SECURITIES AND EXCHANGE COMMISSION
                              WASHINGTON, DC 20549


                                    FORM 10-Q

(Mark One)

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

     For the quarterly period ended June 30, 1998


                                       OR

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

         For the transition period from _______________ to __________________



                         Commission file number 0-17706
                         -------------------------------


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


           Pennsylvania                                23-2318082
     ---------------------------           -----------------------------------
     (State or Other Jurisdiction          (I.R.S. Employer Identification No.)
    of Incorporation or Organization)


    10 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 [X]  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 [x] No [ ]

     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 July 10, 1998
-----------------------------                     ----------------------------
Common Stock, par value $1.25                               1,431,912

<PAGE>
                            QNB CORP. AND SUBSIDIARY

                                    FORM 10-Q

                           QUARTER ENDED JUNE 30, 1998


                                      INDEX


                         PART I - FINANCIAL INFORMATION


ITEM 1.           FINANCIAL STATEMENTS                                PAGE

                    Consolidated  Statements  of Income for
                    Three and Six Months Ended June 30, 1998
                    and 1997                                            1

                    Consolidated Balance Sheets at June 30, 1998
                    and December 31, 1997                               2

                    Consolidated Statements of Cash Flows for Six
                    Months Ended June 30, 1998 and 1997                 3

                    Notes to Consolidated Financial Statements          4


ITEM 2.           MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF
                       OPERATIONS AND FINANCIAL CONDITION               6

ITEM 3.           Quantitative and Qualitative Disclosure About
                  Market Risk                                          19


                           PART II - OTHER INFORMATION

ITEM 1.           Legal Proceedings.                                   20

                    (See Regulation S-K Item 305)

ITEM 2.           Changes in Securities                                20

ITEM 3.           Defaults Upon Senior Securities                      20

ITEM 4.           Submissions of Matters to a Vote of Securities
                  Holders                                              20    

ITEM 5.           Other Information                                    21    

ITEM 6.           Exhibits and Reports on Form 8-K                     21    
          

<PAGE>

                         PART I - FINANCIAL INFORMATION

ITEM 1.  FINANCIAL STATEMENTS

<TABLE>      
<CAPTION>
CONSOLIDATED STATEMENTS OF INCOME

                                            (in thousands, except share data)
                                                       (unaudited)
                                             --------------------------------
                                              Three Months        Six Months
                                             Ended June 30,      Ended June 30,
                                             1998      1997      1998      1997
--------------------------------------------------------------------------------
<S>                                        <C>       <C>       <C>       <C>
Interest Income
Interest and fees on loans                 $3,777    $3,534    $7,402    $6,999
Interest and dividends on investment
 securities:
     Taxable                                1,632     1,535     3,257     2,959
     Tax-exempt                               160       135       300       265
Interest on Federal funds sold                119        48       184        92
--------------------------------------------------------------------------------
     Total interest income                  5,688     5,252    11,143    10,315
--------------------------------------------------------------------------------
Interest Expense
Interest on deposits
     NOW accounts                             150       167       293       332
     Money market accounts                    239       233       474       464
     Savings                                  206       194       404       384
     Time                                   1,444     1,339     2,836     2,634
     Time over $100,000                       287       237       564       448
Interest on short-term borrowings              86        77       161       147
--------------------------------------------------------------------------------
     Total interest expense                 2,412     2,247     4,732     4,409
--------------------------------------------------------------------------------
     Net interest income                    3,276     3,005     6,411     5,906
Provision for loan losses                     100       100       200       200
--------------------------------------------------------------------------------
     Net interest income after
      provision for loan losses             3,176     2,905     6,211     5,706
--------------------------------------------------------------------------------
Non-Interest Income
Fees for services to customers                256       269       515       538
Mortgage servicing fees                        44        48        86        93
Net gain on investment
 securities available-for-sale                 --         5        68       165
Net gain on sale of loans                     110         8       164        42
Other operating income                        109       119       299       238
--------------------------------------------------------------------------------
     Total non-interest income                519       449     1,132     1,076
--------------------------------------------------------------------------------
Non-Interest Expense
Salaries and employee benefits              1,363     1,303     2,724     2,654
Net occupancy expense                         160       162       316       325
Furniture and equipment expense               162       158       319       345
Marketing expense                             124        82       188       141
Supplies expense                               51        42        94        92
Professional fees                              29        40        61        89
Insurance expense                              24        24        48        51
Other real estate owned expense                35        71        81       106
Other expense                                 460       372       845       730
--------------------------------------------------------------------------------
          Total non-interest expense        2,408     2,254     4,676     4,533
--------------------------------------------------------------------------------
     Income before income taxes             1,287     1,100     2,667     2,249
Provision for income taxes                    346       319       749       647
--------------------------------------------------------------------------------
     Net Income                            $  941    $  781    $1,918    $1,602
--------------------------------------------------------------------------------
     Net Income Per Share - Basic          $  .66    $  .55    $ 1.34    $ 1.12
--------------------------------------------------------------------------------
     Net Income Per Share - Diluted        $  .65    $  .54    $ 1.33    $ 1.12
--------------------------------------------------------------------------------
     Cash Dividends Per Share              $  .18    $  .16    $  .36    $  .32
--------------------------------------------------------------------------------
</TABLE>

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

                                     Page 1
<PAGE>

<TABLE>
QNB CORP. AND SUBSIDIARY
<CAPTION>
CONSOLIDATED BALANCE SHEETS

                                                         (in thousands)
                                                          (unaudited)
--------------------------------------------------------------------------------
                                                    June 30,       December 31,
                                                      1998            1997
--------------------------------------------------------------------------------
<S>                                               <C>               <C>
Assets
Cash and due from banks                            $ 12,961         $ 12,574
Federal funds sold                                    8,210            2,022
Investment securities
     available-for-sale                              76,690           75,920
     held-to-maturity (market value
      $45,154 and $40,713)                           44,829           40,400
Total loans, net of unearned income of
      $373 and $448                                 168,595          167,720
     Allowance for loan losses                       (2,886)          (2,670)
--------------------------------------------------------------------------------
          Net loans                                 165,709          165,050
Premises and equipment, net                           4,181            4,066
Other real estate owned                                 773            1,564
Accrued interest receivable                           2,007            2,007
Other assets                                          2,304            2,169
--------------------------------------------------------------------------------
Total assets                                       $317,664         $305,772
--------------------------------------------------------------------------------

Liabilities
Deposits
     Demand, non-interest-bearing                  $ 37,850         $ 38,692
     NOW accounts                                    41,895           42,176
     Money market accounts                           32,604           32,520
     Savings                                         37,878           36,629
     Time                                           106,779          101,447
     Time over $100,000                              19,320           15,702
--------------------------------------------------------------------------------
          Total deposits                            276,326          267,166
Short-term borrowings                                11,510           10,342
Accrued interest payable                              1,125            1,057
Other liabilities                                     1,400            1,375
--------------------------------------------------------------------------------
Total liabilities                                   290,361          279,940
--------------------------------------------------------------------------------

Commitments and contingencies

Shareholders' Equity
Common stock, par value $1.25 per share;
     authorized 5,000,000 shares; issued
     1,431,912 shares and 1,431,240 shares           1,790            1,789
Surplus                                              4,393            4,369
Retained earnings                                   20,204           18,801
Accumulated other comprehensive income                 916              873
--------------------------------------------------------------------------------
Total shareholders' equity                          27,303           25,832
--------------------------------------------------------------------------------
Total liabilities and shareholders' equity        $317,664         $305,772
--------------------------------------------------------------------------------
</TABLE>

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

                                     Page 2
<PAGE>

QNB CORP. and Subsidiary
--------------------------------------------------------------------------------
<TABLE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
<CAPTION>

