





**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**


**MARCH
      31, 2007 AND 2006, AND DECEMBER 31, 2006**


**(Unaudited)**





2.
      STOCK-BASED COMPENSATION (Continued):





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


Options
                  granted
              
              2007
              
              2006
              
              2005Risk-free
                  interest rate
              
              
              4.74
              %
              
              4.27
              %
              
              4.18
              %Dividend
                  yield
              
              
              3.50
              
              
              3.23
              
              
              2.40Volatility
              
              
              15.99
              
              
              13.28
              
              
              14.05Expected
                  life
              
              
              5
                  yrs.
              
              
              5
                  yrs.
              
              
              10
                  yrs





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





The
      fair
      market value of options granted in the first quarter of 2007 and 2006 was $3.57
      and $3.13, respectively.





Stock
      option activity during the three months ended March 31, 2007 is as
      follows:


WeightedAverage
              
              AggregateWeighted
              
              Remaining
              
              IntrinsicNumber
                  of
              
              Average
              
              Contractual
              
              ValueOptions
              
              Exercise
                  Price
              
              Term
                  (in yrs.)
              
              (in
                  thousands)Outstanding
                  at January 1, 2007
              
              
              189,323
              
              $
              20.14
              
              
              4.92Exercised
              
              
              -
              
              
              -Granted
              
              
              17,400
              
              
              25.15Outstanding
                  at March 31, 2007
              
              
              206,723
              
              
              20.56
              
              
              4.69
              
              $
              1,348Exercisable
                  at March 31, 2007
              
              
              137,023
              
              
              16.16
              
              
              4.08
              
              $
              1,348





Page
            5




**QNB
      CORP. AND SUBSIDIARY**





**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**


**MARCH
      31, 2007 AND 2006, AND DECEMBER 31, 2006**


**(Unaudited)**





3.
      EARNINGS PER SHARE





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





For
                the Three Months Ended March 31,2007
            
            2006Numerator
                for basic and diluted earningsper
                share-net income
            
            $
            1,269
            
            $
            1,678Denominator
                for basic earnings per share-weighted
                average shares outstanding
            
            
            3,128,598
            
            
            3,118,353Effect
                of dilutive securities-employeestock
                options
            
            
            46,778
            
            
            52,490Denominator
                for diluted earnings pershare-
                adjusted weighted averageshares
                outstanding
            
            
            3,175,376
            
            
            3,170,843Earnings
                per share-basic
            
            $
            .41
            
            $
            .54Earnings
                per share-diluted
            
            $
            .40
            
            $
            .53





There
      were 69,700 and 34,900 stock options that were anti-dilutive as of March 31,
      2007 and 2006, respectively. These stock options were not included in the above
      calculation.





Page
            6




**QNB
      CORP. AND SUBSIDIARY**





**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**


**MARCH
      31, 2007 AND 2006, AND DECEMBER 31, 2006**


**(Unaudited)**





4.
      COMPREHENSIVE INCOME





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





The
      following shows the components and activity of comprehensive income during
      the
      three months ended March 31, 2007 and 2006 (net of the income tax effect):





For
                the Three Months
              Ended
                March 31,2007
            
            2006Unrealized
                holding gains (losses) arising during the period on securities available
                for sale (net of taxes of $(24) and $471, respectively)
            
            $
            47
            
            $
            (916
            )Reclassification
                adjustment for gains included in net income (net of taxes of $88
                and $121,
                respectively)
            
            
            (172
            )
            
            (234
            )Net
                change in unrealized losses during the period
            
            
            (125
            )
            
            (1,150
            )Accumulated
                other comprehensive losses, beginning of period
            
            
            (815
            )
            
            (1,262
            )Transition
                adjustment to retained earnings in conjunction with fair value option
                election (net of taxes of $(929) and $0, respectively)
            
            
            1,803
            
            
            0Accumulated
                other comprehensive gains (losses), end of period
            
            $
            863
            
            $
            (2,412
            )Net
                income
            
            $
            1,269
            
            $
            1,678Other
                comprehensive income, net of tax:Unrealized
                holding losses arising during theperiod
                (net of taxes of $64 and $592,respectively)
            
            
            (125
            )
            
            (1,150
            )Comprehensive
                income
            
            $
            1,144
            
            $
            528




Page
            7


**QNB
      CORP. AND SUBSIDIARY**





**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**


**MARCH
      31, 2007 AND 2006, AND DECEMBER 31, 2006**


**(Unaudited)**





5.
      LOANS





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





March
                31,
              2007
            
            December
                31,
              2006Commercial
                and industrial
            
            $
            81,385
            
            $
            72,718Construction
            
            
            19,475
            
            
            10,503Real
                estate-commercial
            
            
            120,919
            
            
            118,166Real
                estate-residential
            
            
            123,460
            
            
            123,531Consumer
            
            
            4,717
            
            
            5,044Indirect
                lease financing
            
            
            13,394
            
            
            13,405Total
                loans
            
            
            363,350
            
            
            343,367Unearned
                costs
            
            
            85
            
            
            129Total
                loans net of unearned costs
            
            $
            363,435
            
            $
            343,496




6.
      INTANGIBLE ASSETS





As
      a
      result of a purchase of deposits in 1997, QNB recorded a deposit premium of
      $511,000. This premium is being amortized, for book purposes, over ten years
      and
      is reviewed annually for impairment. The net deposit premium intangible was
      $30,000 and $43,000 at March 31, 2007 and December 31, 2006, respectively.
      Amortization expense for core deposit intangibles was $13,000 for both periods
      ended March 31, 2007 and 2006.





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


Three-MonthsEndedMarch
                  31,
              
              Year
                  EndedDecember 31,2007
              
              2006Mortgage
                  servicing rights beginning balance
              
              $
              472
              
              $
              528Mortgage
                  servicing rights capitalized
              
              
              12
              
              
              31Mortgage
                  servicing rights amortized
              
              
              (19
              )
              
              (87
              )Fair
                  market value adjustments
              
              
              -
              
              
              -Mortgage
                  servicing rights ending balance
              
              $
              465
              
              $
              472Mortgage
                  loans serviced for others
              
              $
              69,946
              
              $
              70,816Amortization
                  expense of intangibles
              
              
              32
              
              
              138
  Page
              8


**QNB
      CORP. AND SUBSIDIARY**





**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**


**MARCH
      31, 2007 AND 2006, AND DECEMBER 31, 2006**


**(Unaudited)**





6.
      INTANGIBLE ASSETS (Continued):





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


For
                  the Year Ended 12/31/07
              
              $
              127For
                  the Year Ended 12/31/08
              
              
              79For
                  the Year Ended 12/31/09
              
              
              66For
                  the Year Ended 12/31/10
              
              
              55For
                  the Year Ended 12/31/11
              
              
              45





7.
      INCOME
      TAXES





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





8.
      RELATED PARTY TRANSACTIONS





As
      of
      March 31, 2007, loans receivable from directors, principal officers, and their
      related interests totaled $4,923,000. All of these transactions were made in
      the
      ordinary course of business on substantially the same terms, including interest
      rates and collateral, as those prevailing at the time for comparable
      transactions with other persons. Also, they did not involve a more than normal
      risk of collectibility or present any other unfavorable features.





Page
            9




**QNB
      CORP. AND SUBSIDIARY**





**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**


**MARCH
      31, 2007 AND 2006, AND DECEMBER 31, 2006**


**(Unaudited)**





9.
      FAIR
      VALUE MEASUREMENTS AND FAIR VALUE OPTION FOR FINANCIAL ASSETS AND FINANCIAL
      LIABILITIES





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.





In
      February 2007, the FASB issued FASB No. 159, *The
      Fair Value Option for Financial Assets and Financial Liabilities, including
      an
      amendment of FASB Statement No. 115* .
      FASB
      No. 159 provides companies with an option to report selected financial assets
      and liabilities at fair value. Most of the provisions of this statement apply
      only to entities that elect the fair value option. However, the amendment to
      FASB No. 115, *“Accounting
      for Certain Investments in Debt and Equity Securities”* ,
      applies
      to all entities with available-for-sale and trading securities. FASB No. 159
      also establishes presentation and disclosure requirements designed to facilitate
      comparisons between companies that choose different measurement attributes
      for
      similar types of assets and liabilities.





