**SECURITIES
      AND EXCHANGE COMMISSION**


**WASHINGTON,
      DC 20549**







**FORM
      10-Q**





(Mark
      One)


ý
              QUARTERLY
                  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
                  ACT OF
                  1934
  For
                the quarterly period ended September
                30, 2005





OR


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





For
      the
      transition period from _________________________________ to
      _________________________________








Commission
      file number 0-17706





QNB
      Corp.


(Exact
      Name of Registrant as Specified in Its Charter)





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





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





Not
      Applicable


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





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





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





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





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





Class
            
            Outstanding
                at November 4, 2005Common
                Stock, par value $.625
            
            
            3,102,635














**QNB
      CORP. AND SUBSIDIARY**





**FORM
      10-Q**





**QUARTER
      ENDED SEPTEMBER 30, 2005**








**INDEX**


**PAGE****PART
                I - FINANCIAL INFORMATION****ITEM
                1.**
            **CONSOLIDATED
                FINANCIAL STATEMENTS (Unaudited)**Consolidated
                Statements of Income for Three and Nine Months Ended September 30,
                2005
                and 2004
            
            1Consolidated
                Balance Sheets at September 30, 2005 and December 31, 2004
            
            2Consolidated
                Statements of Cash Flows for Nine Months Ended September 30, 2005
                and
                2004
            
            3Notes
                to Consolidated Financial Statements
            
            4**ITEM
                2.**
            **MANAGEMENT'S
                DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL
                CONDITION**
            
            10**ITEM
                3.**
            **QUANTITATIVE
                AND QUALITATIVE DISCLOSURE ABOUTMARKET
                RISK**
            
            34**ITEM
                4.**
            **CONTROLS
                AND PROCEDURES**
            
            34**PART
                II - OTHER INFORMATION****ITEM
                1.**
            **LEGAL
                PROCEEDINGS**
            
            35**ITEM
                2.**
            **UNREGISTERED
                SALES OF EQUITY SECURITIES AND USE OF PROCEEDS**
            
            35**ITEM
                3.**
            **DEFAULTS
                UPON SENIOR SECURITIES**
            
            35**ITEM
                4.**
            **SUBMISSIONS
                OF MATTERS TO A VOTE OF SECURITIES HOLDERS**
            
            35**ITEM
                5.**
            **OTHER
                INFORMATION**
            
            35**ITEM
                6.**
            **EXHIBITS**
            
            35**SIGNATURES****CERTIFICATIONS**










*QNB* *Corp.
        and Subsidiary*
 CONSOLIDATED
        STATEMENTS OF INCOME
 (in
                  thousands, except share data)(unaudited)**Three
                  Months**
              
              **Nine
                  Months****Ended
                  September 30,**
              
              **Ended
                  September 30,****2005**
              
              **2004**
              
              **2005**
              
              **2004****Interest
                  Income**Interest
                  and fees on loans and leases
              
              $
              4,330
              
              $
              3,665
              
              $
              12,293
              
              $
              10,423Interest
                  and dividends on investment securities:Taxable
              
              
              2,165
              
              
              2,243
              
              
              6,637
              
              
              6,630Tax-exempt
              
              
              564
              
              
              571
              
              
              1,695
              
              
              1,666Interest
                  on Federal funds sold
              
              
              59
              
              
              24
              
              
              145
              
              
              57Interest
                  on interest-bearing balances and other interest income
              
              
              25
              
              
              16
              
              
              88
              
              
              51Total
                  interest income
              
              
              7,143
              
              
              6,519
              
              
              20,858
              
              
              18,827**Interest
                  Expense**Interest
                  on depositsInterest-bearing
                  demand accounts
              
              
              352
              
              
              179
              
              
              782
              
              
              449Money
                  market accounts
              
              
              210
              
              
              108
              
              
              698
              
              
              226Savings
              
              
              52
              
              
              55
              
              
              160
              
              
              161Time
              
              
              1,270
              
              
              1,053
              
              
              3,597
              
              
              3,055Time
                  over $100,000
              
              
              386
              
              
              267
              
              
              983
              
              
              715Interest
                  on short-term borrowings
              
              
              100
              
              
              32
              
              
              199
              
              
              82Interest
                  on Federal Home Loan Bank advances
              
              
              755
              
              
              731
              
              
              2,225
              
              
              2,166Total
                  interest expense
              
              
              3,125
              
              
              2,425
              
              
              8,644
              
              
              6,854Net
                  interest income
              
              
              4,018
              
              
              4,094
              
              
              12,214
              
              
              11,973Provision
                  for loan and lease losses
              
              
              -
              
              
              -
              
              
              -
              
              
              -Net
                  interest income after provision for loan losses
              
              
              4,018
              
              
              4,094
              
              
              12,214
              
              
              11,973**Non-Interest
                  Income**Fees
                  for services to customers
              
              
              488
              
              
              528
              
              
              1,379
              
              
              1,500ATM
                  and debit card income
              
              
              176
              
              
              153
              
              
              506
              
              
              433Income
                  on bank-owned life insurance
              
              
              61
              
              
              62
              
              
              187
              
              
              200Mortgage
                  servicing income
              
              
              27
              
              
              29
              
              
              63
              
              
              92Net
                  (loss) gain on investment securities available-for-sale
              
              
              (4
              )
              
              66
              
              
              (580
              )
              
              762Net
                  gain on sale of loans
              
              
              31
              
              
              33
              
              
              127
              
              
              131Other
                  operating income
              
              
              159
              
              
              118
              
              
              753
              
              
              413Total
                  non-interest income
              
              
              938
              
              
              989
              
              
              2,435
              
              
              3,531**Non-Interest
                  Expense**Salaries
                  and employee benefits
              
              
              1,728
              
              
              1,846
              
              
              5,428
              
              
              5,352Net
                  occupancy expense
              
              
              268
              
              
              262
              
              
              821
              
              
              751Furniture
                  and equipment expense
              
              
              282
              
              
              311
              
              
              855
              
              
              827Marketing
                  expense
              
              
              140
              
              
              114
              
              
              446
              
              
              369Third
                  party services
              
              
              171
              
              
              180
              
              
              480
              
              
              510Telephone,
                  postage and supplies expense
              
              
              125
              
              
              126
              
              
              361
              
              
              382State
                  taxes
              
              
              103
              
              
              52
              
              
              320
              
              
              283Other
                  expense
              
              
              323
              
              
              353
              
              
              981
              
              
              1,028Total
                  non-interest expense
              
              
              3,140
              
              
              3,244
              
              
              9,692
              
              
              9,502Income
                  before income taxes
              
              
              1,816
              
              
              1,839
              
              
              4,957
              
              
              6,002Provision
                  for income taxes
              
              
              385
              
              
              386
              
              
              1,124
              
              
              1,308**Net
                  Income**
              
              $
              1,431
              
              $
              1,453
              
              $
              3,833
              
              $
              4,694**Net
                  Income Per Share - Basic**
              
              $
              .46
              
              $
              .47
              
              $
              1.24
              
              $
              1.52**Net
                  Income Per Share - Diluted**
              
              $
              .45
              
              $
              .46
              
              $
              1.21
              
              $
              1.48**Cash
                  Dividends Per Share**
              
              $
              .195
              
              $
              .185
              
              $
              .585
              
              $
              .555
 
 
 *The
        accompanying notes are an integral part of the unaudited consolidated financial
        statements.*
  Form
            10-Q
 Page
            1
  *QNB* *Corp.
        and Subsidiary*
 CONSOLIDATED
        BALANCE SHEETS
 (in
                  thousands)(unaudited)**September
                  30,**
              
              **December
                  31,****2005**
              
              **2004****Assets**Cash
                  and due from banks
              
              $
              22,017
              
              $
              19,026Federal
                  funds sold
              
              
              1,494
              
              
              3,159Total
                  cash and cash equivalents
              
              
              23,511
              
              
              22,185Investment
                  securitiesAvailable-for-sale
                  (cost $245,209 and $266,000)
              
              
              244,487
              
              
              267,561Held-to-maturity
                  (market value $6,127 and $6,432)
              
              
              5,898
              
              
              6,203Non-marketable
                  equity securities
              
              
              3,682
              
              
              3,947Loans
                  held-for-sale
              
              
              300
              
              
              312Total
                  loans and leases, net of unearned income
              
              
              287,488
              
              
              268,048Allowance
                  for loan and lease losses
              
              
              (2,568
              )
              
              (2,612
              )Net loans and leases
              
              
              284,920
              
              
              265,436Bank-owned
                  life insurance
              
              
              8,003
              
              
              7,906Premises
                  and equipment, net
              
              
              5,258
              
              
              5,640Accrued
                  interest receivable
              
              
              2,639
              
              
              2,531Other
                  assets
              
              
              3,414
              
              
              1,923Total
                  assets
              
              $
              582,112
              
              $
              583,644**Liabilities**DepositsDemand,
                  non-interest-bearing
              
              $
              56,743
              
              $
              52,603Interest-bearing
                  demand accounts
              
              
              103,168
              
              
              95,120Money
                  market accounts
              
              
              43,790
              
              
              60,434Savings
              
              
              51,816
              
              
              55,511Time
              
              
              156,649
              
              
              160,845Time
                  over $100,000
              
              
              47,698
              
              
              41,975Total deposits
              
              
              459,864
              
              
              466,488Short-term
                  borrowings
              
              
              18,357
              
              
              13,374Federal
                  Home Loan Bank advances
              
              
              55,000
              
              
              55,000Accrued
                  interest payable
              
              
              1,334
              
              
              1,179Other
                  liabilities
              
              
              926
              
              
              1,828Total
                  liabilities
              
              
              535,481
              
              
              537,869**Shareholders'
                  Equity**Common
                  stock, par value $.625 per share; authorized 10,000,000 shares;
                  3,209,321
                  and 3,204,764 shares issued; 3,102,635 and 3,098,078 shares
                  outstanding
              
              
              2,006
              
              
              2,003Surplus
              
              
              9,078
              
              
              9,005Retained
                  earnings
              
              
              37,588
              
              
              35,570Accumulated
                  other comprehensive (loss) gain, net
              
              
              (547
              )
              
              691Treasury
                  stock, at cost; 106,686 shares
              
              
              (1,494
              )
              
              (1,494
              )Total
                  shareholders' equity
              
              
              46,631
              
              
              45,775Total
                  liabilities and shareholders' equity
              
              $
              582,112
              
              $
              583,644
 
 *The
        accompanying notes are an integral part of the unaudited consolidated financial
        statements.*
  Form
            10-Q
 Page
            2
  *QNB* *Corp.
        and Subsidiary*
 CONSOLIDATED
        STATEMENTS OF CASH FLOWS
 (in
                  thousands)(unaudited)**Nine
                  Months Ended September 30,**
              
              **2005**
              
              **2004****Operating
                  Activities**Net
                  income
              
              $
              3,833
              
              $
              4,694Adjustments
                  to reconcile net income to net cash provided by operating
                  activitiesDepreciation
                  and amortization
              
              
              652
              
              
              638Securities
                  gains
              
              
              (673
              )
              
              (762
              )Impairment
                  write-down of securities
              
              
              1,253
              
              
              —Net
                  gain on sale of repossessed assets
              
              
              (211
              )
              
              —Proceeds
                  from sale of repossed assets
              
              
              211
              
              
              —Net
                  gain on sale of loans
              
              
              (127
              )
              
              (131
              )Loss
                  on disposal of premises and equipment
              
              
              1
              
              
              3Loss
                  on equity investment in title company
              
              
              —
              
              
              20Proceeds
                  from sales of residential mortgages
              
              
              7,510
              
              
              7,737Originations
                  of residential mortgages held-for-sale
              
              
              (7,500
              )
              
              (6,428
              )Income
                  on bank-owned life insurance
              
              
              (187
              )
              
              (200
              )Life
                  insurance proceeds/premiums net
              
              
              90
              
              
              (21
              )Deferred
                  income tax (benefit) provision
              
              
              (163
              )
              
              386Net
                  (decrease) increase in income taxes receivable
              
              
              (249
              )
              
              169Net
                  increase in accrued interest receivable
              
              
              (108
              )
              
              (42
              )Net
                  amortization of premiums and discounts
              
              
              690
              
              
              652Net
                  increase (decrease) in accrued interest payable
              
              
              155
              
              
              (153
              )Increase
                  in other assets
              
              
              (516
              )
              
              (324
              )Decrease
                  in other liabilities
              
              
              (488
              )
              
              (383
              )Net
                  cash provided by operating activities
              
              
              4,173
              
              
              5,855**Investing
                  Activities**Proceeds
                  from maturities and calls of investment securitiesavailable-for-sale
              
              
              26,177
              
              
              46,174held-to-maturity
              
              
              300
              
              
              4,925Proceeds
                  from sales of investment securitiesavailable-for-sale
              
              
              37,521
              
              
              54,544Purchase
                  of investment securitiesavailable-for-sale
              
              
              (44,048
              )
              
              (114,927
              )Net
                  change in non-marketable equity securities
              
              
              265
              
              
              (165
              )Net
                  increase in loans and leases
              
              
              (19,411
              )
              
              (30,344
              )Net
                  purchases of premises and equipment
              
              
              (271
              )
              