                                                               (in thousands)
                                                                (unaudited)
--------------------------------------------------------------------------------
Six Months Ended June 30,                                   1998         1997
--------------------------------------------------------------------------------
<S>                                                        <C>          <C>    
Operating Activities
     Net income                                            $1,918       $1,602
     Adjustments to reconcile net income to net cash
      provided by operating activities
          Provision for loan losses                           200          200
          Depreciation and amortization                       215          250
          Securities gains                                    (68)        (165)
          Net gain on sale of loans                          (164)         (42)
          Proceeds from sales of residential mortgages      7,199          593
          Originations of residential mortgages held-for-
           sale                                            (5,159)        (396)
          Net (gains) losses on sales or writedowns of
           other real estate owned                            (16)           9
          Deferred income tax provision                       (63)         (20)
          Change in income taxes payable                      106          (70)
          Net increase in interest and dividends receivable    --         (128)
          Net amortization of premiums and discounts            5            8
          Net increase in interest payable                     68           30
          Increase in other assets                           (124)         (82)
          Decrease in other liabilities                       (16)         (70)
--------------------------------------------------------------------------------
          Net cash provided by operating activities         4,101        1,719
--------------------------------------------------------------------------------
Investing Activities
     Proceeds from maturities and calls of investment
      securities
          available-for-sale                               10,924        6,146
          held-to-maturity                                  8,599        1,978
     Proceeds from sales of investment securities
          available-for-sale                                5,114        9,951
     Purchase of investment securities
          available-for-sale                              (16,701)     (26,958)
          held-to-maturity                                (13,007)      (1,245)
     Net increase (decrease) in Federal funds sold         (6,188)       2,510
     Proceeds from sales of student loans                   1,467        1,381
     Net increase in loans                                 (4,280)      (6,016)
     Net purchases of premises and equipment                 (331)         (54)
     Proceeds from the sale of other real estate owned        856          306
--------------------------------------------------------------------------------
          Net cash used by investing activities           (13,547)     (12,001)
--------------------------------------------------------------------------------
Financing Activities
     Net decrease (increase) in
      non-interest-bearing deposits                          (842)       6,636
     Net increase in interest-bearing deposits             10,002        6,048
     Net increase (decrease) in short-term borrowings       1,168         (187)
     Cash dividends paid                                     (515)        (457)
     Proceeds from issuance of common stock                    20           52
--------------------------------------------------------------------------------
          Net cash provided by financing activities         9,833       12,092
--------------------------------------------------------------------------------
     Increase in cash and cash equivalents                    387        1,810
     Cash and cash equivalents at beginning of year        12,574       12,459
--------------------------------------------------------------------------------
     Cash and cash equivalents at end of period           $12,961      $14,269
--------------------------------------------------------------------------------
Supplemental Cash Flow Disclosures
     Interest paid                                        $ 4,664      $ 4,379
     Income taxes paid                                        700          730
     Non-Cash Transactions
          Change in net unrealized holding gains (losses),
           net of taxes, on investment securities              43          (29)
          Transfer of loans to other real estate owned         49           --

</TABLE>

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

                                     Page 3

<PAGE>

                            QNB CORP. AND SUBSIDIARY


                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                  JUNE 30, 1998 AND 1997, AND DECEMBER 31, 1997
                                   (Unaudited)


1. REPORTING AND ACCOUNTING POLICIES

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

The  consolidated  balance sheet as of June 30, 1998, as well as the  respective
statements  of income and cash flows for the three and six month  periods  ended
June 30, 1998 and 1997, are unaudited. These financial statements should be read
in conjunction with the audited financial  statements and notes thereto included
in QNB's 1997 Annual Report incorporated in the Form 10-K.

The  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.  The results for the periods
presented are not necessarily  indicative of the full year.  Certain accounts in
last  year's  financial  statements  have been  reclassified  to  conform to the
current  year's  presentation.  These  reclassifications  had no  effect  on net
income.

2. PER SHARE DATA

The following sets forth the computation of basic and diluted earnings per share
(share and per share data are not in thousands):

<TABLE>
<CAPTION>

                                  For the Three Months        For the Six Months
                                    Ended June 30,              Ended June 30,
                                     1998     1997              1998     1997
                                     ----     ----              ----     ----
<S>                              <C>        <C>               <C>       <C>

Numerator for basic and diluted
 earnings per share-net income       $941    $   781          $1,918     $1,602

Denominator for basic earnings
 per share- Weighted average
 shares outstanding             1,431,483  1,427,643       1,431,362  1,427,178

Effect of dilutive securities-
 employee Stock options            10,560      5,543           9,262      5,608

Denominator for diluted earnings
 per share- adjusted weighted
 average shares outstanding     1,442,043   1,433,186      1,441,624  1,432,786

Earnings per share-basic             $.66        $.55          $1.34      $1.12
Earnings per share-diluted           $.65        $.54          $1.33      $1.12

</TABLE>

                                   Form 10-Q
                                     Page 4
<PAGE>

3. COMPREHENSIVE INCOME

In June 1997, the Financial  Accounting  Standards  Board (FASB) issued SFAS No.
130,  "Reporting  Comprehensive  Income." SFAS No. 130 requires the inclusion of
comprehensive income,  either in a separate statement,  or as part of a combined
statement of income and  comprehensive  income in a full set of  general-purpose
financial statements.

Comprehensive  income is defined  as the  change in equity of a business  entity
during a period from transactions and other events and circumstances,  excluding
those resulting from investments by and  distributions  to owners.  For QNB, the
sole component of other comprehensive income is the unrealized holding gains and
losses on available-for-sale investment securities.

The following shows the components and activity of  comprehensive  income during
the period (net of the income tax effect):


Unrealized  holding gains arising  during the period on
 securities  held at June 30, 1998                                    $ 73
Reclassification adjustment equal to beginning unrealized
 for all sold securities                                               (30)
                                                                      -----
     Net change in unrealized during the period                         43
     Unrealized, beginning of period                                   873
                                                                      -----
     Unrealized, end of period                                        $916
     Net income                                                     $1,918

Other comprehensive income, net of tax:
     Unrealized holding gains arising during the period                 43
                                                                      ----
Comprehensive Income                                                $1,962
                                                                    ======

                                   Form 10-Q
                                     Page 5

<PAGE>

                            QNB CORP. AND SUBSIDIARY


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  which  provides a full range of commercial and retail
banking services through its banking  subsidiary,  The Quakertown  National Bank
(the  "Bank"),  a 121 year old  community  bank with  locations  in Upper Bucks,
Northern Montgomery and Southern Lehigh Counties.  The results of operations and
financial  condition  discussed herein are presented on a consolidated basis and
the consolidated entity is referred to herein as "QNB."

In addition to historical  information,  this management discussion and analysis
contains forward-looking  statements.  The forward-looking  statements contained
herein are subject to certain  risks and  uncertainties  that could cause actual
results  to  differ  materially  from  those  projected  in the  forward-looking
statements.  Readers  are  cautioned  not  to  place  undue  reliance  on  these
forward-looking  statements,  which reflect management's analysis only as of the
date hereof.  The  Corporation  undertakes no  obligation to publicly  revise or
update these forward-looking  statements to reflect events or circumstances that
arise after the date hereof.  Readers should  carefully  review the risk factors
described in other  documents the  Corporation  files from time to time with the
Securities and Exchange Commission, including the quarterly reports on Form 10-Q
filed by the  Corporation in 1998, and any Current  Reports on Form 8-K filed by
the Corporation.

RESULTS OF OPERATIONS - OVERVIEW

QNB recorded  record  earnings of $941,000 or $.65 per share on a diluted  basis
for the three month period ending June 30, 1998.  This represents a 20.5 percent
increase from net income of $781,000 or $.54 per share-diluted  reported for the
same period in 1997.  For the six month  periods  ending June 30, 1998 and 1997,
net income was  $1,918,000  and  $1,602,000,  respectively  an  increase of 19.7
percent.  Net income per share-diluted was $1.33 and $1.12 for the corresponding
six month periods.

The  increase  in net  income for the both the three and six month  periods  was
primarily a result of higher net interest income. Net interest income represents
interest income, dividends, and fees on earning assets, less expense incurred on
funding  sources.  Net interest  income  increased to $3,276,000 for the quarter
ending  June 30,  1998 from  $3,005,000  for the same  quarter  in 1997.  An 8.8
percent  increase in average  earning assets and a three basis point increase in
the net interest margin  contributed to the increase in net interest income. The
recovery of interest on a non-accrual loan  contributed  $88,000 to net interest
income during the second quarter of 1998.  Excluding this  recognition,  the net
interest  margin  would have  declined by  approximately  nine basis points when
comparing  the  two  quarters.  Declining  interest  rates  on  both  loans  and
investment securities negatively impacted the net interest margin.

Non-interest  income  increased  $70,000 or 15.6 percent when  comparing the two
quarters. Gains on the sale of both residential mortgages and student loans were
$110,000 and $8,000 for the respective  quarters  ending June 30, 1998 and 1997.
The $72,000  increase in the gains on residential  mortgages sales in the second
quarter of 1998 was a result of the  refinancing  boom  resulting from extremely
low  mortgage  rates.  The  $30,000  variance in the gain on the sale of student
loans was a function of timing.  Most of the gain on student  loans for 1997 was
recorded during the first quarter.