During
      the first quarter of 2007, QNB elected to early adopt the provisions FASB No.
      157 and FASB No. 159. QNB selected the fair value option for various financial
      assets and liabilities, including $97,744,000 of mortgage-backed securities
      and
      collateralized mortgage obligations (CMOs) previously classified as
      available-for sale securities and Federal Home Loan Bank (FHLB) advances of
      $50,000,000. QNB elected to move these available-for-sale securities to trading
      securities in order to be able to more actively trade a portion of its
      investment portfolio. Economic factors, such as yield, duration and prepayment
      risk, were considered in selecting these securities. The FHLB advances were
      selected because they act as partial natural hedge against the securities
      selected in light of changing interest rates. The initial fair value measurement
      of these items, as prescribed by FASB No. 159, resulted in a cumulative-effect
      adjustment, net of tax, of $2,335,000, recorded as a reduction of retained
      earnings as of January 1, 2007. Of this cumulative-effect adjustment, $1,803,000
      represents unrealized losses reclassified from accumulated other comprehensive
      income for available-for-sale securities. The following table presents
      information about the eligible instruments for which QNB elected the fair value
      option and for which transition adjustments were recorded as of January 1,
      2007:




**Carrying
                Value**
              **at**
              **January
                1, 2007**
            
            **Transition
                Adjustment to Retained**
              **Earnings**
            
            **Carrying
                Value at January 1, 2007 (After Adoption of FASB No.
                159)**Collateralized
                mortgage obligations
            
            $
            57,416
            
            $
            (1,739
            )
            $
            55,677Mortgage-backed
                securities
            
            
            40,328
            
            
            (993
            )
            
            39,335FHLB
                advances
            
            
            50,000
            
            
            805
            
            
            50,805Pretax
                cumulative-effect of the adoption of the fair value option
            
            
            
            
            
            (3,537
            )Increase
                in deferred tax asset
            
            
            
            
            
            1,202Cumulative-effect
                of the adoption of the fair value option
            
            
            
            
            $
            (2,335
            )




Page
            10




**QNB
      CORP. AND SUBSIDIARY**





**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**


**MARCH
      31, 2007 AND 2006, AND DECEMBER 31, 2006**


**(Unaudited)**





9.
      FAIR
      VALUE MEASUREMENTS AND FAIR VALUE OPTION FOR FINANCIAL ASSETS AND FINANCIAL
      LIABILITIES (Continued):





The
      fair
      value option was not selected on CMOs with a book value of $3,393,000 and a
      fair
      value of $3,356,000. These securities were not selected because either the
      individual issues had small balances with short average lives and duration
      or
      because they had a higher coupon with a longer average life and duration than
      those selected. In addition, the fair value option was not selected on
      mortgage-backed securities with a book value of $28,334,000 and a fair value
      of
      $28,135,000. Of this total $23,048,000 (book value) represent 20-year and
      30-year mortgage-backed securities. QNB did not select the fair value option
      for
      any 20-year or 30-year mortgage-backed securities. The remaining mortgage-backed
      securities that were not selected under the fair value option had small
      balances, were purchased at a discount or had longer average lives.





QNB
      had
      investment securities held-for-trading of $90,685,000 and FHLB advances of
      $50,927,000 as of March 31, 2007. The aggregate unpaid principal balance on
      the
      FHLB advances was $50,000,000 as of March 31, 2007. As required by FASB No.
      157,
      each financial asset and liability must be identified as having been valued
      according to specified level of input, 1, 2 or 3. Level 1 inputs are quoted
      prices (unadjusted) in active markets for identical assets or liabilities that
      QNB has the ability to access at the measurement date. Fair values determined
      by
      Level 2 inputs utilize inputs other than quoted prices included in Level 1
      that
      are observable for the asset, either directly or indirectly. Level 2 inputs
      include quoted prices for similar assets in active markets, and inputs other
      than quoted prices that are observable for the asset or liability.  Level 3
      inputs are unobservable inputs for the asset, and include situations where
      there
      is little, if any, market activity for the asset or liability. In certain cases,
      the inputs used to measure fair value may fall into different levels of the
      fair
      value hierarchy. In such cases, the level in the fair value hierarchy, within
      which the fair value measurement in its entirety falls, has been determined
      based on the lowest level input that is significant to the fair value
      measurement in its entirety. QNB’s assessment of the significance of a
      particular input to the fair value measurement in its entirety requires
      judgment, and considers factors specific to the asset. The following table
      presents information about QNB’s assets and liabilities measured at fair value
      on a recurring basis as of March 31, 2007 and indicates the fair value hierarchy
      of the valuation techniques utilized by QNB to determine such fair
      value:





**Quoted
                Prices in Active Markets for Identical Assets (Level
                1)**
            
            **Significant
                Other Observable Inputs (Level 2)**
            
            **Balance
                as of**
              **March
                31, 2007**Securities
                available-for-sale
            
            $
            -
            
            $
            116,186
            
            $
            116,186Securities
                held-for-trading
            
            
            90,685
            
            
            -
            
            
            90,685FHLB
                advances
            
            
            -
            
            
            50,927
            
            
            50,927Total
            
            $
            90,685
            
            $
            167,113
            
            $
            257,798





QNB
      recognized $160,000 of unrealized trading losses on the CMOs and mortgage-backed
      securities and $122,000 of unrealized losses on the FHLB advances in first
      quarter earnings for the change in fair value of these instruments during the
      quarter. The change in the fair value of the FHLB advances during the quarter
      is
      related to changes in interest rates, not to changes in the credit risk of
      QNB.
      Trading losses are included in non-interest income on the consolidated statement
      of income.




Page
            11




**QNB
      CORP. AND SUBSIDIARY**





**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**


**MARCH
      31, 2007 AND 2006, AND DECEMBER 31, 2006**


**(Unaudited)**





9.
      FAIR
      VALUE MEASUREMENTS AND FAIR VALUE OPTION FOR FINANCIAL ASSETS AND FINANCIAL
      LIABILITIES (Continued):





Interest
      income on the fair value securities is recorded on an accrual basis using the
      current face or par value of the securities and the coupon rate. Premiums and
      discounts are not amortized or accreted to income but are reflected in the
      change in fair value. Interest income on these securities is included in total
      taxable interest and dividend income on investment securities on the
      consolidated statement of income. Interest expense on the FHLB advances is
      accrued based on the unpaid principal balance and the contractual rate and
      is
      reported on the consolidated statement of income on the line interest on Federal
      Home Loan Bank advances.





As
      of
      March 31, 2007, QNB did not have any assets or liabilities measured at fair
      value on a nonrecurring basis.




The
      measurement of fair value should be consistent with one of the following
      valuation techniques: market approach, income approach, and/or cost approach.
      The market approach uses prices and other relevant information generated by
      market transactions involving identical or comparable assets or liabilities
      (including a business). For example, valuation techniques consistent with the
      market approach often use market multiples derived from a set of comparables.
      Multiples might lie in ranges with a different multiple for each comparable.
      The
      selection of where within the range the appropriate multiple falls requires
      judgment, considering factors specific to the measurement (qualitative and
      quantitative). Valuation techniques consistent with the market approach include
      matrix pricing. Matrix pricing is a mathematical technique used principally
      to
      value debt securities without relying exclusively on quoted prices for the
      specific securities, but rather by relying on the securities’ relationship to
      other benchmark quoted securities. As of March 31, 2007, all of the financial
      assets and liabilities measured at fair value utilized the market approach.
      The
      CMOs and mortgaged-backed securities were valued using quoted prices while
      the
      FHLB advances were valued using matrix pricing.




10.
      SUBSEQUENT EVENT





In
      April
      2007, QNB restructured its balance sheet by selling the investment securities
      held-for-trading and repaying the FHLB advances identified above. The securities
      sold had a yield of approximately 4.26 percent, while the FHLB advances had
      a
      cost of 5.55 percent. The sale of investments and prepayment of FHLB advances
      resulted in net trading gains of approximately $130,000 in April 2007 resulting
      from the change in value from March 31, 2007 to the trade date. In April, QNB
      entered into a $25,000,000 repurchase agreement, with a large regional financial
      institution, at an average cost of 4.78 percent and purchased approximately
      $63,524,000 in investment securities at an average yield of 5.51 percent. The
      majority of the securities purchased and the repurchase agreements will be
      accounted for under the fair value option of FASB No. 159. QNB is considering
      researching the use of hedging techniques (interest rate swaps, caps and floors)
      to help manage the income volatility associated with using the fair value
      option.





QNB
      believes that these transactions will better position the company to manage
      interest rate risk, as the securities sold were primarily bonds that had
      significant prepayment risk in a declining interest rate environment, while
      the
      FHLB borrowings were largely comprised of convertible advances that would
      convert from a fixed rate to a higher floating rate in a rising rate
      environment. In addition to improving QNB’s interest rate risk profile, the
      transactions should increase net interest income and the net interest margin
      during the remainder of 2007 as well as future periods. The reduction in the
      amount of borrowings and investments should also improve QNB’s return on
      assets.




Page
            12




**QNB
      CORP. AND SUBSIDIARY**





**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**


**MARCH
      31, 2007 AND 2006, AND DECEMBER 31, 2006**


**(Unaudited)**




11.
      RECENT ACCOUNTING PRONOUNCEMENTS





In
      September 2006, the FASB reached consensus on the guidance provided by Emerging
      Issues Task Force Issue 06-4 (EITF 06-4), *Accounting
      for Deferred Compensation and Postretirement Benefit Aspects of Endorsement
      Split-Dollar Life Insurance Arrangements* .
      The
      guidance is applicable to endorsement split dollar life insurance arrangements,
      whereby the employer owns and controls the insurance policy, that are associated
      with a postretirement benefit. EITF 06-4 requires that for a split-dollar life
      insurance arrangement within the scope of EITF 06-4, an employer should
      recognize a liability for future benefits in accordance with FASB No. 106 (if,
      in substance, a postretirement benefit plan exists) or Accounting Principles
      Board Opinion No. 12 (if the arrangement is, in substance, an individual
      deferred compensation contract) based on the substantive agreement with the
      employee. EITF 06-4 is effective for fiscal years beginning after December
      15,
      2007. QNB is currently evaluating the impact the adoption of the standard will
      have on its results of operations and financial position.





