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, 1998

                                       or

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

         For the transition period from ________________ to _________________

                        Commission File Number: 0-24036

                     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)

                                  (515) 673-8328
--------------------------------------------------------------------------------
              (Registrant's telephone number, including area code)


--------------------------------------------------------------------------------
              (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 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                                 879,942
          ------------                         -----------------------
             Class                             Shares Outstanding
                                               as of November 12, 1998

Transitional Small Business Disclosure Format (check one):
Yes [   ];  No  [ X ]
<PAGE>
<TABLE>
<CAPTION>
             HORIZON FINANCIAL SERVICES CORPORATION and SUBSIDIARIES

                                      INDEX

                                                                                         Page
                                                                                         ----
<S>                                                                                      <C>
Part I.  Financial Information                                                           

          Item 1.  Financial Statements

          Consolidated Balance Sheets at September 30, 1998 and June 30, 1998.             1

          Consolidated Statements of Operations for the three months ended                 2
          September 30, 1998 and 1997.

          Consolidated Statements of Comprehensive Income for the three months             3
          ended September 30, 1998 and 1997.

          Consolidated Statements of Cash Flows for the three months ended                 4
          September 30, 1998 and 1997.

          Notes to Consolidated Financial Statements                                       5

          Item 2.  Management's Discussion and Analysis of Financial Condition and         7
                     Results of Operations


Part II.  Other Information                                                               13

          Signatures                                                                      14

          Index of Exhibits                                                               15

          Exhibits                                                                        16
</TABLE>
<PAGE>
                                     PART I

ITEM 1.  FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
                              HORIZON FINANCIAL SERVICES CORPORATION and SUBSIDIARIES
                                            Consolidated Balance Sheets

                                                             September 30,          June 30,
                                                                 1998                 1998
                                                             -------------        ------------
<S>                                                          <C>               <C>         
Assets
Cash and cash equivalents ..............................     $  5,686,073      $  6,366,619
Securities available for sale ..........................       22,387,574        23,921,718
Loans receivable, net ..................................       55,135,918        55,996,418
Real estate ............................................          188,885           190,402
Stock in Federal Home Loan Bank, at cost ...............        1,202,500         1,202,500
Office property and equipment, net .....................        1,180,119         1,126,516
Accrued interest receivable ............................          694,388           683,120
Deferred tax asset .....................................           14,975           405,541
Prepaid expenses and other assets ......................           67,679            53,911
                                                             ------------      ------------

     Total assets ......................................     $ 86,558,111      $ 89,946,745
                                                             ============      ============

Liabilities and Stockholders' Equity
Deposits ...............................................     $ 57,110,256      $ 60,144,866
Advances from Federal Home Loan Bank ...................       20,471,743        20,038,174
Advance payments by borrowers for taxes and insurance ..           88,192           407,050
Accrued taxes on income:
     Current ...........................................         (285,930)          291,492
     Deferred ..........................................              --                -- 
Accrued expenses and other liabilities .................          641,122           577,343
                                                             ------------      ------------

     Total liabilities .................................       78,025,383        81,458,925
                                                             ------------      ------------
Stockholders' equity
Preferred stock, $.01 par value, authorized 250,000
     shares, none issued ...............................             --                --
Common stock, $.01 par value, 1,500,000 shares
     authorized, issued and outstanding 1,046,198 shares           10,462            10,462
Additional paid-in capital .............................        4,927,544         4,894,744
Retained earnings, substantially restricted ............        5,050,226         5,730,257
Treasury stock, at cost ................................       (1,185,924)       (1,185,924)
Unearned employee stock ownership plan shares ..........         (113,103)         (129,205)
Unearned recognition and retention plan shares .........           (2,385)          (11,439)
Unrealized losses on securities available for sale .....         (154,092)         (821,075)
                                                             ------------      ------------

     Total stockholders' equity ........................        8,532,728         8,487,820
                                                             ------------      ------------

Total liabilities and stockholders' equity .............     $ 86,558,111      $ 89,946,745
                                                             ============      ============
</TABLE>
                                       -1-
<PAGE>
<TABLE>
<CAPTION>
             HORIZON FINANCIAL SERVICES CORPORATION and SUBSIDIARIES
                      Consolidated Statements of Operations