Total non-interest  expense increased $154,000 or 6.8 percent when comparing the
two quarters.  Higher  personnel  costs and marketing  costs  contributed to the
increase.  A $40,000 pledge to the Main Street Program,  a program  designed for
the  revitalization  of  downtown  Quakertown,  contributed  to the  increase in
marketing expense.

                                   Form 10-Q
                                     Page 6

<PAGE>

                            QNB CORP. AND SUBSIDIARY

                 MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS
                      OF OPERATIONS AND FINANCIAL CONDITION

RESULTS OF OPERATIONS (Continued)

For the six month period  ending June 30, 1998,  net interest  income  increased
$505,000 or 8.6 percent to  $6,411,000.  Significant  growth in average  earning
assets  accounts for most of the  improvement  in net interest  income.  Average
earning  assets  increased  8.4 percent when  comparing  the two  periods.  Also
positively  impacting  net  interest  income  was a slight  increase  in the net
interest margin from 4.64 percent to 4.66 percent.  Excluding the recognition of
interest on a non-accrual  loan, the net interest  margin would have declined to
4.60 percent for the six months ending June 30, 1998.

Non-interest  income increased  $56,000 or 5.2 percent and non-interest  expense
increased $143,000 or 3.2 percent when comparing the six month periods. Gains on
the sale of  residential  mortgages and  increased  fees from  checkcard  income
contributed to the increase in non-interest  income.  Slightly higher  personnel
expense as well as an increase in marketing  costs and the  amortization  of the
deposit  premium  related to the  acquisition of deposits from First Lehigh Bank
during the fourth quarter of 1997  contributed  to the increase in  non-interest
expense.

Return on average  assets was 1.21 percent and 1.09 percent  while the return on
average  equity was 14.49  percent and 13.34 percent for the three months ending
June 30, 1998 and 1997, respectively.  For the six month periods ending June 30,
1998 and 1997,  return on average  assets was 1.26  percent and 1.14 percent and
the return on average equity was 15.05 percent and 13.91 percent, respectively.


NET INTEREST INCOME

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

Net  interest  income for the three  months  ended June 30, 1998 was  $3,276,000
compared  to  $3,005,000  for the period  ending June 30,  1997.  An 8.8 percent
increase  in average  earning  assets and a 3 basis  point  increase  in the net
interest  margin  contributed to the increase in net interest income between the
periods.  The yield on earning  assets on a fully taxable  equivalent  basis was
7.95  percent for the second  quarter of 1998 versus 7.96 percent for the second
quarter of 1997,  while the rate paid on  interest-bearing  liabilities was 3.89
percent for both periods.  The net interest margin on a fully taxable equivalent
basis for the three month period  ended June 30, 1998 was 4.66 percent  compared
to 4.63 percent for the same period in 1997.  Positively  impacting the yield on
earning assets and the net interest margin was the recognition of  approximately
$88,000  in  interest  income  on a  non-accrual  loan.  The  loan  had  been in
non-accrual  status  since  September of 1995 and was paid off during the second
quarter  of 1998.  Excluding  the  recognition  of this  interest,  the yield on
earning assets would have been 7.83 percent, a decline of 13 basis points, while
the net interest  margin would have been 4.54  percent,  a decline of nine basis
points from the second quarter of 1997.

Declining  interest rates during 1998,  particularly  during the second quarter,
negatively impacted the yield on both investment securities and loans. While the
yield on investment  securities  for the second  quarter of 1998 of 6.60 percent
represents a slight  increase from the 6.59 percent yield recorded in the second
quarter of 1997, it represents a 13 basis point decline from the yield  recorded
during the first quarter of 1998. The lower rate

                                   Form 10-Q
                                     Page 7

<PAGE>

                            QNB CORP. AND SUBSIDIARY

                 MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS
                      OF OPERATIONS AND FINANCIAL CONDITION

NET INTEREST INCOME (Continued)

environment  has increased the  prepayments  on  mortgage-backed  securities and
callable  agency bonds.  The  reinvestment  of these  proceeds has been at lower
rates.  Helping  to  mitigate  some of the  impact  of lower  rates on the total
portfolio was the sale of approximately $9,000,000 in securities with a weighted
average  yield of 5.80  percent  at the end of 1997 and the  beginning  of 1998.
These funds were reinvested in higher  yielding  securities with slightly longer
maturities.  The yield on average  loans,  excluding  the impact of the interest
recognized on the  non-accrual  loan,  was 8.77 percent for the second  quarter.
This  represents a decline from the yield of 8.92  percent  recorded  during the
second  quarter of 1997 and the 8.89 percent for the first quarter of 1998.  The
decline in the yields on loans is a result of falling  market  interest rates as
well as the  reduction  of rates for existing  commercial  loan  customers.  The
extreme  competition  for loans is  causing  the  pricing  of loans to  decline.
Average  loans to average  earning  assets was 58.3 percent and 59.5 percent for
the three  month  periods  ending June 30,  1998 and 1997.  This ratio  declined
despite a 6.5 percent increase in average loans.

Net  interest  income  for the  six  month  period  ending  June  30,  1998  was
$6,411,000, an increase of $505,000 over the $5,906,000 recorded in 1997. An 8.4
percent  increase in average  earning assets and a 2 basis point increase in the
net interest margin contributed to the increase. Total interest income increased
$828,000 from  $10,315,000 to  $11,143,000  when comparing the six month periods
ending June 30, 1997 to June 30, 1998.  The yield on earning  assets,  excluding
the impact of the interest on the  non-accrual  loan decreased from 7.97 percent
to 7.90  percent,  with the yield on loans  declining  from 8.91 percent to 8.81
percent.  During  the six  month  period  the  yield  on  investment  securities
increased  from 6.59  percent to 6.66  percent.  Average  investment  securities
increased 9.3 percent to $112,354,000  while average loans increased 6.0 percent
to $170,002,000.  Total interest expense  increased  $323,000 from $4,409,000 to
$4,732,000 for the six month periods. The yield on interest-bearing  liabilities
increased  slightly  from  3.88  percent  to 3.89  percent,  with  the  yield on
interest-bearing  deposits  falling one basis point to 3.90 percent and the rate
paid on  short-term  borrowings  increasing  49 basis  points  to 3.71  percent.
Average interest-bearing  deposits increased 7.6 percent to $236,281,000 for the
six month period ending June 30, 1998.

The  small  increase  in the  rate  paid  on  interest-bearing  liabilities  was
primarily the result of higher rates on time deposits and short-term  borrowings
offset by lower rates on NOW. The average rate paid on time  deposits  increased
three basis points while the rate paid on NOW  decreased  30 basis  points.  QNB
lowered  the rate  paid on its  interest-checking  NOW  accounts  because  these
accounts  are  relatively  insensitive  to  changes  in  interest  rates  and to
partially  offset higher rates paid on other more rate sensitive  accounts.  The
yield on short-term borrowings, primarily cash management accounts, increased 49
basis points when comparing the six month  periods.  During the third quarter of
1997 QNB changed the rate structure on its cash management  accounts to a tiered
structure that pays a higher rate of interest on higher balances.  This was done
to  compete  with  brokerage  house  and  mutual  fund  money  market  products.
Management  expects the net interest  margin to decline  throughout  the rest of
1998 as a result of lower yields on earning assets,  both investment  securities
and  loans.  The low  rate  environment  and the flat  yield  curve  will  cause
prepayments  on  mortgage-backed  securities  and the  call of  agency  bonds to
increase.  This  additional  cash flow will most likely be  reinvested  in lower
yielding  securities.  Yields on loans  may  continue  to  decline  as  existing
commercial  loan customers seek to have their rates lowered as well as new loans
being booked at lower rates. If QNB can achieve its primary goals of loan growth
and an  increase  in the  loan-to-average  earning  asset  ratio,  the impact on
interest income and the net interest margin of lower rates maybe lessened as QNB
can generally yield more on its loans than it can on its investment  securities.
With  regard to  deposits,  management  anticipates  that rates will remain near
current levels as the competition for funding sources remains strong.


                                   Form 10-Q
                                     Page 8

<PAGE>
                            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 bring the  allowance for loan
losses to a level considered adequate in relation to the risk of probable losses
in the loan portfolio.  Actual loan losses,  net of recoveries,  serve to reduce
the allowance.

