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 March 31, 1999

                                       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
<PAGE>

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

            Common Stock                           880,062
            ------------                      ------------------
               Class                          Shares Outstanding
                                              as of May 14, 1999

Transitional Small Business Disclosure Format (check one):
                      Yes     [   ]     No    [  X ]

<PAGE>

             HORIZON FINANCIAL SERVICES CORPORATION and SUBSIDIARIES

                                      INDEX


Part I.  Financial Information                                            Page
-------  ---------------------                                            ----

          Item 1.  Financial Statements

           Consolidated  Balance  Sheets at March 31,  1999 and June 30,
           1998.                                                             1

           Consolidated  Statements of  Operations  for the three months
           and nine months ended March 31, 1999 and 1998.                    2

           Consolidated Statements of Comprehensive Income for the three
           months and nine months ended March 31, 1999 and 1998.             3

          Consolidated  Statements  of Cash  Flows for the nine  months
          ended March 31, 1999 and 1998.                                     4

          Notes to Consolidated Financial Statements                         5

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

Part II.  Other Information                                                 14

          Signatures                                                        15

          Index of Exhibits                                                 16

          Exhibits                                                          17



<PAGE>
                                PART I

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

                                                                March 31,          June 30,
Assets                                                            1999               1998
------                                                        ------------       ------------ 
<S>                                                           <C>                <C>         
Cash and cash equivalents ..............................      $  6,146,552       $  6,366,619
Securities available for sale ..........................        20,876,819         23,921,718
Loans receivable, net ..................................        54,547,411         55,996,418
Real estate ............................................           344,657            190,402
Stock in Federal Home Loan Bank, at cost ...............         1,202,500          1,202,500
Office property and equipment, net .....................         1,112,401          1,126,516
Accrued interest receivable ............................           604,443            683,120
Deferred tax asset .....................................         1,093,460            405,541
Prepaid expenses and other assets ......................           108,450             53,911
                                                              ------------       ------------

     Total assets ......................................      $ 86,036,693       $ 89,946,745
                                                              ------------       ============

Liabilities and Stockholders' Equity
Deposits ...............................................      $ 56,933,476       $ 60,144,866
Advances from Federal Home Loan Bank ...................        20,628,349         20,038,174
Advance payments by borrowers for taxes and insurance ..           294,071            407,050
Accrued taxes on income:
     Current ...........................................           123,042            291,492
     Deferred ..........................................             - - -              - - -
Accrued expenses and other liabilities .................           317,209            577,343
                                                              ------------       ------------

     Total liabilities .................................        78,296,147         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 .............................         4,974,034          4,894,744
Retained earnings, substantially restricted ............         5,039,036          5,730,257
Treasury stock, at cost ................................        (1,185,197)        (1,185,924)
Unearned employee stock ownership plan shares ..........           (81,013)          (129,205)
Unearned recognition and retention plan shares .........             - - -            (11,439)
Unrealized losses on securities available for sale .....        (1,016,776)          (821,075)
                                                              ------------       ------------

     Total stockholders' equity ........................         7,740,546          8,487,820
                                                              ------------       ------------

Total liabilities and stockholders' equity .............      $ 86,036,693       $ 89,946,745
                                                              ============       ============
</TABLE>
                                  -1-
<PAGE>
<TABLE>
<CAPTION>
                                 HORIZON FINANCIAL SERVICES CORPORATION and SUBSIDIARIES
                                          Consolidated Statements of Operations

                                                                 Three Months                       Nine Months
                                                                 Ended March 31,                  Ended March 31,
                                                             1999             1998             1999              1998
                                                         -----------      -----------      -----------       -----------
<S>                                                      <C>              <C>              <C>               <C>        
Interest income:
Interest on loans .................................      $ 1,119,010      $ 1,200,794      $ 3,457,169       $ 3,548,861
Interest on securities available for sale .........          315,754          428,711        1,068,102         1,283,672
Other interest earning assets .....................           47,855           80,858          166,964           194,575
                                                         -----------      -----------      -----------       -----------
Total interest income .............................        1,482,619        1,710,363        4,692,235         5,027,108
                                                         -----------      -----------      -----------       -----------