                                                                    Three Months
                                                                  Ended September 30
                                                               1998              1997
                                                            -----------      -----------
<S>                                                         <C>              <C>        
Interest income:
  Loans ...............................................     $ 1,191,002      $ 1,154,315
  Investment securities available for sale ............         381,671          423,746
  Other investment income .............................          78,489           57,064
                                                            -----------      -----------

Total interest income .................................       1,651,162        1,635.125
                                                            -----------      -----------

Interest expense:
  Deposits ............................................         690,853          667,490
  Advance from Federal Home Loan Bank .................         269,884          303,015
                                                            -----------      -----------

Total interest expense ................................         960,737          970,505
                                                            -----------      -----------

Net interest income ...................................         690,425          664,620

Provision for losses on loans .........................          24,000           28,000
                                                            -----------      -----------

Net interest income after provision for losses on loans         666,425          636,620
                                                            -----------      -----------

Noninterest income:
  Fees, commissions and service charges ...............         119,789          104,254
  (Loss) gain on securities, net ......................      (1,307,650)         107,726
  Other ...............................................           8,364           28,646
                                                            -----------      -----------

Total noninterest income ..............................      (1,179,497)         240,626
                                                            -----------      -----------
<PAGE>
<CAPTION>
             HORIZON FINANCIAL SERVICES CORPORATION and SUBSIDIARIES
                      Consolidated Statements of Operations

                                                                    Three Months
                                                                  Ended September 30
                                                               1998              1997
                                                            -----------      -----------
<S>                                                         <C>              <C>        
Noninterest expense:
  Compensation, payroll taxes and employee benefits ...         304,861          286,053
  Advertising .........................................          14,583           14,642
  Office property and equipment .......................          76,225           96,377
  Federal insurance premiums and special assessments ..           9,099            8,632
  Data processing services ............................          28,982           28,102
  Other real estate expense, net ......................            (537)           7,056
  Other ...............................................          68,276           57,560
                                                            -----------      -----------

Total noninterest expense .............................         501,489          498,422
                                                            -----------      -----------

Earnings (loss) before taxes on income ................      (1,014,561)         378,824

Taxes on income .......................................        (373,075)         132,000
                                                            -----------      -----------

Net earnings (loss) ...................................     $  (641,486)     $   246,824
                                                            ===========      ===========
  Earnings per common share - (1)
     Basic ............................................     ($     0.75)     $      0.30
     Diluted ..........................................     ($     0.73)     $      0.29

</TABLE>




(1)  Earnings per share restated to reflect a two-for-one  stock split (effected
     as a 100% stock  dividend)  issued to stockholders of record on October 20,
     1997 and adoption of Statement  of Financial  Accounting  Standard No. 128,
     "Earnings Per Share", effective December 31, 1997.

                                       -2-
<PAGE>
<TABLE>
<CAPTION>
             HORIZON FINANCIAL SERVICES CORPORATION and SUBSIDIARIES
                 Consolidated Statements of Comprehensive Income

                                                                             Three Months
                                                                          Ended September 30
                                                                         1998           1997
                                                                      ---------      ---------
<S>                                                                   <C>            <C>      
Net income ......................................................     $(641,486)     $ 246,824

Other Comprehensive Income:
      Unrealized gains (losses) on securities available for sale:
          Unrealized holding gains (losses) arising
            during the period, net of tax .......................        35,216         72,532
      Less: reclassification adjustment for net (gains) losses
            included in net income, net of tax ..................       631,767         (3,065)
                                                                      ---------      ---------

Other comprehensive income, net of tax ..........................       666,983         69,467
                                                                      ---------      ---------


Comprehensive income ............................................     $  25,497      $ 316,291
                                                                      ---------      ---------
</TABLE>





                                       -3-
<PAGE>
<TABLE>
<CAPTION>
             HORIZON FINANCIAL SERVICES CORPORATION and SUBSIDIARIES
                      Consolidated Statements of Cash Flows

                                                                          Three months ended
                                                                             September 30,
                                                                         1998             1997
                                                                     -----------      -----------
<S>                                                                  <C>              <C>         
Cash flows from operating activities:
Net earnings ...................................................     $  (641,486)         246,824
Adjustments to reconcile net earnings to net cash provided
by operating activities:
  Depreciation .................................................          26,503           39,765
  Amortization of fees, premiums and accretion of discounts, net           1,118           31,099
  Provision for losses on loans and real estate ................          24,000           28,000
  Loans originated for sale ....................................      (2,033,325)             -- 
  Proceeds on sales of loans ...................................       2,258,625              -- 
  (Profit) loss on sale of securities ..........................          36,650         (107,726)
  Gain on sale of fixed assets .................................          (8,364)             -- 
  Increase in accrued interest receivable ......................         (11,268)          (5,198)
  Amortization of stock compensation plans .....................          25,156           25,520
  Other, net ...................................................        (493,094)         120,095
                                                                     -----------      -----------