Management  uses various  tools to assess the adequacy of the allowance for loan
losses.  One tool is a methodology  recommended by the Office of the Comptroller
of the  Currency.  This  methodology  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. Other tools include ratio
analysis and peer group analysis.  Accounting requirements,  as discussed below,
also impact the determination of the allowance for loan losses.

The  provision  for loan losses was  $100,000  for both three month  periods and
$200,000  for  both six  month  periods  ending  June 30,  1998  and  1997.  Net
charge-offs in the second  quarter of 1998 were $1,000  compared to $117,000 for
the same  period in 1997.  QNB had a net  recovery  of $16,000 for the first six
months of 1998.  This  compares  to a net  charge-off  $125,000  during the same
period of 1997. The partial  charge-off of a group of investment  property loans
to one borrower  account for $94,000 of the charge-offs in the second quarter of
1997.  Management  anticipates the provision for loan losses in 1998 will remain
near 1997 levels despite the expected  continuing  improvement in asset quality.
Anticipated loan growth will make any reduction in the provision for loan losses
unlikely.

Non-performing  assets  (non-accruing loans, loans past due 90 days or more, and
other real estate owned)  continued  their positive  trend  downward  during the
first half of 1998 and amounted to .55 percent of total assets at June 30, 1998.
This  compares to 1.26  percent at June 30, 1997 and .96 percent at December 31,
1997.  Non-accrual loans were $937,000 and $2,491,000 at June 30, 1998 and 1997.
Non-accrual loans at December 31, 1997 were $1,209,000.  Other real estate owned
was  $773,000  at June 30,  1998  compared  to  $1,080,000  at June 30, 1997 and
$1,564,000 at December 31, 1997. Management anticipates non-performing assets to
decline  further as a result of the sale of other real estate  owned and through
payments received on non-performing loans.

There were no restructured loans as of June 30, 1998,  December 31, 1997 or June
30, 1997 as defined in  Statement  of  Financial  Accounting  Standards  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 $2,886,000 and $2,670,000 at June 30, 1998 and
December 31, 1997,  respectively.  The ratio of the allowance to total loans was
1.71 percent and 1.59  percent for the  respective  periods.  While QNB believes
that its  allowance  is adequate to cover  losses in the loan  portfolio,  there
remain  inherent  uncertainties  regarding  future  economic  events  and  their
potential impact on asset quality.


                                   Form 10-Q
                                     Page 9

<PAGE>

                            QNB CORP. AND SUBSIDIARY

                 MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS
                      OF OPERATIONS AND FINANCIAL CONDITION


PROVISION FOR LOAN LOSSES (Continued)

A loan is considered impaired, based on current information and events, if it is
probable that QNB will be unable to collect the scheduled  payments of principal
or interest when due according to the contractual terms of the loan agreement.

The  measurement  of impaired  loans is generally  based on the present value of
expected future cash flows discounted at the historical effective interest rate,
except that all collateral-dependent  loans are measured for impairment based on
the fair value of the collateral.

At June 30, 1998 and 1997, the recorded investment in loans for which impairment
has been  recognized  totaled  $866,000 and $2,247,000,  respectively,  of which
$816,000 and $1,454,000 related to loans with no valuation allowance and $50,000
and  $793,000  related  to loans with a  corresponding  valuation  allowance  of
approximately $50,000 and $544,000,  respectively.  Most of the loans identified
as impaired are collateral-dependent.


NON-INTEREST INCOME

QNB,  through its core  banking  business,  generates  various  fees and service
charges.  Total  non-interest  income is composed of service  charges on deposit
accounts,  mortgage servicing fees, gains on the sale of investment  securities,
gains  on the  sale of  residential  mortgages  and  student  loans,  and  other
miscellaneous fee income.  Total  non-interest  income increased $70,000 or 15.6
percent to $519,000 for the quarter  ending June 30, 1998 when  compared to June
30, 1997. For the six month period total  non-interest  income increased $56,000
or 5.2 percent to $1,132,000.

Fees for services to  customers,  the largest  component  of total  non-interest
income,  is primarily  comprised of service charges on deposit  accounts.  These
fees decreased 4.8 percent,  to $256,000 from  $269,000,  when comparing the two
quarters  and 4.3  percent to $515,000  when  comparing  the six month  periods.
Charges related to a lower volume of overdrafts account for most of the decline.
QNB reviews all service  charges and fee  schedules  related to its products and
services  on  an  ongoing   basis.   QNB  prices  its   products   and  services
competitively.

To date, when QNB sells its residential  mortgages in the secondary  market,  it
retains  servicing  rights.  A normal  servicing fee is retained on all mortgage
loans sold and serviced. Mortgage servicing fees for the quarter ending June 30,
1998 were  $44,000  which  represents  a $4,000  decline from the same period in
1997.  The decrease in mortgage  servicing fees for the quarter is a result of a
5.5 percent  decline in the average  balance of  mortgages  sold and serviced to
$67,036,000.  For the six month period mortgage  servicing fees decreased $7,000
or 7.5  percent to  $86,000.  The  average  balance of  mortgages  serviced  was
approximately $67,681,000 for the six month period ending June 30, 1998 compared
to  $71,998,000  for the first six months of 1997. The decrease in the volume of
mortgages  serviced for others is a result of payments,  both recurring and from
refinances,  outpacing the origination  and sale of new  residential  mortgages.
Management's decision to retain most 15 and some 20 year mortgages,  which would
have been sold in prior years has also reduced the amount of mortgages  sold and
serviced.  The timing of mortgage  payments and  delinquencies  also impacts the
amount of servicing fees recorded.  QNB anticipates mortgage servicing income to
increase  slightly  during  the  remainder  of 1998 due to the  increase  in the
origination  and sale of  residential  mortgages  resulting  from lower interest
rates.

                                   Form 10-Q
                                    Page 10
<PAGE>

                            QNB CORP. AND SUBSIDIARY

                MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS
                     OF OPERATIONS AND FINANCIAL CONDITION


NON-INTEREST INCOME (Continued)


There were no gains on sale of investment securities during the second period of
1998. This compares to net gains of $5,000 for the same period in 1997. The gain
on the sale in 1997 was a result of the sale of approximately $6,500,000 of U.S.
Treasury and U.S. agency  securities.  These  securities were primarily sold for
liquidity reasons.  Gains on the sale of investment  securities were $68,000 for
the first six months of 1998,  compared to $165,000  for the first six months of
1997. QNB owns a small portfolio of marketable equity  securities,  bank stocks.
During the first quarter of 1998 QNB sold a holding with a cost basis of $28,000
at a gain of $62,000.  This  compares to a similar sale during the first quarter
of 1997 when QNB sold  securities  with a cost basis of  $329,000  for a gain of
$159,000.  During the first quarter of 1998 QNB sold approximately $5,000,000 in
lower yielding  agency  securities at a gain of $6,000.  These  securities had a
weighted average yield of 5.81 percent and were sold for both liquidity purposes
and to  reposition  the  portfolio.  During  the first  quarter of 1997 QNB sold
approximately $3,467,000 of available-for-sale  agency debt securities at a gain
of $1,000.  This sale was also done for  liquidity  purposes.  QNB  historically
experiences deposit outflows at the beginning of the year.

QNB recorded a gain of $110,000 on the sale of loans  during the second  quarter
of 1998. This compares to a $8,000 gain for the same period in 1997. For the six
month  periods  ending June 30, 1998 and 1997 net gains on the sale of loans was
$164,000  and  $42,000,  respectively.  The sale of student  loans  accounts for
$33,000 and $3,000 of the gains, during the second quarter of 1998 and 1997. QNB
sold  approximately  $1,256,000  and $251,000 in student loans during the second
quarter  of 1998 and 1997.  Gains on the sale of  student  loans  accounted  for
$36,000 and $32,000 of the total gains during the six month periods  ending June
30,  1998 and 1997,  respectively.  Most of the  student  loan sale  during 1997
occurred during the first quarter.  QNB  anticipates  that the gains recorded on
the sale of student loans will decline  dramatically  in 1999 as a result of the
reduction in prices paid by the student loan agencies.

The net gain on the sale of residential mortgage loans was $77,000 and 5,000 for
the three month  periods  ending June 30, 1998 and 1997 and $128,000 and $10,000
for the respective six month periods. The net gain on residential mortgage sales
is directly  related to the volume of mortgages sold and the timing of the sales
relative to the  interest  rate  environment.  The larger gains during 1998 is a
result of both  events.  Proceeds  from the sale of  residential  mortgages  was
approximately $5,148,000 and $268,000 during the second quarter of 1998 and 1997
and $7,199,000 and $593,000 for the six month periods.  Declining interest rates
during the first half of 1998  presented an  opportunity  for many  borrowers to
refinance their  mortgages at lower rates.  This provided an opportunity for QNB
to originate and sell more mortgages.  As of June 30, 1998 QNB had approximately
$267,000  in  mortgage  loans  classified  as held for  sale.  These  loans  are
accounted for at lower of cost or market.

