UNITED STATES
                        SECURITY AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

                                   FORM 10-QSB

(Mark One)

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

For the quarterly period ended  September 30, 2004
                               ---------------------

                                       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:   0-24036
                        --------------

                     Horizon Financial Services Corporation
--------------------------------------------------------------------------------
             (Exact name of registrant as specified in its charter)

                                    Delaware
--------------------------------------------------------------------------------
         (State or other jurisdiction of incorporation or organization)

                                   42-1419757
--------------------------------------------------------------------------------
                      (I.R.S. Employer Identification No.)

   301 First Avenue East, Oskaloosa, Iowa                  52577
--------------------------------------------------------------------------------
  (Address of principal executive offices)               (Zip Code)

                                  (641)673-8328
--------------------------------------------------------------------------------
              (Registrant's telephone number, including area code)


--------------------------------------------------------------------------------
        (Former name, former address and former fiscal year, if changed
                               since last report)

Check  whether the issuer (1) 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 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. |X| YES |_| NO

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

              Common Stock                     780,431
              ------------                     -------
                Class                     Shares Outstanding
                                        as of October 31, 2004

Transitional Small Business Disclosure Format (check one):
Yes |_|:  No |X|

<PAGE>

              HORIZON FINANCIAL SERVICES CORPORATION and SUBSIDIARY

                                      INDEX

<TABLE>
<CAPTION>
Part I. Financial Information                                                       Page
                                                                                    ----
<S>                                                                                  <C>
         Item 1.  Financial Statements (Unaudited)

         Consolidated Balance Sheets at September 30, 2004 and June 30, 2004          2

         Consolidated Statements of Operations for the three months ended             3
         September 30, 2004 and 2003

         Consolidated Statements of Comprehensive Income for the three months         4
         ended September 30, 2004 and 2003

         Consolidated Statements of Cash Flows for the three months ended             5
         September 30, 2004 and 2003

         Notes to Consolidated Financial Statements                                   6

         Item 2.  Management's Discussion and Analysis                                8

         Item 3.  Controls and Procedures                                            14

Part II. Other Information                                                           16

         Signatures                                                                  18

         Index of Exhibits                                                           19
</TABLE>

<PAGE>

                                     PART I

ITEM 1. FINANCIAL STATEMENTS
        --------------------

              HORIZON FINANCIAL SERVICES CORPORATION and SUBSIDIARY
                           Consolidated Balance Sheets

<TABLE>
<CAPTION>
                                                                September 30,             June 30,
Assets                                                                   2004                 2004
------                                                                   ----                 ----
                                                                   (Unaudited)
<S>                                                              <C>                 <C>
Cash and cash equivalents                                        $   2,736,567       $   1,863,244
Securities available-for-sale                                       11,553,230          12,494,069
Loans receivable, net                                               81,903,882          79,378,663
Real estate owned                                                      506,613             437,022
Stock in Federal Home Loan Bank, at cost                               467,300             464,000
Office property and equipment, net                                   4,098,423           3,352,387
Accrued interest receivable                                            749,603             722,273
Deferred income tax asset                                              173,300             221,200
Income tax receivable                                                       --              18,792
Prepaid expenses and other assets                                       92,125              86,196
                                                                 -------------       -------------

     Total assets                                                $ 102,281,043       $  99,037,846
                                                                 =============       =============

Liabilities and Stockholders' Equity
------------------------------------

Deposits                                                         $  82,934,595       $  78,723,389
Advances from Federal Home Loan Bank                                 6,907,500           7,957,500
Advance payments by borrowers for taxes and insurance                   27,789             353,802
Accrued income taxes payable                                            75,450                  --
Accrued expenses and other liabilities                                 631,990             538,353
                                                                 -------------       -------------

     Total liabilities                                              90,577,324          87,573,044
                                                                 -------------       -------------

Stockholders' equity
--------------------
Preferred stock, $.01 par value, authorized 250,000
     shares; none issued                                                    --                  --
Common stock, $.01 par value, authorized 1,500,000
     shares; 1,046,198 shares issued                                    10,462              10,462
Additional paid-in capital                                           5,052,022           5,052,022
Retained earnings, substantially restricted                          8,801,356           8,639,455
Treasury stock, at cost, (274,827 and 274,727 shares
     at September 30, 2004 and June 30, 2004, respectively)         (2,100,498)         (2,099,098)
Accumulated other comprehensive loss- net
     unrealized loss on securities available-for-sale                  (59,623)           (138,039)
                                                                 -------------       -------------

     Total stockholders' equity                                     11,703,719          11,464,802
                                                                 -------------       -------------

Total liabilities and stockholders' equity                       $ 102,281,043       $  99,037,846
                                                                 =============       =============
</TABLE>

See Notes to Consolidated Financial Statements.