Net cash provided by (used in) operating activities ............        (815,485)         378,379
                                                                     -----------      -----------

Cash flows from investing activities:
  Principal collected on securities available for sale .........       2,478,849          719,224
  Proceeds from sale of securities available for sale ..........         454,463        7,278,901
  Purchase of securities available for sale ....................        (379,387)      (5,108,798)
  Purchase of Federal Home Loan Bank stock .....................           - - -         (149,000)
  Loans to customers, net ......................................         611,200       (2,344,733)
  Proceeds from sale of real estate ............................           - - -          225,000
  Proceeds from sale of fixed asset ............................           9,844            - - -
  Purchase of office property and equipment, net ...............         (81,586)         (42,864)
                                                                     -----------      -----------

Net cash provided by investing activities ......................       3,093,383          577,730
                                                                     -----------      -----------
<PAGE>
<CAPTION>
             HORIZON FINANCIAL SERVICES CORPORATION and SUBSIDIARIES
                      Consolidated Statements of Cash Flows

                                                                          Three months ended
                                                                             September 30,
                                                                         1998             1997
                                                                     -----------      -----------
<S>                                                                  <C>              <C>         
Cash flows from financing activities:
  Decrease in customer deposit accounts, net ...................      (3,034,610)      (1,356,348)
  Decrease advance payments by borrowers for taxes and insurance        (318,858)        (296,949)
  Proceeds from advances from FHLB .............................       3,450,000        8,500,000
  Principal payments on advances from FHLB .....................      (3,016,431)      (5,515,492)
  Payment of dividends .........................................         (38,545)         (32,601)
                                                                     -----------      -----------

Net cash provided by (used in) financing activities ............      (2,958,444)       1,298,610
                                                                     -----------      -----------

Net increase (decrease) in cash and cash equivalents ...........        (680,546)       2,254,719
Cash and cash equivalents at beginning of year .................       6,366,619        5,621,242
                                                                     -----------      -----------
Cash and cash equivalents at end of year .......................     $ 5,686,073        7,875,961
                                                                     ===========      ===========

Supplemental disclosures of cash flow information:
  Cash paid for interest .......................................     $   862,747          905,602
  Cash paid for taxes ..........................................         204,347              -- 
                                                                     ===========      ===========


To mark assets available for sale to fair value:
  Change in fair value .........................................     $(1,057,549)     $  (110,624)
  Less deferred taxes ..........................................         390,566           41,157
                                                                     -----------      -----------
  Change in valuation allowance ................................     $   666,983      $    69,467
                                                                     ===========      ===========

</TABLE>


                                       -4-
<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,
1998 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,  1998 and its results of  operations  and  statements  of cash flows for the
periods  presented.  These consolidated  financial  statements do not purport to
contain all the necessary  disclosures required by generally accepted accounting
principles 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,  1998.  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.  ORGANIZATION

The Company was organized as a Delaware  corporation at the direction of Horizon
Federal  Savings  Bank (the  "Bank") for the purpose of becoming a savings  bank
holding company, as part of the conversion from a mutual to a stock institution.
The conversion was completed on June 28, 1994 with the sale of 506,017 shares of
the Company's common stock at a price of $10 per share.  Total proceeds from the
conversion  of $4,148,060  (net of issuance  costs of $507,300 and a loan to the
ESOP of $404,810)  have been  recorded as common stock and paid-in  capital.  On
October 10, 1997 the Company  declared a two-for-one  stock split (effected as a
100% stock  dividend)  payable on or about November 10, 1997 to  shareholders of
record on October 20,  1997.  Earnings  per share have been  restated to reflect
this stock split and the adoption of Statement of Financial  Accounting Standard
No.
128, "Earnings Per Share", effective December 31, 1997.