                                   Form 10-Q
                                    Page 11

<PAGE>

                            QNB CORP. AND SUBSIDIARY

                MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS
                     OF OPERATIONS AND FINANCIAL CONDITION


NON-INTEREST INCOME (Continued)

Other operating  income  decreased  $10,000 to $109,000 when comparing the three
month  periods  ending  June 30,  1998 and  1997,  but  increased  $61,000  when
comparing the six month  periods.  For the quarter,  increases in check card and
ATM interchange  income  totaling  $15,000 were offset by lower rental income on
other real estate owned of $6,000 and the net loss on the  writedown and sale of
other real estate owned of $25,000.  The increase in other income when comparing
the six month  periods  includes  increases  in check  card and ATM  interchange
income of $20,000  and $8,000,  respectively.  The net gain on the sale of other
real estate owned accounts for $16,000 of the increase; while the recognition of
fees from official  checks  contributed  $11,000 to the total  increase in other
operating income.


NON-INTEREST EXPENSE

Non-interest  expense  includes  salaries and employee  benefits,  net occupancy
expense,  furniture and equipment expense,  marketing expense, supplies expense,
professional fees expense,  insurance expense,  other real estate owned expense,
and various other operating expenses.  Total non-interest  expense of $2,408,000
for the quarter  ending June 30, 1998  represents an increase of $154,000 or 6.8
percent from levels reported in the second quarter of 1997.  Total  non-interest
expense for the six months ending June 30, 1998 was  $4,676,000,  an increase of
$143,000 or 3.2 percent over 1997 levels.

Salaries and benefits, the largest component of non-interest expense,  increased
$60,000 or 4.6  percent to  $1,363,000  for the  quarter  ending  June 30,  1998
compared to the same quarter in 1997.  Salaries expense increased $73,000 or 7.2
percent during the period to $1,092,000 while benefits expense decreased $13,000
or 4.6 percent to  $271,000.  Excluding  the accrual  for  bonuses,  core salary
expense  increased 5.1 percent when  comparing  the two  quarters.  Annual merit
increases in addition to a slight  increase in the number of  employees  account
for the  increase  during 1998.  The decline in benefits  expense is a result of
lower medical costs and unemployment compensation costs.

Salaries and benefit  expense for the six month period  ending June 30, 1998 was
$2,724,000,  an increase of $70,000 or 2.6 percent from the same period in 1997.
Salary  expense was $78,000 or 3.8 percent  higher,  while  benefit  expense was
$8,000 or 1.4  percent  lower.  The  increase in salary  expense is  primarily a
reflection  of annual merit  increases.  Lower  medical  costs and  unemployment
compensation  costs  were  partially  offset by  increases  in the  accrual  for
retirement plan expense.

Net occupancy expense decreased $2,000 or 1.2 percent for the three month period
and $9,000 or 2.8 percent for the six month period.  Lower utility costs, due to
the  relatively  mild winter and spring account for the decline in net occupancy
expense.  Furniture and equipment  expense  increased $4,000 or 2.5 percent when
comparing the three month periods  ending June 30, 1998 and 1997,  but decreased
$26,000 or 7.5 percent when comparing the six month periods. The increase during
the  quarter  was a result of higher  costs for the  maintenance  of  equipment,
particularly  computer equipment.  The $13,000 increase in equipment maintenance
costs was partially  offset by a $9,000 decrease in depreciation  expense during
the quarter.

The significant  decrease in furniture and equipment  expense when comparing the
six month periods is the result of lower  depreciation  expense of $33,000.  QNB
uses an accelerated method of depreciation on its furniture and equipment.  This
provides for higher  expense in the earlier  years of an asset's  life.  QNB has
purchased relatively little furniture and equipment during the past three years.
These smaller amounts of purchases along with lower  depreciation  expense as an
asset  ages,  account  for the  decline in  depreciation  expense.  Depreciation
expense is

                                   Form 10-Q
                                    Page 12
<PAGE>

                            QNB CORP. AND SUBSIDIARY

                MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS
                     OF OPERATIONS AND FINANCIAL CONDITION


NON-INTEREST EXPENSE (Continued)

anticipated  to  increase  during  the  year  as QNB  invests  in  new  computer
technology and as older equipment is replaced.

Marketing  expense increased $42,000 to $124,000 for the quarter ending June 30,
1998 and $47,000 to $188,000 for the six month period.  A $40,000  pledge to the
Main Street  Program,  a program  designed  for the  revitalization  of downtown
Quakertown,  contributed  to the increase in marketing  expense.  An increase in
advertising expense in response to local banking mergers also contributed to the
increase.

Professional  fees decreased $11,000 or 27.5 percent when comparing the quarters
ending June 30, 1998 and 1997 and $28,000 or 31.5 percent when comparing the six
month  periods.  Less  reliance  on legal  counsel for loan  workout  situations
resulting from the improvement in asset quality along with the  reimbursement of
some previously expensed legal costs account for the decline.

Other real estate owned expense  decreased $36,000 to $35,000 when comparing the
second  quarter of 1998 to the same  quarter of 1997 and $25,000 to $81,000 when
comparing the six month periods. The lower amount in 1998 is a reflection in the
reduction in the number of  properties  owned and the costs of taxes,  insurance
and maintenance on these properties.  Other real estate expense in 1997 includes
the loss on the sale of a property of $9,000.  Management anticipates other real
estate  expense to continue to decline  during the year as the costs  associated
with these properties are eliminated as they are sold.

Total other expense for the three months  ending June 30, 1998 was $460,000,  an
increase of $88,000 or 23.7 percent over the same period in 1997. An increase in
the accrual for a director's deferred compensation plan accounted for $61,000 of
the  increase.  This  increase  reflects  an  adjustment  to the  interest  rate
assumption  caused by the decline in market interest rates.  The amortization of
the deposit  premium  relating to the  acquisition  completed  during the fourth
quarter of 1997 accounts for an additional $13,000 of the increase.

For the six month  period  ending  June 30,  1998,  other  non-interest  expense
increased  $115,000 or 15.8 percent to $845,000 when compared to the same period
in  1997.  The  adjustment  for  the  directors'   deferred   compensation  plan
contributed  $61,000 while the amortization of the deposit premium accounted for
$26,000 of the increase.  Increases in postage  expense,  directors fees,  state
taxes and loan origination costs were partially offset by declines in check card
expense and fraud  losses.  Other  expense in the first quarter of 1997 included
costs related to the startup and distribution of the check card.

INCOME TAXES

Applicable  income taxes and  effective  tax rates were $346,000 or 26.9 percent
for the three month period  ending June 30,  1998,  and $319,000 or 29.0 percent
for the same period in 1997.  For the six month period  applicable  income taxes
and effective  rates were $749,000 or 28.1 percent and $647,000 or 28.8 percent,
respectively.  The lower effective tax rate during the second quarter of 1998 is
mainly the  result of tax  credits  received  on an  investment  in a low income
housing project.

QNB  utilizes an asset and  liability  approach  for  financial  accounting  and
reporting of income taxes.  As of June 30, 1998 QNB's net deferred tax asset was
$412,000.  A deferred tax asset of $739,000  relating to the  allowance for loan
losses was partially  offset by a deferred tax  liability of $472,000  resulting
from the SFAS No.115 adjustment for available-for-sale investment securities. As
of June 30, 1997 QNB's net  deferred  tax asset was  $769,000 of which  $663,000
related to the allowance for loan losses.

                                   Form 10-Q
                                    Page 13
<PAGE>


                            QNB CORP. AND SUBSIDIARY

                MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS
                     OF OPERATIONS AND FINANCIAL CONDITION


BALANCE SHEET ANALYSIS

The Balance Sheet Analysis reviews average balance sheet data for the six months
ended June 30, 1998 and 1997, as well as the period  ending  balances as of June
30, 1998 and December 31, 1997.