Interest expense:
Interest on deposits ..............................          626,453          682,982        1,987,454         2,040,346
Interest on advances and other borrowing ..........          255,312          328,049          774,694           950,018
                                                         -----------      -----------      -----------       -----------

Total interest expense ............................          881,765        1,011,031        2,762,148         2,990,364
                                                         -----------      -----------      -----------       -----------

Net interest income ...............................          600,854          699,332        1,930,087         2,036,744

Provision for losses on loans .....................           24,000           33,808           72,000            79,808
                                                         -----------      -----------      -----------       -----------

Net interest income after provision for
Losses on loans ...................................          576,854          665,524        1,858,087         1,956,936
                                                         -----------      -----------      -----------       -----------

Non-interest income:
Fees, commissions and service charges .............          131,210          105,438          374,095           328,484
Profit (loss) on securities available for sale, net            6,831           61,072       (1,597,293)          254,865
Other .............................................            - - -            - - -            8,573            26,731
                                                         -----------      -----------      -----------       -----------

Total non-interest income (loss) ..................          138,041          166,510       (1,214,625)          610,080
                                                         -----------      -----------      -----------       -----------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
                                 HORIZON FINANCIAL SERVICES CORPORATION and SUBSIDIARIES
                                          Consolidated Statements of Operations

                                                                 Three Months                       Nine Months
                                                                 Ended March 31,                  Ended March 31,
                                                             1999             1998             1999              1998
                                                         -----------      -----------      -----------       -----------
<S>                                                      <C>              <C>              <C>               <C>        
Non-interest expense:
Compensation, payroll taxes and
  employee benefits ...............................          308,923          291,774          924,313           886,449
Advertising .......................................           20,151           24,229           46,104            48,938
Office property and equipment .....................           91,963           84,182          238,397           259,774
Federal insurance premiums ........................           13,114            8,904           31,062            26,949
Data processing services ..........................           40,227           31,295          112,503            87,667
Other real estate expense, net ....................            4,935            3,636            6,005            14,776
Other .............................................           56,796           37,204          202,253           185,922
                                                         -----------      -----------      -----------       -----------

Total non-interest expense ........................          536,109          481,224        1,560,637         1,510,475
                                                         -----------      -----------      -----------       -----------

Earnings (loss) before taxes on income ............          178,786          350,810         (917,175)        1,056,541

Taxes on income ...................................           62,342          121,037         (341,658)          365,726
                                                         -----------      -----------      -----------       -----------

Net earnings (loss) ...............................      $   116,444      $   229,773      $  (575,517)      $   690,815
                                                         ===========      ===========      ===========       ===========
     Earnings (loss) per common share
       Basic ......................................      $      0.14      $      0.27      ($     0.67)      $      0.84
       Diluted ....................................      $      0.13      $      0.27      ($     0.67)      $      0.81

</TABLE>

                                       -2-

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

                                                                        Three Months Ended             Nine Months Ended
                                                                             March 31,                     March 31,
                                                                       1999            1998            1999            1998
                                                                    ---------       ---------       ---------       ---------
<S>                                                                 <C>             <C>             <C>             <C>      
Net income (loss) ............................................      $ 116,444       $ 229,773       ($575,517)      $ 690,815

Other Comprehensive Income:
   Unrealized gains (losses) on securities available for sale:
      Unrealized holding gains (losses) arising
         during the period, net of tax .......................        318,576        (944,285)       (976,648)       (818,266)
   Less: reclassification adjustment for net (gains) losses
         included in net income, net of tax ..................        (23,324)        (25,430)        780,947         (32,520)
                                                                    ---------       ---------       ---------       ---------

Other comprehensive income, net of tax .......................        295,252        (969,715)       (195,701)       (850,786)
                                                                    ---------       ---------       ---------       ---------


Comprehensive income .........................................      $ 411,696       ($739,942)      ($771,218)      ($159,971)
                                                                    ---------       ---------       ---------       ---------
</TABLE>