3.  PRINCIPLES OF CONSOLIDATION

The consolidated  financial  statements  include the accounts of the Company and
its wholly owned  subsidiary,  the Bank and the Bank's wholly owned  subsidiary,
Horizon  Investment  Services,  Inc. The principal  business activity of Horizon
Investment  Services,  Inc. is to sell credit life insurance to customers of the
Bank. All material intercompany accounts and transactions have been eliminated.


                                       -5-

<PAGE>
4.  EARNINGS PER SHARE

The Company has adopted  Statement  of  Financial  Accounting  Standard  No. 128
"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, 1998 and 1997:
<TABLE>
<CAPTION>
                                                                3 Months      3 Months
                                                                 Ended          Ended
                                                                9/30/98        9/30/97
                                                               ---------      ---------
<S>                                                            <C>            <C>      
Net Earnings .............................................     ($641,486)     $ 246,824
                                                               =========      =========


Basic earnings per share:
        Weighted average shares outstanding ..............       879,972        851,080

        Less unearned employee stock ownership plan shares       (23,339)       (36,037)
                                                               ---------      ---------

Weighted average number of common shares outstanding .....       856,603        815,043
                                                               =========      =========

Earnings per common share - basic ........................     ($   0.75)     $    0.30
                                                               =========      =========

Diluted earnings per share:
        Weighted average shares outstanding ..............       879,942        851,080

        Less unearned employee stock ownership plan shares       (23,339)       (36,037)

        Assumed incremental option shares
           using the treasury stock method ...............        26,492         29,449
                                                               ---------      ---------

Common and common equivalent shares outstanding ..........       883,095        844,492
                                                               =========      =========

Earnings per common share - diluted ......................     ($   0.73)     $    0.29
                                                               =========      =========
</TABLE>



                                       -6-
<PAGE>
ITEM 2.      MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
             AND RESULTS OF OPERATIONS

GENERAL

Horizon  Financial  Services  corporation (the "Company"),  and its wholly-owned
operating  subsidiary Horizon Federal Savings Bank (the "Bank") 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: the strength of the United States economy in general
and the  strength  of the  local  economies  in which the  Company  and the Bank
conduct operations;  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;  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;
the  willingness of users to substitute  competitors'  products and services for
the Bank's products and services;  the success of the Bank in gaining regulatory
approval of its products and services,  when required;  the impact of changes in
financial  services' laws and  regulations  (including  laws  concerning  taxes,
banking, securities and insurance); technological changes; acquisitions; changes
in consumer  spending and saving habits;  and 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 and prospects 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.

The Company is a savings  bank  holding  company  the primary  asset of which is
Horizon  Federal  Savings 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  "Conversion").  All
references  to the  Company  prior  to June 28,  1994,  except  where  otherwise
indicated, are to the Bank and its subsidiary on a consolidated basis.

The principal  business of the Company  (through its operating  subsidiary,  the
Bank), has historically consisted of attracting deposits from the general public
and  making  loans  secured  by  residential  and,  to a  lesser  extent,  other
properties.  The Company's results of operations are primarily  dependent on net
interest  rate  spread,  which is the  difference  between the average  yield on
loans,  mortgage-backed  and related  securities and investments and the average
rate paid on deposits and other borrowing.  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.


                                       -7-

<PAGE>
The Company's  results of  operations  are also affected by, among other things,
fee  income  received,  loss or profit on  securities  available  for sale,  the
establishment  of  provisions  for  possible  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 housing 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.

Some local  economic  conditions  in the Bank's market are  weakening.  The farm
economy has been strong for over five years but is now beginning to soften. As a
result of an  over-supply of grain,  farm prices for grain and livestock,  which
are currently depressed, may continue to remain depressed and possibly even drop
further.  In the event current economic and market conditions persist or worsen,
loan demand and existing loans may be affected.  No assurances can be given that
the Bank will be able to maintain or increase  its loan  portfolio,  which could
adversely  affect the  financial  condition  and  results of  operations  of the
Company and the Bank.