                                       2
<PAGE>

              HORIZON FINANCIAL SERVICES CORPORATION and SUBSIDIARY
                      Consolidated Statements of Operations

<TABLE>
<CAPTION>
                                                                  Three Months Ended
                                                                     September 30,
                                                                 2004              2003
                                                                 ----              ----
                                                                      (Unaudited)
<S>                                                          <C>               <C>
Interest income:
  Loans                                                      $ 1,320,197       $ 1,264,779
  Investment securities available-for-sale                       105,596           151,546
  Other interest income                                            4,840             6,120
                                                             -----------       -----------

Total interest income                                          1,430,633         1,422,445
                                                             -----------       -----------

Interest expense:
  Deposits                                                       334,586           348,938
  Advances from Federal Home Loan Bank                            85,164            74,246
                                                             -----------       -----------

Total interest expense                                           419,750           423,184
                                                             -----------       -----------

Net interest income                                            1,010,883           999,261

Provision for losses on loans                                     55,000            60,000
                                                             -----------       -----------

Net interest income after provision for losses on loans          955,883           939,261
                                                             -----------       -----------

Non-interest income:
  Fees, commissions and service charges                          213,901           178,745
  (Loss) gain on sale of securities, net                          (2,520)          100,901
  Gain on sale of mortgage loans                                  26,930            29,028
                                                             -----------       -----------

Total non-interest income                                        238,311           308,674
                                                             -----------       -----------

Non-interest expense:
  Compensation, payroll taxes and employee benefits              463,862           391,777
  Advertising                                                     34,503            35,443
  Office property and equipment                                  174,737           122,765
  Federal insurance premiums and special assessments               2,887             3,049
  Data processing services                                        60,603            49,900
  Other real estate                                               21,045            24,463
  Other                                                          126,195            76,083
                                                             -----------       -----------

Total non-interest expense                                       883,832           703,480
                                                             -----------       -----------

Earnings before taxes                                            310,362           544,455

Taxes                                                            100,250           188,450
                                                             -----------       -----------

Net earnings                                                 $   210,112       $   356,005
                                                             ===========       ===========

Basic and diluted earnings per common share                  $      0.27       $      0.47
                                                             ===========       ===========
</TABLE>

See Notes to Consolidated Financial Statements.


                                       3
<PAGE>

              HORIZON FINANCIAL SERVICES CORPORATION and SUBSIDIARY
                 Consolidated Statements of Comprehensive Income

<TABLE>
<CAPTION>
                                                                          Three Months Ended
                                                                             September 30,
                                                                          2004          2003
                                                                          ----          ----
                                                                             (Unaudited)
<S>                                                                    <C>            <C>
Net income                                                             $ 210,112      $ 356,005

Other Comprehensive Income:
      Unrealized gains (losses) on securities available-for-sale:
          Unrealized holding gains (losses) arising
            during the period, net of tax                                 76,836        (74,173)
      Reclassification adjustment for net losses (gains)
            included in income, net of tax                                 1,580        (63,265)
                                                                       ---------      ---------

Other comprehensive income (loss), net of tax                             78,416       (137,438)
                                                                       ---------      ---------

Comprehensive income                                                   $ 288,528      $ 218,567
                                                                       =========      =========
</TABLE>

See Notes to Consolidated Financial Statements.


                                       4
<PAGE>

              HORIZON FINANCIAL SERVICES CORPORATION and SUBSIDIARY
                      Consolidated Statements of Cash Flows

<TABLE>
<CAPTION>
                                                                                          Three months ended
                                                                                             September 30,
                                                                                        2004              2003
                                                                                        ----              ----
Cash flows from operating activities:                                                        (Unaudited)
<S>                                                                                 <C>               <C>
Net earnings                                                                        $   210,112       $   356,005
Adjustments to reconcile net income to net cash provided
by (used in) operating activities:
  Depreciation                                                                           87,657            49,696
  Amortization of fees, premiums, and accretion of discounts, net                        27,477            45,904
  Provision for losses on loans                                                          55,000            60,000
  Loans originated for sale                                                          (3,409,193)       (5,590,590)
  Proceeds on sales of loans                                                          3,455,905         5,025,240
  Gain on sale of mortgage loans                                                        (26,930)          (29,028)
  Loss (gain) on sale of securities                                                       2,520          (100,901)
  Gain on sale of office property and equipment                                          (4,829)              (55)
  Reinvested dividends                                                                  (10,222)          (18,117)
  Increase in accrued interest receivable                                               (27,330)          (42,764)
  Increase in accrued income taxes receivable / payable                                  94,242           188,451
  Other, net                                                                             87,708           (29,498)
                                                                                    -----------       -----------

Net cash provided by (used in) operating activities                                     542,117           (85,477)
                                                                                    -----------       -----------

Cash flows from investing activities:
  Securities available-for-sale:
     Purchases                                                                         (112,500)       (2,048,053)
     Proceeds from sale                                                                 110,880         1,510,061
     Proceeds from maturity and principal collected                                   1,049,000         1,843,859
  Loans to customers, net                                                            (2,664,592)       (1,415,229)
  Investment in real estate                                                              (5,000)               --
  Proceeds from sale of office property and equipment                                    15,700                --
  (Purchase) redemption of Federal Home Loan Bank stock                                  (3,300)           73,100
  Purchases of office property and equipment                                           (844,564)          (98,922)
                                                                                    -----------       -----------

Net cash used in investing activities                                                (2,454,376)         (135,364)
                                                                                    -----------       -----------

Cash flows from financing activities:
  Increase in deposits                                                                4,211,206           535,611
  Principal payments on advances from Federal Home Loan Bank                         (5,100,000)         (345,115)
  Proceeds from advances from Federal Home Loan Bank                                  4,050,000           707,500
  Decrease in advance payments by borrowers for taxes and insurance                    (326,013)         (350,345)
  Exercise of stock options                                                                  --            83,489
  Treasury stock acquired                                                                (1,400)           (1,300)
  Payment of dividends                                                                  (48,211)          (40,116)
                                                                                    -----------       -----------

Net cash provided by financing activities                                             2,785,582           589,724
                                                                                    -----------       -----------

Net increase (decrease) in cash and cash equivalents                                    873,323           368,883

Cash and cash equivalents at beginning of period                                      1,863,244         5,303,912
                                                                                    -----------       -----------
Cash and cash equivalents at end of period                                          $ 2,736,567       $ 5,672,795
                                                                                    ===========       ===========

Supplemental disclosures of cash flow information:
  Cash paid during the period for:
     Interest                                                                       $   309,397       $   360,578
     Taxes                                                                                6,008                --
  Noncash investing and financing activities:
     Transfers from loans to real estate                                            $    64,591       $    32,878
                                                                                    ===========       ===========
</TABLE>

See Notes to Consolidated Financial Statements.


