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 December 31, 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                               880,062
              ------------                               -------
                  Class                             Shares Outstanding
                                                  as of February 11, 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 December 31, 1998 and June 30, 1998.          1

 Consolidated  Statements of Operations  for the three months and six         2
 months ended December 31, 1998 and 1997.

 Consolidated Statements of Comprehensive Income for the three months         3
 and six months ended December 31, 1998 and 1997.

 Consolidated Statements of Cash Flows for the six months ended               4
 December 31, 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



<PAGE>
                                     PART I

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

                                                               December 31,       June 30,
Assets                                                           1998               1998
------                                                       ------------      ------------
<S>                                                          <C>               <C>         
Cash and cash equivalents ..............................     $  4,520,949      $  6,366,619
Securities available for sale ..........................       21,475,866        23,921,718
Loans receivable, net ..................................       55,229,858        55,996,418
Real estate ............................................          287,472           190,402
Stock in Federal Home Loan Bank, at cost ...............        1,202,500         1,202,500
Office property and equipment, net .....................        1,160,468         1,126,516
Accrued interest receivable ............................          623,559           683,120
Deferred tax asset .....................................        1,254,278           405,541
Prepaid expenses and other assets ......................           40,898            53,911
                                                             ------------      ------------

     Total assets ......................................     $ 85,795,848      $ 89,946,745
                                                             ------------      ============

Liabilities and Stockholders' Equity
Deposits ...............................................     $ 58,513,874      $ 60,144,866
Advances from Federal Home Loan Bank ...................       19,450,204        20,038,174
Advance payments by borrowers for taxes and insurance ..          203,975           407,050
Accrued taxes on income:
     Current ...........................................           45,942           291,492
     Deferred ..........................................            - - -             - - -
Accrued expenses and other liabilities .................          250,346           577,343
                                                             ------------      ------------

     Total liabilities .................................       78,464,341        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 .............................        4,953,659         4,894,744
Retained earnings, substantially restricted ............        4,961,137         5,730,257
Treasury stock, at cost ................................       (1,185,197)       (1,185,924)
Unearned employee stock ownership plan shares ..........          (96,526)         (129,205)
Unearned recognition and retention plan shares .........            - - -           (11,439)
Unrealized losses on securities available for sale .....       (1,312,028)         (821,075)
                                                             ------------      ------------

     Total stockholders' equity ........................        7,331,507         8,487,820
                                                             ------------      ------------

Total liabilities and stockholders' equity .............     $ 85,795,848      $ 89,946,745
                                                             ============      ============
</TABLE>
                                       -1-
<PAGE>
<TABLE>
<CAPTION>
                                HORIZON FINANCIAL SERVICES CORPORATION and SUBSIDIARIES
                                         Consolidated Statements of Operations

                                                                Three Months                        Six Months
                                                              Ended December 31,                Ended December 31,
                                                            1998             1997             1998            1997
                                                        -----------      -----------      -----------      -----------
<S>                                                     <C>              <C>              <C>              <C>        
Interest income:
Interest on loans .................................     $ 1,147,157      $ 1,193,752      $ 2,338,159      $ 2,348,067
Interest on securities available for sale .........         370,677          431,215          752,348          854,961
Other interest earning assets .....................          40,620           56,653          119,109          113,717
                                                        -----------      -----------      -----------      -----------
Total interest income .............................       1,558,454        1,681,620        3,209,616        3,316,745
                                                        -----------      -----------      -----------      -----------

Interest expense:
Interest on deposits ..............................         670,148          689,874        1,361,001        1,357,364
Interest on advances and other borrowing ..........         249,498          318,954          519,382          621,969
                                                        -----------      -----------      -----------      -----------

Total interest expense ............................         919,646        1,008,828        1,880,383        1,979,333
                                                        -----------      -----------      -----------      -----------

Net interest income ...............................         638,808          672,792        1,329,233        1,337,412

Provision for losses on loans .....................          24,000           18,000           48,000           46,000
                                                        -----------      -----------      -----------      -----------

Net interest income after provision for
Losses on loans ...................................         614,808          654,792        1,281,233        1,291,412
                                                        -----------      -----------      -----------      -----------

Non-interest income:
Fees, commissions and service charges .............         123,096          118,792          242,885          223,046
Profit (loss) on securities available for sale, net        (296,474)          86,067       (1,604,124)         193,793
Other .............................................             209           (1,915)           8,573           26,731
                                                        -----------      -----------      -----------      -----------

Total non-interest income (loss) ..................        (173,169)         202,944       (1,352,666)         443,570
                                                        -----------      -----------      -----------      -----------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
                                HORIZON FINANCIAL SERVICES CORPORATION and SUBSIDIARIES
                                         Consolidated Statements of Operations
                                                      (continued)