              (1,395
              )Net
                  cash provided (used) by investing activities
              
              
              533
              
              
              (41,188
              )**Financing
                  Activities**Net
                  increase in non-interest-bearing deposits
              
              
              4,140
              
              
              5,533Net
                  (decrease) increase in interest-bearing non-maturity
                  deposits
              
              
              (12,291
              )
              
              25,147Net
                  increase in time deposits
              
              
              1,527
              
              
              14,755Net
                  increase (decrease) in short-term borrowings
              
              
              4,983
              
              
              (956
              )Cash
                  dividends paid
              
              
              (1,815
              )
              
              (1,718
              )Proceeds
                  from issuance of common stock
              
              
              76
              
              
              41Net
                  cash (used) provided by financing activities
              
              
              (3,380
              )
              
              42,802Increase
                  in cash and cash equivalents
              
              
              1,326
              
              
              7,469Cash
                  and cash equivalents at beginning of year
              
              
              22,185
              
              
              26,066Cash
                  and cash equivalents at end of period
              
              $
              23,511
              
              $
              33,535**Supplemental
                  Cash Flow Disclosures**Interest
                  paid
              
              $
              8,489
              
              $
              7,007Income
                  taxes paid
              
              
              1,517
              
              
              815Non-Cash
                  TransactionsChange
                  in net unrealized holding gains (losses), net of taxes, on
                  available-for-sale securities
              
              
              (1,238
              )
              
              (987
              )Transfer
                  of loan to repossessed assets
              
              
              -
              
              
              1,026
 
 *The
        accompanying notes are an integral part of the unaudited consolidated financial
        statements.*
  Form
            10-Q
 Page
            3
  **QNB
      CORP. AND SUBSIDIARY**





**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**


**SEPTEMBER
      30, 2005 AND 2004, AND DECEMBER 31, 2004**


**(Unaudited)**





1.
      REPORTING AND ACCOUNTING POLICIES





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





The
      consolidated balance sheet as of September 30, 2005, as well as the statements
      of income for the three-month and nine-month periods ended September 30, 2005
      and 2004, and the statements of cash flows for the nine-month periods ended
      September 30, 2005 and 2004, is unaudited. These consolidated financial
      statements should be read in conjunction with the audited consolidated financial
      statements and notes thereto included in QNB's 2004 Annual Report incorporated
      in the Form 10-K. Operating results for the three and nine-month periods ended September 30,
      2005
      are not necessarily indicative of the results that may be expected for the
      year
      ending December 31, 2005.





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. Certain items
      in the 2004 consolidated financial statements have been reclassified to conform
      to the 2005 financial statement presentation format. These reclassifications
      had
      no effect on net income. The results for the periods presented are not
      necessarily indicative of the full year. Tabular information other than 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 amount of assets and
      liabilities at the date of the consolidated financial statements and the
      reported amounts of revenues and expenses during the reporting period. Actual
      results could differ from such estimates.





**STOCK
      BASED COMPENSATION**





At
      September 30, 2005, QNB had stock-based employee compensation plans that were
      accounted for under the recognition and measurement principles of Accounting
      Principles Bulletin (APB) Opinion No. 25, *Accounting
      for Stock Issued to Employees* ,
      and
      related interpretations. Effective January 1, 2006, QNB will adopt Financial
      Accounting Standards Board (FASB) Statement No. 123 (revised 2004), *Share-Based
      Payment* (FAS No.
      123R). See Note 7 for further details. No
      stock-based employee compensation cost is reflected in net income, as all
      options granted under the plans had an exercise price equal to the market value
      of the underlying common stock on the date of grant. The
      "fair
      value" approach under FASB Statement No. 123, *Accounting
      for Stock-Based Compensation* ,
      takes
      into account the time value of the option and will generally result in
      compensation expense being recorded. Each year since the inception of Statement
      No. 123, QNB has disclosed, in the notes to the consolidated financial
      statements contained in its annual report to shareholders, what the earnings
      impact would have been had QNB elected the "fair value" approach under Statement
      No. 123. Such disclosure is now required on a quarterly basis in accordance
      with
      Statement No. 148, *Accounting
      for Stock-Based Compensation - Transition and Disclosure - an amendment of
      FASB
      Statement No. 123* .





Form
          10-Q
 Page
          4





**QNB
      CORP. AND SUBSIDIARY**





**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**


**SEPTEMBER
      30, 2005 AND 2004, AND DECEMBER 31, 2004**


**(Unaudited)**





The
      following table illustrates the effect on net income and earnings per share
      if
      the company had applied the fair value recognition provisions of FASB Statement
      No. 123 to stock-based employee compensation.





For
                the Three MonthsEnded September 30,
            
            For
                the Nine MonthsEnded September 30,2005
            
            2004
            
            2005
            
            2004Net
                income, as reported
            
            $
            1,431
            
            $
            1,453
            
            $
            3,833
            
            $
            4,694Deduct:
                Total stock-based employee compensation expense determined under
                fair
                value based method for all awards, net related tax effects
            
            
            25
            
            
            25
            
            
            76
            
            
            69Pro
                forma net income
            
            $
            1,406
            
            $
            1,428
            
            $
            3,757
            
            $
            4,625Earnings
              per shareBasic – as reported
            
            $
            .46
            
            $
            0.47
            
            $
            1.24
            
            $
            1.52Basic –
                pro forma
            
            $
            .45
            
            $
            0.46
            
            $
            1.21
            
            $
            1.49Diluted –
                as reported
            
            $
            .45
            
            $
            0.46
            
            $
            1.21
            
            $
            1.48Diluted –
                pro forma
            
            $
            .44
            
            $
            0.45
            
            $
            1.18
            
            $
            1.46





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):





For
                the Three Months
              Ended
                September 30,
            
            For
                the Nine Months Ended September 30,2005
            
            2004
            
            2005
            
            2004Numerator
                for basic and diluted earnings per share-net income
            
            $
            1,431
            
            $
            1,453
            
            $
            3,833
            
            $
            4,694Denominator
                for basic earnings per share-weighted average shares
                outstanding
            
            
            3,102,628
            
            
            3,096,857
            
            
            3,101,300
            
            
            3,096,057Effect
                of dilutive securities-employee stock options
            
            
            71,420
            
            
            79,689
            
            
            74,898
            
            
            82,214Denominator
                for diluted earnings per share- adjusted weighted average shares
                outstanding
            
            
            3,174,048
            
            
            3,176,546
            
            
            3,176,198
            
            
            3,178,271Earnings
                per share-basic
            
            $
            .46
            
            $
            0.47
            
            $
            1.24
            
            $
            1.52Earnings
                per share-diluted
            
            $
            .45
            
            $
            0.46
            
            $
            1.21
            
            $
            1.48











Form
          10-Q
 Page
          5





**QNB
      CORP. AND SUBSIDIARY**





**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**


**SEPTEMBER
      30, 2005 AND 2004, AND DECEMBER 31, 2004**


**(Unaudited)**





2.
      PER
      SHARE DATA (Continued):





There
      were 40,000 stock options that were anti-dilutive for the three and nine-month
      periods ended September 30, 2005. There were 20,000 stock options that were
      anti-dilutive for the three and nine-month periods ended September 30, 2004.
      These stock options were not included in the above calculation.





3.
      COMPREHENSIVE INCOME





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





The
      following table shows the components and activity of comprehensive income during
      the periods ended September 30, 2005 and 2004 (net of the income tax effect):





For
                the Three Months
              Ended
                September 30,
            
            For
                the Nine Months
              Ended
                September 30,2005
            
            2004
            
            2005
            
            2004Unrealized
                holding (losses) gains arising during the period on securities held
            
            $
            (1,283
            )
            $
            2,855
            
            $
            (1,811
            )
            $
            (484
            )Reclassification
                adjustment for losses (gains) included in net income
            
            
            3
            
            
            (44
            )
            
            573
            
            
            (503
            )Net
                change in unrealized (losses) gains during the period
            
            
            (1,280
            )
            
            (139)222,811
            
            
            (1,238
            )
            
            (987
            )Unrealized
                holding gains (losses), beginning of period
            
            
            733
            
            
            (1,457
            )
            
            691
            
            
            2,341Unrealized
                holding (losses) gains, end of period
            
            $
            (547
            )
            $
            1,354
            
            $
            (547
            )
            $
            1,354Net
                income
            
            $
            1,431
            
            $
            1,453
            
            $
            3,833
            
            $
            4,694Other
                comprehensive income, net of tax:
              Unrealized
                holding (losses) gains arising during the period
            
            
            (1,280
            )
            
            2,811
            
            
            (1,238
            )
            
            (987
            )Comprehensive
                income
            
            $
            151
            
            $
            4,264
            
            $
            2,595
            
            $
            3,707











Form
          10-Q
 Page
          6





**QNB
      CORP. AND SUBSIDIARY**





**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**


**SEPTEMBER
      30, 2005 AND 2004, AND DECEMBER 31, 2004**


**(Unaudited)**





4.
      LOANS
      AND LEASES





The
      following table presents loans and leases by category as of September 30, 2005
      and December 31, 2004:





September
                30,
              2005
            
            December
                31,
              2004Commercial
                and industrial
            
            $
            58,616
            
            $
            57,364Agricultural
            
            
            5
            
            
            8Construction
            
            
            8,510
            
            
            7,027Real
                estate-commercial
            
            
            98,547
            
            
            98,397Real
                estate-residential
            
            
            111,066
            
            
            99,893Consumer
            
            
            5,411
            
            
            5,376Lease
                financing
            
            
            5,291
            
            
            0Total
                loans and leases
            
            
            287,446
            
            
            268,065Less
                unearned costs (income)
            
            
            42
            
            
            (17
            )Total
                loans and leases, net of unearned income
            
            $
            287,488
            
            $
            268,048





5.
      INTANGIBLE ASSETS





As
      a
      result of a purchase of deposits in 1997, QNB recorded a deposit premium of
      $511,000. This premium is being amortized, for book purposes, over ten years
      and
      is reviewed annually for impairment. The net carrying amount was $107,000 and
      $145,000 at September 30, 2005 and December 31, 2004, respectively. Amortization
      expense for core deposit intangibles was $12,000 for both three-month periods
      ended September 30, 2005 and 2004 and $38,000 for both nine-month periods ended
      September 30, 2005 and 2004.





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





September
                30,
            
            December
                31,2005
            
            2004Mortgage
                servicing rights beginning balance
            
            $
            552
            
            $
            582Mortgage
                servicing rights capitalized
            
            
            56
            
            
            66Mortgage
                servicing rights amortized
            
            
            (86
            )
            
            (122
            )Fair
                market value adjustments
            
            
            5
            
            
            26Mortgage
                servicing rights ending balance
            
            $
            527
            
            $
            552Mortgage
                loans serviced for others
            
            $
            76,715
            
            $
            78,904Amortization
                expense of intangibles
            
            
            124
            
            
            173











Form
          10-Q
 Page
          7








**QNB
      CORP. AND SUBSIDIARY**





**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**


**SEPTEMBER
      30, 2005 AND 2004, AND DECEMBER 31, 2004**


**(Unaudited)**





5.
      INTANGIBLE ASSETS (Continued):





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





**Estimated
      Amortization Expense**


For
                the Year Ended 12/31/05
            
            $
            162For
                the Year Ended 12/31/06
            
            
            147For
                the Year Ended 12/31/07
            
            
            125For
                the Year Ended 12/31/08
            
            
            68For
                the Year Ended 12/31/09
            
            
            56





6.
      RELATED PARTY TRANSACTIONS





On
      September 22, 2005, QNB Corp.’s wholly-owned subsidiary, The Quakertown National
      Bank (the “Bank”), approved and entered into an agreement with Eugene T.
      Parzych, Inc. for the renovation of the Bank’s property at 322 W. Broad Street,
      Quakertown, Pennsylvania to be used as additional office space. The cost of
      the
      renovations is expected to be approximately $1 million. The bids for this
      project were submitted through a formal bidding process and reviewed by the
      Board of Directors. The bid received from Eugene T. Parzych, Inc. was the second
      lowest bid presented. Mr. Gary S. Parzych is the president of Eugene T. Parzych,
      Inc. and is also a director of QNB Corp. Management and the Board of Directors
      of QNB Corp. and the Bank believe this is an arms-length
      transaction.





As
      of
      September 30, 2005, amounts due from directors, principal officers, and their
      related interests totaled $3,564,000. 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.





7.
      RECENT
      ACCOUNTING PRONOUNCEMENTS





**Stock-Based
      Compensation and Share-Based Payment**





In
      April
      2005, the Securities and Exchange Commission adopted a new rule that amends
      the
      compliance dates for FASB Statement No. 123 (revised 2004), *Share-Based
      Payment* (FAS No.
      123R). The Statement requires that compensation cost, relating to share-based
      payment transactions, be recognized in financial statements and that this cost
      be measured based on the fair value of the equity or liability instruments
      issued. FAS No. 123 (Revised 2004) covers a wide range of share-based
      compensation arrangements including share options, restricted share plans,
      performance-based awards, share appreciation rights, and employee share purchase
      plans. QNB will adopt FAS No. 123 (Revised 2004) on January 1, 2006 and is
      currently evaluating the impact the adoption of the standard will have on QNB’s
      results of operations.