Average  earning  assets for the six month period ended June 30, 1998  increased
$22,499,000 or 8.4 percent to $289,182,000  from $266,683,000 for the six months
ending June 30, 1997. Average loans and average investments increased $9,565,000
and $9,575,000,  respectively while Federal funds sold increased $3,374,000. The
increase  in  average  loans is a result  of the  business  development  program
developed over the past couple of years,  competitive  pricing and participation
relationships with other local community banks. Average commercial,  residential
mortgage and consumer loans  increased  $6,851,000,  $1,549,000 and  $1,165,000,
respectively.  The  increase in  commercial  loans is  primarily  in the area of
commercial  and industrial  loans.  Although a certain amount of these loans are
considered  unsecured,  the majority are secured by non-real  estate  collateral
such as equipment,  vehicles,  accounts receivable and inventory.  The growth in
the  residential   mortgage   portfolio  is  a  result  of  increased   mortgage
originations  spurred by the  refinancing  resulting from lower interest  rates.
QNB's  decision to retain in  portfolio  more  residential  mortgage  loans also
positively  impacted the balance of the portfolio.  The increase in the consumer
loan  portfolio  is a result  of home  equity  loan  promotions  and  attractive
interest rates.

The growth in average investment  securities were primarily in the categories of
U.S Government  agency bonds,  municipal bonds and  mortgage-backed  securities.
Agency  securities,   primarily  callable  bonds,  increased  $6,582,000,  while
municipal bonds increased $1,629,000 when comparing the six month periods.

The  growth  in  average  earning  assets  was  primarily  funded  by  increased
interest-bearing  deposits,  principally time deposits. Average interest-bearing
deposits  increased  $16,602,000  or  7.6  percent  while  non-interest  bearing
deposits  increased  $4,556,000 or 16.1 percent when comparing the two quarters.
Average  time  deposits  increased  $10,790,000  while  average NOW accounts and
savings accounts increased $2,749,000 and $2,175,000, respectively. The purchase
of  approximately  $6,800,000 in deposits from First Lehigh Bank  contributed to
the increase in total  deposits.  A significant  portion of the increase in time
deposits  were accounts with  balances  over  $100,000.  These average  balances
increased  $4,306,000.  Attractive rates on these products  compared to rates on
money market accounts  contributed to the increase.  These deposits tend to have
short  maturities.   Average   shareholders'   equity  increased  $2,470,000  to
$25,698,000.

Total assets at June 30, 1998 were  $317,662,000,  compared with $305,772,000 at
December 31, 1997,  an increase of 3.9 percent for the six month  period.  Total
deposits  increased from  $267,166,000  at December 31, 1997 to  $276,326,000 at
June 30, 1998.  This trend is encouraging as QNB  historically  has  experienced
deposit  run-off  during the first half of the year. The increase in assets from
December 31, 1997 to June 30, 1998 is primarily  centered in Federal  funds sold
and  investment   securities   which   increased   $6,188,000  and   $5,199,000,
respectively during the period. The higher balance of Federal funds sold at June
30, 1998 is in response to the increase in short-term  $100,000 time deposits as
well as the increase in balances held by abstract  companies who clear  mortgage
settlements  through QNB. These deposits tend to be short-term in nature.  Total
time deposits increased $8,950,000,  with time deposits over $100,000 increasing
$3,618,000.  Savings accounts increased  $1,249,000 while  non-interest  bearing
deposits declined by $842,000 from December 31, 1997 to June 30, 1998.

At June 30, 1998 the fair value of investment securities  available-for-sale was
$76,690,000 or $1,388,000 above the amortized cost of $75,302,000. This compares
to a fair value of $75,920,000 or $1,323,000 above


                                   Form 10-Q
                                    Page 14

<PAGE>

                            QNB CORP. AND SUBSIDIARY

                MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS
                     OF OPERATIONS AND FINANCIAL CONDITION


BALANCE  SHEET  ANALYSIS
(Continued)

the amortized cost of  $74,597,000  at December 31, 1997. An unrealized  holding
gain,  net of taxes,  of $916,000  and  $873,000  was recorded as an increase to
shareholders'  equity at June 30, 1998 and December 31, 1997.  Falling  interest
rates as well as continued price appreciation in the stock market contributed to
the increase in the fair value of the investment portfolio.

The   available-for-sale   portfolio   had  a  weighted   average   maturity  of
approximately 4 years and 11 months at June 30, 1998 and 5 years at December 31,
1997. The weighted average maturity is based on the stated contractual  maturity
of all  securities  except  for  mortgage-backed  securities  which are based on
estimated  average life. The maturity of the portfolio may be shorter because of
call  features  in  many  debt   securities   and  because  of   prepayments  on
mortgage-backed  securities. The interest rate sensitivity analysis reflects the
expected maturity  distribution of the securities portfolio based upon estimated
call dates and anticipated cash flows assuming management's most likely interest
rate environment.  The expected weighted average life of the  available-for-sale
portfolio  was 1 years and 8 months at June 30, 1998 and 1 year and 10 months at
December 31, 1997,  based on these  assumptions.  The slight  contraction of the
expected  average  life of the  portfolio is a result of the decline in interest
rates thereby  increasing the likelihood of some of the callable agency bonds to
be called earlier and an increase in the level of prepayments on mortgage-backed
securities.

Investment  securities  held-to-maturity  are reported at amortized  cost. As of
June  30,  1998  and  December  31,  1997,  QNB  had  securities  classified  as
held-to-maturity  with an amortized cost of $44,829,000  and  $40,400,000  and a
market value of $45,154,000 and $40,713,000,  respectively. The held-to-maturity
portfolio had a weighted  average  maturity of approximately 6 years at June 30,
1998 and 2 years and 10 months at  December  31,  1997.  The  expected  weighted
average life of the held-to-maturity  portfolio was 3 years and 6 months at June
30, 1998 and 2 years and 10 months at December  31,  1997.  The  increase in the
average maturity is a result of the purchase of approximately  $4,214,000 of ten
year  tax-exempt   municipal   securities  and  $8,793,000  of   mortgage-backed
securities  with average  lives of five years.  The purchase of  mortgage-backed
securities  replaced  the  run-off  of  approximately  $7,479,000  in  principal
reduction caused by prepayments.


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 tries to manage the coordination of its mix of cash, Federal
funds sold,  investment  securities and loans in order to match the  volatility,
seasonality,  interest  sensitivity  and  growth  trends of its  deposit  funds.
Liquidity is provided from asset sources  through  maturities  and repayments of
loans and  investment  securities,  net  interest  income  and fee  income.  The
portfolio of investments  available-for-sale and QNB's policy of selling certain
residential mortgage originations and student loans in the secondary market also
provide sources of liquidity.

Cash and due from banks, Federal funds sold,  available-for-sale  securities and
loans  held-for-sale  were  $98,427,000  and  $91,915,000  at June 30,  1998 and
December  31,  1997.  These  sources  were  adequate  to meet  seasonal  deposit
withdrawals and loan demand during the first half of 1998 and should be adequate
to  meet  normal  fluctuations  in  loan  demand  and  or  deposit  withdrawals.
Approximately  $35,583,000 and $36,510,000 of  available-for-sale  securities at
June 30, 1998 and December 31, 1997 were pledged as  collateral  for  repurchase
agreements,  public  deposits and other deposits as provided by law. The Bank is
currently  in the process of applying  for  membership  in the Federal Home Loan
Bank. This would provide QNB with an

                                   Form 10-Q
                                    Page 15

<PAGE>

                            QNB CORP. AND SUBSIDIARY

                MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS
                     OF OPERATIONS AND FINANCIAL CONDITION


LIQUIDITY (Continued)

additional source of liquidity through the ability to borrow both short-term and
longer term funds from the Federal Home Loan Bank.  Approval is expected  during
the third quarter of 1998.

The  consolidated  statements of cash flows present the changes in cash and cash
equivalents from operating,  investing and financing activities.  QNB's cash and
cash  equivalents  increased  $387,000 to  $12,961,000  at June 30,  1998.  This
compares to a  $1,810,000  increase  during the first six months of 1997.  After
adjusting net income for non-cash  transactions,  operating  activities provided
$4,101,000 in cash flow in the first six months of 1998,  compared to $1,719,000
in the same period of 1997.  An increase in  residential  mortgage loan activity
and higher net income account for most of the difference between the periods.

Net cash used by investing  activities was $13,547,000  during the first half of
1998. The $6,188,000  increase in Federal funds sold was the largest factor. The
purchase of investment  securities in excess of proceeds from maturities,  calls
or sales of  $5,071,000  and the net increase in loans of  $4,280,000  were also
activities that used cash. Proceeds from the sale of other real estate owned and
student loans provided $2,323,000 of cash. Net cash used by investing activities
was $12,001,000  during the first six months of 1997. This resulted largely from
the  purchase  of  investment  securities  exceeding  sales  and  maturities  by
$10,128,000  and a net  increase in loans of  $6,016,000.  A decrease in Federal
funds sold  provided  $2,510,000  while  proceeds from the sale of student loans
provided $1,381,000.