FINANCIAL CONDITION

The Company's total assets at September 30, 1998 of $86.5 million decreased $3.4
million,  or 3.78%,  from $89.9  million at June 30,  1998.  This  decrease  was
reflected  in a $1.5  million  decrease in  securities  available  for sale,  an
$860,000  decrease in net loans  receivable and a $680,000  decrease in cash and
cash  equivalents  and  a  $390,000  decrease  in  deferred  income  tax.  Total
liabilities  decreased  $3.5 million to $78.0 million on September 30, 1998 from
$81.5  million on June 30, 1998,  primarily  due to a $3.0  million  decrease in
deposits  from $60.1  million at June 30, 1998 to $57.1 million at September 30,
1998.  Current taxes on income decreased $577,000 from $291,000 at June 30, 1998
to ($286,000) at September 30, 1998 and advance  payments by borrowers for taxes
and  insurance  decreased  $319,000 from $407,000 at June 30, 1998 to $88,000 at
September 30, 1998. The decrease was partially offset by a $433,000  increase in
Federal Home Loan Bank  advances.  Retained  earnings  decreased  $680,000  from
$5,730,000  at June 30, 1998 to $5,050,00 at September  30, 1998 and  unrealized
losses on  securities  available  for sale  increased  $667,000 to ($154,000) at
September  30,  1998  from  ($821,000)  at June 30,  1998.  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,  respectively. 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.

                                       -8-
<PAGE>
Comparison  of three month  periods  ended  September 30, 1998 and September 30,
1997.

GENERAL

Net earnings decreased $888,000 from $247,000 at September 30, 1997 to a loss of
$641,000 at September 30, 1998.  This decrease was primarily  attributable  to a
decrease  in  noninterest  income  from  $241,000  at  September  30,  1997 to a
$1,179,000  loss at September 30, 1998 as a result of a $1.3 million  write-down
on interest only mortgage-backed securities as further described below.

INTEREST INCOME

Interest income increased $16,000 to $1,651,000 for the three month period ended
September  30, 1998  compared to  $1,635,000  for the three month  period  ended
September  30, 1997.  The increase was  primarily the result of a 9 basis points
increase in the weighted  average  yield on average  interest-earning  assets to
8.08% at  September  30,  1998 as compared to 7.99% for the same period in 1997.
The average outstanding  balance of  interest-earning  assets decreased slightly
from $81.9 million at September 30, 1997 to $81.8 million at September 30, 1998.

INTEREST EXPENSE

Interest expense  decreased $10,000 to $961,000 for the three month period ended
September  30,  1998  compared  to $971,000  for the three  month  period  ended
September  30, 1997.  The decrease in interest  expense was primarily due to the
weighted average yield on  interest-bearing  liabilities  decreasing by 13 basis
points to 4.91% at  September  30, 1998 as compared to 5.04% for the same period
in 1997. The average outstanding balance of average interest-bearing liabilities
increased $1.3 million from $77.0 million at September 30, 1997 to $78.3 million
at September 30, 1998.

NET INTEREST INCOME

Net interest income  increased  $26,000 from $664,000 for the three month period
ended  September 30, 1997 to $690,000 for the three month period ended September
30, 1998. The increase in net interest income was a result of increased interest
income and  decreased  interest  expense as described  above.  The Company's net
interest  margin  increased  22 basis points to 3.17% for the three month period
ended September 30, 1998 as compared to 2.95% for the same period in 1997.

PROVISION FOR LOSSES ON LOANS

The provision for losses on loans is a result of management's  periodic analysis
of the adequacy of the Company's allowance for losses on loans. During the three
month period ended  September  30, 1998 the  Company's  provision  for losses on
loans was $24,000 compared to $28,000 for the three month period ended September
30, 1997.  The decrease in the provision  for losses on loans was  predominantly
attributable to a $10,000 provision for loss on a single family residential loan
for the period ended  September  30, 1997 with no such loss for the period ended
September  30,  1998.  As of  September  30, 1998 the  Company's  non-performing
assets,  consisting  of  nonaccrual  loans,  accruing  loans  90  days  or  more
delinquent,  real estate owned and repossessed  consumer property,  totaled $1.2
million or 1.33% of total assets,  compared to $922,000 or 1.02% of total assets
as of June 30, 1998. As of September 30, 1998 the Company's allowance for losses
on loans was $384,000,  representing 33.3% of non-performing  assets and .70% of
net loans receivable.

                                       -9-
<PAGE>
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  toward reserve  levels,
consistent  with the Company's loss  experiences  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 value. 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 values and interest  rates.
Because the  Company  has had  extremely  low loan  losses  during its  history,
management  also  considers  the  loss  experience  of  similar   portfolios  in
comparable  lending  markets.  In  addition,   federal  regulators  may  require
additional   reserves  as  a  result  of  their   examination  of  the  Company.
Accordingly,  the  calculation  of the adequacy of the  allowance  for losses on
loans is not based directly on the level of non-performing assets. 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.