                                       5
<PAGE>

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                     HORIZON FINANCIAL SERVICES CORPORATION

1. BASIS OF PRESENTATION

The consolidated  financial  statements for the three months ended September 30,
2004 and 2003 are unaudited.  In the opinion of management of Horizon  Financial
Services Corporation (the "Registrant" or "Company"), these financial statements
reflect all adjustments, consisting only of normal occurring accruals, necessary
to  present  fairly  the  consolidated  financial  position  of the  Company  at
September 30, 2004 and its results of operations  and cash flows for the periods
presented. These consolidated financial statements do not purport to contain all
the necessary  disclosures required by accounting  principles generally accepted
in the  United  States of America  that  might  otherwise  be  necessary  in the
circumstances and should be read in conjunction with the consolidated  financial
statements and notes therein included in the annual report of Horizon  Financial
Services  Corporation  for the year  ended  June 30,  2004.  The  results of the
periods  presented  are  not  necessarily   representative  of  the  results  of
operations and cash flows which may be expected for the entire year.

2. PRINCIPLES OF CONSOLIDATION

The consolidated  financial  statements  include the accounts of the Company and
its wholly owned subsidiary,  Horizon Federal Savings Bank (the "Bank"), and the
Bank's wholly owned subsidiary,  Horizon Investment Services, Inc. The principal
business activity of Horizon Investment  Services,  Inc. is to offer and sell to
clients of the Bank  investment  products  including  insurance,  mutual  funds,
equities,  and real estate investment trusts. All material intercompany accounts
and transactions have been eliminated in consolidation.


                                       6
<PAGE>

3. EARNINGS PER SHARE

The following provides a reconciliation of the amounts used in the determination
of basic and  diluted  earnings  per share for the  three  month  periods  ended
September 30, 2004 and 2003:

                                                           Three Months Ended
                                                              September 30,
                                                            2004         2003
                                                            ----         ----
                                                               (Unaudited)
Net earnings                                             $ 210,112     $ 356,005
                                                         =========     =========

Basic earnings per share:

Weighted average number of common shares outstanding       771,393       753,549
                                                         ---------     ---------

Earnings per common share - basic                        $    0.27     $    0.47
                                                         =========     =========

Diluted earnings per share:
       Weighted average common shares outstanding          771,393       753,549

       Assumed incremental option shares
          using the treasury stock method                    5,725         8,788
                                                         ---------     ---------

Common and common equivalent shares outstanding            777,118       762,337
                                                         =========     =========

Earnings per common share - diluted                      $    0.27     $    0.47
                                                         =========     =========

4. POSTRETIREMENT BENEFIT PLAN

On September 1, 2003 the Company froze its defined  benefit  pension plan and is
in the process of terminating  the plan. The standard  termination  commenced on
June 30, 2004. The pension plan  liability  recorded by the Company at September
30, 2004 and June 30, 2004 is $127,000.  Estimated plan liabilities  supplied in
the  sensitivity  analysis  provided to the plan by  Principal  Financial  Group
supports the  determination  that the plan assets and Company's  current pension
plan accrued liability will cover the estimated termination funding of the plan.
However,  actual distributions from the termination of the plan could take up to
18 months to complete and the final cost to  terminate  the plan will be unknown
until  distribution  occurs.  Depending  upon  interest  rates  at the  time  of
distribution, the plan liability could be more or less than the expected amount.
The value of assets can change dramatically with market conditions.  The Company
will continue to monitor the estimated plan termination  liability,  but at this
time does not expect that additional accruals will be necessary.

On April 1, 2004 the Company initiated a 401k plan upon the determination that a
401k plan would be more  beneficial for the Company's  employees and would allow
the Company to better predict and control expenses associated with the Company's
retirement plan benefit.


                                       7
<PAGE>

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
        ------------------------------------

GENERAL
-------

Horizon Financial Services Corporation ("the Company") is a savings bank holding
company,  the primary  asset of which is Horizon  Federal  Savings  Bank,  ("the
Bank").  The Company was  incorporated  in March 1994 and sold 506,017 shares of
common  stock on June 28, 1994 for the purpose of  acquiring  all of the capital
stock of the Bank in connection with the Bank's  conversion from mutual to stock
form of ownership.

The principal  business of the Company  (through its operating  subsidiary,  the
Bank), has historically consisted of attracting deposits from the general public
and making  residential  and commercial real estate loans,  commercial  business
loans and a variety of consumer loans.  The Company's  results of operations are
primarily dependent on the difference or spread ("interest rate spread") between
the  average  yield  on  loans,   mortgage-backed  and  related  securities  and
investments  and the average rate paid on deposits and other  borrowings as well
as the relative amounts of such assets and liabilities. The interest rate spread
is affected by  regulatory,  economic and  competitive  factors  that  influence
interest  rates,  loan  demand  and  deposit  flows.  The  Company,  like  other
non-diversified  savings institution  holding companies,  is subject to interest
rate risk to the degree that its  interest-earning  assets  mature or reprice at
different times, or on a different basis, than its interest-bearing liabilities.