Net cash provided by financing activities of $9,833,000 during the six months of
1998 was the result of an increase in interest-bearing deposits,  primarily time
deposits.  An increase in the balances of repurchase  agreements,  also provided
cash. A reduction in non-interest bearing deposits of $842,000 was a use of cash
during the period.  Net cash  provided by financing  activities  of  $12,092,000
during  the first  six  months of 1997 was the  result  of an  increase  in both
non-interest-bearing  deposits and  interest-bearing  deposits,  primarily  time
deposits and money market accounts, of $6,636,000 and $6,048,000.

CAPITAL ADEQUACY

A strong  capital  position  is  fundamental  to  support  continued  growth and
profitability,  to serve the  needs of  depositors,  and to yield an  attractive
return  for  shareholders.  QNB's  shareholders'  equity  at June  30,  1998 was
$27,303,000 or 8.59 percent of total assets compared to shareholders'  equity of
$25,832,000 or 8.45 percent at December 31, 1997.  

Shareholders'  equity averaged  $25,698,000 for the first six months of 1998 and
$23,886,000 during all of 1997, an increase of 7.6 percent. The ratio of average
total equity to average total assets improved to 8.38 percent for 1998, compared
to 8.27  percent  for 1997.  The  increase  in the  equity  to asset  ratio is a
function of significantly  higher net income,  an increase in capital  retention
despite  increasing the cash dividend in both 1998 and 1997 and modest growth in
average assets.

QNB Corp.  and the  Quakertown  National Bank are 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),  Tier II capital
which  includes a portion of the  allowance  for loan losses,  and total capital
(Tier I plus II). Risk-based capital ratios are

                                   Form 10-Q
                                    Page 16

<PAGE>


                            QNB CORP. AND SUBSIDIARY

                MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS
                     OF OPERATIONS AND FINANCIAL CONDITION


CAPITAL ADEQUACY (Continued)

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 assets.

The minimum  regulatory capital ratios are 4.00 percent for Tier I, 8.00 percent
for the total risk-based and 4.00 percent for leverage.  Under the requirements,
QNB has a Tier I  capital  ratio of 14.06  percent  and 13.49  percent,  a total
risk-based ratio of 15.32 percent and 14.74 percent and a leverage ratio of 8.33
percent and 8.23 percent at June 30, 1998 and December 31, 1997, respectively.

The Federal Deposit  Insurance  Corporation  Improvement Act of 1991 established
five capital level  designations  ranging from "well capitalized" to "critically
undercapitalized."  At June 30,  1998 and  December  31,  1997 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 Tier I leverage
ratio of 5.00 percent.

INTEREST RATE SENSITIVITY

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

Gap analysis measures the difference  between volumes of  rate-sensitive  assets
and  liabilities  and quantifies  these  repricing  differences for various time
intervals. Static gap analysis describes interest rate sensitivity at a point in
time.  However, it alone does not accurately measure the magnitude of changes in
net interest income since 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  and  amortizing  loans are
scheduled based on their  anticipated  cash flow.  Savings  accounts,  including
passbook,  statement  savings,  money market,  and NOW  accounts,  do not have a
stated  maturity or repricing term and can be withdrawn or repriced at any time.
This may impact QNB's margin if more expensive  alternative  sources of deposits
are required to fund loans or deposit runoff.  Management projects the repricing
characteristics   of  these  accounts  based  on  historical   performance   and
assumptions  that it believes  reflect  their rate  sensitivity.  A positive gap
results when the amount of interest rate sensitive  assets exceeds interest rate
sensitive  liabilities.  A negative gap results when the amount of interest rate
sensitive liabilities exceeds interest rate sensitive assets.

QNB  primarily   focuses  on  the  management  of  the  one-year  interest  rate
sensitivity gap. At June 30, 1998,  interest-earning  assets scheduled to mature
or  likely to be  called,  repriced  or  repaid  in one year were  $107,149,000.
Interest-sensitive  liabilities  scheduled to mature or reprice  within one year
were  $119,236,000.  The one year  cumulative gap, which reflects QNB's interest
sensitivity  over a period of time, was a negative  $12,07,000 at June 30, 1998.
The cumulative  one-year gap equals 4.08 percent of total earning  assets.  This
negative or  liability  sensitive  gap will  generally  benefit QNB in a falling
interest rate  environment,  while rising interest rates could negatively impact
QNB.


                                   Form 10-Q
                                    Page 17
<PAGE>

                            QNB CORP. AND SUBSIDIARY

                MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS
                     OF OPERATIONS AND FINANCIAL CONDITION


INTEREST RATE SENSITIVITY (Continued)

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.

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.  Based on management's estimate of
balance sheet growth and  composition  and interest rates for the next year, net
interest  income for the next twelve  months is  expected  to increase  modestly
compared to the prior  twelve  months.  The  projected  increase in net interest
income is primarily the result of forecasted  growth in total earning assets and
a change in the composition of earning  assets,  with the loan to earning assets
ratio increasing slightly.  These factors will be partially offset by a decrease
in the net interest margin.

If  interest  rates are 100 basis  points  lower than  management's  most likely
interest rate environment, the simulation model projects net interest income for
the next twelve months to slightly exceed the most likely scenario.  Conversely,
if interest rates were 100 basis points higher, net interest income for the most
likely  scenario would decline  slightly.  These results are consistent with the
results of the gap analysis described above.

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.

In the event QNB should  experience  a mismatch  in its desired gap ranges or an
excessive  decline in its net interest  income  subsequent  to an immediate  and
sustained  change in interest  rates,  it has a number of options which it could
utilize  to  remedy  such a  mismatch.  QNB  could  restructure  its  investment
portfolio  through sale or purchase of securities with more favorable  repricing
attributes. It could also emphasize loan products with appropriate maturities or
repricing  attributes,  or it could attract  deposits or obtain  borrowings with
desired maturities.

The nature of QNB's current  operation is such that it is not subject to foreign
currency exchange or commodity price risk. Additionally, neither the Corporation
nor the Bank owns trading assets. At June 30, 1998, QNB did not have any hedging
transactions in place such as interest rate swaps, caps or floors.

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

--------------------------------------------------------------------------------
Change in Interest Rates   Net Interest Income   Dollar Change   Percent Change
--------------------------------------------------------------------------------
     +300 Basis Points        $11,412               $(1,318)         (10.35)%
     +200 Basis Points         11,824                  (906)          (7.12)
     +100 Basis Points         12,316                  (414)          (3.25)
     FLAT RATE                 12,730                     -               -
     -100 Basis Points         13,135                   405            3.18
     -200 Basis Points         13,309                   579            4.55
     -300 Basis Points         13,233                   503            3.95


                                   Form 10-Q
                                    Page 18

<PAGE>

                            QNB CORP. AND SUBSIDIARY

                MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS
                     OF OPERATIONS AND FINANCIAL CONDITION


IMPACT OF YEAR 2000

QNB is currently in the process of addressing the challenge that faces all users
of automated  systems,  including  information  systems.  Many computer  systems
process  transactions based on two digits  representing the year of transaction,
rather than a full four digits.  These computer systems may not operate properly
when the last two digits  become  "00",  as will  occur on January 1, 2000.  The
problem could affect a wide variety of automated  information  systems,  such as
mainframe applications, personal computers, communication systems, environmental
systems and other information systems.

At the  beginning of 1997,  QNB  developed a five phase plan to address the year
2000 issue. These phases are Awareness, Assessment,  Renovation,  Validation and
Implementation.  The Awareness  phase  included the  establishment  of a team of
employees,  including executive management, and the development of strategies to
make  employees and  customers  aware of the  situation.  The  Assessment  phase
included the identification of areas of operations  critical for the delivery of
products and  services.  This phase also  included the inventory of all hardware
and  software  applications  and  the  identification  of  customer  and  vendor
interdependencies. The majority of the programs and applications used by QNB are
purchased  from  outside  vendors.   The  vendors  providing  the  software  are
responsible  for  maintenance  of  the  systems  and   modifications  to  enable
uninterrupted  usage  after  December  31,  1999.  These  two  phases  have been
completed.