NONINTEREST INCOME

Noninterest  income  decreased $1.4 million to ($1,179,000) for the three months
ended  September 30, 1998 from $241,000 for the same period ended  September 30,
1997.  The  decrease was  attributable  to a $1.3  million  loss  recognized  on
securities  at  September  30, 1998  compared to a $108,000  gain on the sale of
securities at September 30, 1997. The loss  recognized on securities  during the
three month period ended in 1998 was the result of a $1.3 million  write down on
interest only mortgage-backed  securities resulting from a decline in fair value
that was judged to be other than temporary.  This decline in fair value resulted
from a sustained increase in the prepayment speeds, due to refinancings,  of the
underlying  mortgage  loans as a result of the low  interest  rate  environment.
Further  declines  in the  fair  value  of  these  securities  are  possible  if
prepayment  speeds  continue to increase.  The Bank cannot  anticipate  interest
rates or prepayment speeds.

NONINTEREST EXPENSE

Total  noninterest  expense  increased $3,000 from $498,000 for the three months
ended  September 30, 1997 to $501,000 for the three month period ended September
30, 1998.  Compensation and employee benefits expenses, the largest component of
noninterest expense,  increased $19,000 for the three months ended September 30,
1998  compared  to the same  period  in  1997,  primarily  as a result  of costs
generally  associated  with the Company's  stock-based  compensation  plans as a
result of an increase in the Company's stock price.  Other noninterest  expenses
also  increased  as a result of audit  expense  paid in the three  months  ended
September  30,  1998 and none paid in the same period in 1997.  These  increases
were  primarily  offset by a $20,000  decline in office  property and  equipment
expense  resulting from real estate taxes paid at September 30, 1997 and similar
taxes not paid for the comparabe period in 1998 and a $7,000 decline in expenses
associated with real estate owned as a result of a decrease in real estate owned
from $333,500 at September 30, 1997 to $189,000 at September 30, 1998.
<PAGE>

TAXES ON INCOME

The  Company  received a tax  benefit of  $373,000  for the three  months  ended
September  30, 1998, as a result of the net loss for the quarter due to the $1.3
million write-down on its interest-only  mortgage-backed securities as discussed
above.




                                      -10-
<PAGE>
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 Federal  Home Loan Bank  ("FHLB") of Des Moines or utilize
other borrowings of funds based on need,  comparative  costs and availability at
the time.

The Office of Thrift  Supervision  (the "OTS") requires minimum levels of liquid
assets. OTS regulations  presently require the Bank to maintain an average daily
balance of liquid assets (United States  Treasury and federal agency  securities
and other investments having maturities of five years of less) equal to at least
5.0%  of the  sum of its  average  daily  balance  of net  withdrawable  deposit
accounts and borrowings  payable in one year or less. Such  requirements  may be
changed from time to time by the OTS to reflect  changing  economic  conditions.
Such  investments  are intended to provide a source of  relatively  liquid funds
upon which the Bank may rely,  if  necessary,  to fund deposit  withdrawals  and
other  short-term  funding  needs.  The Bank  has  historically  maintained  its
liquidity ratio in excess of that required. The Bank's liquidity ratio was 9.21%
on September 30, 1998 and 10.41% on June 30, 1998.

At September  30, 1998,  the Company had advances of $20.5 million from the FHLB
of Des Moines outstanding.  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.  The Company anticipates
that it will have sufficient  funds available to meet current loan  commitments.
At September 30, 1998, the Company had outstanding  commitments to extend credit
which  amounted to  $1,916,000  (including  $1,178,000  in  available  revolving
commercial  lines of credit).  At September  30, 1998,  certificates  of deposit
scheduled  to  mature  in one year or less  totaled  $22.8  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.

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, 1998 the Bank had tangible and core capital of $6.6 million, or
7.6% of adjusted  total assets,  which was  approximately  $5.3 million and $3.1
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, 1998 the Bank had
risk-based capital of $6.8 million (including $6.6 million in core capital),  or
13.4% of  risk-weighted  assets of $50.7  million.  This amount was $2.8 million
above the 8.0% requirement in effect on that date.
<PAGE>

YEAR 2000

A great deal of information has been disseminated about the widespread  computer
problems  that may  arise  in the year  2000.  Computer  programs  that can only
distinguish  the final two  digits of the year  interest  (a common  programming
practice in earlier years) are expected to read entries for the year 2000 as the
year 1900 and compute payment,  interest or delinquency based on the wrong date,
or are expected to be unable to compute payment, interest or delinquency.  Rapid
and accurate  data  processing  is essential to the operation of the Company and
the Bank. Data processing is also essential to most other financial institutions
and many other companies. An internal committee of the Company, comprised of six
officers and one outside director, has been formed to address the potential risk
that year 2000 poses for the Company and the Bank.