The Company's  results of  operations  are also affected by, among other things,
fee income received, loss or gain on securities  available-for-sale and mortgage
loans, the establishment of provisions for probable loan losses,  income derived
from subsidiary  activities,  the level of operating  expenses and income taxes.
The Company's operating expenses  principally  consist of employee  compensation
and benefits,  occupancy  expenses,  federal deposit  insurance  premiums,  data
processing expenses and other general and administrative expenses.

The  Company  is  significantly   affected  by  prevailing  economic  conditions
including  federal  monetary  and fiscal  policies  and  federal  regulation  of
financial  institutions.  Deposit balances are influenced by a number of factors
including interest rates paid on competing personal investments and the level of
personal  income and  savings  within the  institution's  market  area.  Lending
activities  are  influenced  by the demand for all of the various types of loans
the Company offers as well as competition from other lending  institutions.  The
primary sources of funds for lending activities include deposits, loan payments,
borrowings and funds provided from operations.

Local  economic  conditions in the Bank's  Mahaska and Marion County markets are
slowly  improving,  but the  conditions  in the Polk  County  market are better.
Current  farm prices for grain are  decreasing  but yields are  better,  so most
farmers are maintaining  decent income.  Livestock farmers are not having a year
that  compares to grain  farmers,  and the outlook is mixed.  Mahaska and Marion
County markets are experiencing  weakness in some lines of retail business,  but
improving in others. Economic conditions in the Des Moines metropolitan area are
better because the  population is growing and business is expanding,  which will
help the Bank's new office grow successfully in Pleasant Hill.  However,  in the
event current  economic and market  conditions  persist or worsen in the Mahaska
and Marion County markets, loan demand and existing loans may be affected, which
could adversely affect the financial  condition and the results of operations of
the Company and the Bank.


                                       8
<PAGE>

DISCLOSURE REGARDING FORWARD LOOKING STATEMENTS
-----------------------------------------------

The  Company,  and its  subsidiaries  may from time to time make written or oral
"forward-looking  statements",  including  statements contained in the Company's
filings with the Securities and Exchange  Commission  (including  this Quarterly
Report on Form 10-QSB and the exhibits  hereto and  thereto),  in its reports to
stockholders and in other communications by the Company,  which are made in good
faith by the Company and the Bank  pursuant to the "safe  harbor"  provisions of
the Private Securities Litigation Reform Act of 1995.

These  forward-looking   statements  include  statements  with  respect  to  the
Company's  and the  Bank's  beliefs,  plans,  objectives,  goals,  expectations,
anticipations,  estimates and intentions,  that are subject to significant risks
and  uncertainties,  and are subject to change based on various factors (some of
which are  beyond  the  Company's  and the  Bank's  control).  The words  "may",
"could",  "should",  "would",  "believe",  "anticipate",  "estimate",  "expect",
"intend",   "plan"  and   similar   expressions   are   intended   to   identify
forward-looking statements. The following factors, among others, could cause the
Company's and the Bank's  financial  performance to differ  materially  from the
plans,  objectives,  expectations,  estimates and  intentions  expressed in such
forward-looking statements:

o     the strength of the United  States  economy in general and the strength of
      the  local  economies  in which the  Company  and the Bank  conduct  their
      operations;

o     the effects of, and changes in,  trade,  monetary and fiscal  policies and
      laws,  including  interest  rate  policies of the Federal  Reserve  Board,
      inflation, interest rate, market and monetary fluctuations;

o     the timely  development  of and acceptance of new products and services of
      the Bank and the perceived overall value of these products and services by
      users,   including   the  features,   pricing  and  quality   compared  to
      competitors' products and services;

o     the willingness of users to substitute  competitors' products and services
      for the Bank's products and services;

o     the success of the Bank in gaining regulatory approval of its products and
      services, when required;

o     the  impact  of  changes  in  financial  services'  laws  and  regulations
      (including laws concerning taxes, banking, securities and insurance);

o     technological changes;

o     acquisitions;

o     changes in consumer spending and saving habits; and

o     the success of the Company and the Bank at managing the risks  involved in
      the foregoing.

The foregoing list of important factors is not exclusive.  Additional discussion
of factors  affecting  the  Company's  business is  contained  in the  Company's
periodic filings with the Securities and Exchange  Commission.  The Company does
not undertake and expressly  disclaims any intent or  obligation,  to update any
forward-looking statements,  whether written or oral, that may be made from time
to time by or on behalf of the Company or the Bank.

FINANCIAL CONDITION
-------------------

The Company's total assets increased $3.3 million, or 3.27%, to $102.3 million
at September 30, 2004 from $99.0 million at June 30, 2004. This increase is
primarily attributable to an increase in loans receivable, net, of $2.5 million,
to $81.9 million at September 30, 2004 from $79.4 million at June 30, 2004, an
increase in cash and cash equivalents of $873,000, to $2.7 million at September
30, 2004 from $1.9 million at June 30, 2004, and an increase of $746,000, or
22.3%, to $4.1 million at September 30, 2004 from $3.4 million at June 30, 2004,
in office property and equipment. Offsetting theses increases were a decrease in
securities available-for-sale of $941,000, or 7.53%, to $11.6 million at
September 30, 2004 from $12.5 million at June 30, 2004, as the Bank's
mortgage-backed securities in the available-for-sale portfolio experienced
moderate


                                       9
<PAGE>

principal   repayments   with  the  funds  received  being   disbursed  in  loan
originations and repayments of Federal Home Loan Bank ("FHLB") advances.