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

                                                                              Nine months ended
                                                                                   March 31,
                                                                           1999                1998
                                                                       ------------       ------------
<S>                                                                    <C>                     <C>    
Cash flows from operating activities:
Net earnings (losses) ...........................................      $   (575,517)           690,815
Adjustments to reconcile net earnings to net cash provided
by operating activities:
  Depreciation ..................................................            93,288            136,495
  Amortization of fees, premiums and accretion of discounts, net           (207,155)           120,963
  Provision for losses on loans and real estate .................            72,000             79,808
  Loans originated for sale .....................................        (7,376,223)        (3,495,915)
  Proceeds on sales of loans ....................................         7,641,255          2,618,228
  (Profit) loss on sale of securities ...........................         1,587,646           (254,865)
  Gain on sale of fixed assets ..................................            (8,364)             - - -
  (Increase) decrease in accrued interest receivable ............            78,677            (61,516)
  Deferred taxes on income ......................................          (571,481)             - - -
  Amortization of stock compensation plans ......................            59,631             75,652
  Other, net ....................................................          (400,903)           484,012
                                                                       ------------       ------------

Net cash provided by (used in) operating activities .............           392,854            393,677
                                                                       ------------       ------------

Cash flows from investing activities:
  Principal collected on securities available for sale ..........         4,072,087          2,175,295
  Proceeds from sale of securities available for sale ...........         3,301,821         14,836,333
  Purchase of securities available for sale .....................        (6,021,639)       (17,709,466)
  Purchase of investment real estate ............................          (100,000)             - - -
  Purchase of Federal Home Loan Bank stock ......................             - - -           (347,700)
  Loans to customers, net .......................................         1,054,790         (2,910,849)
  Proceeds from sale of real estate .............................             - - -            350,000
  Proceeds from sale of fixed asset .............................             9,844              - - -
  Purchase of office property and equipment, net ................           (80,653)           (68,850)
                                                                       ------------       ------------

Net cash provided by (used in) investing activities .............         2,236,250         (3,675,237)
                                                                       ------------       ------------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
<S>                                                                    <C>                     <C>    
Cash flows from financing activities:
  Decrease in customer deposit accounts, net ....................        (3,211,390)         1,447,720
  Decrease advance payments by borrowers for taxes and insurance           (112,979)           (92,469)
  Proceeds from advances from FHLB ..............................         6,650,000         14,500,000
  Principal payments on advances from FHLB ......................        (6,059,825)        (9,547,168)
  Net proceeds from options exercised ...........................               659            159,584
  Payment of dividends ..........................................          (115,636)          (107,007)
                                                                       ------------       ------------

Net cash provided by (used in) financing activities .............        (2,849,171)         6,360,660
                                                                       ------------       ------------

Net increase (decrease) in cash and cash equivalents ............          (220,067)         3,079,100
Cash and cash equivalents at beginning of year ..................         6,366,619          5,621,242
                                                                       ------------       ------------
Cash and cash equivalents at end of year ........................      $  6,146,552          8,700,342
                                                                       ============       ============

Supplemental disclosures of cash flow information:
  Cash paid for interest ........................................      $  2,909,324          2,845,491
  Cash paid for taxes ...........................................           369,685             53,681
  Transfers of loans to real estate acquired through foreclosures            57,185              - - -
                                                                       ============       ============

To mark assets available for sale to fair value:
  Change in fair value ..........................................      $    312,139       $  1,356,940
  Less deferred taxes ...........................................          (116,438)          (506,154)
                                                                       ------------       ------------
  Change in valuation allowance .................................      $   (195,701)      $   (850,786)
                                                                       ============       ============
</TABLE>

                                       -4-

<PAGE>
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                     HORIZON FINANCIAL SERVICES CORPORATION


1.  BASIS OF PRESENTATION

The consolidated  financial statements for the three and nine months ended March
31,  1999 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 March
31,  1999 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.

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 following provides a reconciliation of the amounts used in the determination
of basic and  diluted  earnings  per share for the three and nine month  periods
ended March 31, 1999 and 1998:

<TABLE>
<CAPTION>

                                                                3 Months        3 Months        9 Months        9 Months
                                                                  Ended           Ended           Ended            Ended
                                                                 3/31/99         3/31/98         3/31/99          3/31/98
                                                                ---------       ---------       ---------       -----------
<S>                                                             <C>             <C>             <C>             <C>        
Net Earnings .............................................      $ 116.444       $ 229,773       ($575,517)      $   690,815
                                                                =========       =========       =========       ===========

Basic earnings per share:
        Weighted average shares outstanding ..............        880,062         866,797         880,016           856,979