In
      March
      2005, the Securities and Exchange Commission ("SEC") issued Staff Accounting
      Bulletin No. 107 ("SAB No. 107"), *Share-Based
      Payment* ,
      providing guidance on option valuation methods, the accounting for income tax
      effects of share-based payment arrangements upon adoption of








Form
          10-Q
 Page
          8








**QNB
      CORP. AND SUBSIDIARY**





**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**


**SEPTEMBER
      30, 2005 AND 2004, AND DECEMBER 31, 2004**


**(Unaudited)**





7.
      RECENT
      ACCOUNTING PRONOUNCEMENTS (Continued):





In
      March
      2005, the Securities and Exchange Commission ("SEC") issued Staff Accounting
      Bulletin No. 107 ("SAB No. 107"), *Share-Based
      Payment* ,
      providing guidance on option valuation methods, the accounting for income tax
      effects of share-based payment arrangements upon adoption of
      FAS No. 123R, and the disclosures in Management’s Discussion and
      Analysis subsequent to the adoption. QNB will provide SAB No. 107
      required disclosures upon adoption of FAS No. 123R on January
      1, 2006
      and is currently evaluating the impact the adoption of the standard will have
      on
      QNB’s financial condition, results of operations, and cash flows.





**Accounting
      Changes and Errors Corrections**




In
      June
      2005, the FASB issued FAS No. 154, *Accounting
      Changes and Errors Corrections, a replacement of APB Opinion No. 20 and FAS
      No.
      3* .
      The
      Statement applies to all voluntary changes in accounting principle, and changes
      the requirements for accounting for and reporting of a change in accounting
      principle. FAS No. 154 requires retrospective application to prior periods’
      financial statements of a voluntary change in accounting principle unless it
      is
      impractical. APB Opinion No. 20 previously required that most voluntary changes
      in accounting principle be recognized by including in net income of the period
      of the change the cumulative effect of changing to the new accounting principle.
      FAS No. 154 improves financial reporting because its requirements enhance the
      consistency of financial reporting between periods. The provisions of FAS No.
      154 are effective for accounting changes and corrections of errors made in
      fiscal years beginning after December 15, 2005.











Form
          10-Q
 Page
          9


**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, retail banking and investment management
      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 forward-looking
      statements contained or incorporated by reference in this document. These
      factors include, but are not limited, to the following:


·
            Operating,
                legal and regulatory risks


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


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


·
            Volatility
                in interest rates


·
            Increased
                credit risk





QNB
      cautions that these forward-looking statements are subject to numerous
      assumptions, risks and uncertainties, all of which change over time, and QNB
      assumes no duty to update forward-looking statements. Management cautions
      readers not to place undue reliance on any forward-looking statements. These
      statements speak only as of the date made, and they advise readers that various
      factors, including those described above, could affect QNB’s financial
      performance and could cause actual results or circumstances for future periods
      to differ materially from those anticipated or projected. Except as required
      by
      law, we do not undertake, and specifically disclaim 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) and predominant
      practices within the banking industry. 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
      disclosure of contingent assets and liabilities.











Form
          10-Q
 Page
          10





**QNB
      CORP. AND SUBSIDIARY**





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





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


QNB
      evaluates estimates on an on-going basis, including those related to the
      allowance for loan and lease losses, non-accrual loans, other real estate owned,
      other-than-temporary investment impairments, intangible assets, stock option
      plan and income taxes. QNB bases its estimates on historical experience and
      various other factors and assumptions that are believed to be reasonable under
      the circumstances, the results of which form the basis for making judgments
      about the carrying values of assets and liabilities that are not readily
      apparent from other sources. Actual results may differ from these estimates
      under different assumptions or conditions.





QNB
      believes the following critical accounting policies affect its more significant
      judgments and estimates used in preparation of its consolidated financial
      statements: allowance for loan and lease 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 and Lease Losses**





QNB
      maintains an allowance for loan and lease losses, which is intended 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 and lease losses and recoveries of previous losses. The provisions
      for
      loan losses are charged to earnings to bring the total allowance for loan and
      lease losses to a level considered necessary by management.





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





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





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





Management
      believes that it uses the best information available to make determinations
      about the adequacy of the allowance and that it has established its existing
      allowance for loan and lease losses in accordance with GAAP. If circumstances
      differ substantially from the assumptions used in making determinations, future











Form
          10-Q
 Page
          11




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





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


adjustments
      to the allowance for loan and lease 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 or leases 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,
      capital 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. During the second quarter of 2005, QNB established
      a
      valuation allowance of $190,000 to offset a portion of the tax benefits
      associated with certain impaired securities that management believes may not
      be
      realizable. Because the judgment about the level of future taxable income is
      dependent to a great extent on matters that may, at least in part, go 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.





**OVERVIEW**





QNB
      reported net income for the third quarter of 2005 of $1,431,000, or $.45 per
      common share on a diluted basis. The third quarter 2005 results compare to
      net
      income of $1,453,000, or $.46 per share diluted, for the same period in 2004.
      Net income for the first nine months of 2005 was $3,833,000, or $1.21 per
      diluted share, a decrease from the $4,694,000, or $1.48 per diluted share,
      for
      the comparable period in 2004.





The
      results for the 2005 nine-month period were significantly impacted by a
      $1,253,000 other-than-temporary impairment loss, recorded in the second quarter,
      related to certain Fannie Mae (FNMA) and Freddie Mac (FHLMC) preferred stock
      issues recorded in accordance with U.S. generally accepted accounting principles
      (GAAP).  On
      an
      after-tax basis, the non-cash, non-operating impairment charge was approximately
      $1,017,000. Excluding
      the securities write-down, net income for the nine-month period would have
      been
      $4,850,000, or $1.53 per share on a diluted basis.





Two
      important measures of profitability in the banking industry are an institution's
      return on average assets and return on average shareholders' equity. Return
      on
      average assets was .97% and 1.01%, while the return on average equity was 12.19%
      and 13.30%, for the three months ended September 30, 2005 and 2004,








Form
          10-Q
 Page
          12





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


**OVERVIEW
      (Continued)**


respectively.
      For the nine-month periods ended September 30, 2005 and 2004, return on average
      assets was .88% and 1.13%, and the return on average equity was 11.07% and
      14.75%, respectively. Excluding the


impact
      of
      the impairment charge, the return on average assets for the nine-month period
      ended September 30, 2005 would have been 1.11% and the return on average equity
      would have been 14.00%.





QNB’s
      net
      interest income declined in the third quarter of 2005, to $4,018,000, as
      compared to $4,094,000 for the same quarter of 2004 due to the continued
      compression of the net interest margin. Funding costs of deposits and short-term
      borrowings increased to a greater degree than the rates earned on loans and
      investments. This is primarily the result of three factors: a highly competitive
      deposit and loan pricing environment, a sustained flat Treasury yield curve
      and
      the current structure of QNB’s balance sheet. The net interest margin declined
      12 basis points to 3.18% from the third quarter of 2004 to the third quarter
      of
      2005.





Non-interest
      income, excluding gains and losses on securities and loans, was $911,000 for
      the
      quarter ended September 30, 2005, a 2.4% increase over the $890,000 earned
      in
      2004. The increase in non-interest income is attributed to ATM and debit card
      income as consumers continue to rely on the card as a more acceptable way to
      pay
      for goods and services. Also contributing to the increase in non-interest income
      was QNB’s membership in a title insurance company and an increase in official
      check income, each of which increased $12,000 for the quarter. Offsetting this
      increase was a $40,000 decrease in fees for services to customers.





Non-interest
      expenses were $3,140,000 for the quarter ended September 30, 2005, compared
      to
      $3,244,000 in 2004, a 3.2% decrease. Salary and benefit expense declined
      $118,000, to $1,728,000, for the quarter ended September 30, 2005. Contributing
      to the decline were fewer full-time equivalent employees and a reduction in
      incentive compensation expense.





The
      balance sheet obtained strong growth in loans with average loans increasing
      $20,044,000 when comparing the three months ended September 30, 2005 to
      September 30, 2004 QNB’s successful loan growth is attributable to developing
      new relationships as well as further cultivating existing relationships with
      small businesses in our communities . Also contributing to the loan growth
      was
      the new lease financing line of business, as well as the continued demand for
      residential mortgage and home equity loans. This loan growth was achieved while
      maintaining excellent asset quality. No provision for loan and lease losses
      was
      necessary during the quarter. On the funding side of the balance sheet, total
      average deposits decreased $748,000, or .2%. Average money market balances
      and
      average time deposit balances increased $1,019,000 and $8,133,000, respectively,
      while average interest-bearing demand accounts and average savings accounts
      decreased $7,074,000 and $2,826,000, respectively, when comparing the
      three-month periods.





QNB
      earns
      its revenues primarily from the difference between the interest income it earns
      on loans and investment securities and the interest expense it pays for deposits
      and borrowed money that fund these assets. QNB also derives revenue from deposit
      related services. QNB seeks to achieve sufficient and reliable earnings by
      growing its business while maintaining adequate levels of capital and liquidity
      and limiting its exposure to credit and interest rate risk to Board approved
      levels.





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’s “Sincere Interest in Your Success” is achieved by
      offering a broad range of high quality financial products and services. QNB
      has
      established internal standards of service excellence and actively trains all
      employees on those standards so the customer experiences a consistent high
      level
      of service at all points of contact with the Bank. QNB also complements the
      customer experience with high quality technology solutions in order to meet
      its
      mission of “High Tech, High Touch”.





Form
          10-Q
 Page
          13





**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****September
                30, 2005**
            
            **September
                30, 2004****Average**
            
            **Average**
            
            
            
            **Average**
            
            **Average****Balance**
            
            **Rate**
            
            **Interest**
            
            **Balance**
            
            **Rate**
            
            **Interest****Assets**Federal
                Funds Sold
            
            $
            6,779
            
            
            3.45
            %
            $
            59
            
            $
            6,325
            
            
            1.52
            %
            $
            24Investment
                securities:U.S.
                Treasury
            
            
            6,107
            
            
            2.22
            %
            
            34
            
            
            6,436
            
            
            1.97
            %
            
            32U.S.
                Government agencies
            
            
            26,580
            
            
            3.98
            %
            
            265
            
            
            30,317
            
            
            3.64
            %
            
            276State
                and municipal
            
            
            52,595
            
            
            6.50
            %
            
            855
            
            
            53,062
            
            
            6.53
            %
            
            866Mortgage-backed
                and CMOs
            
            
            140,905
            
            
            4.17
            %
            
            1,468
            
            
            145,638
            
            
            4.29
            %
            
            1,563Other
            
            
            28,291
            
            
            5.87
            %
            
            415
            
            
            29,708
            
            
            5.24
            %
            
            389Total
                investment securities
            
            
            254,478
            
            
            4.77
            %
            
            3,037
            
            
            265,161
            
            
            4.72
            %
            
            3,126Loans:Commercial
                real estate
            
            
            125,132
            
            
            6.23
            %
            
            1,965
            
            
            120,392
            
            
            5.79
            %
            
            1,751Residential
                real estate
            
            
            25,669
            
            
            5.85
            %
            
            375
            
            
            20,564
            
            
            6.08
            %
            
            313Home
                equity loans
            
            
            61,055
            
            
            6.00
            %
            
            923
            
            
            57,005
            
            
            5.61
            %
            
            803Commercial
                and industrial
            
            
            47,761
            
            
            6.33
            %
            
            763
            
            
            44,767
            
            
            4.98
            %
            
            561Lease
                financing
            
            
            3,674
            
            
            8.85
            %
            
            82
            
            
            -
            
            
            0.00
            %
            
            -Consumer
                loans
            
            
            5,434
            
            
            8.68
            %
            
            119
            
            
            5,849
            
            
            9.11
            %
            
            134Tax-exempt
                loans
            
            
            11,939
            
            
            5.21
            %
            
            157
            
            
            12,043
            
            
            5.14
            %
            
            156Total
                loans, net of unearned income*
            
            
            280,664
            
            
            6.20
            %
            
            4,384
            
            
            260,620
            
            
            5.67
            %
            
            3,718Other
                earning assets
            
            
            4,716
            
            
            2.12
            %
            
            25
            
            
            4,874
            
            
            1.28
            %
            
            16Total
                earning assets
            
            
            546,637
            
            
            5.45
            %
            $
            7,505
            
            
            536,980
            
            
            5.10
            %
            $
            6,884Cash
                and due from banks
            
            
            20,101
            
            
            
            
            
            
            
            
            20,241Allowance
                for loan losses
            
            
            (2,582
            )
            
            
            
            
            
            
            
            (2,940
            )Other
                assets
            
            
            19,112
            
            
            
            
            
            
            
            
            18,653Total
                assets
            
            $
            583,268
            
            
            5.11
            %
            
            
            
            $
            572,934
            
            
            4.78
            %**Liabilities
                and Shareholders' Equity**Interest-bearing
                deposits:Interest-bearing
                demand accounts
            
            $
            97,314
            
            
            1.43
            %
            $
            352
            
            $
            104,388
            
            
            0.68
            %
            $
            179Money
                market accounts
            