The  Renovation  phase  includes  code  enhancement,  vendor  certification  and
hardware and  software  upgrades as needed.  The vendor of QNB's core  operating
system has informed  management  that changes are complete and proxy testing was
satisfactorily  completed  by six user  banks.  QNB has  installed  the  updated
software on a mainframe  test system and will begin on site testing early in the
third quarter.

The Validation phase includes testing of all of the impacted applications,  both
internally developed and third party provided.  Testing of the systems has begun
and will continue throughout 1998. Contingency plans, if any are needed, will be
developed  during  1998 to address any  shortcomings  that are  identified.  The
Implementation phase includes incorporating all changes, achieving certification
of year 2000 compliance and implementing contingency plans, if necessary.  QNB's
plan also includes  reviewing any potential  risks  associated with the loan and
investment portfolios due to the year 2000 issue. QNB's goal is to have the plan
complete and be fully compliant by December 31, 1998.

Based on the currently  available  information,  management  does not anticipate
that the cost to address year 2000 issues will have an impact on QNB's financial
condition, results of operations,  liquidity or capital resources. A significant
portion of the anticipated costs are not expected to be incremental,  but rather
will represent the redeployment of existing information technology resources.


OTHER ITEMS

Management is not aware of any current  specific  recommendations  by regulatory
authorities or proposed legislation,  which if they were implemented, would have
a material adverse effect upon the liquidity,  capital resources,  or results of
operations,  although the general cost of compliance  with numerous and multiple
federal and state laws and regulations  does have, and in the future may have, a
negative impact on QNB's results of operations.

ITEM 3.   Quantitative and Qualitative Disclosure about Market Risk.

          The information required herein is set forth in Item 2, above.   

                                   Form 10-Q
                                    Page 19
<PAGE>

                            QNB CORP. AND SUBSIDIARY

                           PART II. OTHER INFORMATION

                                  JUNE 30, 1998

Item 1. Legal Proceedings

         None.

Item 2. Changes in Securities

         None.


Item 3.  Defaults Upon Senior Securities
                   None.

         Item 4.  Submission of Matters to a Vote of Security Holders.
                  The 1998 Annual Meeting (the "Meeting") of the shareholders of
                  QNB Corp. (the  "Registrant")  was held on May 5, 1998. Notice
                  of the  Meeting  was  mailed to  shareholders  of record on or
                  about  April  3,  1998,   together  with  proxy   solicitation
                  materials  prepared in  accordance  with Section  14(a) of the
                  Securities   Exchange  Act  of  1934,  as  amended,   and  the
                  regulations promulgated thereunder.

                  The Meeting was held for the following purposes:

                  (1)      To elect three (3) Directors; and

                  (2)      To approve and adopt the 1998 Stock Incentive Plan.

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

                                                               
                  Nominee                      For               Withhold 
                  -------                      ---               -------

                Gary S. Parzych               1,182,441            2,662

                Norman L. Baringer            1,183,377            1,726 

                Charles M. Meredith, III      1,182,996            2,107


<PAGE>

 
 The continuing directors of the Registrant are:

     Kenneth F. Brown, Jr.

     Henry L. Rosenberger

     Edgar L. Stauffer

     Dennis Helf

     Donald T. Knauss

     Thomas J. Bisko

     There was no  solicitation  in  opposition to Proposal No. 2 to approve and
     adopt  the  Registrant's  1998  Stock  Incentive  Plan,  and the  Plan  was
     approved.  The number of votes cast for or against as well as the number of
     abstentions and broker nonvotes, for the proposal were as follows:

                For               Against          Abstentions
               -------            -------         -------------

               1,143,798          32,975             8,330

Item 5. Other information. None.

Item 6. Exhibits and Reports on Form 8-K (a) Exhibits.


The following Exhibits are included in this Report:

     Exhibit 3.1    Articles of Incorporation of Registrant, as amended.

     Exhibit 3.2    Bylaws of Registrant, as amended.

     Exhibit 10.1   Employment  Agreement  between the  Registrant  and Thomas
                    J. Bisko.  (Incorporated  by reference to Exhibit  10(a)
                    of  Registrant's Current  Report on Form 8-K  filed  with
                    the  Commission  on April 30, 1989).

     Exhibit 10.2   Salary  Continuation  Agreement  between the  Registrant
                    and Thomas J.  Bisko.  (Incorporated  by  reference  to
                    Exhibit  10(b) of Registrant's  Current  Report on Form 8-K
                    filed with the Commission on April 30, 1989).


<PAGE>


     Exhibit 10.3   Deferred  Compensation  Agreement  between the  Registrant
                    and Philip D.  Miller.  (Incorporated  by  reference  to
                    Exhibit  10(c) of Registrant's  Current  Report on Form 8-K
                    filed with the Commission on April 30, 1989).

     Exhibit 10.4   QNB Corp. Stock Incentive Plan.  (Incorporated by reference
                    to Exhibit 4A to Registration  Statement No. 333-16627 on
                    Form S-8, filed with the Commission on November 22, 1996.)

     Exhibit 10.5   QNB Corp.  Employee  Stock  Purchase  Plan.  (Incorporated
                    by reference to Exhibit 4B to  Registration  Statement
                    No.  333-16627 on Form S-8, filed with the Commission on
                    November 22, 1996.)

     Exhibit 10.6   The Quakertown National Bank Profit Sharing and Section
                    401(k) Salary  Deferral  Plan.  (Incorporated  by  reference
                    to Exhibit 4C to Registration  Statement  No.  333-16627
                    on Form S-8,  filed  with the Commission on November 22,
                    1996.)

     Exhibit 11     Statement Re: Computation of Earnings Per Share.
                    (Included in Part I, Item I, hereof.)

     Exhibit 27     Financial Data Schedule.

     Exhibit 99     Financial Data Schedule for June 30, 1997, revised
                    to reflect changes in Earnings Per Share.

                     (b)      Reports on Form 8-K
                                None

<PAGE>

                                   SIGNATURES


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


                                                 QNB Corp.


Date:  August 13, 1998                       By: /s/ Robert C. Werner
                                                 --------------------------
                                                 Robert C. Werner
                                                 Vice President


Date:  August 13, 1998                       By: /s/ Bret H. Krevolin
                                                 ---------------------------
                                                 Bret H. Krevolin
                                                 Chief Accounting Officer


                                    Form 10-Q
                                     Page 20

<PAGE>


                                  EXHIBIT INDEX
                                                               Sequential Page
                                                            Number in Manually
Exhibit Number                                                Signed Original
--------------                                              ------------------

Exhibit 3.1       Articles of Incorporation of Registrant,
                  as amended.

Exhibit 3.2       Bylaws of Registrant, as amended.

Exhibit 10.1      Employment Agreement between the Registrant and
                  Thomas J. Bisko.  (Incorporated by reference to
                  Exhibit 10(a) of Registrant's Current Report
                  on Form 8-K filed with the Commission on April
                  30, 1989).

Exhibit 10.2      Salary Continuation Agreement between the Registrant
                  and Thomas J. Bisko.  (Incorporated by reference to
                  Exhibit 10(b) of Registrant's Current Report on Form
                  8-K filed with the Commission on April 30, 1989).

Exhibit 10.3      Deferred Compensation Agreement between the Registrant
                  and Philip D. Miller.  (Incorporated by reference to
                  Exhibit 10(c) of Registrant's Current Report on Form
                  8-K filed with the Commission on April 30, 1989).

Exhibit 10.4      QNB Corp. Stock Incentive Plan.  (Incorporated by
                  reference to Exhibit 4A to Registration Statement No.
                  333-16627 on Form S-8, filed with the Commission
                  on November 22, 1996.)

Exhibit 10.5      QNB Corp. Employee Stock Purchase Plan. (Incorporated
                  by reference to Exhibit 4B to Registration Statement No.
                  333-16627 on Form S-8, filed with the Commission on
                  November 22, 1996.)

Exhibit 10.6      The  Quakertown  National Bank Profit Sharing and
                  Section 401(k) Salary  Deferral  Plan.  (Incorporated
                  by reference to Exhibit 4C to  Registration  Statement
                  No.  333-16627 on Form S-8, filed with the Commission
                  on November 22, 1996.)

Exhibit 11        Statement Re: Computation of Earnings Per Share.
                  (Included in Part I, Item I, hereof.)

Exhibit 27        Financial Data Schedule.


<PAGE>


Exhibit  99       Financial  Data  Schedule  for June 30,  1997,
                  revised to reflect changes in Earnings Per Share.


                                    Form 10-Q
                                    Page 21