        Less unearned employee stock ownership plan shares        (17,240)        (29,675)        (20,282)          (32,848)
                                                                ---------       ---------       ---------       -----------

Weighted average number of common shares outstanding .....        862,822         837,122         859,734           824,131
                                                                =========       =========       =========       ===========

Earnings (loss) per common share - basic .................      $    0.14       $    0.27       ($   0.67)      $      0.84
                                                                =========       =========       =========       ===========

Diluted earnings per share:
        Weighted average shares outstanding ..............        880,062         866,797         880,016           856,979

        Less unearned employee stock ownership plan shares        (17,240)        (29,675)        (20,282)          (32,848)

        Assumed incremental option shares
           using the treasury stock method ...............         21,746          24,901          24,158            30,264
                                                                ---------       ---------       ---------       -----------

Common and common equivalent shares outstanding ..........        884,568         862,023         883,892           854,395
                                                                =========       =========       =========       ===========

Earnings (loss) per common share - diluted ...............      $    0.13       $    0.27       ($   0.67)      $      0.81
                                                                =========       =========       =========       ===========
</TABLE>

                                       -6-

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

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 "Conversion").

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 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 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 have  weakened.  The farm
economy had been strong for over five years but has now softened. As a result of
an  over-supply  of  grain,  farm  prices  for grain  and  livestock,  which are
currently  depressed,  may continue to remain  depressed.  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 the balance or quality of its loan  portfolio,  which could
adversely  affect the  financial  condition  and  results of  operations  of the
Company and the Bank.
<PAGE>
DISCLOSURE REGARDING FORWARD LOOKING STATEMENTS
-----------------------------------------------

The Company,  and its wholly-owned  operating subsidiary Horizon Federal Savings
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.


                                       -7-
<PAGE>
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 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;
o            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.

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

The  Company's  total assets at March 31, 1999 of $86.0 million  decreased  $3.9
million, or 4.35%, from $89.9 million at June 30, 1998. Securities available for
sale decreased $3.0 million, or 12.7%, due to write-downs primarily in the first
quarter on certain  interest  only  mortgage-backed  securities of $1.5 million,
$1.1 million in principal payments, prepayments and sales, net of purchases, and
a  $312,000  downward  adjustment  in the fair value of the  available  for sale
portfolio.  Total loans receivable,  net, decreased $1.4 million,  or 2.6%, from
June 30, 1998 as a result of increased  prepayments  due to the  refinancings of
loans moving into the secondary  market.  These  decreases were used to fund the
$3.2 million decrease in deposits.
<PAGE>
Total liabilities decreased $3.2 million, or 3.9%, to $78.3 million at March 31,
1999 from $81.5 million at June 30, 1998,  primarily  due to a $3.2 million,  or
5.3%,  decrease in deposits from $60.1 million at June 30, 1998 to $56.9 million
at March 31, 1999.  Management  believes the decrease in certificates of deposit
was the result of depositors  seeking  higher  returns in mutual funds and other
investments.  Advances from the Federal Home Loan Bank  increased  $590,000,  or
2.9%,  to $20.6  million at March 31, 1999 from $20.0  million at June 30, 1998.
Total  stockholders'  equity decreased  $747,000,  or 8.8%, from $8.5 million at
June 30, 1998 to $7.7  million at March 31, 1999 due to loss of earnings  and an
increase in unrealized losses on securities available for sale.


                                       -8-
<PAGE>
RESULTS OF OPERATIONS
---------------------

The Company's  results of operations  depend  primarily on the levels of its net
interest income, non-interest income and 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,   and  more  recently  includes
significant write-downs on "interest only" mortgage-backed securities.

Comparison  of three month and nine month periods ended March 31, 1999 and March
31, 1998

GENERAL
-------

Net earnings for the three  months  ended March 31, 1999  decreased  $113,000 to
$117,000 from $230,000 for the three month period ended March 31, 1998.  For the
nine  months  ended March 31,  1999,  net  earnings  decreased  $1.3  million to
($575,000) from $691,000 for the comparable period in 1998. The decrease for the
three  month  period was  primarily  attributable  to a $98,000  decrease in net
interest  income to $601,000 at March 31, 1999 compared to $699,000 for the same
period  ended March 31,  1998.  For the nine month  period  ended March 31, 1999
compared to the same period  ended March 31,  1998 the  decrease  was  primarily
attributable  to  substantial   write-downs  on  interest  only  mortgage-backed
securities as further described below.