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





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





Page
          13


**QNB
      CORP. AND SUBSIDIARY**





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


**OF
      OPERATIONS AND FINANCIAL CONDITION**


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





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





**Forward-Looking
      Statements**





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





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





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




·
            Increased
                credit risk;




·
            Operating,
                legal and regulatory risks;




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




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





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





**Critical
      Accounting Policies and Estimates**





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




Page
          14




**QNB
      CORP. AND SUBSIDIARY**





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


**OF
      OPERATIONS AND FINANCIAL CONDITION**


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





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





**Allowance
      for Loan Losses**





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





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





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





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




Page
          15


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


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





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





**Income
      Taxes.**





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





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





Securities
      are evaluated periodically to determine whether a decline in their value is
      other-than-temporary. Management utilizes criteria such as the magnitude and
      duration of the decline, in addition to the reasons underlying the decline,
      to
      determine whether the loss in value is other-than-temporary. The term
“other-than-temporary” is not intended to indicate that the decline is
      permanent, but indicates that the prospects for a near-term recovery of value
      are not necessarily favorable, or that there is a lack of evidence to support
      realizable value equal to or greater than 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.





Page
            16


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





**RESULTS
      OF OPERATIONS - OVERVIEW**





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





QNB
      reported net income for the first quarter of 2007 of $1,269,000, or $.40 per
      common share on a diluted basis. These results compare to net income for the
      first quarter of 2006 of $1,678,000, or $.53 per share diluted.





Net
      interest income for the first quarter of 2007 was $4,232,000, a $246,000
      increase from net interest income reported for the same period in 2006.
      Contributing to the increase in net interest income when comparing the two
      quarters was a 6.1 percent increase in average earning assets, as well as the
      change in the mix of earning assets as higher yielding loans replaced lower
      yielding investment securities. The net interest margin for the first quarter
      of
      2007 was 3.22 percent compared to 3.26 percent for the first quarter of 2006
      and
      3.01 percent for the fourth quarter of 2006. The improvement in the net interest
      margin from the fourth quarter of 2006 reflects the growth in loans as well
      as
      the impact of selling lower yielding securities at a loss during the fourth
      quarter of 2006.





Impacting
      the first quarter of 2007 was a $75,000 provision for loan losses. The continued
      growth in loans combined with net charge-offs of $83,000 during the first
      quarter of 2007, contributed to the need for the provision. There was no
      provision for loan losses during the first quarter of 2006.





The
      results for the first quarter of 2007 were also negatively impacted by QNB’s
      election, effective January 1, 2007, to early adopt Financial Accounting
      Standards Board Statement No. 157 (FASB No. 157), *Fair
      Value Measurements* and
      Financial Accounting Standards Board Statement No. 159 (FASB No. 159), *The
      Fair Value Option for Financial Assets and Financial Liabilities, including
      an
      amendment of FASB Statement No. 115* . 
      Upon adoption of FASB No. 159, QNB selected the fair value measurement
      option for various financial assets and liabilities, including $97,744,000
      of
      mortgage-backed securities and collateralized mortgage obligations (CMOs)
      previously classified as available-for-sale securities and Federal Home Loan
      Bank (FHLB) advances of $50,000,000. The initial fair value measurement of
      these
      items, as prescribed by FASB No. 159, resulted in a cumulative-effect
      adjustment, net of tax, of $2,335,000, recorded as a reduction of retained
      earnings as of January 1, 2007. The impact of this charge on total shareholders'
      equity was offset by the year-end 2006 fair value adjustment of $1,803,000
      related to these specific investment securities recorded as an element of
      shareholders' equity in the accumulated other comprehensive loss account. Prior
      to the adoption of these standards, which the Board of Directors approved on
      April 12, 2007, QNB had intended to hold these securities until their scheduled
      maturity or until there was a market price recovery.  QNB’s adoption of
      these standards is further described in footnote 8 in the notes to the financial
      statements.





Total
      non-interest income decreased $400,000 when comparing the first quarter of
      2007
      to the same period in 2006. As
      a
      result of QNB’s fair value measurement election for the above financial
      instruments, QNB recognized $282,000 of pretax unrealized trading losses in
      its
      first quarter earnings for the change in fair value of such instruments from
      the
      election date of January 1, 2007 to March 31, 2007. In
      addition, the gain on sale of investment securities decreased $95,000 when
      comparing the two quarters.





Page
            17




**QNB
      CORP. AND SUBSIDIARY**





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


**OF
      OPERATIONS AND FINANCIAL CONDITION**





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





Total
      non-interest expense increased $86,000, to $3,322,000, for the first quarter
      of
      2007 as compared to the first quarter of 2006. The increase was centered in
      personnel costs, which increased $53,000, and net occupancy and equipment costs,
      which increased $55,000.





The
      provision for income taxes for the first quarter of 2007 increased $94,000.
      Positively impacting the provision for income taxes and net income during the
      first quarter of 2006 was the reversal of a portion of the tax valuation
      allowance related to the impairment of certain Fannie Mae (FNMA) and Freddie
      Mac
      (FHLMC) preferred stock issues. QNB’s reversal of $138,000 of the tax valuation
      allowance was a result of its ability to realize tax benefits due to realized
      capital gains and an increase in unrealized gains of certain equity
      securities.





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





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




Page
          18


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


**Average
        Balances, Rate, and Interest Income and Expense Summary (** ***Tax-Equivalent
        Basis*** **)**
  **Three
                  Months Ended****March
                  31, 2007**
              
              **March
                  31, 2006****Average**
              
              **Average**
              
              
              
              **Average**
              
              **Average****Balance**
              
              **Rate**
              
              **Interest**
              
              **Balance**
              
              **Rate**
              
              **Interest****Assets**Federal
                  funds sold
              
              $
              3,098
              
              
              5.26
              %
              $
              40
              
              $
              2,129
              
              
              4.59
              %
              $
              24Investment
                  securities:U.S.
                  Treasury
              
              
              5,147
              
              
              4.70
              %
              
              60
              
              
              6,032
              
              
              3.22
              %
              
              48U.S.
                  Government agencies
              
              
              32,578
              
              
              5.53
              %
              
              450
              
              
              20,740
              
              
              4.17
              %
              
              216State
                  and municipal
              
              
              40,020
              
              
              6.61
              %
              
              661
              
              
              48,290
              
              
              6.53
              %
              
              788Mortgage-backed
                  and CMOs
              
              
              125,017
              
              
              5.03
              %
              
              1,573
              
              
              128,925
              
              
              4.27
              %
              
              1,376Other
              
              
              18,156
              
              
              6.13
              %
              
              278
              
              
              25,799
              
              
              6.01
              %
              
              387Total
                  investment securities
              
              
              220,918
              
              
              5.47
              %
              
              3,022
              
              
              229,786
              
              
              4.90
              %
              
              2,815Loans:Commercial
                  real estate
              
              
              157,103
              
              
              6.77
              %
              
              2,621
              
              
              135,184
              
              
              6.45
              %
              
              2,152Residential
                  real estate*
              
              
              26,530
              
              
              5.92
              %
              
              393
              
              
              25,945
              
              
              5.81
              %
              
              377Home
                  equity loans
              
              
              69,369
              
              
              6.48
              %
              
              1,109
              
              
              63,760
              
              
              6.22
              %
              
              977Commercial
                  and industrial
              
              
              55,189
              
              
              7.41
              %
              
              1,008
              
              
              51,203
              
              
              6.87
              %
              
              867Indirect
                  lease financing
              
              
              13,327
              
              
              9.31
              %
              
              310
              
              
              7,239
              
              
              9.20
              %
              
              167Consumer
                  loans
              
              
              4,852
              
              
              10.05
              %
              
              120
              
              
              4,910
              
              
              8.99
              %
              
              109Tax-exempt
                  loans
              
              
              22,210
              
              
              6.13
              %
              
              336
              
              
              19,123
              
              
              5.73
              %
              
              270Total
                  loans, net of unearned income
              
              
              348,580
              
              
              6.86
              %
              
              5,897
              
              
              307,364
              
              
              6.49
              %
              
              4,919Other
                  earning assets
              
              
              4,257
              
              
              5.83
              %
              
              61
              
              
              4,586
              
              
              4.33
              %
              
              49Total
                  earning assets
              
              
              576,853
              
              
              6.34
              %
              
              9,020
              
              
              543,865
              
              
              5.82
              %
              
              7,807Cash
                  and due from banks
              
              
              10,856
              
              
              
              
              
              
              
              
              18,393Allowance
                  for loan losses
              
              
              (2,733
              )
              
              
              
              
              
              
              
              (2,514
              )Other
                  assets
              
              
              22,232
              
              
              
              
              
              
              
              
              19,227Total
                  assets
              
              $
              607,208
              
              
              
              
              
              
              
              $
              578,971**Liabilities
                  and Shareholders' Equity**Interest-bearing
                  deposits:Interest-bearing
                  demand
              