Total  liabilities  increased  $3.0  million,  or  3.43%,  to $90.6  million  at
September 30, 2004 from $87.6 million at June 30, 2004 as deposits  continued to
increase  this quarter to $82.9 million at September 30, 2004 from $78.7 million
at June 30, 2004, a $4.2 million increase,  or 5.4%.  Accompanying this increase
were increases in accrued income taxes of $75,000 and accrued expenses and other
liabilities  of  $94,000.  Offsetting  these  increases,  in part,  were a $1.05
million decrease in FHLB advances and a $326,000 decrease in advance payments by
borrowers for taxes and insurance.  In this respect,  advances  declined to $6.9
million at  September  30, 2004 from $8.0  million at June 30,  2004,  or 13.2%.
Total  stockholders'  equity  increased  2.1%, or $239,000,  to $11.7 million at
September 30, 2004 from $11.5 million at June 30, 2004,  the result of increased
retained earnings of $162,000 and a decrease in accumulated other  comprehensive
loss of $78,400.  There were no other  significant  changes in the components of
the Company's balance sheet.

RESULTS OF OPERATIONS
---------------------

The  Company's  results of operations  depend  primarily on the level of its net
interest income and non-interest income and the level of its operating expenses.
Net  interest  income  depends  upon the volume of  interest-earning  assets and
interest-bearing liabilities and interest rates earned or paid on such assets or
liabilities.  The  Company's  non-interest  income  consists  primarily  of fees
charged on transaction  accounts which help to offset the costs  associated with
establishing  and maintaining  these accounts,  and to a lesser extent,  gain or
losses  on  sale  of  securities.  The  principal  components  of the  Company's
non-interest  expense has historically been compensation and related expense, as
well as property and equipment expense.

Comparison  of three month  periods  ended  September 30, 2004 and September 30,
2003

GENERAL
-------

Net  earnings  decreased  $146,000 to $210,000  for the three month period ended
September 30, 2004 from $356,000 for the three month period ended  September 30,
2003.  This decrease in net earnings for the three month period ended  September
30,  2004 over the  comparable  period  in 2003 was  primarily  attributable  to
increased  non-interest expense of $180,000, or 25.6%, as the Bank absorbed many
additional  costs associated with the opening of the new bank office in Pleasant
Hill,  Iowa,  and to decreased  non-interest  income of $70,400,  or 22.8%.  Net
interest income increased, both before and after provisions for losses on loans,
as interest income increased  slightly and interest expense decreased  slightly.
As a result,  net  interest  income  improved  by $11,600,  increasing  to $1.01
million for the three month period ended  September  30, 2004 from  $999,300 for
the three month period ended  September 30, 2003.  The lower level of income was
also offset in part by lower income taxes, which decreased by $88,200, or 46.8%.
Basic and  fully-diluted  earnings  per common  share  decreased to $.27 for the
three month period ended September 30, 2004 from $.47 for the three month period
ended  September  30, 2003.  The  Company's  outstanding  shares of common stock
decreased to 771,371 from 771,471 during the period.

INTEREST INCOME
---------------

Interest  income  increased  $8,200 to $1.43  million for the three month period
ended  September  30, 2004  compared to $1.42 million for the three month period
ended  September  30, 2003.  The increase was  primarily the result of a $55,400
increase  in  interest  on loans due to a $14.3  million,  or 21.5%  increase in
average net loans  receivable for three


                                       10
<PAGE>

month  period  ended  September  30, 2004 as compared to the three month  period
ended  September 30, 2003.  Weighted  average yield on loans  decreased 78 basis
points to 6.86% for the three month period ended  September  30, 2004 from 7.64%
for the three month period ended September 30, 2003. Also affecting  interest on
loans for the September 30, 2004 period was an adjustment of $60,030 to reduce a
previous   over-accrual  of  interest  on  one  loan.   Interest  on  securities
available-for-sale  decreased  $46,000,  or 30.3%, as average balances decreased
$4.04  million  for the three month  period  ended  September  30, 2004 to $12.0
million from $16.0 million for the same period in 2003.  Weighted  average yield
for the September 30, 2004 period  decreased 25 basis points to 3.53% from 3.78%
for the  comparable  period in 2003.  This was the result of moderate  principal
prepayments  on  mortgage-backed  securities,  payoff  of a SBA  pool,  sale and
purchase  activities  in the  available-for-sale  portfolio  in  prior  quarters
creating a different  portfolio  mix, and reduced  rates on  investments  due to
market conditions.

Other  interest  income  decreased  $1,000 to $5,000 for the three month  period
ended  September  30, 2004  compared to $6,000 for the three month  period ended
September 30, 2003. The average  outstanding  balance of other interest  earning
assets  decreased  $3.1 million for the three month period ended  September  30,
2004 as compared  to the same  period in 2003 as liquid  assets held in time and
demand accounts were disbursed for loan originations.  Weighted average yield on
other interest  earning  assets  increased 13 basis points to .38% from .25% for
the period  ended  September  30, 2004 as compared to the 2003  period.  Average
interest-earning   assets   increase   by  $7.2   million,   or  8.3%,   with  a
weighted-average  interest  rate  decrease  of 21 basis  points to 6.28% for the
three month  period ended  September  30, 2004 as compared to 6.49% for the same
period in 2003.