            
            45,183
            
            
            1.84
            %
            
            210
            
            
            44,164
            
            
            0.97
            %
            
            108Savings
            
            
            52,571
            
            
            0.39
            %
            
            52
            
            
            55,397
            
            
            0.39
            %
            
            55Time
            
            
            161,786
            
            
            3.11
            %
            
            1,270
            
            
            158,388
            
            
            2.64
            %
            
            1,053Time
                over $100,000
            
            
            47,676
            
            
            3.21
            %
            
            386
            
            
            42,941
            
            
            2.47
            %
            
            267Total
                interest-bearing deposits
            
            
            404,530
            
            
            2.23
            %
            
            2,270
            
            
            405,278
            
            
            1.63
            %
            
            1,662Short-term
                borrowings
            
            
            17,693
            
            
            2.25
            %
            
            100
            
            
            12,481
            
            
            1.01
            %
            
            32Federal
                Home Loan Bank advances
            
            
            55,000
            
            
            5.45
            %
            
            755
            
            
            55,000
            
            
            5.29
            %
            
            731Total
                interest-bearing liabilities
            
            
            477,223
            
            
            2.60
            %
            
            3,125
            
            
            472,759
            
            
            2.04
            %
            
            2,425Non-interest-bearing
                deposits
            
            
            56,833
            
            
            
            
            
            
            
            
            53,912Other
                liabilities
            
            
            2,643
            
            
            
            
            
            
            
            
            2,807Shareholders'
                equity
            
            
            46,569
            
            
            
            
            
            
            
            
            43,456Total
                liabilities andshareholders' equity
            
            $
            583,268
            
            
            2.13
            %
            
            
            
            $
            572,934
            
            
            1.68
            %Net
                interest rate spread
            
            
            
            
            
            2.85
            %
            
            
            
            
            
            
            
            3.06
            %Margin/net
                interest income
            
            
            
            
            
            3.18
            %
            $
            4,380
            
            
            
            
            
            3.30
            %
            $
            4,459





Tax-exempt
      securities and loans were adjusted to a tax-equivalent basis and are based
      on
      the marginal Federal corporate tax rate of 34%.


Non-accrual
      loans are included in earning assets.


*
      Includes loans held-for-sale








Form
          10-Q
 Page
          14


**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*****)**





**Nine
                Months Ended****September
                30, 2005**
            
            **September
                30, 2004****Average**
            
            **Average**
            
            
            
            **Average**
            
            **Average****Balance**
            
            **Rate**
            
            **Interest**
            
            **Balance**
            
            **Rate**
            
            **Interest****Assets**Federal
                Funds Sold
            
            $
            6,312
            
            
            3.07
            %
            $
            145
            
            $
            6,560
            
            
            1.16
            %
            $
            57Investment
                securities:U.S.
                Treasury
            
            
            6,124
            
            
            2.10
            %
            
            96
            
            
            6,653
            
            
            1.95
            %
            
            97U.S.
                Government agencies
            
            
            37,498
            
            
            3.74
            %
            
            1,052
            
            
            29,723
            
            
            3.78
            %
            
            843State
                and municipal
            
            
            52,660
            
            
            6.50
            %
            
            2,569
            
            
            51,503
            
            
            6.54
            %
            
            2,525Mortgage-backed
                and CMOs
            
            
            136,983
            
            
            4.18
            %
            
            4,299
            
            
            142,821
            
            
            4.25
            %
            
            4,554Other
            
            
            29,431
            
            
            5.66
            %
            
            1,249
            
            
            29,947
            
            
            5.31
            %
            
            1,193Total
                investment securities
            
            
            262,696
            
            
            4.70
            %
            
            9,265
            
            
            260,647
            
            
            4.71
            %
            
            9,212Loans:Commercial
                real estate
            
            
            123,388
            
            
            6.15
            %
            
            5,674
            
            
            112,099
            
            
            5.84
            %
            
            4,900Residential
                real estate
            
            
            24,957
            
            
            5.87
            %
            
            1,098
            
            
            20,333
            
            
            6.31
            %
            
            963Home
                equity loans
            
            
            60,100
            
            
            5.88
            %
            
            2,642
            
            
            53,807
            
            
            5.73
            %
            
            2,307Commercial
                and industrial
            
            
            45,628
            
            
            6.15
            %
            
            2,099
            
            
            41,891
            
            
            4.88
            %
            
            1,531Lease
                financing
            
            
            1,488
            
            
            9.11
            %
            
            101
            
            
            -
            
            
            0.00
            %
            
            -Consumer
                loans
            
            
            5,298
            
            
            8.83
            %
            
            350
            
            
            5,662
            
            
            9.55
            %
            
            405Tax-exempt
                loans
            
            
            12,683
            
            
            5.25
            %
            
            499
            
            
            12,257
            
            
            5.24
            %
            
            480Total
                loans, net of unearned income*
            
            
            273,542
            
            
            6.09
            %
            
            12,463
            
            
            246,049
            
            
            5.75
            %
            
            10,586Other
                earning assets
            
            
            4,689
            
            
            2.50
            %
            
            88
            
            
            4,830
            
            
            1.41
            %
            
            51Total
                earning assets
            
            
            547,239
            
            
            5.37
            %
            $
            21,961
            
            
            518,086
            
            
            5.13
            %
            $
            19,906Cash
                and due from banks
            
            
            19,252
            
            
            
            
            
            
            
            
            19,706Allowance
                for loan losses
            
            
            (2,595
            )
            
            
            
            
            
            
            
            (2,926
            )Other
                assets
            
            
            19,006
            
            
            
            
            
            
            
            
            18,309Total
                assets
            
            $
            582,902
            
            
            5.04
            %
            
            
            
            $
            553,175
            
            
            4.81
            %**Liabilities
                and Shareholders’ Equity**Interest-bearing
                deposits:Interest-bearing
                demand accounts
            
            $
            93,440
            
            
            1.12
            %
            $
            782
            
            $
            99,262
            
            
            0.60
            %
            $
            449Money
                market accounts
            
            
            55,073
            
            
            1.69
            %
            
            698
            
            
            39,203
            
            
            0.77
            %
            
            226Savings
            
            
            54,507
            
            
            0.39
            %
            
            160
            
            
            54,702
            
            
            0.39
            %
            
            161Time
            
            
            162,986
            
            
            2.95
            %
            
            3,597
            
            
            155,212
            
            
            2.63
            %
            
            3,055Time
                over $100,000
            
            
            44,307
            
            
            2.96
            %
            
            983
            
            
            40,351
            
            
            2.37
            %
            
            715Total
                interest-bearing deposits
            
            
            410,313
            
            
            2.03
            %
            
            6,220
            
            
            388,730
            
            
            1.58
            %
            
            4,606Short-term
                borrowings
            
            
            13,330
            
            
            2.00
            %
            
            199
            
            
            11,904
            
            
            0.92
            %
            
            82Federal
                Home Loan Bank advances
            
            
            55,000
            
            
            5.41
            %
            
            2,225
            
            
            55,000
            
            
            5.26
            %
            
            2,166Total
                interest-bearing liabilities
            
            
            478,643
            
            
            2.41
            %
            
            8,644
            
            
            455,634
            
            
            2.01
            %
            
            6,854Non-interest-bearing
                deposits
            
            
            55,192
            
            
            
            
            
            
            
            
            52,138Other
                liabilities
            
            
            2,766
            
            
            
            
            
            
            
            
            2,888Shareholders’
                equity
            
            
            46,301
            
            
            
            
            
            
            
            
            42,515Total
                liabilities andshareholders’ equity
            
            $
            582,902
            
            
            1.98
            %
            
            
            
            $
            553,175
            
            
            1.66
            %Net
                interest rate spread
            
            
            
            
            
            2.96
            %
            
            
            
            
            
            
            
            3.12
            %Margin/net
                interest income
            
            
            
            
            
            3.25
            %
            $
            13,317
            
            
            
            
            
            3.37
            %
            $
            13,052





Tax-exempt
      securities and loans were adjusted to a tax-equivalent basis and are based
      on
      the marginal Federal corporate tax rate of 34%.


Non-accrual
      loans are included in earning assets.


*
      Includes loans held-for-sale








Form
          10-Q
 Page
          15


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





**Three
                Months Ended**
            
            **Nine
                Months Ended****September
                30, 2005 compared**
            
            **September
                30, 2005 compared****to
                September 30, 2004**
            
            **to
                September 30, 2004**Total
            
            Due
                to change in:
            
            Total
            
            Due
                to change in:Change
            
            Volume
            
            Rate
            
            Change
            
            Volume
            
            Rate**Interest
                income:**Federal
                Funds Sold
            
            $
            35
            
            $
            2
            
            $
            33
            
            $
            88
            
            $
            (2
            )
            $
            90Investment
                securities:U.S.
                Treasury
            
            
            2
            
            
            (2
            )
            
            4
            
            
            (1
            )
            
            (8
            )
            
            7U.S.
                Government agencies
            
            
            (11
            )
            
            (34
            )
            
            23
            
            
            209
            
            
            220
            
            
            (11
            )State
                and municipal
            
            
            (11
            )
            
            (8
            )
            
            (3
            )
            
            44
            
            
            57
            
            
            (13
            )Mortgage-backed
                and CMOs
            
            
            (95
            )
            
            (51
            )
            
            (44
            )
            
            (255
            )
            
            (186
            )
            
            (69
            )Other
            
            
            26
            
            
            (19
            )
            
            45
            
            
            56
            
            
            (20
            )
            
            76Loans:Commercial
                real estate
            
            
            214
            
            
            71
            
            
            143
            
            
            774
            
            
            490
            
            
            284Residential
                real estate
            
            
            62
            
            
            77
            
            
            (15
            )
            
            135
            
            
            219
            
            
            (84
            )Home
                equity loans
            
            
            120
            
            
            58
            
            
            62
            
            
            335
            
            
            268
            
            
            67Commercial
                and industrial
            
            
            202
            
            
            38
            
            
            164
            
            
            568
            
            
            136
            
            
            432Lease
                financing
            
            
            82
            
            
            82
            
            
            -
            
            
            101
            
            
            101
            
            
            -Consumer
                loans
            
            
            (15
            )
            
            (9
            )
            
            (6
            )
            
            (55
            )
            
            (26
            )
            
            (29
            )Tax-exempt
                loans
            
            
            1
            
            
            (1
            )
            
            2
            
            
            19
            
            
            17
            
            
            2Other
                earning assets
            
            
            9
            
            
            (1
            )
            
            10
            
            
            37
            
            
            (1
            )
            
            38Total
                interest income
            
            $
            621
            
            $
            203
            
            $
            418
            
            $
            2,055
            
            $
            1,265
            
            $
            790**Interest
                expense:**Interest-bearing
                demand accounts
            
            $
            173
            
            $
            (11
            )
            $
            184
            
            $
            333
            
            $
            (26
            )
            $
            359Money
                market accounts
            
            
            102
            
            
            3
            
            
            99
            
            
            472
            
            
            91
            
            
            381Savings
            
            
            (3
            )
            
            (3
            )
            
            (0
            )
            
            (1
            )
            
            (1
            )
            
            (0
            )Time
            
            
            217
            
            
            23
            
            
            194
            
            
            542
            
            
            152
            
            
            390Time
                over $100,000
            
            
            119
            
            
            30
            
            
            89
            
            
            268
            
            
            70
            
            
            198Short-term
                borrowings
            
            
            68
            
            
            13
            
            
            55
            
            
            117
            
            
            10
            
            
            107Federal
                Home Loan Bank advances
            
            
            24
            
            
            -
            
            
            24
            
            
            59
            
            
            -
            
            
            59Total
                interest expense
            
            
            700
            
            
            55
            
            
            645
            
            
            1,790
            
            
            296
            
            
            1,494**Net
                interest income**
            
            $
            (79
            )
            $
            148
            
            $
            (227
            )
            $
            265
            
            $
            969
            
            $
            (704
            )








Form
          10-Q
 Page
          16


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


**NET
      INTEREST INCOME**





The
      following table presents the adjustment to convert net interest income to net
      interest income on a fully taxable equivalent basis for the three and nine-month
      periods ended September 30, 2005 and 2004.





For
                the Three Months
            
            For
                the Nine MonthsEnded
                September 30,
            
            Ended
                September 30,2005
            
            2004
            
            2005
            
            2004Total
                interest income
            
            $
            7,143
            
            $
            6,519
            
            $
            20,858
            
            $
            18,827Total
                interest expense
            
            
            3,125
            
            
            2,425
            
            
            8,644
            
            
            6,854Net
                interest income
            
            
            4,018
            
            
            4,094
            
            
            12,214
            
            
            11,973Tax
                equivalent adjustment
            
            
            362
            
            
            365
            
            
            1,103
            
            
            1,079Net
                interest income (fully taxable equivalent)
            
            $
            4,380
            
            $
            4,459
            
            $
            13,317
            
            $
            13,052




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





For
      purposes of this discussion, interest income and the average yield earned on
      loans and investment securities are adjusted to a tax-equivalent basis as
      detailed in the tables that appear on pages 14 and 15. This adjustment to
      interest income is made for analysis purposes only. Interest income is increased
      by the amount of savings of Federal income taxes, which QNB realizes by
      investing in certain tax-exempt State and municipal securities and by making
      loans to certain tax-exempt organizations. In this way, the ultimate economic
      impact of earnings from various assets can be more easily compared.