              $
              92,994
              
              
              2.15
              %
              
              492
              
              $
              96,228
              
              
              1.85
              %
              
              439Money
                  market
              
              
              51,531
              
              
              3.02
              %
              
              384
              
              
              43,222
              
              
              2.41
              %
              
              257Savings
              
              
              45,640
              
              
              0.39
              %
              
              44
              
              
              50,265
              
              
              0.39
              %
              
              48Time
              
              
              178,467
              
              
              4.36
              %
              
              1,917
              
              
              161,392
              
              
              3.45
              %
              
              1,374Time
                  over $100,000
              
              
              57,182
              
              
              4.67
              %
              
              659
              
              
              48,635
              
              
              3.57
              %
              
              428Total
                  interest-bearing deposits
              
              
              425,814
              
              
              3.33
              %
              
              3,496
              
              
              399,742
              
              
              2.58
              %
              
              2,546Short-term
                  borrowings
              
              
              25,666
              
              
              3.56
              %
              
              225
              
              
              19,300
              
              
              3.01
              %
              
              143Federal
                  Home Loan Bank advances
              
              
              52,718
              
              
              5.54
              %
              
              720
              
              
              55,000
              
              
              5.55
              %
              
              752Total
                  interest-bearing liabilities
              
              
              504,198
              
              
              3.57
              %
              
              4,441
              
              
              474,042
              
              
              2.94
              %
              
              3,441Non-interest-bearing
                  deposits
              
              
              49,963
              
              
              
              
              
              
              
              
              53,658Other
                  liabilities
              
              
              3,511
              
              
              
              
              
              
              
              
              2,862Shareholders'
                  equity
              
              
              49,536
              
              
              
              
              
              
              
              
              48,409Total
                  liabilities andshareholders'
                  equity
              
              $
              607,208
              
              
              
              
              
              
              
              $
              578,971Net
                  interest rate spread
              
              
              
              
              
              2.77
              %
              
              
              
              
              
              
              
              2.88
              %Margin/net
                  interest income
              
              
              
              
              
              3.22
              %
              
              4,579
              
              
              
              
              
              3.26
              %
              
              4,366


Tax-exempt
            securities and loans were adjusted to a tax-equivalent basis and are
            based on
            the marginal Federal corporate tax rate of 34
            percent.
 Non-accrual
          loans are included in earning assets.
  *
        Includes loans held-for-sale


Page
          19


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


**Three
                  Months Ended****March
                  31, 2007 compared to****March
                  31, 2006**Total
              
              Due
                  to change in:Change
              
              Volume
              
              Rate**Interest
                  income:**Federal
                  funds sold
              
              
              16
              
              
              11
              
              
              5Investment
                  securities:U.S.
                  Treasury
              
              
              12
              
              
              (7
              )
              
              19U.S.
                  Government agencies
              
              
              234
              
              
              123
              
              
              111State
                  and municipal
              
              
              (127
              )
              
              (135
              )
              
              8Mortgage-backed
                  and CMOs
              
              
              197
              
              
              (42
              )
              
              239Other
              
              
              (109
              )
              
              (115
              )
              
              6Loans:Commercial
                  real estate
              
              
              469
              
              
              349
              
              
              120Residential
                  real estate
              
              
              16
              
              
              9
              
              
              7Home
                  equity loans
              
              
              132
              
              
              86
              
              
              46Commercial
                  and industrial
              
              
              141
              
              
              68
              
              
              73Indirect
                  lease financing
              
              
              143
              
              
              140
              
              
              3Consumer
                  loans
              
              
              11
              
              
              (1
              )
              
              12Tax-exempt
                  loans
              
              
              66
              
              
              44
              
              
              22Other
                  earning assets
              
              
              12
              
              
              (4
              )
              
              16Total
                  interest income
              
              
              1,213
              
              
              526
              
              
              687**Interest
                  expense:**Interest-bearing
                  demand
              
              
              53
              
              
              (15
              )
              
              68Money
                  market
              
              
              127
              
              
              50
              
              
              77Savings
              
              
              (4
              )
              
              (4
              )
              
              0Time
              
              
              543
              
              
              145
              
              
              398Time
                  over $100,000
              
              
              231
              
              
              75
              
              
              156Short-term
                  borrowings
              
              
              82
              
              
              47
              
              
              35Federal
                  Home Loan Bank advances
              
              
              (32
              )
              
              (31
              )
              
              (1
              )Total
                  interest expense
              
              
              1,000
              
              
              267
              
              
              733**Net
                  interest income**
              
              
              213
              
              
              259
              
              
              (46
              )




Page
          20


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




**NET
      INTEREST INCOME**





The
      following table presents the adjustment to convert net interest income to net
      interest income on a fully taxable equivalent basis for the periods ended March
      31, 2007 and 2006.


For
                  the Three MonthsEnded
                  March 31,2007
              
              2006Total
                  interest income
              
              $
              8,673
              
              $
              7,427Total
                  interest expense
              
              
              4,441
              
              
              3,441Net
                  interest income
              
              
              4,232
              
              
              3,986Tax
                  equivalent adjustment
              
              
              347
              
              
              380Net
                  interest income (fully taxable equivalent)
              
              $
              4,579
              
              $
              4,366


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, borrowed funds and shareholders’ equity. Net interest income
      is affected by changes in interest rates, the volume and mix of earning assets
      and interest-bearing liabilities, and the amount of earning assets funded by
      non-interest bearing deposits.





For
      purposes of this discussion, interest income and the average yield earned on
      loans and investment securities are adjusted to a tax-equivalent basis as
      detailed in the tables that appear on pages 19 and 20. This adjustment to
      interest income is made for analysis purposes only. Interest income is increased
      by the amount of savings of federal income taxes, which QNB realizes by
      investing in certain tax-exempt state and municipal securities and by making
      loans to certain tax-exempt organizations. In this way, the ultimate economic
      impact of earnings from various assets can be more easily compared.




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





Net
      interest income increased $246,000, or 6.2 percent, to $4,232,000 for the
      quarter ended March 31, 2007 as compared to $3,986,000 for the quarter ended
      March 31, 2006. On a tax-equivalent basis, net interest income increased by
      $213,000, or 4.9 percent, from $4,366,000 for the three months ended March
      31,
      2006 to $4,579,000 for the same period ended March 31, 2007. The
      interest rate environment resulting from changes in the shape of the yield
      curve
      as well as the competitive environment for loans and deposits has negatively
      impacted the net interest margin. These two factors have resulted in funding
      costs for deposits and borrowed money increasing to a greater degree than the
      rate earned on loans and investment securities. An
      increase in average earning assets and a change in the mix of earning assets
      from lower yielding investment securities to higher yielding loans helped offset
      a slight decline in the net interest margin.





Page
          21




**QNB
      CORP. AND SUBSIDIARY**





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


**OF
      OPERATIONS AND FINANCIAL CONDITION**


**NET
      INTEREST INCOME (Continued)**





Average
      earning assets increased 6.1 percent, with average loans increasing 13.4 percent
      when comparing the first quarter of 2007 to the same period in 2006. Average
      investment securities, including trading securities, decreased 3.9 percent
      when
      comparing these same periods while the net
      interest margin declined by 4 basis points. The net interest margin decreased
      to
      3.22 percent for the first quarter of 2007 from 3.26 percent for the first
      quarter of 2006. However, the net interest margin of 3.22 percent for the first
      quarter of 2007 represents an increase from the 3.01 percent margin recorded
      during the fourth quarter of 2006. The improvement in the net interest margin
      from the fourth quarter of 2006 reflects the impact of the adoption of FASB
      No.
      159 on investment income, the impact of selling lower yielding securities at
      a
      loss and reinvesting the proceeds into higher yielding securities during the
      fourth quarter of 2006 and the growth in loans.





For
      the
      most part, earning assets are funded by deposits, which increased when comparing
      the two quarters. Average
      deposits increased $22,377,000, or 4.9 percent, when comparing the first
      quarters of 2007 and 2006. Most of the growth in average deposits was in higher
      cost time deposits and money market accounts.





The
      yield
      on earning assets on a tax-equivalent basis increased from 5.82 percent for
      the
      first quarter of 2006 to 6.34 percent for the first quarter of 2007. Interest
      income on investment securities increased $207,000 when comparing the two
      quarters, as the increase in the yield on the portfolio was able to offset
      the
      decline in balances. The average yield on investment securities increased from
      4.90 percent for the first quarter of 2006 to 5.47 percent for the first quarter
      of 2007. QNB purchased very few securities in the normal course of business
      over
      the past year because of the strong growth in loans. Most of the increase in
      the
      yield on the portfolio has been the result of either purchase and sale
      transactions in which lower yielding securities were sold at a loss with the
      proceeds reinvested in higher yielding securities, or through the sale, maturity
      or payments of lower yielding securities with the proceeds used to fund loan
      growth. The purpose of the purchase and sale transactions was to position QNB
      to
      achieve increased net interest income in the future as well as to reposition
      the
      cash flow from the portfolio. Also contributing to interest income and the
      yield
      on investment securities was the transfer of the securities from
      available-for-sale to trading. Premiums and discounts are not amortized or
      accreted on trading securities. This contributed approximately $134,000 to
      interest income during the first quarter of 2007 which was offset by trading
      securities losses of $160,000 recorded in other income for the first quarter
      of
      2007.





The
      yield
      on loans increased 37 basis points, to 6.86 percent, when comparing the first
      quarter of 2007 to the first quarter of 2006. The average prime rate when
      comparing these same periods increased 82 basis points, from 7.43 percent to
      8.25 percent. While QNB’s earning assets were positively impacted by the
      increases in the prime rate, the overall yield on the loan portfolio did not
      increase proportionately, since only a portion of the loan portfolio reprices
      immediately with changes in the prime rate. More significant factors limiting
      the increase in the portfolio yield was the inverted yield curve with short-term
      rates being higher than mid- and longer-term rates along with the competition
      for loans. Customers preferred to lock in fixed-rate or adjustable-rate loans
      with fixed-rate terms for three to ten years over higher floating-rate loans.
      The yield on commercial purpose loans including tax-exempt loans, increased
      by a
      greater amount than the yield on residential mortgage and home equity loans.
      Growth in the indirect lease financing portfolio also contributed to the
      increase in the yield on total loans as the yield on these loans averaged 9.31
      percent for the first quarter of 2007.