INTEREST EXPENSE
----------------

Interest expense  decreased $3,000, to $420,000 for the three month period ended
September  30,  2004  compared  to $423,000  for the three  month  period  ended
September 30, 2003. Weighted average interest-bearing liabilities increased $6.2
million for the three month period ended  September  30, 2004 as compared to the
same period in 2003,  with a reduced  weighted  average rate of 2.05% in 2004 as
compared  to 2.23% for 2003,  an 18 basis point  decrease.  Interest on deposits
decreased  $14,400  for the three  month  period  ended  September  30,  2004 to
$334,600  from $349,000 for the same period ended  September 30, 2003.  Weighted
average  interest-bearing  deposits  increased  $3.3 million for the three month
period ended September 30, 2004 as compared to the same period in 2003, with the
weighted  average  rate paid on  interest-bearing  deposits  for the three month
period ended  September 30, 2004 at 1.82% compared to 1.99% for the period ended
2003.

Interest on FHLB  advances  increased  $11,000 to $85,000  from  $74,000 for the
three month  period ended  September  30, 2004 as compared to the same period in
2003. Average borrowings increased $2.8 million for the three month period ended
September  30,  2004 as  compared  to the same  period in 2003 and the  weighted
average  rate paid on  borrowings  decreased  to 3.93% three month  period ended
September 30, 2004 as compared to 5.11% for the same period in 2003.

NET INTEREST INCOME
-------------------

Net interest income increased $11,600 to $1.01 million for the three month
period ended September 30, 2004 from $999,300 for the three month period ended
September 30, 2003. The Company's annualized net interest margin for the three
month period ended September 30, 2004 was 4.26% compared to 4.56% for the period
ended September 30, 2003. The ratio of the Company's average interest-earning
assets to average interest-bearing liabilities increased to 115.70% for the
three month period ended September 30, 2004 from 115.55% for the three month
period ended September 30, 2003. The interest rate spread between
interest-earning assets and interest-bearing liabilities for the three month
period ended September 30, 2004 was 4.23% and the interest rate spread for the
comparable period ended September 30, 2003 was 4.26%.


                                       11
<PAGE>

PROVISION FOR LOSSES ON LOANS
-----------------------------

The provision for losses on loans is based on management's  periodic analysis of
the  adequacy of the  Company's  allowance  for losses on loans.  The  Company's
provision  for losses on loans was  $55,000  for the three  month  period  ended
September 30, 2004  compared to $60,000 for the same period ended  September 30,
2003.  As of September 30, 2004,  non-performing  assets  totaled  $3,606,000 or
3.53% of total  assets,  compared to  $2,804,000  or 2.83% of total assets as of
June 30, 2004. As of September 30, 2004,  the Company's  allowance for losses on
loans was $682,000,  representing 18.9% of non-performing assets and .83% of net
loans  receivable.  At June 30,  2004 the  allowance  for  losses  on loans  was
$697,000, representing .88% of net loans receivable.

The Company continues to monitor and adjust its allowance for losses on loans as
management's analysis of its loan portfolio and economic conditions dictate. The
Company believes it has taken an appropriate  approach to maintain the allowance
for loan losses at a level  consistent  with the Company's  loss  experience and
considering,  among  other  factors,  the  composition  of  the  Company's  loan
portfolio,  the level of the Company's classified and non-performing  assets and
their estimated values.  Future additions to the Company's  allowance for losses
on loans and any  change in the  related  ratio of the  allowance  for losses on
loans to  non-performing  loans are dependent upon the economy,  changes in real
estate and other  collateral  values and interest  rates.  In addition,  federal
regulators may require  additional  reserves as a result of their examination of
the  Company.  The  allowance  for  losses on loans  reflects  what the  Company
currently  believes is an adequate  level of reserves,  although there can be no
assurance  that future  losses will not exceed the  estimated  amounts,  thereby
adversely affecting future results of operations.

NON-INTEREST INCOME
-------------------

Non-interest  income  decreased  $70,400 to $238,300  for the three months ended
September 30, 2004 from  $308,700 for the same period ended  September 30, 2003.
The decrease was primarily  attributable to a $103,400  decrease in gain on sale
of  securities  as the  Company  substantially  decreased  the level of sales of
securities in the 2004 period compared to the same period in 2003. Additionally,
for the three month  period  ended  September  30, 2004 gain on sale of mortgage
loans decreased $2,100, to $26,900 from $29,000. Offsetting these decreases were
increased  fees,  service charges and commissions for the period ended September
30, 2004 of $35,000, or 19.7%, over the same period ended September 30, 2003.

NON-INTEREST EXPENSE
--------------------

Total  non-interest  expense increased  $180,400,  or 25.6%, to $883,800 for the
three months ended  September  30, 2004 from $703,400 for the three months ended
September 30, 2003. The increase was primarily  attributable  to a compensation,
payroll taxes and employee benefits increase of $72,000, as additional personnel
were  hired to staff our new  Pleasant  Hill  banking  center.  There  were also
increases in office  property and  equipment of $52,000,  and other  expenses of
$50,000, again, primarily attributable to the new banking office.

TAXES ON INCOME
---------------

The  Company had a $88,200  decrease  in taxes on  earnings  for the three month
period ended  September  30, 2004 as a result of  decreased  net  earnings.  The
effective tax rate for the three month period ended  September 30, 2004 is 32.3%
compared to 34.6% for the three month  period  ended  September  30,  2003.


                                       12
<PAGE>

The Company  receives  approximately  $42,500 in low-income  housing tax credits
annually  through  2005.  The  quarterly  assessment  is $10,500  which causes a
greater impact on the effective tax rate of the Company when earnings are lower,
thus  accounting  for the reduced  effective tax rate for the three month period
ended September 30, 2004.

COMMITMENTS AND CONTINGENCIES
-----------------------------

In the  ordinary  course of business,  the Company is engaged in various  issues
involving  litigation.  Management  believes  that  none of this  litigation  is
material to the Company's results of operations.