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





Net
      interest income decreased 1.9%, to $4,018,000, for the quarter ended September
      30, 2005, as compared to $4,094,000 for the quarter ended September 30, 2004.
      On
      a tax-equivalent basis, net interest income decreased by 1.8% from $4,459,000
      for the three months ended September 30, 2004 to $4,380,000 for the same period
      ended September 30, 2005. Through the second quarter of 2005, the growth
      in earning assets had been able to offset the declining net interest margin.
      The
      ability of QNB to increase net interest income had been the result of the growth
      in deposits and the investment of these deposits into profitable loans and
      investment securities. The third quarter represents the period where the
      majority of tax money is received by local school districts and bid out to
      financial institutions. These funds are short-term in nature with most of the
      funds withdrawn within nine months. As a result of the flat yield curve and
      the
      above market deposit pricing by a few financial institutions, QNB decided not
      to
      aggressively seek to retain some deposits of these school districts by paying
      high short-term rates. These funds would not have added significant incremental
      net interest income and








Form
          10-Q
 Page
          17


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




**NET
      INTEREST INCOME** **(Continued)**





would
      have further eroded the net interest margin. When comparing the third quarter
      of
      2005 to the same period in 2004, average
      deposits increased $2,173,000, or .5%, average short-term borrowings increased
      $5,212,000 and average earning assets increased $9,657,000, or 1.8%. On a
      comparison of balances at September 30, 2005 and 2004, total deposits decreased
      $24,210,000 to $459,864,000 at September 30, 2005, with municipal money market
      and municipal interest-bearing demand accounts decreasing $23,707,000, to
      approximately $50,537,000 at September 30, 2005.





When
      comparing the third quarters of 2005 and 2004, the net interest margin and
      net
      interest rate spread declined by 12 basis points and 21 basis points,
      respectively. The net interest margin decreased to 3.18% for the third quarter
      of 2005 from 3.30% for the third quarter of 2004, while the net interest rate
      spread decreased to 2.85% from 3.06% during the same period. In this
      rising interest rate environment, interest rates paid on deposits, particularly
      floating rate municipal interest- bearing demand accounts, indexed money market
      deposits and time deposits, are repricing faster and to a greater degree than
      rates earned on loans and investment securities.





The
      Federal Reserve Board continued its “measured pace” strategy by increasing the
      Federal funds rate six times by 25 basis points each time during the first
      nine
      months of 2005. Since June 29, 2004, it has increased the rate eleven times
      by
      an aggregate of 275 basis points, from 1.00% to 3.75%. While the yield on
      earning assets on a tax-equivalent basis has increased from 5.10% for the third
      quarter of 2004 to 5.45% for the third quarter of 2005, the rate of increase
      was
      slowed because of the fixed rate nature of the investment and loan portfolio
      and
      the strong price competition for loans. The yield on the investment portfolio
      increased slightly from 4.72% for the third quarter of 2004 to 4.77% for the
      third quarter of 2005. The increase in the yield on the investment portfolio
      was
      constrained by limited cash flow to reinvest at slightly higher interest
      rates.





The
      yield on
      loans
      increased 53 basis points to 6.20% when comparing the third quarter of 2004
      to
      the third quarter of 2005. The average prime rate when comparing these same
      periods increased 200 basis points, from 4.42% to 6.42%. While
      QNB
      was positively impacted from the multiple increases in prime rate, the overall
      yield on the loan portfolio did not increase proportionately, since only a
      percentage of the loan portfolio reprices immediately with changes in the prime
      rate. The benefits from an increase in the prime rate were partially offset
      by
      the long period of historically low interest rates which resulted in the
      refinancing of residential mortgage, home equity and commercial real estate
      loans into lower yielding fixed rate loans. The commercial and industrial
      category of loans benefited the most from the increase in the prime rate, as
      many of these loans are indexed to that rate. The yield on this category
      increased 135 basis points when comparing the two quarters. The yield on home
      equity lines of credit has also increased as these loans are indexed to the
      prime rate. Also contributing to the increase in the yield on loans was QNB’s
      entrance into equipment lease financing to small businesses. The average balance
      of lease receivables for the third quarter of 2005 was $3,674,000 at an average
      rate of 8.85%. The rate of increase in loan yields will be determined by how
      quickly and to what degree the Federal Reserve Board continues to increase
      interest rates, the shape of the yield curve and how much the competitive nature
      of the business keeps loan rates down.





The
      yield
      on earning assets and total interest income was positively impacted by the
      change in the mix of earning assets resulting from the growth in loans. Total
      average loans increased $20,044,000, or 7.7%, when comparing the third quarter
      of 2005 to the third quarter of 2004. This growth in loans contributed to the
      increase in the average loan to average deposit ratio from 56.8% for the third
      quarter of 2004 to 61.4% for the third quarter of 2005. The loan to deposit
      ratio at September 30, 2005 was 62.6%, an improvement from the 54.0% at
      September 30, 2004.














Form
          10-Q
 Page
          18


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


**NET
      INTEREST INCOME** **(Continued)**





While
      total interest income on a tax-equivalent basis increased $621,000 when
      comparing the third quarter of 2005 to the third quarter of 2004, total interest
      expense increased $700,000. The increase in interest expense was primarily
      the
      result of the increase in interest rates paid on deposits and short-term
      borrowings as total average interest bearing liabilities only increased .9%
      when
      comparing the two quarters. The rate paid on interest-bearing liabilities
      increased from 2.04% for the third quarter of 2004 to 2.60% for the third
      quarter of 2005, while the rate paid on interest-bearing deposits increased
      from
      1.63% to 2.23% during this same period. Interest expense and the rate paid
      on
      municipal interest-bearing demand accounts, indexed money market accounts and
      time deposit accounts increased the most as these accounts were more reactive
      to
      the increase in market interest rates. Interest expense on total money market
      accounts increased $102,000, and the rate paid increased from .97% to 1.84%
      when
      comparing the two quarters. The increase in the rate paid was primarily the
      result of the impact of rising short-term interest rates on QNB’s Treasury
      Select Money Market Account. This product is a variable rate account, indexed
      to
      the monthly average of the 91-day Treasury bill based on balances in the
      account. The yield on this product has increased as short-term interest rates
      have increased.





Interest
      expense on time deposits increased $336,000, while the average rate paid on
      time
      deposits increased from 2.61% to 3.14% when comparing the two periods. Like
      fixed-rate loans and investment securities, certificates of deposit reprice
      over
      time and, therefore, have less of an immediate impact on costs in either a
      rising or falling rate environment. Unlike loans and investment securities,
      the
      maturity and repricing characteristics tend to be shorter. This feature,
      combined with the strong rate competition for these deposits, will likely result
      in the continued increase in the rates paid on time deposits. Average time
      deposits increased $8,133,000, or 4.0%, when comparing the third quarter of
      2005
      to the third quarter of 2004.





Interest
      expense on interest-bearing demand accounts increased $173,000 when comparing
      the two quarters while the rate paid increased from .68% to 1.43%. Approximately
      40.0% of the average balance of $97,314,000 for the third quarter of 2005 is
      municipal deposits which reprice with changes in the Federal funds rate.





For
      the
      nine-month period ended September 30, 2005, net interest income increased
      $241,000, or 2.0%, to $12,214,000. On a tax-equivalent basis, net interest
      income increased $265,000, or 2.0%. Included in net interest income for the
      first nine months of 2005 and 2004 was $40,000 and $65,000, respectively, in
      interest and fees recognized on the pay-off of loans that had not been accruing
      interest or had previously been charged off. The increase in net interest income
      is a result of the increase in average earning assets offsetting the decline
      in
      the net interest margin. Average earning assets increased 5.6% while the net
      interest margin declined 12 basis points. The net interest margin on a
      tax-equivalent basis was 3.25% for the nine-month period ended September 30,
      2005 compared with 3.37% for the same period in 2004.





Total
      interest income on a tax-equivalent basis increased $2,055,000, from $19,906,000
      to $21,961,000, when comparing the nine-month periods ended September 30, 2004
      to September 30, 2005. Approximately $1,265,000 of the increase in interest
      income was related to volume. Average loans increased 11.2%, to $273,542,000
      and
      contributed $1,205,000 to the increase in interest income. Total interest income
      also benefited from the increase in short-term interest rates and the prime
      rate
      as the yield on earning assets increased from 5.13% to 5.37% for the nine-month
      periods. The yield on loans increased from 5.75% to 6.09% during this time.
      As
      mentioned previously, the yield on investments has been constrained and actually
      decreased slightly from 4.71% to 4.70% when comparing the nine-month periods.





Total
      interest expense increased $1,790,000, from $6,854,000 to $8,644,000, for the
      nine-month periods with interest on demand accounts, money market accounts,
      and
      time deposits accounting for $333,000, $472,000








Form
          10-Q
 Page
          19


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


**NET
      INTEREST INCOME (Continued)**





and
      $810,000, respectively, of the increase. Unlike interest income, interest
      expense was impacted more by an increase in rates paid than by volume increases.
      Approximately $1,494,000 of the increase in interest expense was a result of
      higher interest rates. The yield on interest-bearing demand accounts, money
      market accounts and time deposits increased 52 basis points, 92 basis points
      and
      37 basis points, respectively, when comparing the average rate paid for the
      nine-month periods ended September 30, 2005 and 2004. Interest expense on
      short-term borrowings increased by $117,000 as the average rate paid on these
      accounts increased from .92% to 2.00%. Average money market balances and average
      time deposit balances increased $15,870,000 and $11,730,000, respectively,
      while
      average interest-bearing demand accounts decreased $5,822,000 when comparing
      the
      nine-month periods.




****


**PROVISION
      FOR LOAN** **AND LEASE LOSSES**





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





The
      determination of an appropriate level of the allowance for loan and lease 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
      and lease 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 exceptions to QNB’s
      loan policy and QNB’s portfolio exposure to borrowers with large dollar
      concentration. Other tools include ratio analysis and peer group
      analysis.





QNB’s
      management determined no provision for loan and lease losses was necessary
      for
      either the three or nine-month periods ended September 30, 2005 or 2004, as
      the
      analysis described above resulted in an allowance for loan and lease losses
      that
      was adequate in relation to the estimate of known and inherent losses in the
      portfolio. In addition, charge-offs and non-performing assets remain at low
      levels. QNB had net charge-offs of $17,000 and $307,000 during the third
      quarters of 2005 and 2004, respectively. For the nine-month periods ended
      September 30, 2005 and 2004 QNB had net charge-offs of $44,000 and $338,000,
      respectively. Included in net charge-offs in the third quarter of 2004 was
      a
      $350,000 charge-off related to the relinquishment of assets by a borrower to
      the
      Bank, as its secured creditor, and the transfer of this loan to other assets
      as
      a repossessed asset. This charge-off was recovered in the fourth quarter of
      2004
      and the first quarter of 2005 through the liquidation of assets, which was
      recorded in non-interest income as gains of $141,000 in the fourth quarter
      of
      2004 and $209,000 in the first quarter of 2005. In addition, during the third
      quarter of 2004, QNB had a $50,000 recovery on a loan that had been charged-off
      in 1998.




Non-performing
      assets (non-accruing loans, loans past due 90 days or more, other real estate
      owned and other repossessed assets) amounted to .00% and .26% of total assets,
      respectively, at September 30, 2005 and 2004. This compares to .08% at December
      31, 2004. There were no non-accrual loans at September 30, 2005. Non-accrual
      loans were $373,000 and $377,000 at December 31, 2004 and September 30, 2004,
      respectively. QNB did not have any other real estate owned as of September
      30,
      2005, December 31, 2004 or September











Form
          10-Q
 Page
          20


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


**PROVISION
      FOR LOAN** **AND LEASE LOSSES (Continued)**





30,
      2004.
      There were no repossessed assets at September 30, 2005. Repossessed assets
      were
      $1,026,000 at September 30, 2004. The book value of repossessed assets at
      December 31, 2004 was zero.





There
      were no restructured loans as of September 30, 2005, December 31, 2004 or
      September 30, 2004 as defined in FASB Statement No. 15, "Accounting by Debtors
      and Creditors for Troubled Debt Restructurings," that have not already been
      included in loans past due 90 days or more or non-accrual loans.





The
      allowance for loan and lease losses was $2,568,000 and $2,612,000 at September
      30, 2005 and December 31, 2004, respectively. The ratio of the allowance to
      total loans was .89% and .97% at the respective period end dates. The decline
      in
      the ratio is primarily the result of growth in the loan portfolio without the
      need to add a provision for loan and lease losses. While QNB believes that
      its
      allowance is adequate to cover losses in the loan portfolio, there remain
      inherent uncertainties regarding future economic events and their potential
      impact on asset quality.





A
      loan is
      considered impaired, based on current information and events, if it is probable
      that QNB will be unable to collect the scheduled payments of principal or
      interest when due according to the contractual terms of the loan agreement.
      The
      measurement of impaired loans is generally based on the present value of
      expected future cash flows discounted at the historical effective interest
      rate,
      except that all collateral-dependent loans are measured for impairment based
      on
      the fair value of the collateral.