While
      total interest income on a tax-equivalent basis increased $1,213,000 when
      comparing the first quarter of 2007 to the first quarter of 2006, total interest
      expense increased $1,000,000. The increase in interest expense was a result
      of
      an increase in interest rates paid on both deposits and short-term borrowings.
      The rate paid on interest-bearing liabilities increased from 2.94 percent for
      the first quarter of 2006 to 3.57 percent for the first quarter of 2007, with
      the rate paid on interest-bearing deposits increasing from 2.58 percent to
      3.33
      percent during this same period. Interest expense and the rate paid on time
      deposit and money market accounts increased the most as these accounts were
      more
      reactive to the changes in market interest rates and competition. Interest
      expense on time deposits increased $774,000, while the average rate paid on
      time
      deposits increased from 3.48 percent to 4.43 percent when comparing the two
      periods. Average time deposits increased $25,622,000, or 12.2 percent, when
      comparing the first quarter of 2007 to the first quarter of 2006.




Page
          22


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


**NET
      INTEREST INCOME (Continued)**





Like
      fixed-rate loans and investment securities, time deposits reprice over time
      and,
      therefore, have less of an immediate impact on costs in either a rising or
      falling rate environment. Unlike loans and investment securities, the maturity
      and repricing characteristics of time deposits tend to be shorter. With interest
      rates increasing over the past two years, customers have opted for shorter
      maturity time deposits. Approximately 68.9 percent of time deposits at March
      31,
      2007 will reprice or mature over the next 12 months.





As
      mentioned previously, the competition for deposits, and especially time
      deposits, led to significantly higher rates paid on these products. Like other
      financial institutions, QNB, as a result of consumer demand and the need to
      retain deposits, offered relatively short maturity time deposits at attractive
      rates. Most consumers are looking for short maturity time deposits in
      anticipation of short-term rates continuing to increase. It was and still is
      very common to see time deposit promotions with maturities less than one year
      at
      yields above 5.00 percent. Given the short-term nature of QNB’s time deposit
      portfolio and the current rates being offered, it is likely that both the
      average rate paid and total interest expense on time deposits will continue
      to
      increase in 2007.





Interest
      expense on money market accounts increased $127,000, and the rate paid increased
      from 2.41 percent to 3.02 percent when comparing the first quarter of 2007
      to
      the first quarter of 2006. Average money market balances increased $8,309,000
      when comparing the two quarters. During 2006, the primary money market product
      offered was the Treasury Select product which was indexed to a percentage of
      the
      91-day Treasury bill rate based on balances in the account. The rate on this
      product increased as short-term interest rates increased. In addition, in
      response to competition, QNB promoted a 4.00 percent minimum rate on this
      product for new accounts with balances over $10,000 or for existing accounts
      with additional deposits of $5,000. This 4.00 percent promotional rate was
      offered for most of 2006 and was above the calculated rate under the terms
      of
      this product. In 2007, the Treasury Select money market account was changed
      to
      the Select money market account and the rate on this product is no longer
      indexed to the 91-day Treasury bill but is determined by QNB. However, because
      of the continued strong competition for these deposits, QNB has maintained
      a
      rate close to 4.00 percent for the first quarter of 2007.





Interest
      expense on short-term borrowings increased $82,000 both as a result of increases
      in balances and rates. The average rate paid increased from 3.01 percent for
      the
      first quarter of 2006 to 3.56 percent for the first quarter of 2007, while
      average balances increased $6,366,000 to $25,666,000. Repurchase agreements
      (a
      sweep product for commercial customers) increased $8,420,000 on average when
      comparing the two periods, while federal funds purchased decreased $2,243,000
      during the same period.





As
      mentioned previously net interest income and the net interest margin should
      increase during the remainder of 2007 as a result of the second quarter 2007
      balance sheet restructuring. In
      April
      2007, QNB restructured its balance sheet by selling the investment securities
      and repaying the $50 million of FHLB advances identified as trading assets
      and
      liabilities. The investment securities sold had a yield of approximately 4.26%,
      while the FHLB advances had a cost of approximately 5.55%. The sale will result
      in trading gains of approximately $130,000 in the second quarter of 2007
      resulting from the change in value from March 31, 2007 to the trade date. In
      April, QNB entered into a $25 million repurchase agreement at an average cost
      of
      4.78% and purchased approximately $64 million in investment securities at an
      average yield of 5.51%. These transactions will better position the company
      to
      manage interest rate risk, as the securities sold were primarily bonds that
      had
      significant prepayment risk in a declining interest rate environment, while
      the
      FHLB borrowings were largely comprised of convertible advances that would
      convert from a fixed rate to a higher floating rate in an increasing rate
      environment. In addition to improving QNB’s interest rate risk profile, the
      transactions should increase net interest income and the net interest rate
      margin during the remainder of 2007 as well as future periods. The deleveraging
      of the balance sheet by reducing the amount of borrowings should also improve
      the Bank’s return on assets.




Page
          23


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


**PROVISION
      FOR LOAN LOSSES**





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





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





QNB’s
      management determined that a $75,000 provision for loan losses was necessary
      for
      the three-month period ended March 31, 2007. There was no provision for loan
      losses necessary for the same period in 2006. 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. Growth in the loan portfolio and an
      increase in net charge-offs were the primary contributors to the need for a
      provision.





QNB
      had
      net charge-offs of $83,000 and $20,000 during the first quarter of 2007 and
      2006, respectively. The net charge-offs during the first quarter of 2007 related
      primarily to loans in the indirect lease financing portfolio. The asset quality
      of the commercial portfolio remains strong.




Non-performing
      assets (non-accruing loans, loans past due 90 days or more, other real estate
      owned and other repossessed assets) amounted to .07 percent and .002 percent
      of
      total assets at March 31, 2007 and 2006, respectively. These levels compare
      to
      .08 percent at December 31, 2006. Non-accrual loans were $122,000 and $416,000
      at March 31, 2007 and December 31, 2006, respectively. There were no non-accrual
      loans at March 31, 2006. Loans past due 90 days or more and still accruing
      were
      $241,000 and $9,000, at March 31, 2007 and 2006, respectively. QNB did not
      have
      any other real estate owned as of March 31, 2007, December 31, 2006 or March
      31,
      2006. Repossessed assets consisting of equipment, automobiles and motorcycles
      were $45,000, $41,000 and $9,000 at March 31, 2007, December 31, 2006 and March
      31, 2006, respectively.





Page
          24




**QNB
      CORP. AND SUBSIDIARY**





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


**OF
      OPERATIONS AND FINANCIAL CONDITION**




**PROVISION
        FOR LOAN LOSSES (Continued)**




There
      were no restructured loans as of March 31, 2007, December 31, 2006 or March
      31,
      2006, respectively, as defined in FASB No. 15, *Accounting
      by Debtors and Creditors for Troubled Debt Restructurings* ,
      that
      have not already been included in loans past due 90 days or more or non-accrual
      loans.





The
      allowance for loan losses was $2,721,000 and $2,729,000 at March 31, 2007 and
      December 31, 2006, respectively. The ratio of the allowance to total loans
      was
      .75 percent and .79 percent at the respective period end dates. The decrease
      in
      the ratio is a result of the strong growth in the loan portfolio during the
      first quarter of 2007. The ratio, at .75 percent is at a level below peers
      but a
      ratio that QNB believed was adequate based on its analysis.





A
      loan is
      considered impaired, based on current information and events, if it is probable
      that QNB will be unable to collect the scheduled payments of principal or
      interest when due according to the contractual terms of the loan agreement.
      The
      measurement of impaired loans is generally based on the present value of
      expected future cash flows discounted at the historical effective interest
      rate,
      except that all collateral-dependent loans are measured for impairment based
      on
      the fair value of the collateral. At
      March
      31, 2007 and December 31, 2006, the recorded investment in loans for which
      impairment had been recognized in accordance with FASB Statement No. 114, *Accounting
      by Creditors for Impairment of a Loan—an amendment of FASB Statements No. 5 and
      15* , totaled
      $109,000 and $403,000, respectively. The loans identified as impaired were
      collateral-dependent, with no valuation allowance necessary. There were no
      loans
      considered impaired at March 31, 2006.





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





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





**NON-INTEREST
      INCOME**





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





Total
      non-interest income decreased $400,000, or 33.1 percent, to $808,000 for the
      quarter ended March 31, 2007 when compared to March 31, 2006. Contributing
      to
      the decline in non-interest income were unrealized trading losses of $282,000
      related to the change in fair value of trading assets and liabilities during
      the
      first quarter of 2007 and a decline of $87,000 related to gains on the sale
      of
      securities and loans. Excluding these items, non-interest income decreased
      $31,000, or 3.7 percent.