CRITICAL ACCOUNTING POLICIES
----------------------------

The company has identified one critical  accounting policy and practice relative
to the financial  conditions and results of operation.  This  accounting  policy
relates to the allowance for losses on loans.

The  allowance  for  losses on loans is based on  management's  opinion,  and is
adequate  to  absorb  losses  in  the  existing  portfolio.  In  evaluating  the
portfolio,  management  takes into  consideration  numerous  factors,  including
current economic conditions,  prior loan loss experience, the composition of the
loan  portfolio,  and  management's  estimate of  probable  credit  losses.  The
allowance for losses on loans is established  through a provision for loss based
on  management's  evaluation  of the risk  inherent in the loan  portfolio,  the
composition of the portfolio,  specific  impaired  loans,  and current  economic
conditions. Such evaluation,  which includes a review of all loans on which full
collectibility may not be reasonably assured, considers among other matters, the
estimated  net  realizable   value  of  the  underlying   collateral,   economic
conditions,   historical  loss  experience,   and  other  factors  that  warrant
recognition in providing for an adequate allowance for losses on loans.

In the event that management's evaluation of the level of the allowance for loan
losses is  inadequate,  the Company  would need to increase  its  provision  for
losses on loans.

LIQUIDITY AND CAPITAL RESOURCES
-------------------------------

The Company's principal sources of funds are deposits and principal and interest
payments collected on mortgage loans, investments and related securities.  While
scheduled loan repayments and maturing  investments are relatively  predictable,
deposit flows and early loan  prepayments are more influenced by interest rates,
general  economic  conditions  and  competition.  Additionally,  the Company may
borrow funds from the FHLB or utilize  other  borrowings of funds based on need,
comparative costs and availability at the time.

The Bank has historically maintained its liquidity ratio at, or above, the level
needed to meet its operational  needs. The Bank's  liquidity  ratio,  which is a
percentage of the  institutions  liquid assets to its unpledged net withdrawable
accounts, was 6.25% on September 30, 2004 and 5.05% on June 30, 2004.

At September  30, 2004,  the Company had advances of $6.91  million  outstanding
from the FHLB.  The Company uses its  liquidity  resources  principally  to meet
ongoing  commitments,  to fund  maturing  certificates  of deposit  and  deposit
withdrawals,  and to meet operating expenses. At September 30, 2004, the Company
had  outstanding  commitments  to extend  credit which  amounted to  $11,431,000
(including  $1,851,000 in available  revolving  commercial lines of credit).  At
September 30, 2004,  certificates of deposit  scheduled to mature in one year or
less totaled $18.9  million.  Management  believes,  based on its  experience to
date,  that a  significant  portion of these funds will remain with the Company.
Management  believes  that loan  repayments  and other  sources of funds will be
adequate to meet the Company's foreseeable liquidity needs.


                                       13
<PAGE>

Liquidity management is both a daily and long-term responsibility of management.
The Bank  adjusts  its  investments  in liquid  assets  based upon  management's
assessment  of (i) expected  loan demand,  (ii) expected  deposit  flows,  (iii)
yields available on interest-bearing  investments and (iv) the objectives of its
asset/liability  management  program.  Excess liquidity generally is invested in
interest-earning  overnight deposits and other short-term  government and agency
obligations.

At September  30, 2004,  the Bank had tangible and core capital of $9.7 million,
or 9.6% of adjusted total assets,  which was approximately $8.2 million and $5.7
million above the minimum  requirements of 1.5% and 4.0%,  respectively,  of the
adjusted  total assets in effect on that date. At September  30, 2004,  the Bank
had  risk-based  capital  of  $10.3  million  (including  $9.7  million  in core
capital),  or 13.8% of  risk-weighted  assets of $74.9 million.  This amount was
$4.4  million  above the 8.0%  requirement  in effect on that date.  The Bank is
considered to be "well-capitalized" under Federal regulatory guidelines.

EFFECT OF NEW ACCOUNTING STANDARDS
----------------------------------

At its March 2004 meeting, the Emerging Issues Task Force ("EITF") revisited
EITF Issue No. 03-1, "The Meaning of Other-Than-Temporary Impairment and its
Application to Certain Investments" (EITF No. 03-1"). Effective with reporting
periods beginning after June 15, 2004, companies carrying certain types of debt
and equity securities in amounts higher than the securities' fair value will
have to use more detailed criteria to evaluate whether to record a loss and will
have to disclose additional information about unrealized losses. The Company has
reviewed the revised EITF No. 03-1 and had planned to implement these additional
procedures effective with the quarter beginning July 1, 2004, however the FASB
has since issued a statement of financial position deferring the effective date
of the revised EITF No. 03-1 until further implementation issues may be
resolved. Adoption of the new issuance could have an impact on the Company's
financial position and results of operations but the extent of any impact will
vary due to the fact that the model, as issued, calls for many judgments and
additional evidence gathering as such evidence exists at each securities
valuation date.

ITEM 3. CONTROLS AND PROCEDURES
        -----------------------

Any control system,  no matter how well designed and operated,  can provide only
reasonable   (not  absolute)   assurance  that  its  objectives   will  be  met.
Furthermore,  no evaluation of controls can provide absolute  assurance that all
control issues and instances of fraud, if any, have been detected.