There
      were no loans considered impaired at September 30, 2005. At September 30 2004,
      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
      $376,000. The loans identified as impaired were collateral-dependent, with
      no
      valuation allowance necessary.





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





Since
      the
      allowance for loan and lease 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 and lease losses and
      actual results could differ in the near term. In addition, various regulatory
      agencies, as an integral part of their examination process, periodically review
      QNB’s allowance for losses on loans. Such agencies may require QNB to recognize
      additions to the allowance based on their judgments about information available
      to them at the time of their examination.





**NON-INTEREST
      INCOME**





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





Total
      non-interest income decreased $51,000, to $938,000, for the quarter ended
      September 30, 2005, when compared to September 30, 2004. For the nine-month
      period, total non-interest income decreased $1,096,000








Form
          10-Q
 Page
          21


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


**NON-INTEREST
      INCOME (Continued)**





to
      $2,435,000. Excluding gains and losses on the sale of securities and loans,
      non-interest income for the three month period increased $21,000, or 2.4%,
      and
      for the nine-month period increased $250,000, or 9.5%.





Fees
      for
      services to customers are primarily comprised of service charges on deposit
      accounts. These fees decreased $40,000, or 7.6%, to $488,000 when comparing
      the
      two quarters and $121,000, or 8.1%, to $1,379,000 when comparing the nine-month
      periods. Contributing to the decline in fee income was a $10,000 reduction
      for
      the quarter and a reduction of $46,000 for the nine-month period in service
      charge income on non-interest bearing business checking accounts. The decline
      in
      the service charges on business accounts reflects the impact of a higher
      earnings credit rate, resulting from the increases in short-term interest rates,
      applied against balances to offset service charges incurred. Also, negatively
      impacting service charge income was the elimination of the monthly fee on an
      interest-bearing checking account product. This fee change resulted in the
      reduction in fee income of approximately $10,000 for the quarter and $29,000
      for
      the nine-month period. In addition, overdraft income decreased $23,000 for
      the
      three-month period and $50,000 for the nine-month period. This decrease was
      a
      result of a decline in the volume of overdrafts during the third quarter of
      2005, as well as an increase in the amount of these fees waived or charged-off
      as uncollectible during both the three and nine-month periods ended September
      30, 2005.





ATM
      and
      debit card income is primarily comprised of income on debit cards and ATM
      surcharge income for the use of QNB ATM machines by non-QNB customers.
      ATM and debit card income was $176,000 for the third quarter of 2005, an
      increase of $23,000, or 15.0%, from the amount recorded during the third quarter
      of 2004. Income from ATM and debit cards was $506,000 and $433,000 for the
      nine
      months ended September 30, 2005 and 2004, respectively. This represents an
      increase of 16.9%. Debit card income increased $16,000, or 14.7%, and $45,000,
      or 14.4%, for the three-month and nine-month periods, respectively. The increase
      in debit card income was a result of the increased reliance on the card as
      a
      means of paying for goods and services by both consumers and business
      cardholders. An increase in pin based transactions resulted in additional
      interchange income of $9,000 and $26,000 when comparing the three and nine-month
      periods, respectively. Partially offsetting these positive variances was a
      reduction in ATM surcharge income of $4,000 during the three month period.
      This
      decrease was a result of fewer transactions by non-QNB customers at QNB ATM
      machines.





Income
      on
      bank-owned life insurance represents the earnings on life insurance policies
      in
      which the Bank is the beneficiary. The earnings on these policies were $61,000
      and $62,000 for the three months ended September 30, 2005 and 2004,
      respectively. For the nine-month period, earnings on these policies decreased
      $13,000, to $187,000. The insurance carriers reset the rates on these policies
      annually. The decline in income is a result of a lower earnings rate resulting
      from the lower interest rate environment at the last reset date.





When
      QNB
      sells its residential mortgages in the secondary market, it retains servicing
      rights. A normal servicing fee is retained on all mortgage loans sold and
      serviced. QNB recognizes its obligation to service financial assets that are
      retained in a transfer of assets in the form of a servicing asset. The servicing
      asset is amortized in proportion to and over the period of net servicing income
      or loss. Servicing assets are assessed for impairment based on their fair value.
      Mortgage servicing fees for the three and nine-month periods ended September
      30,
      2005 were $27,000 and $63,000, respectively. Included in these amounts is a
      $6,000 and $5,000 positive adjustment to the valuation allowance for impairment
      resulting from the increase in interest rates during the third quarter of 2005.
      Mortgage servicing fees for the three month and nine-month periods ended
      September 30, 2004 were $29,000 and $92,000, respectively. Included in these
      amounts is a $2,000 and $31,000 positive adjustment to the valuation allowance
      for impairment resulting from the increase in interest rates and slowdown in
      mortgage prepayments in 2004. Excluding the valuation allowance adjustments,
      mortgage servicing income would have been $21,000 and $27,000 for the third
      quarters of 2005 and 2004,








Form
          10-Q
 Page
          22


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


**NON-INTEREST
      INCOME (Continued)**





respectively,
      and $58,000 and $61,000 for the nine-month periods ended September 30, 2005
      and
      2004, respectively.





Also
      impacting mortgage servicing income was the difference in amortization expense
      and a decrease in the amount of mortgages serviced. The amount of amortization
      expense tends to be higher during periods of increased mortgage refinancing
      activity, because when a loan is paid off, the servicing asset related to that
      mortgage must be expensed. Amortization expense for the three-month periods
      ended September 30, 2005 and 2004 was $27,000 and $24,000, respectively. For
      the
      respective nine-month periods, amortization expense was $86,000 and $95,000.
      The
      average balance of mortgages serviced for others was $77,066,000 for the third
      quarter of 2005, compared to $81,728,000 for the third quarter of 2004, a
      decrease of 5.7%. The average balance of mortgages serviced was approximately
      $77,630,000 for the nine-month period ended September 30, 2005, compared to
      $83,477,000 for the first nine months of 2004, a decrease of 7.0%. The timing
      of
      mortgage payments and delinquencies also impacts the amount of servicing fees
      recorded.





During
      the third quarter of 2005 QNB
      recorded a loss on the sale of investment securities of $4,000. This was the
      result of an additional loss on the sale of one of the FHLMC perpetual preferred
      stock issues written down during the second quarter of 2005. There were no
      sales
      from the equity portfolio during the third quarter of 2005. Net gains on the
      sale of investment securities were $66,000 for the third quarter of 2004. Gain
      on the sale of equity securities contributed $58,000, while the sale of some
      fixed income securities for liquidity purposes resulted in a gain of
      $8,000.





Net
      security (losses)/gains were ($580,000) and $762,000 for the nine-month periods
      ended September 30, 2005 and 2004, respectively. In
      the
      second quarter of 2005, QNB determined that certain unrealized losses on
      perpetual preferred stock of FNMA and FHLMC was other-than-temporary in
      accordance with SFAS 115 “Accounting for Certain Investments in Debt and Equity
      Securities” and the SEC’s Staff Accounting Bulletin No. 59 “Accounting for
      Non-current Marketable Equity Securities”. The securities that were subject to
      the impairment charge were $4,500,000 of variable rate securities that are
      rated
      AA- and Aa3 by S&P and Moody’s, respectively. These investment grade
      securities were held as part of the available for sale portfolio; therefore,
      the
      unrealized losses had already been recorded as a reduction in other
      comprehensive income, and no additional charge to capital was required. QNB’s
      assessment considered the duration and severity of the unrealized loss, the
      financial condition and near term prospects of the issuers, and the likelihood
      of the market value of these instruments increasing to the initial cost basis
      within a reasonable period of time. Based on the events at these issuers and
      the
      anticipated interest rate environment expected in the near term, it was
      concluded that the unrealized losses were other-than-temporary, and an
      impairment charge of $1,253,000 was recorded to write-down these investments
      to
      their fair values. Along
      with the impairment charge discussed above, for the nine-month period 2005,
      QNB
      recorded $240,000 of net gains from sales from the fixed income securities
      portfolio and $433,000 of gains from the equity portfolio. For the nine-month
      period, 2004 gains from the equity portfolio were $639,000, while gains from
      the
      fixed income portfolio were $123,000.





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.





The
      net
      gain on residential mortgage sales is directly related to the volume of
      mortgages sold and the timing of the sales relative to the interest rate
      environment. The net gain on the sale of residential mortgage loans was








Form
          10-Q
 Page
          23


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


**NON-INTEREST
      INCOME (Continued)**





$31,000
      and $33,000 for the quarters ended September 30, 2005 and 2004, respectively.
      For the nine-month periods ended September 30, 2005 and 2004, net gains on
      the
      sale of loans were $127,000 and $131,000, respectively. Residential mortgage
      loans to be sold are identified at origination. Included
      in the gains on the sale of residential mortgages in the three-month periods
      were $17,000 and $11,000 related to the recognition of mortgage servicing
      assets. Included
      in the gains on the sale of residential mortgages in the nine-month periods
      were
      $56,000 and $59,000 related to the recognition of mortgage servicing assets.
      Proceeds from the sale of mortgages were $2,287,000 and $1,438,000 for the
      third
      quarter of 2005 and 2004, respectively. For the nine-month periods, proceeds
      from the sale of residential mortgage loans amounted to $7,510,000 and
      $7,737,000, respectively.





Other
      operating income increased $41,000, to $159,000, during the third quarter of
      2005. The increase in other operating income for the quarter was the result
      of
      $12,000 of income from QNB’s membership in Laurel Abstract Company LLC, a title
      insurance company, and an increase of $12,000 related to income on official
      checks. The increase in official check income was a result of the increase
      in
      short-term interest rates. The third quarter of 2004 included a $20,000
      write-down of the bank’s investment in Bankers’ Settlement Services of Eastern
      Pennsylvania, LLC, a title insurance company, which was liquidated.





For
      the
      nine-month period, other operating income increased $340,000, or 82.3%, to
      $753,000. The increase in other operating income for the quarter was the result
      of $21,000 of income from Laurel Abstract Company LLC, $62,000 of income from
      the proceeds of bank owned life insurance, a $45,000 refund of prior years’
      sales tax payments and $208,000 in gains from the sale of repossessed
      assets.





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





**NON-INTEREST
      EXPENSE**





Non-interest
      expense is comprised of costs related to salaries and employee benefits, net
      occupancy, furniture and equipment, marketing, third party services and various
      other operating expenses. Total non-interest expense of $3,140,000 for the
      quarter ended September 30, 2005 represents a decrease of $104,000, or 3.2%,
      from levels reported in the third quarter of 2004. Total non-interest expense
      for the nine months ended September 30, 2005 was $9,692,000, an increase of
      $190,000, or 2.0%, over 2004 levels.





Salaries
      and benefits is the largest component of non-interest expense. Salaries and
      benefits expense decreased $118,000, or 6.4%, to $1,728,000 for the quarter
      ended September 30, 2005 compared to the same quarter in 2004. Salary expense
      decreased $93,000, or 6.2%, during the period to $1,403,000, while benefits
      expense decreased $25,000, or 7.1%, to $325,000. Included in salary expense
      for
      the three months ended September 30, 2005 was a reversal of $40,000 of
      anticipated incentive compensation accrued during the first quarter of 2005.
      Included during the third quarter of 2005 was an accrual of $80,000 related
      to
      the incentive compensation plan. Excluding the impact of the incentive
      compensation plan, salary expense increased 1.9% for the three-month period.
      The
      number of full time-equivalent employees decreased by three when comparing
      the
      third quarters of 2005 and 2004. Merit increases offset the impact of the
      reduction in the number of employees. The decline in benefits expense is
      primarily the result of timing, as there was one less pay period in the third
      quarter of 2005 than there was in the third quarter of 2004. This difference
      resulted in lower payroll taxes and retirement plan expense.





Form
          10-Q
 Page
          24


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


**NON-INTEREST
      EXPENSE (Continued)**





For
      the
      nine-month period ended September 30, 2005, salaries and benefits expense
      increased $76,000, to $5,428,000, compared to the same period in 2004. Salary
      expense increased by $67,000, or 1.6%, to $4,356,000, while benefits expense
      increased by $9,000, or .8%, to $1,072,000, when comparing the two periods.
      There was no accrual for the nine months ended September 30, 2005 related to
      the
      incentive compensation plan. Included in salary expense for the nine months
      ended September 30, 2004 was an accrual of $180,000 for incentive compensation.
      Excluding the impact of the accrual for incentive compensation in 2004, salary
      expense increased 6.0% for the nine-month period. Merit and promotional
      increases, as well as an increase in the number of employees, contributed to
      this increase in salary expense. The number of full time-equivalent employees
      increased by three when comparing the nine-month periods.





Net
      occupancy expense
      increased $6,000, to $268,000, when comparing the third quarter of 2005 to
      the
      third quarter of 2004. For the nine-month period, net occupancy expense
      increased $70,000, to $821,000. For the three month period an increase in
      utility costs and taxes was partially offset by a reduction in maintenance
      costs. Contributing to the increase in the nine-month periods was higher costs
      related to depreciation, utilities, taxes maintenance and rent expense. The
      addition of a new supermarket branch, which opened late June 2004 and the
      purchase in July of 2004 of a building to be used for office space, contributed
      to these increases in net occupancy expense. It is anticipated that the
      completion of the renovation of the building and occupancy will take place
      during 2006.