                                      -11-

<PAGE>
Accurate data  processing is essential to the  operations of the Company and the
Bank, and a lack of accurate processing by its vendors (or by the Company or the
Bank)  could  have a  significant  adverse  impact  on the  Company's  financial
condition  and  results of  operations.  The Bank has  undergone  a recent  data
processing  service  bureau  conversion.  The Bank has been assured by its newly
selected  data  processing  service  bureau that their  computer  services  will
function  properly on and after January l, 2000.  The Bank's newly selected data
processing  service bureau has advised Management that it, in fact, is currently
year 2000 compliant with no programming  corrections  needed,  and will commence
testing in December  1998. If by the end of this year it appears that the Bank's
primary data  processing  service  bureau is not year 2000  compliant or will be
unable to resolve this problem in a timely manner, then the Bank will identify a
secondary data processing  service provider to complete the task. If the Bank is
unable to do this,  it will  identify  those steps  necessary  to  minimize  the
negative  impact the computer  problems could have on the Bank.  Notwithstanding
the foregoing,  if the Company and the Bank are unable to resolve this potential
problem in time, the Bank will likely  experience  significant  data  processing
delays,  mistakes or failures.  These delays,  mistakes or failures could have a
significant  adverse impact on the financial condition and results of operations
of the Company.

The  Company  has also  received  year 2000  updates  from most of its  material
non-information system providers, including but not limited to security cameras,
credit card and ATM card processors, the vault alarm, check printers,  telephone
systems,  participation  loan servicers,  and  institutions  the Company or Bank
invests  through  or with,  and based on these  updates  do not  anticipate  any
significant year 2000 issues.

In addition  to expenses  related to our own  systems,  the Company  could incur
losses if loan payments are delayed due to year 2000  problems  affecting any of
our significant borrowers or impairing the payroll systems of large employers in
the Company's market area. We have been communicating with the Bank's vendors to
assess  their  progress  in  evaluating   their  systems  and  implementing  any
corrective measures required by them to be prepared for the year 2000. Year 2000
readiness  request letters have also been sent to certain borrowers of the Bank.
These  borrowers were selected based on the aggregate  amounts owed to the Bank,
the type of  loans  outstanding,  and the  perceived  Year  2000  risk  based on
management's knowledge of the loan customers and their operations.  To date, the
Bank has not been  advised by such  parties that they do not have plans in place
to  address  and  correct  the  issues  associated  with the year 2000  problem;
however,  no  assurance  can be given as to the adequacy of such plans or to the
timeliness of their implementation.

The Company is expensing all costs  associated  with year 2000  required  system
changes as those costs are  incurred,  and such costs are being  funded  through
operating cash flows.  The total  out-of-pocket  costs associated with year 2000
compliance  is  estimated  to be  approximately  $10,000.  The cost of  internal
resources for year 2000 compliance has not been estimated.  The Company does not
expect  significant  increases in future data processing costs or other expenses
related to its year 2000 compliance.


                                      -12-

<PAGE>
                                     PART II
                                OTHER INFORMATION

ITEM 1.      Legal Proceedings

             None

ITEM 2.      Changes in Securities

             None

ITEM 3.      Defaults Upon Senior Securities

             None

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

             None

ITEM 5.      Other Information

             None

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

             (a)   Exhibits:
                   Exhibit 27 Financial Data Schedule

             (b)   Reports on Form 8-K:
                   None


                                      -13-

<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 13,1998                /s/ Robert W. DeCook
      --------------------           -------------------------------------------
                                     Robert W. DeCook
                                     President and Chief Executive Officer




Date: November 13, 1998               /s/ Sharon McCrea
      --------------------           -------------------------------------------
                                     Sharon McCrea
                                     Vice President and Chief Financial Officer








                                      -14-
<PAGE>
                                INDEX OF EXHIBITS


Exhibit                          
-------
27.        Financial Data Schedule