Page
          25


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


**NON-INTEREST
      INCOME (Continued)**





Fees
      for
      services to customers are primarily comprised of service charges on deposit
      accounts. These fees decreased $16,000, or 3.6 percent, to $424,000 when
      comparing the three-month periods. Overdraft income decreased $11,000 for the
      three-month period as a result of a decline in the volume of overdrafts. Fees
      on
      business checking accounts declined $6,000 for the three-month period. This
      decline reflects the impact of a higher earnings credit rate in the first
      quarter of 2007 as compared to the first quarter of 2006. This credit is applied
      against balances to offset service charges incurred.





ATM
      and
      debit card income is primarily comprised of income on debit cards and ATM
      surcharge income for the use of QNB’s ATM machines by non-QNB customers. ATM and
      debit card income was $188,000 for the first quarter of 2007, an increase of
      $4,000, or 2.2 percent, from the amount recorded during the first quarter of
      2006. Debit card income increased $2,000, or 1.5 percent, for the three-month
      period. In addition, an increase in pin-based transactions resulted in
      additional interchange income of $5,000 when comparing the three-month periods.
      Partially offsetting these positive variances was a reduction in ATM surcharge
      income of $2,000 between the two quarters. The proliferation of ATM machines,
      as
      well as the ability to get cash back during a pin-based transaction, has likely
      contributed to the decline in the number of transactions by non-QNB customers
      at
      QNB’s ATM machines.





Income
      on
      bank-owned life insurance represents the earnings on life insurance policies
      of
      which the Bank is the beneficiary. The earnings on these policies were $64,000
      and $61,000 for the three months ended March 31, 2007 and 2006, respectively.
      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 obligation to service financial assets that are retained in
      a
      transfer of assets in the form of a servicing asset. The servicing asset is
      amortized in proportion to, and over, the period of net servicing income or
      loss. Servicing assets are assessed for impairment based on their fair value.
      Mortgage servicing fees for the three-month periods ended March 31, 2007 and
      2006 were  $25,000
      and $23,000, respectively. There was no valuation allowance necessary in either
      period. Amortization expense related to the mortgage servicing asset for the
      three-month periods ended March 31, 2007 and 2006 was $19,000 and $25,000,
      respectively. As the residential mortgage market has softened, origination
      activity has slowed dramatically. The slowdown in mortgage activity has also
      had
      a negative impact on the average balance of mortgages sold and serviced as
      well
      as the fee income generated from these loans. The average balance of mortgages
      serviced for others was $69,946,000 for the first quarter of 2007, compared
      to
      $76,219,000 for the first quarter of 2006, a decrease of 8.2 percent. The timing
      of mortgage payments and delinquencies also impacts the amount of servicing
      fees
      recorded.





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





For
      the
      three-months ended March 31, 2007 and 2006, QNB
      recorded net gains on investment securities of $260,000 and $355,000,
      respectively. Included in net securities gains for the three-month period ended
      March 31, 2007 were gains of $50,000 from the sale of debt securities by the
      Bank and $210,000 of gains related to activity in the marketable equity
      securities portfolio by the Corporation. During the first quarter of 2007,
      QNB
      sold $11,680,000
      of securities with an average yield of 5.46 percent to help fund loans with
      an
      average yield of 7.16 percent.




Page
          26


**QNB
          CORP. AND SUBSIDIARY**
 
 **MANAGEMENT'S
          DISCUSSION AND ANALYSIS OF RESULTS**
 **OF
          OPERATIONS AND FINANCIAL CONDITION**
 **NON-INTEREST
        INCOME (Continued)**


Of
      the
      gains recorded in the first quarter of 2006, $157 ,000
      were
      from the sale of debt and equity securities at the Bank and $198,000 related
      to
      activity in the marketable equity securities portfolio at the Corporation.
      During the first quarter of 2006, QNB entered into several liquidity
      transactions through the sale of investment securities to fund the strong growth
      in loans. In addition, QNB sold its preferred stock holdings and recorded a
      gain
      of $451,000 on the carrying value of those issues that had previously been
      impaired and a $300,000 loss on one issue that was not impaired in
      2005.




The
      net
      gain on the sale of residential mortgage loans was $21,000 and $13,000 for
      the
      quarters ended March 31, 2007 and 2006, respectively. Residential
      mortgage loans to be sold are identified at origination. The net gain on
      residential mortgage sales is directly related to the volume of mortgages sold
      and the timing of the sales relative to the interest rate environment. Included
      in the gains on the sale of residential mortgages in these periods were $12,000
      and $7,000, respectively related to the recognition of mortgage servicing
      assets. Proceeds
      from the sale of residential mortgages were $1,537,000 and $940,000 for the
      first quarters of 2007 and 2006, respectively.





Other
      income decreased $24,000 to $108,000, when comparing the first quarter of 2007
      to the first quarter of 2006. Retail brokerage income contributed $18,000 to
      this decline. QNB changed its Raymond James relationship from an independent
      branch employing a branch manager to a third party revenue sharing arrangement.
      Losses on the sale of repossessed assets increased $13,000 when comparing the
      first quarter of 2007 to the first quarter of 2006. Partially offsetting these
      declines were $4,000 in fees related to the origination of reverse mortgages
      and
      $5,000 in fees collected for cashing checks for non-QNB
      customers.





**NON-INTEREST
      EXPENSE**





Non-interest
      expense is comprised of costs related to salaries and employee benefits, net
      occupancy, furniture and equipment, marketing, third party services and various
      other operating expenses. Total non-interest expense of $3,322,000 for the
      quarter ended March 31, 2007, represented an increase of $86,000, or 2.7
      percent, from levels reported in the first quarter of 2006.





Salaries
      and benefits is the largest component of non-interest expense. Salaries and
      benefits expense increased $53,000, or 2.9 percent, to $1,858,000 for the
      quarter ended March 31, 2007 compared to the same quarter in 2006. Salary
      expense increased $55,000, or 3.8 percent, during the period to $1,481,000
      while
      benefits expense decreased $2,000, or .6 percent, to $377,000. Included
      in salary expense for the first quarter of 2007 and 2006, respectively, was
      $33,000 and $27,000 in stock option compensation expense. Merit
      and
      promotional increases comprised the remaining increase in salary expense. The
      number of full time-equivalent employees remained unchanged when comparing
      the
      first quarter of 2007 and 2006.





Net
      occupancy expense increased $33,000 to $312,000, when comparing the first
      quarter of 2007 to the first quarter of 2006. Contributing to the increase were higher costs related to depreciation ($8,000),
      utilities ($7,000) and branch rent ($15,000). Some of the increase in
      depreciation and utilities costs related to the renovations and opening of
      the
      commercial loan center in June 2006. The increase in branch rent primarily
      related to higher common area maintenance charges at leased locations and an
      increase in rent at one location.




Page
          27


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


**NON-INTEREST
      EXPENSE (Continued)**





Furniture
      and equipment expense increased $24,000 to $255,000, when comparing the two
      quarters. Depreciation expense increased $15,000, most of which was related
      to
      fixed assets associated with the loan center and hardware associated with the
      Bank’s core computer system that was replaced in the second quarter of 2006.
      Also contributing to the increase were higher costs associated with equipment
      maintenance, both repairs and maintenance contracts.





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 $161,000 for the first quarter of 2007 compared to $169,000
      for the first quarter of 2006. The decrease in expense is primarily related
      to
      the use of consultants for special projects in the first quarter of
      2006.





Telephone,
      postage and supplies expense decreased $14,000 to $126,000, when comparing
      the
      three-month periods. Supplies expense decreased $13,000 when comparing the
      three-month periods. This decrease was a result of higher costs in the first
      quarter of 2006 for ATM and debit cards and costs related to supplies for the
      loan center.





State
      tax
      expense represents the payment of the Pennsylvania shares tax, which is based
      on
      the equity of the Bank, Pennsylvania sales and use tax and the Pennsylvania
      capital stock tax. State tax expense was $122,000 for the first quarter of
      2007,
      an increase of $9,000 compared to the same period in 2006. This increase was
      a
      result of a higher shares tax resulting from an increase in the Bank’s
      equity.





**INCOME
      TAXES**





QNB
      utilizes an asset and liability approach for financial accounting and reporting
      of income taxes. As of March 31, 2007, QNB’s net deferred tax asset was
      $1,743,000. The primary components of deferred taxes were a deferred tax asset
      of $925,000 relating to the allowance for loan losses and a deferred tax asset
      of $1,299,000 resulting from the unrealized losses on trading assets and
      liabilities. This asset was partially offset by a deferred tax liability of
      $445,000 resulting from the FASB No. 115 adjustment for available-for-sale
      investment securities. The deferred tax asset related to the trading assets
      and
      liabilities will be realized during the second quarter as a result of the sale
      of these financial instruments. As of March 31, 2006, QNB's net deferred tax
      asset was $1,917,000. A deferred tax asset of $770,000 related to the allowance
      for loan losses and a deferred tax asset of $1,243,000 resulting from the FASB
      No. 115 adjustment for available-for-sale investment securities.





The
      realizability of deferred tax assets is dependent upon a variety of factors,
      including the generation of future taxable income, the existence of taxes paid
      and recoverable, the reversal of deferred tax liabilities and tax planning
      strategies. A valuation allowance of $71,000 existed as of March 31, 2006 to
      offset a portion of the tax benefits associated with certain impaired securities
      that management believed may not be realizable. During 2006, QNB was able to
      recognize tax benefits due to realized and unrealized capital gains which
      allowed for the reversal of the valuation allowance. Based upon these and other
      factors, management believes it is more likely than not that QNB will realize
      the benefits of these remaining deferred tax assets. The net deferred tax asset
      is included in other assets on the consolidated balance
      sheet.