Furniture
      and equipment expense decreased $29,000, or 9.3%, to $282,000, when comparing
      the three-month periods ended September 30, 2005 and 2004 and increased $28,000,
      or 3.4%, to $855,000, when comparing the nine-month periods. For the three-month
      periods, depreciation and amortization expense decreased $27,000. For the
      nine-month periods, depreciation expense increased $8,000, while equipment
      maintenance costs increased by $16,000. The equipment maintenance costs related
      primarily to maintenance contracts on new equipment or increases in rates on
      old
      contracts.





Marketing
      expense increased $26,000, to $140,000, for the quarter ended September 30,
      2005
      and $77,000, to $446,000, for the nine-month period. Advertising expense
      increased $18,000 and $26,000 when comparing the three and nine-month periods,
      respectively. Public relations expense increased $16,000 and $13,000 when
      comparing three and nine-month periods, respectively, while promotional expense
      increased $10,000 during the nine-month period. QNB has made a strategic
      decision to increase its visibility in the communities it serves through
      increased use of billboards, television advertising and promotional giveaways
      to
      increase both product and brand recognition. Donations increased $36,000 when
      comparing the nine-month periods. QNB contributes to many not-for-profit
      organizations, clubs and community events in the local communities it
      serves.





Third
      party services are comprised of professional services including legal,
      accounting and auditing and consulting services, as well as fees paid to outside
      vendors for support services of day-to-day operations. These support services
      include trust services, retail non-deposit services, correspondent banking
      services, statement printing and mailing, investment security safekeeping and
      supply management services. Third party services expense was $171,000 in the
      third quarter of 2005, compared to $180,000 for the third quarter of 2004.
      For
      the nine-month period, third party services decreased $30,000, to $480,000.
      Third party services in 2004 included expenses to a marketing firm that provided
      benefits to certain QNB deposit customers. This contract ended in October 2004.
      These cost savings of $14,000 for the three month period and $44,000 for the
      nine month period offset the loss of fee income described in the fees for
      services to customers. Higher costs associated with internal and external
      auditing and tax services partially offset these savings. In addition,
      consultant expense increased $11,000 when comparing the two quarters and $10,000
      when comparing the








Form
          10-Q
 Page
          25


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


**NON-INTEREST
      EXPENSE (Continued)**





nine-month
      periods. The primary contributor was the use of a consultant to assist QNB
      in
      its entrance into the new lease financing line of business.





Telephone,
      postage and supplies expense decreased $1,000 to $125,000 when comparing the
      three-month periods and $21,000 to $361,000 when comparing the nine-month
      periods. Postage expense increased $7,000 and $12,000 in the respective periods
      reflecting an increase in the volume of mail primarily statements and
      promotional pieces. This was offset by lower telephone expense of $8,000 and
      $26,000 during the same periods. The reduction in telephone expense primarily
      relates to refunds of overcharges incurred in late 2004 and early 2005 as well
      as costs incurred in 2004 related to an additional line and costs associated
      with the new branch.





State
      tax
      expense represents the Bank’s payment of the Pennsylvania Shares Tax, which is
      based primarily on the equity of the bank, Pennsylvania sales and use tax and
      the Corporation’s Pennsylvania capital stock tax. For the three month period
      ended September 30, 2005 and 2004 state tax expense increased $51,000 to
      103,000, while for the nine-month period State taxes increased $37,000 to
      $320,000. The Bank’s Pennsylvania shares tax increased $9,000 and $27,000 during
      the respective three and nine month periods while the Corporation’s tax
      increased $43,000 during the three month period and $12,000 for the nine month
      period. The third quarter of 2004 included a $42,000 credit for Pennsylvania
      capital stock tax.





**INCOME
      TAXES**





QNB
      utilizes an asset and liability approach for financial accounting and reporting
      of income taxes. As of September
      30, 2005, QNB's net deferred tax asset was $959,000. The primary components
      of
      deferred taxes are a deferred tax asset of $743,000 relating to the allowance
      for loan and lease losses, $390,000 related to impaired equity securities and
      $175,000 resulting from the SFAS No.115 adjustment for available-for-sale
      investment securities. As of September 30, 2004, QNB's net deferred tax
      liability was $163,000. The primary components of deferred taxes are a deferred
      tax asset of $635,000 relating to the allowance for loan and lease losses and
      a
      deferred tax liability of $697,000 resulting from the SFAS 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 $190,000 was established as of June 30,
      2005 to offset a portion of the tax benefits associated with certain impaired
      securities that management believed may not be realizable. 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 (liabilities) is included in other assets (liabilities) on the
      consolidated balance sheet.





Applicable
      income taxes and effective tax rates were $385,000, or 21.2%, for the
      three-month period ended September 30, 2005, and $386,000, or 21.0%, for the
      same period in 2004. For the nine-month period, applicable income taxes and
      effective tax rates were $1,124,000, or 22.7%, and $1,308,000, or 21.8%. The
      higher rate for the nine-month period September 30, 2005 compared to the same
      period in 2004 is a result of the $190,000 valuation allowance established
      for
      the impairment of securities in the second quarter of 2005.









Form
          10-Q
 Page
          26


**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
      nine months ended September 30, 2005 and 2004, as well as the period ended
      balances as of September 30, 2005 and December 31, 2004.





Average
      earning assets for the nine-month period ended September 30, 2005 increased
      $29,153,000, or 5.6%, to $547,239,000, from $518,086,000 for the nine months
      ended September 30, 2004. Average investments increased $2,049,000, or .8%,
      while average loans increased $27,493,000, or 11.2%. Average Federal funds
      sold
      decreased $248,000 when comparing these same periods.





Increasing
      loan balances has been, and remains, a major focus of QNB. Despite the extremely
      competitive environment for loans, QNB was successful in increasing total loans,
      while maintaining excellent asset quality. Total loans increased $26,479,000,
      or
      10.1%, between September 30, 2004 and September 30, 2005 and $19,428,000, or
      7.2%, since December 31, 2004. The year-over-year comparison takes out the
      seasonality of commercial line of credit borrowings. Contributing to the growth
      in loans was a new line of business, lease financing. This line of business
      is
      intended to assist in meeting loan growth targets as well as increasing the
      average yield of the portfolio. As of September 30, 2005, the outstanding
      balance of leases financing receivables was $5,291,000.





Average
      total commercial loans and average lease financing receivables increased
      $15,452,000 and $1,488,000, respectively, when comparing the first nine months
      of 2005 to the first nine months of 2004, while average home equity loans and
      residential mortgage loans increased $6,293,000 and $4,624,000, respectively.
      During this same time frame, average consumer loans decreased $364,000. Most
      of
      the growth in average commercial loans is in loans secured by real estate,
      either commercial or residential properties, which increased $11,289,000. Of
      this increase $6,422,000, or 57.0%, are variable rate loans. These loans could
      have a fixed rate for a period of time, such as three or five years, before
      the
      rate adjusts. Most of the growth in the commercial and industrial category
      represents loans with fixed interest rates. Customers are requesting to lock
      in
      a fixed rate, with the expectation that short-term interest rates will continue
      to rise.





The
      11.7%
      increase in average home equity loans reflects their popularity with consumers,
      especially those refinancing existing residential mortgage loans, because they
      have lower origination costs than residential mortgage loans. When comparing
      average balances, most of the growth in home equity loans in the past year
      has
      been in the variable rate home equity line of credit. This product’s interest
      rate floats at prime minus .50% and became extremely attractive when prime
      dropped to 4.0%. The average balance of variable rate home equity loans for
      the
      nine month period increased $4,083,000. However, when comparing growth since
      December 31, 2004 fixed rate home equity loans have increased $4,250,000 while
      variable rate home equity lines of credit have decreased by $145,000. QNB
      anticipates that, if the prime rate continues to increase, customers will
      continue to refinance their floating rate lines into fixed rate home equity
      loans.





The
      increase in residential mortgage loans was primarily the result of the
      introduction of several hybrid adjustable rate mortgage products. These products
      have a fixed rate for a five to ten year period of time, and then adjust
      annually after the fixed period is over. QNB holds these loans in portfolio.
      Since December 31, 2004 variable rate residential mortgage loans have increased
      from $13,502,000, to $17,425,000, at September 30, 2005.




The
      growth in average earning assets was funded primarily by deposit growth. Total
      average deposits increased $24,637,000, or 5.6%, to $465,505,000 for the first
      nine months of 2005 compared to the first nine months of 2004. Most of the
      growth was in money market accounts, which increased $15,870,000 on average.








Form
          10-Q
 Page
          27


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


**FINANCIAL
      CONDITION ANALYSIS (Continued)**





The
      increase in average money market balances reflects a $20,000,000 deposit of
      a
      school district during the third quarter of 2004 and an increase in indexed
      money market balances as short-term interest rates have risen. Most of the
      school district deposit was withdrawn as expected during the second quarter
      of
      2005. The average balance of the school district’s deposits increased by
      approximately $7,900,000, when comparing the nine-month periods, while the
      average balance of the indexed money market accounts increased by $6,492,000
      over the same timeframe.





Also
      contributing to the growth in average deposits were time deposits, which
      increased $11,730,000, or 6.0%, when comparing the nine-month periods. Average
      time deposits with balances under $100,000 increased $7,774,000, to
      $162,986,000, while average time deposits equal to or greater than $100,000
      increased $3,956,000, to $44,307,000. Most
      of
      the growth occurred in the maturity range of greater than one year through
      three
      year categories, which QNB promoted heavily in 2004 and the first nine months
      of
      2005 in an effort to lock in funding costs in anticipation of rising rates.
      Increasing time deposit balances will be a challenge because of the strong
      rate
      competition, particularly with maturities between eight months through two
      years. Most customers are looking for the highest rate for the shortest term
      because of the belief that short-term interest rates will continue to rise.
      Matching or beating competitors’ rates could have a negative impact on the net
      interest margin.





Average
      non-interest bearing demand accounts increased $3,054,000, or 5.9%, to
      $55,192,000. A “Free Checking” promotion, as well as the acquisition of new
      business accounts, was a significant factor in the increase in non-interest
      bearing deposits.





Average
      savings accounts decreased $195,000, or .4%. The decline in savings deposits
      may
      be attributable to consumers looking to obtain higher yields currently being
      offered in time deposits and money market accounts.





Average
      interest-bearing demand deposit accounts declined $5,822,000, or 5.9%, when
      comparing the nine-month periods with average municipal balances representing
      $5,180,000 of the decrease.





Total
      assets at September 30, 2005 were $582,112,000, compared with $583,644,000
      at
      December 31, 2004, a decrease of .3%. Total deposits declined $6,624,000, or
      1.4%, during this same period. Most of the decline in deposits was a result
      of
      the decision to not aggressively seek to retain some deposits of municipalities
      by paying high short-term rates. With the flat yield curve, these funds would
      not have added significant incremental net interest income and would have
      further eroded the net interest margin. The primary category impacted by this
      decision was money market accounts, which declined $16,644,000 between December
      31, 2004 and September 30, 2005. Municipal money market balances declined
      approximately $18,000,000 between these two dates. Total savings accounts
      declined $3,695,000, as some customers sought out higher yielding money market
      accounts and time deposits. Total interest-bearing transaction accounts and
      time
      deposits increased $8,048,000 and $1,527,000, respectively, between these dates,
      while total non-interest bearing demand accounts increased $4,140,000, or 7.9%,
      to $56,743,000 at September 30, 2005. The increase in interest-bearing demand
      accounts reflects the seasonal nature of the municipal deposits. Municipal
      interest-bearing demand accounts increased $12,151,000 between December 31,
      2004
      and September 30, 2005. It is anticipated that most of this increase will be
      withdrawn by December 31, 2005. Most of the decline in total deposits was offset
      by an increase in short-term borrowings, primarily repurchase agreements.
      Repurchase agreement balances increased $4,983,000 between December 31, 2004
      and
      September 30, 2005.









Form
          10-Q
 Page
          28


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


**FINANCIAL
      CONDITION ANALYSIS (Continued)**





On
      the
      asset side, total loans increased $19,428,000, or 7.2%, while total investment
      securities decreased $23,379,000 since December 31, 2004. The decline in
      investment securities relates directly to the withdrawal of the municipal funds
      as well as the growth in loans. The increase in other assets at September 30,
      2005 relates to an increase in prepaid expenses and deferred taxes as compared
      to December 31, 2004. The decline in other liabilities is primarily related
      to
      distributions under a directors deferred compensation plan, the payment of
      the
      accrued 2004 incentive compensation and the reduction in deferred tax
      liability.





At
      September 30, 2005, the fair value of investment securities available-for-sale
      was $244,487,000, or $722,000 below the amortized cost of $245,209,000. This
      compares to a fair value of $267,561,000, or $1,561,000 above the amortized
      cost
      of $266,000,000, at December 31, 2004. An unrealized holding loss, net of taxes,
      of $547,000 was recorded as a decrease to shareholders’ equity at September 30,
      2005, while an unrealized holding gain of $691,000 was recorded as an increase
      to shareholders' equity at December 31, 2004. Rising interest rates during
      2005
      and particularly during the third quarter of 2005 had the impact of reducing
      the
      market value of the available-for-sale portfolio.