Disclosure Controls and Procedures

The  Company's  management,  with  the  participation  of  the  Company's  Chief
Executive Officer and Chief Financial  Officer,  has evaluated the effectiveness
of the Company's  disclosure controls and procedures (as such term is defined in
Rules  13a-15(e)  and  15d-15(e)  under  the  Securities  Exchange  Act of  1934
(Exchange  Act)) as of the end of the period  covered by this  report.  Based on
such  evaluation,  the Company's  Chief  Executive  Officer and Chief  Financial
Officer  have  concluded  that,  as of the end of  such  period,  the  Company's
disclosure  controls and  procedures  are  effective in  recording,  processing,
summarizing  and  reporting,  on a  timely  basis,  information  required  to be
disclosed  by the  Company in the  reports  that it files or  submits  under the
Exchange Act.

Internal Control Over Financial Reporting

There have not been any changes in the Company's internal control over financial
reporting  (as such term is


                                       14
<PAGE>

defined in Rules  13a-15(f)  and 15d- 15(f) under the  Exchange  Act) during the
fiscal quarter to which this report relates that have  materially  affected,  or
are reasonably likely to materially  affect, the Company's internal control over
financial reporting.


                                       15
<PAGE>

                                     PART II
                                OTHER INFORMATION

ITEM 1.     Legal Proceedings
            -----------------

            None, other than debt collection in the ordinary course of business.

ITEM 2.     Unregistered Sales of Equity Securities and Use of Proceeds
            -----------------------------------------------------------

            (c) The following table provides  information about purchases by the
            company  during  the  quarter  ended  September  30,  2004 of equity
            securities that are registered by the company pursuant to Section 12
            of the Exchange Act.

                      Issuer Purchases of Equity Securities

<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------------
                         (a)              (b)                     (c)                      (d)
                                                                                      Maximum Number
                                                                                     (or Approximate
                                                           Total Number of           Dollar Value) of
                        Total           Average          Shares Purchased as       Shares that May Yet
                       Number            Price            Part of Publicly          Be Purchased Under
                      of Shares         Paid Per         Announced Plans or            the Plans or
  Period              Purchased          Share                Programs                   Programs
-------------------------------------------------------------------------------------------------------
<S>                      <C>            <C>                      <C>                        <C>
07/01/2004-              100            $14.00(1)                --                         --
07/31/2004
-------------------------------------------------------------------------------------------------------
08/01/2004-               --                --                   --                         --
08/30/2004
-------------------------------------------------------------------------------------------------------
09/01/2004-               --                --                   --                         --
09/30/2004
-------------------------------------------------------------------------------------------------------
        Total            100            $14.00                   --                         --
-------------------------------------------------------------------------------------------------------
</TABLE>

(1)   Share purchase occurred pursuant to a private offer.

ITEM 3.     Defaults Upon Senior Securities
            -------------------------------

            None

ITEM 4.     Submission of Matters to a Vote of Security Holders
            ---------------------------------------------------

            None


                                       16
<PAGE>

ITEM 5.     Other Information
            -----------------

            None

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

            (a)   Exhibits:

                  See Index to Exhibits

            (b)   The  following is a  description  of the Form 8-K furnished or
                  filed during the three months ended September 30, 2004:

                  On August 27, 2004, a current report on Form 8-K was furnished
                  to announce the Company's  earnings for the quarter and fiscal
                  year ended June 30, 2004.

                  On September  3, 2004, a current  report on Form 8-K was filed
                  to announce the  resignation  of Norman P.  Zimmerman from the
                  Board of Directors of Horizon Financial Services Corporation.


                                       17
<PAGE>

                                   SIGNATURES

Pursuant  to the  requirement  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.

                                          HORIZON FINANCIAL SERVICES CORPORATION
                                          Registrant


Date: November 10, 2004                   /s/ Robert W. DeCook
      -------------------                 --------------------------------------
                                          Robert W. DeCook
                                          President and Chief Executive Officer


Date: November 10, 2004                   /s/ Vicki Hladik
      --------------------                --------------------------------------
                                          Vicki Hladik
                                          Chief Financial Officer

<PAGE>

                                INDEX TO EXHIBITS

Exhibit
Number                                     Document
------                                     --------

   3              The Articles of Incorporation  and Bylaws,  filed on March 18,
                  1994 as exhibits  3.1 and 3.2,  respectively,  to  Registrants
                  Registration  Statement on Form S-1 (File No.  33-76674),  are
                  incorporated herein by reference.

   4              Registrant's  Specimen Stock  Certificate,  filed on March 18,
                  1994 as Exhibit to Registrant's Registration Statement on Form
                  S-1 (File No. 33-76674), is incorporated herein by reference.

   10.1           Employment  Agreements between the Bank and Messrs. DeCook and
                  Gillespie,  filed as Exhibits 10.1 and 10.2, respectively,  to
                  Registrant's  Report on Form  10-KSB for the fiscal year ended
                  June 30, 1994 (File No. 0-24036),  are incorporated  herein by
                  reference.

   10.2           1994 Stock Option and Incentive Plan, filed as Exhibit 10.3 in
                  Registrant's  Report on Form  10-KSB for the fiscal year ended
                  June 30, 1994 (File No.  0-24036),  is incorporated  herein by
                  reference.

   10.3           Recognition  and  Retention  Plan,  filed as  Exhibit  10.4 to
                  Registrant's  Report on Form  10-KSB for the fiscal year ended
                  June 30, 1994 (File No.  0-24036),  is incorporated  herein by
                  reference.

   10.4           Horizon Federal Savings Bank 401(K) Plan

   11             Statement re computation of earnings per share (See Footnote 3
                  of the Registrant's Notes to Consolidated Financial Statements
                  contained herein)

   31.1           Certification pursuant to Rule 13a-14(a)

   31.2           Certification pursuant to Rule 13a-14(a)

   32             Certification pursuant to Rule 13a-14(b)