Applicable
      income taxes and effective tax rates were $374,000, or 22.8 percent, for the
      three-month period ended March 31, 2007 and $280,000, or 14.3 percent, for
      the
      same period in 2006. The lower effective tax rate
      in
      the first quarter of 2006 was primarily a result of the reversal of $138,000
      of
      the valuation allowance during the period. Excluding the reversal of the tax
      valuation allowance, the effective tax rate would have been 21.3 percent for
      the
      three-month period ended March 31, 2006.




Page
          28


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


**FINANCIAL
      CONDITION ANALYSIS**





The
      following balance sheet analysis compares average balance sheet data for the
      three months ended March 31, 2007 and 2006, as well as the period ended balances
      as of March 31, 2007 and December 31, 2006.





Average
      earning assets for the three-month period ended March 31, 2007 increased
      $32,988,000, or 6.1 percent, to $576,853,000 from $543,865,000 for the three
      months ended March 31, 2006. Average loans increased $41,216,000, or 13.4
      percent, while average investments decreased $8,868,000, or 3.9 percent. Average
      federal funds sold increased $969,000 when comparing these same periods. The
      growth in average loans during the past year was funded primarily through an
      increase in deposits and proceeds from the sale or maturity of investment
      securities.





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





Total
      loans have increased 14.8 percent between March 31, 2007 and March 31, 2006
      and
      5.8 percent since December 31, 2006. This loan growth was achieved despite
      an
      extremely competitive environment for both commercial and consumer loans. A
      key
      financial ratio is the loan to deposit ratio. With the continued strong growth
      in loans this ratio improved to 74.0 percent at March 31, 2007 compared with
      71.7 percent at December 31, 2006 and 68.8 percent at March 31,
      2006.





Average
      total commercial loans increased $28,992,000 when comparing the first three
      months of 2007 to the first three months of 2006. Most of the 14.1 percent
      growth in average commercial loans was in loans secured by real estate, either
      commercial or residential properties, which increased $21,919,000. Of this
      increase $19,142,000, or 87.3 percent, were adjustable-rate loans. While
      adjustable, most of these loans have a fixed rate for a period of time, from
      one
      year to ten years, before the rate adjusts. The growth in the commercial and
      industrial category represents loans with fixed interest rates. Also
      contributing to the growth in total commercial loans was an increase in
      tax-exempt loans. QNB continues to be successful in competing for loans to
      schools and municipalities. Average tax-exempt loans increased $3,087,000,
      or
      16.1 percent, when comparing the three-month periods.





Indirect
      lease financing receivables represent loans to small businesses that are
      collateralized by equipment. These loans are originated by a third party and
      purchased by QNB based on criteria specified by QNB. The criteria include
      minimum credit scores of the borrower, term of the lease, type and age of
      equipment financed and geographic area. The geographic area primarily represents
      states contiguous to Pennsylvania. QNB is not the lessor and does not service
      these loans. Average indirect lease financing loans increased $6,088,000 when
      comparing the three-month periods.







Page
          29


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


**FINANCIAL
      CONDITION ANALYSIS (Continued)**





Average
      home equity loans and residential mortgage loans increased $5,609,000 and
      $585,000, respectively, when comparing the first three months of 2007 to the
      first three months of 2006. The 8.8 percent increase in average home equity
      loans reflects the continued popularity of these loans with consumers,
      especially those refinancing existing residential mortgage loans, because they
      have lower origination costs than residential mortgage loans. When comparing
      average balances, all of the growth in home equity loans in the past year has
      been in fixed-rate home equity term loans. This product became more attractive
      to consumers as the prime rate rose during 2005 and 2006, which resulted in
      many
      borrowers refinancing their floating-rate lines into fixed-rate home equity
      loans. QNB continues to be aggressive in pricing its fixed-rate home equity
      loans relative to the market.





The
      mix
      of deposits continued to be impacted by the reaction of customers to changes
      in
      interest rates on various products and by rates paid by the competition.
      Interest rates on time deposits and money market accounts continued to show
      the
      greatest sensitivity. Most customers appear to be looking for the highest rate
      for the shortest term.





Total
      average deposits increased $22,377,000, or 4.9 percent, to $475,777,000 for
      the
      first quarter of 2007 compared to the first quarter of 2006. Money market
      account balances increased $8,309,000 on average. The increase in money market
      balances was primarily the result of a 4.00 percent money market promotion
      offered during most of 2006. This promotion was used to compete with the other
      local financial institutions and internet banks offering attractive rates on
      money market balances.





Average
      interest-bearing demand deposits declined $3,234,000, or 3.4 percent when
      comparing the three month periods. These deposits are primarily comprised of
      business checking accounts and are volatile depending on the timing of deposits
      and withdrawals. In addition, business customers are migrating to sweep accounts
      that transfer excess balances not used to cover daily activity to interest
      bearing accounts. This migration will result in an increase in the cost of
      funds
      as the use of this product increases. Average savings accounts declined
      $4,625,000, or 9.2 percent, when comparing the quarters as customers migrated
      from lower paying savings accounts to higher paying money market accounts and
      short-term time deposits.





The
      decline in interest-bearing demand deposits and savings accounts was offset
      by
      growth in time deposits which increased $25,622,000, or 12.2 percent, when
      comparing the two periods. Most of the growth in time deposits occurred in
      the
      fourth quarter of 2006 and the first quarter of 2007 and in the maturity range
      of greater than six months through 12 months, which QNB promoted heavily in
      response to customers’ preferences and competitors’ offerings. Continuing to
      increase time deposit balances will be a challenge in 2007 because of the strong
      rate competition. Matching or beating competitors’ rates could have a negative
      impact on the net interest margin.





QNB
      used
      short-term borrowings, including overnight borrowings and repurchase agreements,
      to help fund the loan growth. Total average short-term borrowings increased
      $6,366,000 when comparing the two quarters, with repurchase agreements, a sweep
      product for commercial accounts, increasing $8,420,000. However, when comparing
      short-term borrowings at December 31, 2006 and March 31, 2007, balances declined
      from $30,113,000 to $23,238,000. Much of the growth in average balances and
      subsequent period to period decline related to a sweep account with one
      commercial customer. This customer moved funds from the sweep account to time
      deposits during the first quarter of 2007.





Page
          30





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


**FINANCIAL
      CONDITION ANALYSIS (Continued)**





Total
      assets at March 31, 2007 were $619,265,000 compared with $614,539,000 at
      December 31, 2006, an increase of .8 percent. The composition of the asset
      side
      of the balance sheet continued to shift from investment securities to loans.
      Total loans increased $19,939,000, or 5.8 percent, between December 31, 2006
      and
      March 31, 2007 while total investment securities, including those classified
      as
      trading securities, declined $12,938,000, or 5.8 percent. Other assets increased
      $1,383,000 from year-end 2006 to March 31, 2007. Included in other assets at
      March 31, 2007 was a $1,000,000 U.S. Treasury security that matured on March
      31 st ,
      a
      Saturday, but where the funds were not received until April 2 nd .





On
      the
      liability side, total deposits increased by $12,245,000, or 2.6 percent, since
      year-end. Time deposits contributed $8,026,000 of the increase in total deposits
      since year-end. Non-interest bearing demand accounts increased $3,203,000 while
      interest bearing demand accounts declined $1,215,000. As mentioned previously,
      these deposits can be volatile depending on the timing of deposits and
      withdrawals. Savings accounts increased $1,934,000 from December 31, 2006 to
      $47,264,000 at March 31, 2007.





**LIQUIDITY**





Liquidity
      represents an institution’s ability to generate cash or otherwise obtain funds
      at reasonable rates to satisfy commitments to borrowers and demands of
      depositors. QNB manages its mix of cash, federal funds sold and investment
      securities in order to match the volatility, seasonality, interest sensitivity
      and growth trends of its deposit funds. Liquidity is provided from asset sources
      through maturities and repayments of loans and investment securities. The
      portfolio of investment securities classified as trading and 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 line granted by correspondent
      banks totaling $21,000,000. The Bank has a maximum borrowing capacity with
      the
      FHLB of approximately $264,440,000. At March 31, 2007, QNB’s outstanding
      borrowings under the FHLB credit facility had a fair market value of
      $50,927,000. In April 2007, QNB repaid these borrowings as part of its balance
      sheet restructuring and entered into a $25,000,000 repurchase agreement with
      a
      large regional financial institution.





Cash
      and
      due from banks, federal funds sold, trading and available-for-sale securities
      and loans held-for-sale totaled $227,458,000 and $244,091,000 at March 31,
      2007
      and December 31, 2006, respectively. The decline since December 2006 related
      principally to the reduction in investment security balances to fund loan
      growth. The aforementioned sources should be adequate to meet normal
      fluctuations in loan demand and/or deposit withdrawals. During
      the first quarter of 2007, QNB used its federal funds lines to help temporarily
      fund loan growth. Average federal funds purchased were $979,000 for the first
      quarter of 2007. This level compared to $3,222,000 for the same period in 2006.
      At March 31, 2007, QNB had no federal funds purchased.