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

Interest  income  decreased  $228,000 to $1.5 million for the three month period
ended March 31, 1999  compared to $1.7  million for the three month period ended
March 1998 and  $335,000 to $4.7  million for the nine month  period ended March
31, 1999  compared to $5.0  million for the  comparable  period  ended March 31,
1998. The decreases were due to a decrease in average  interest-earning  assets,
primarily  mortgage  loans and securities  available for sale, of  approximately
$6.1  million and $3.0  million  for the three and nine  months  ended March 31,
1999,  respectively,  over the comparable  periods in 1998 and a decrease in the
weighted average yield on average  interest-earning assets to 7.75% for the nine
months ended March 31, 1999 from 8.01% for the same period in 1998. The decrease
in average  interest-earning assets is primarily due to managements decision, at
the current time,  not to invest in  lower-yielding  mortgage-backed  securities
with leveraged FHLB advances.  Also  contributing,  to a lesser degree,  was the
reduction of loans receivable,  net, as a result of borrowers prepaying loans in
order to obtain new loans that are subsequently sold to the secondary market.


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

Interest expense decreased  $129,000 to $882,000 from $1.0 million for the three
month  period and  decreased  $228,000 to $2.8 million from $3.0 million for the
nine month  period ended March 31, 1999 as compared to the same periods in 1998.
The decrease in interest expense was primarily attributable to the interest rate
<PAGE>
on FHLB  advances  decreasing  to 5.23% for the nine months ended March 31, 1999
from 5.70% for the same period in 1998. The weighted average interest rates paid
on average interest bearing  liabilities  decreased to 4.75% for the nine months
ended March 31,  1999 from 5.04% for the same period in 1998.  A decrease in the
average  outstanding  balance of  advances  from the  Federal  Home Loan Bank of
approximately  $3.5 million and $2.5 million for the three and nine months ended
March  31,  1999,  respectively,  over the  comparable  periods  in  1998,  also
contributed to the interest expense reduction.

                                       -9-
<PAGE>
NET INTEREST INCOME
-------------------

Net interest  income was $601,000 and $1.9 million for the three months and nine
months ended March 31, 1999, respectively, compared to $699,000 and $2.0 million
for the comparable  periods in 1998. The decline in net interest  income for the
three month period was primarily due to the lower loan and security  balances as
described  above. The Company's net interest margin was 3.00% for the nine month
period ended March 31, 1999 compared to 2.96% for the same period in 1998.

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 nine
month period ended March 31, 1999,  the Company's  provision for losses on loans
was $72,000  compared to $79,800 for the nine month period ended March 31, 1998.
During the three month period ended March 31, 1999, the Company's  provision for
losses on loans was $24,000 compared to $33,800 for the three month period ended
March 31, 1998. As of March 31, 1999,  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 $1.3 million or 1.49% of
total assets, compared to $922,000 or 1.02% of total assets as of June 30, 1998.
As of March 31, 1999 the  Company's  allowance for losses on loans was $365,000,
representing 28.4% of non-performing assets and .67% 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  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 (LOSS)
------------------------

Noninterest  income  decreased to $138,000 and ($1.2  million) for the three and
nine months ended March 31, 1999 respectively, compared to $166,000 and $610,000
for the same periods ended March 31, 1998.  The decrease in  noninterest  income
for the three month period was  attributable to a $54,000  decrease in profit on
sale of securities from the corresponding  period in 1998.  Partially offsetting
this  decrease  was an increase  in fees,  commissions,  and service  charges of
$26,000 to  $131,000 at March 31, 1999 as compared to $105,000 at March 31, 1998
due to increased  fees received on checking  accounts and  increased  loan fees,
<PAGE>
primarily attributable to loans originated for sale in the secondary market. The
decrease  for  the  nine  month  period  ended  March  31,  1999  was  primarily
attributable  to a $1.6 million loss on assets  available for sale  (including a
$1.5  million loss  recognized  on  securities)  for the nine month period ended
March 31, 1999 as compared to a $255,000  gain for the same period in 1998.  The
loss  recognized on  securities  for the nine month period ended in 1999 of $1.5
million  was  the  result  of  write-downs  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 increase.  The Bank
cannot predict interest rates or prepayment speeds.