As
      a
      result of the decline of municipal deposits, there was a corresponding decline
      in U.S. Government agency securities which were purchased to match these
      deposits. As a result of this, as well as purchases and sales during the
      nine-month period, the composition of the portfolio changed since December
      31,
      2004. The percentage of agency securities declined from 17% of the portfolio
      at
      December 31, 2004 to 11% at September 30, 2005. During this same period, the
      percentage of CMO’s increased from 27% to 30% of the portfolio, and municipal
      securities increased from 19% to 21% of the portfolio.





The
      available-for-sale portfolio ,
      excluding equity securities, had a weighted average maturity of approximately
      4 years
      and
      1 month at September 30,
      2005
      and 3 years, 7 months at December 31, 2004. The weighted average tax-equivalent
      yield was 4.82% and 4.59%, respectively, at September 30,
      2005
      and December 31, 2004. The weighted average maturity is based on the stated
      contractual maturity of all securities except for mortgage-backed securities
      and
      CMOs, 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 and CMOs. However, the estimated
      average life could be longer if rates were to increase and principal payments
      on
      mortgage-backed securities and CMOs would slow. The interest rate sensitivity
      analysis reflects the repricing term of the securities portfolio based upon
      estimated call dates and anticipated cash flows, assuming management’s most
      likely interest rate environment.





Investment
      securities held-to-maturity are reported at amortized cost. The held-to-maturity
      portfolio is comprised solely of tax-exempt municipal securities. As of September 30,
      2005
      and December 31, 2004, QNB had securities classified as held-to-maturity with
      an
      amortized cost of $5,898,000 and $6,203,000 and a market value of $6,127,000
      and
      $6,432,000, respectively. The held-to-maturity portfolio had a weighted average
      maturity of approximately 3 years, 10 months at September  30,
      2005
      and 4 years, 5 months at December 31, 2004. The weighted average tax-equivalent
      yield was 6.80% at September
      3 0,
      2005
      and 6.79% at December 31, 2004.





**LIQUIDITY**





Liquidity
      represents an institution’s ability to generate cash or otherwise obtain funds
      at reasonable rates to satisfy commitments to borrowers and demands of
      depositors. QNB manages its mix of cash, Federal funds sold, investment
      securities and loans in order to match the volatility, seasonality, interest
      sensitivity and growth trends of its deposit funds. Liquidity is provided from
      asset sources through maturities and repayments of loans and investment
      securities, net interest income and fee income. The portfolio of investment
      securities








Form
          10-Q
 Page
          29


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





available-for-sale
      and QNB's policy of selling certain residential mortgage originations in the
      secondary market also provide sources of liquidity. Additional sources of
      liquidity are provided by the Bank’s membership in the Federal Home Loan Bank of
      Pittsburgh (FHLB) and a $10,000,000 unsecured Federal funds line granted by
      a
      correspondent bank. The
      Bank
      has a maximum borrowing capacity with the FHLB of approximately $243,438,000.
      At
      September 30, 2005, QNB’s outstanding borrowings under the FHLB credit
      facilities totaled $55,000,000.





Cash
      and
      due from banks, Federal funds sold, available-for-sale securities and loans
      held-for-sale totaled $268,298,000 and $290,058,000 at September 30, 2005 and
      December 31, 2004, respectively. These sources should be adequate to meet normal
      fluctuations in loan demand and deposit withdrawals. During
      the third quarter of 2005, QNB used its Federal funds line on one occasion.
      Average Federal funds purchased were $56,000 for the third quarter of 2005.
      This
      compares to $1,537,000 for the same period in 2004. At September 30,
      2005,
      QNB had no Federal funds purchased.





Approximately
      $86,516,000 and $103,305,000 of available-for-sale securities at September
      30,
      2005 and December 31, 2004, respectively, were pledged as collateral for
      repurchase agreements and deposits of public funds. In addition, under terms
      of
      its agreement with the FHLB, QNB maintains otherwise unencumbered qualifying
      assets (principally 1-4 family residential mortgage loans and U.S. Government
      and Agency notes, bonds, and mortgage-backed securities) in the amount of at
      least as much as its advances from the FHLB.





**CAPITAL
      ADEQUACY**





A
      strong
      capital position is fundamental to support continued growth and profitability
      and to serve the needs of depositors. QNB's shareholders' equity at September
      30, 2005 was $46,631,000, or 8.01% of total assets. This compares to
      shareholders' equity of $45,775,000, or 7.84% of total assets, at December
      31,
      2004. Shareholders’ equity at September 30, 2005 includes a negative adjustment
      of $547,000 related to unrealized holding losses, net of taxes, on investment
      securities available-for-sale, while shareholders' equity at December 31, 2004
      includes a positive adjustment of $691,000. Without these adjustments
      shareholders' equity to total assets would have been 8.10% and 7.72% at
      September 30, 2005 and December 31, 2004, respectively. The increase in the
      ratio is primarily the result
      of
      an increase in retained earnings. QNB paid out approximately 47.4% of net income
      in the form of cash dividends while retaining approximately 52.6%. Also,
      contributing to the increase in the ratio is a slight decline in total assets
      between December 31, 2004 and September 30, 2005.





Shareholders'
      equity averaged $46,301,000 for the first nine months of 2005 and $42,975,000
      during all of 2004, an increase of 7.74%. The ratio of average total equity
      to
      average total assets increased to 7.94% for the first nine months of 2005,
      compared to 7.64% for all of 2004. The increase in the equity to asset ratio
      is
      a function of the growth in average equity outpacing the growth in total average
      assets.





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), Tier II capital that includes a portion of the allowance for loan
      and lease losses, 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
      assets.







Form
          10-Q
 Page
          30


**QNB
              CORP. AND SUBSIDIARY**
 
 **MANAGEMENT'S
              DISCUSSION AND ANALYSIS OF RESULTS** **OF
              OPERATIONS AND FINANCIAL CONDITION**
 ****
 **CAPITAL
          ADEQUACY (Continued)**





The
      minimum regulatory capital ratios are 4.00% for Tier I, 8.00% for the total
      risk-based and 4.00% for leverage. Under the requirements, QNB had a Tier I
      capital ratio of 13.02% and 12.25%, a total risk-based ratio of 13.73% and
      12.98% and a leverage ratio of 8.06% and 7.44% at September 30, 2005 and
      December 31, 2004, respectively. The increase in capital ratios reflects the
      increase in capital from retained earnings during the first nine months of
      2005.





The
      Federal Deposit Insurance Corporation Improvement Act of 1991 established five
      capital level designations ranging from "well capitalized" to "critically
      undercapitalized." At September 30, 2005 and December 31, 2004, QNB met the
      "well capitalized" criteria, which requires minimum Tier I and total risk-based
      capital ratios of 6.00% and 10.00%, respectively, and a Tier I leverage ratio
      of
      5.00%.





**INTEREST
      RATE SENSITIVITY**





Since
      the
      assets and liabilities of QNB have diverse repricing characteristics that
      influence net interest income, management analyzes interest sensitivity through
      the use of gap analysis and simulation models. Interest rate sensitivity
      management seeks to minimize the effect of interest rate changes on net interest
      margins and interest rate spreads and to provide growth in net interest income
      through periods of changing interest rates. 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, 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
      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. QNB also has another money market account which
      reprices monthly based on a percentage of the average of the 91-day Treasury
      bill.





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 September 30, 2005, interest-earning assets scheduled to mature or
      likely to be called, repriced or repaid in one year were $176,680,000.
      Interest-sensitive liabilities scheduled to mature or reprice within one year
      were $217,461,000. The one-year cumulative gap, which reflects QNB’s interest
      sensitivity over a period of time, was a negative $40,781,000 at September
      30,
      2005. The cumulative one-year gap equals -7.38% of total rate sensitive assets.
      This compares to a negative gap position of $12,285,000, or -2.21% of total
      rate
      sensitive assets, at December 31, 2004 and a negative gap position of
      $25,842,000 or -4.74% of total rate sensitive assets, at June 30, 2005.







Form
          10-Q
 Page
          31


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


**INTEREST
      RATE SENSITIVITY (Continued)**





A
      negative or liability sensitive gap will generally benefit QNB in a falling
      interest rate environment, while rising rates could negatively impact QNB.
      The
      increase in the negative gap position in 2005 is a result of slight average
      life
      and duration extension in the investment portfolio caused by higher interest
      rates and the resulting slowdown in prepayment speeds on mortgage backed
      securities and CMO’s and extension in the loan portfolio as customers have
      desired fixed rate loans over adjustable rate loans in anticipation of higher
      interest rates.





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 September 30,
      2005, that it is unlikely that interest rates would decline by 300 basis
      points.





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.





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 that it could utilize
      to
      remedy such a mismatch. QNB could restructure its investment portfolio through
      the 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 September 30, 2005, QNB did not have any
      hedging transactions in place such as interest rate swaps, caps or floors.








Form
          10-Q
 Page
          32


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





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


Change
                in Interest Rates
            
            Net
                Interest Income
            
            Dollar
                Change
            
            %
                Change+300
                Basis Points
            
            $
            14,477
            
            $
            (1,226
            )
            
            (7.81
            )%+200
                Basis Points
            
            
            15,078
            
            
            (625
            )
            
            (3.98
            )+100
                Basis Points
            
            
            15,542
            
            
            (161
            )
            
            (1.03
            )FLAT
                RATE
            
            
            15,703
            
            
            -
            
            
            --100
                Basis Points
            
            
            15,709
            
            
            6
            
            
            .04-200
                Basis Points
            
            
            14,800
            
            
            (903
            )
            
            (5.75
            )





The
      decline in net interest income in a rising rate environment is consistent with
      the gap analysis and reflects the fixed rate nature of the investment and loan
      portfolio and the increased expense associated with higher cost funding sources.
      The decline in net interest income if rates decline greater than 100 basis
      points reflects the interest rate floors on interest bearing transaction
      accounts, regular money market accounts and savings accounts. Interest rates
      on
      these products do not have the ability to decline to the degree that rates
      on
      earning assets can. These results are inconsistent with the gap analysis and
      identify some of the weaknesses of gap analysis which does not take into
      consideration the magnitude of the rate change on different instruments or
      the
      timing of the rate change. Management may attempt to reduce the size of the
      negative gap position and the impact of rising interest rates by increasing
      the
      amount of cash flow from the investment portfolio through some restructuring
      of
      the investment portfolio and by attempting to promote longer-term time deposits
      or deposits that don’t adjust with an index.














Form
          10-Q
 Page
          33


**QNB
              CORP. AND SUBSIDIARY**
 
 **MANAGEMENT'S
              DISCUSSION AND ANALYSIS OF RESULTS** **OF
              OPERATIONS AND FINANCIAL CONDITION**
 ****
 **ITEM
                  3.**
                **QUANTITATIVE
                    AND QUALITATIVE DISCLOSURE ABOUT MARKET
                    RISK.**





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








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





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










Form
          10-Q
 Page
          34





**QNB
      CORP. AND SUBSIDIARY**





**PART
      II. OTHER INFORMATION**





**SEPTEMBER
      30, 2005**




Item
                  1.
              Legal
                  ProceedingsNone.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 Securities HoldersNone.Item
                  5.
              Other
                  InformationOn
                  November 4, 2005, the Bank entered into a land lease with Colivata
                  Gambone, Inc. The land lease is a twenty-year agreement with an
                  initial
                  annual minimum rent of $90,000. The land will be used for a future
                  branch
                  location.Item
                  6.
              ExhibitsExhibit
                  3(i)
              Articles
                  of Incorporation of Registrant, as amended. (Incorporated by reference
                  to
                  Exhibit 3(i) of Registrant’s 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
                  Registrant’s Form 10-Q filed with the Commission on August 9,
                  2005).Exhibit
                  10.5
              Change
                  of Control Agreement between Registrant and Robert C.
                  WernerExhibit
                  10.6
              Change
                  of Control Agreement between Registrant and Bret H. KrevolinExhibit10.8
              QNB
                  Corp. 2005 Stock Incentive Plan. (Incorporated by reference to
                  Exhibit
                  99.1 to Registration Statement No. 333-125998 on Form S-8, filed
                  with the
                  Commission on June 21, 2005.)Exhibit
                  11
              Statement
                  Re: Computation of Earnings Per Share. (Included in Part I, Item
                  I,
                  hereof.)Exhibit
                  31.1
              Section
                  302 Certification of President and CEOExhibit
                  31.2
              Section
                  302 Certification of Chief Financial OfficerExhibit
                  32.1
              Section
                  906 Certification of President and CEOExhibit
                  32.2
              Section
                  906 Certification of Chief Financial
                  Officer





Form
          10-Q
 Page
          35





**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.By:Date:
              November 4, 2005
            
            /s/ Thomas
              J. BiskoThomas
                J. Bisko
              President/CEO


By:Date:
                November 4, 2005
              
              /s/ Robert
                C. WernerRobert
                    C. Werner
                  Vice
                    President
 By:Date:
                  November 4, 2005
                
                /s/ Bret
                  H. KrevolinBret
                      H. Krevolin
                    Chief
                      Financial Officer


Form
          10-Q
 Page
          36