Approximately
      $75,004,000 and $75,793,000 of trading and available-for-sale securities at
      March 31, 2007 and December 31, 2006, respectively, were pledged as collateral
      for repurchase agreements and deposits of public funds. In addition, under
      terms
      of its agreement with the FHLB, QNB maintains otherwise unencumbered qualifying
      assets (principally 1-4 family residential mortgage loans and U.S. Government
      and agency notes, bonds, and mortgage-backed securities) in the amount of at
      least as much as its advances from the FHLB.





Page
          31


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


**CAPITAL
      ADEQUACY**





A
      strong
      capital position is fundamental to support continued growth and profitability
      and to serve the needs of depositors. QNB's shareholders' equity at March 31,
      2007 was $50,367,000, or 8.13 percent of total assets, compared to shareholders'
      equity of $50,410,000, or 8.20 percent, at December 31, 2006. Shareholders’
equity at March 31, 2007 included a negative cumulative-effect adjustment,
      net
      of tax, of $2,335,000 as a result of the adoption of FASB No. 159 and a positive
      adjustment of $863,000 related to unrealized holding gains, net of taxes, on
      investment securities available-for-sale, while shareholders' equity at December
      31, 2006 included a negative adjustment of $815,000 related to unrealized
      holding losses, net of taxes on available-for-sale investment securities.
      Without the FASB No. 115 available-for-sale adjustments, shareholders' equity
      to
      total assets would have been 7.99 percent and 8.34 percent at March 31, 2007
      and
      December 31, 2006, respectively.





Shareholders'
      equity averaged $49,536,000 for the first three months of 2007 and $49,760,000
      during all of 2006, a decrease of .5 percent. The ratio of average total equity
      to average total assets decreased to 8.16 percent for the first quarter of
      2007
      compared to 8.37 percent for all of 2006.





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





The
      minimum regulatory capital ratios are 4.00 percent for Tier I, 8.00 percent
      for
      the total risk-based capital and 4.00 percent for leverage. Under these
      requirements, QNB had a Tier I capital ratio of 12.01 percent and 13.15 percent,
      a total risk-based ratio of 12.70 percent and 13.91 percent and a leverage
      ratio
      of 8.15 percent and 8.42 percent at March 31, 2007 and December 31, 2006,
      respectively. The decline in both GAAP and regulatory capital ratios from
      December 31, 2006 to March 31, 2007 were the result of the impact of the
      cumulative-effect adjustment recorded as a result of the adoption of FASB No.
      159, the growth in assets and an increase in risk-weighted assets resulting
      from
      the growth in loans.





The
      Federal Deposit Insurance Corporation Improvement Act of 1991 established five
      capital level designations ranging from "well capitalized" to "critically
      undercapitalized." At March 31, 2007 and December 31, 2006, QNB met the "well
      capitalized" criteria which requires minimum Tier I and total risk-based capital
      ratios of 6.00 percent and 10.00 percent, respectively, and a leverage ratio
      of
      5.00 percent.





**INTEREST
      RATE SENSITIVITY**





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




Page
          32


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


**INTEREST
      RATE SENSITIVITY (Continued)**





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





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





QNB
      primarily focuses on the management of the one-year interest rate sensitivity
      gap. At March 31, 2007, interest-earning assets scheduled to mature or likely
      to
      be called, repriced or repaid in one year were $198,980,000. Interest-sensitive
      liabilities scheduled to mature or reprice within one year were $299,388,000.
      The one-year cumulative gap, which reflects QNB’s interest sensitivity over a
      period of time, was a negative $100,408,000 at March 31, 2007. The cumulative
      one-year gap equals -16.79 percent of total rate sensitive assets. This gap
      position compares to a negative gap position of $109,544,000, or -18.44 percent,
      of total rate sensitive assets, at December 31, 2006.





QNB
      also
      uses a simulation model to assess the impact of changes in interest rates on
      net
      interest income. The model reflects management’s assumptions related to asset
      yields and rates paid on liabilities, deposit sensitivity, and the size,
      composition and maturity or repricing characteristics of the balance sheet.
      The
      assumptions are based on what management believes at that time to be the most
      likely interest rate environment. Management also evaluates the impact of higher
      and lower interest rates by simulating the impact on net interest income of
      changing rates. While management performs rate shocks of 100, 200 and 300 basis
      points, it believes, that given the level of interest rates at March 31, 2007,
      that it is unlikely that interest rates would decline by 300 basis points.
      The
      simulation results can be found in the chart on page 34.





The
      decline in net interest income in a rising rate environment is consistent with
      the gap analysis and reflects the fixed-rate nature of the investment and loan
      portfolio and the increased expense associated with higher cost deposits and
      short-term borrowings. In a rising rate environment, the conversion of some
      of
      QNB’s borrowings from the FHLB from fixed rate to variable rate tied to LIBOR
      would also impact net interest income. If converted, QNB would have the option
      of returning the borrowings to the FHLB without penalty. Net interest income
      increases slightly if rates would decline by 100 basis points. However, in
      a 200
      basis point decline scenario, net interest income declines slightly, which
      indicates the current interest pricing on interest-bearing transaction accounts,
      regular money market accounts and savings accounts are at their hypothetical
      floors. Interest rates on these products do not have the ability to decline
      to
      the degree that rates on earning assets can. In addition, in a lower rate
      environment, the cash flow from both the loan and investment portfolios would
      increase and be reinvested at lower rates. These results are inconsistent with
      the gap analysis and identify some of the weaknesses of gap analysis which
      does
      not take into consideration the magnitude
      of the rate change on different instruments or the timing of the rate change.
      The analysis using net interest income does not take into consideration the
      impact of changing interest rates on the value of trading assets and
      liabilities. The change in value of these financial instruments would be
      reported as a trading gain or loss in non-interest income.





Page33


**QNB
          CORP. AND SUBSIDIARY**
 
 **MANAGEMENT'S
          DISCUSSION AND ANALYSIS OF RESULTS**
 **OF
          OPERATIONS AND FINANCIAL CONDITION**
 **INTEREST
        RATE SENSITIVITY (Continued)**


In
      April
      2007, QNB restructured its balance sheet by selling the investment securities
      and repaying the $50 million of FHLB advances identified as trading assets
      and
      liabilities. The investment securities sold had a yield of approximately 4.26%,
      while the FHLB advances had a cost of approximately 5.55%. The sale will result
      in trading gains of approximately $130,000 in the second quarter of 2007
      resulting from the change in value from March 31, 2007 to the trade date. In
      April, QNB entered into a $25 million repurchase agreement at an average cost
      of
      4.78% and purchased approximately $64 million in investment securities at an
      average yield of 5.51%. These transactions will better position the company
      to
      manage interest rate risk, as the securities sold were primarily bonds that
      had
      significant prepayment risk in a declining interest rate environment, while
      the
      FHLB borrowings were largely comprised of convertible advances that would
      convert from a fixed rate to a higher floating rate in an increasing rate
      environment. In addition to improving QNB’s interest rate risk profile, the
      transactions should increase net interest income and the net interest rate
      margin during the remainder of 2007 as well as future periods.





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





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





The
      nature of QNB’s current operation is such that it is not subject to foreign
      currency exchange or commodity price risk. At March 31, 2007, QNB did not have
      any hedging transactions in place such as interest rate swaps, caps or floors.
      As a result of selecting certain financial assets and liabilities to value
      using
      a fair value measurement, QNB is researching the use of interest rate caps
      and
      floors to reduce net income volatility resulting from changing interest rates.





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





Change
                in Interest Rates
            
            Net
                Interest Income
            
            Dollar
                Change
            
            Percent
                Change+300
                Basis Points
            
            $
            14,548
            
            $
            (2,414
            )
            
            (14.23
            )%+200
                Basis Points
            
            
            15,323
            
            
            (1,639
            )
            
            (9.66
            )+100
                Basis Points
            
            
            16,280
            
            
            (682
            )
            
            (4.02
            )FLAT
                RATE
            
            
            16,962
            
            
            -
            
            
            --100
                Basis Points
            
            
            17,016
            
            
            54
            
            
            .32-200
                Basis Points
            
            
            16,448
            
            
            (514
            )
            
            (3.03
            )




Page
          34




**QNB
      CORP. AND SUBSIDIARY**





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


**OF
      OPERATIONS AND FINANCIAL CONDITION**


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





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





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





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





Page35




**QNB
      CORP. AND SUBSIDIARY**





**PART
      II. OTHER INFORMATION**





**MARCH
      31, 2007**





Item
                1.
            Legal
                ProceedingsNone.Item
                1A.
            Risk
                FactorsThere
                were no material changes to the Risk Factors described in Item 1A
                in QNB’s
                AnnualReport
                on Form 10-K for the period ended December 31, 2006.Item
                2.
            Unregistered
                Sales of Equity Securities and Use of ProceedsNone.Item
                3.
            Default
                Upon Senior SecuritiesNone.Item
                4.
            Submission
                of Matters to Vote of Security HoldersNone.Item
                5.
            Other
                InformationNone.Item
                6.
            Exhibits




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




Page
          36





**SIGNATURES**





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


QNB
                Corp.Date:May 10, 2007
            By:
            /s/
              Thomas J. BiskoThomas
                J. Bisko
              President/CEO Date:May 10, 2007
            By:
            /s/
              Bret
              H. KrevolinBret H. Krevolin
              Chief Financial
                Officer


Page37