                                      -10-

<PAGE>
NONINTEREST EXPENSE
-------------------

Total  noninterest  expense was $536,000 and $1.6 million for the three and nine
months ended March 31, 1999, respectively, compared to $481,000 and $1.5 million
for the same  periods in 1998,  reflecting  increases  of $55,000  and  $50,000,
respectively.  Compensation,  payroll taxes and employee  benefits,  the largest
component of non-interest  expense,  increased $17,000 and $38,000 for the three
and nine month periods ended March 31, 1999, respectively,  compared to the same
period during 1998. The increase in compensation  expense for the three and nine
months  ended  March  31,  1999 was  primarily  the  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 during the first  quarter,  normal salary
increases and costs of benefits  provided.  Data processing  services  increased
$9,000 and $25,000 for the three and nine month periods ended March 31, 1999 due
to increased  data  processing  charges.  Other  noninterest  expense  increased
$19,000 and $16,000  for the three and nine month  periods  ended March 31, 1999
primarily due to costs associated with the conversion to a new data center. This
conversion  has  permitted us to offer new services to our  customers  including
telephone banking.  Office property and equipment increased $8,000 and decreased
$21,000 for the three and nine month periods ended March 31, 1999, respectively,
compared to the same period during 1998. There were no other significant changes
in the components of noninterest expense.

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

Taxes on income  decreased  $59,000 for the three month  period  ended March 31,
1999, compared to the same period ended March 31, 1998, as a result of decreased
net  earnings for the period and received a tax benefit of $342,000 for the nine
month period ended March 31, 1999  primarily as a result of the net loss for the
period due to the $1.5 million  write-down on its interest-only  mortgage-backed
securities as discussed above.

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.
<PAGE>
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
4.0%  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 8.63%
on March 31, 1999 and 10.41% on June 30, 1998.

At March 31, 1999,  the Company had  advances of $20.6  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 March
31,  1999,  the Company  had  outstanding  commitments  to extend  credit  which
amounted to $1.3 million (including $834,000 in available  revolving  commercial
lines of credit). At March 31, 1999, certificates of deposit scheduled to mature
in one year or less totaled $20.0 million. Management

                                      -11-

<PAGE>
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 March 31, 1999 the Bank had  tangible and core  capital of $6.0  million,  or
7.1% of adjusted  total assets,  which was  approximately  $4.7 million and $2.6
million above the minimum  requirements of 1.5% and 4.0%,  respectively,  of the
adjusted  total  assets in effect on that date.  At March 31,  1999 the Bank had
risk-based capital of $6.3 million (including $6.0 million in core capital),  or
12.5% of risk- weighted  assets of $50.4  million.  This amount was $2.3 million
above the 8.0% requirement in effect on that date.

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  entered  (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.

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  commenced
testing. Testing is done after each update is received from the data center.

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.  The Bank is presently  working on a  contingency
plan in the event that one or more of its non-  information  system providers is
not operating properly on January 1, 2000. However,  the failure of any of these
material  non-information  systems to operate  properly on and after  January 1,
2000 may disrupt the Bank's  business and have a material  adverse affect on its
financial condition and results of operations.
<PAGE>

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

                                      -12-

<PAGE>
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 $12,000.  Approximately  $8,500 has been expended
for the nine months ended March 31,  1999.  The cost of internal  resources  for
year 2000  compliance has not been  estimated.  At the present time, the Company
does not expect  significant  increases in future data processing costs or other
expenses related to its year 2000 compliance.


                                      -13-

<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:
                   See Index to Exhibits

             (b)   Reports on Form 8-K:
                   None


                                      -14-

<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: May 14, 1999                 /s/ Robert W. DeCook
      ------------                 ---------------------
                                   Robert W. DeCook
                                   President and Chief Executive Officer




Date: May 14, 1999                 /s/ Sharon McCrea
      ------------                 ------------------
                                   Sharon McCrea
                                   Vice President and Chief Financial Officer






                                      -15-

<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.

    11         Statement re computation of earnings per share (See Footnote 4 of
               the  Registrant's  Notes  to  Consolidated  Financial  Statements
               contained herein)

    27         Financial Data Schedule (electronic filing only)


                                      -16-