                                                                Three Months                        Six Months
                                                              Ended December 31,                Ended December 31,
                                                            1998             1997             1998            1997
                                                        -----------      -----------      -----------      -----------
<S>                                                     <C>              <C>              <C>              <C>        
Non-interest expense:
Compensation, payroll taxes and
  employee benefits ...............................         310,529          308,622          615,390          594,675
Advertising .......................................          11,370           10,067           25,953           24,709
Office property and equipment .....................          70,209           79,215          146,434          175,592
Federal insurance premiums ........................           8,849            9,413           17,948           18,045
Data processing services ..........................          43,294           28,270           72,276           56,372
Other real estate expense, net ....................           1,607            4,084            1,070           11,140
Other .............................................          77,181           91,158          145,457          148,718
                                                        -----------      -----------      -----------      -----------

Total non-interest expense ........................         523,039          530,829        1,024,528        1,029,251
                                                        -----------      -----------      -----------      -----------

Earnings (loss) before taxes on income ............         (81,400)         326,907       (1,095,961)         705,731

Taxes on income ...................................         (30,925)         112,689         (404,000)         244,689
                                                        -----------      -----------      -----------      -----------

Net earnings (loss) ...............................     $   (50,475)     $   214,218      $  (691,961)     $   461,042
                                                        ===========      ===========      ===========      ===========
     Earnings (loss) per common share
       Basic ......................................     ($     0.06)     $      0.26      ($     0.81)     $      0.56
       Diluted ....................................     ($     0.06)     $      0.25      ($     0.78)     $      0.54

</TABLE>

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


                                                                        Three Months Ended                Six Months Ended
                                                                           December 31,                      December 31,
                                                                       1998              1997            1998            1997
                                                                   -----------      -----------      -----------      -----------
<S>                                                                <C>              <C>              <C>              <C>        
Net income (loss) ............................................     ($   50,475)     $   214,218      ($  691,961)     $   461,042

Other Comprehensive Income:
   Unrealized gains (losses) on securities available for sale:
      Unrealized holding gains (losses) arising
         during the period, net of tax .......................      (1,330,440)          53,487       (1,295,224)         126,019
   Less: reclassification adjustment for net (gains) losses
         included in net income, net of tax ..................         172,504           (4,025)         804,271           (7,090)
                                                                   -----------      -----------      -----------      -----------

Other comprehensive income, net of tax .......................      (1,157,936)          49,462         (490,953)         118,929
                                                                   -----------      -----------      -----------      -----------


Comprehensive income .........................................     ($1,208,411)     $   263,680      ($1,182,914)     $   579,971
                                                                   -----------      -----------      -----------      -----------

</TABLE>


                                       -3-

<PAGE>
<TABLE>
<CAPTION>
                      HORIZON FINANCIAL SERVICES CORPORATION and SUBSIDIARIES
                               Consolidated Statements of Cash Flows
                                                                             Six months ended
                                                                               December 31,
                                                                          1998             1997
                                                                     ------------      ------------
<S>                                                                  <C>                    <C>    
Cash flows from operating activities:
Net earnings (losses) ..........................................     $   (691,961)          461,042
Adjustments to reconcile net earnings to net cash provided
by operating activities:
  Depreciation .................................................           57,580            88,130
  Amortization of fees, premiums and accretion of discounts, net            5,027            81,117
  Provision for losses on loans and real estate ................           48,000            46,000
  Loans originated for sale ....................................       (4,408,390)              ---
  Proceeds on sales of loans ...................................        4,048,140               ---
  (Profit) loss on sale of securities ..........................        1,604,124          (193,792)
  Gain on sale of fixed assets .................................           (8,364)            - - -
  (Increase) decrease in accrued interest receivable ...........           59,561           (16,982)
  Deferred taxes on income .....................................         (556,723)              ---
  Amortization of stock compensation plans .....................           44,118            50,497
  Other, net ...................................................         (497,689)          159,133
                                                                     ------------      ------------

Net cash provided by (used in) operating activities ............         (296,577)          675,145
                                                                     ------------      ------------

Cash flows from investing activities:
  Principal collected on securities available for sale .........        2,266,435         1,432,143
  Proceeds from sale of securities available for sale ..........          751,162         9,814,349
  Purchase of securities available for sale ....................       (2,963,863)      (10,713,346)
  Purchase of investment real estate ...........................         (100,000)              ---
  Purchase of Federal Home Loan Bank stock .....................              ---         (149,000)
  Loans to customers, net ......................................        1,078,810        (3,766,681)
  Proceeds from sale of real estate ............................              ---           225,000
  Proceeds from sale of fixed asset ............................            9,844               ---
  Purchase of office property and equipment, net ...............          (93,012)          (48,080)
                                                                     ------------      ------------

Net cash provided by (used in) investing activities ............          949,376        (3,205,615)
                                                                     ------------      ------------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
                      HORIZON FINANCIAL SERVICES CORPORATION and SUBSIDIARIES
                               Consolidated Statements of Cash Flows
                                            (continued
                                                                             Six months ended
                                                                               December 31,
                                                                          1998             1997
                                                                     ------------      ------------
<S>                                                                  <C>                    <C>    
Cash flows from financing activities:
  Decrease in customer deposit accounts, net ...................       (1,630,992)         (781,077)
  Decrease advance payments by borrowers for taxes and insurance         (203,075)         (200,032)
  Proceeds from advances from FHLB .............................        5,450,000         8,500,000
  Principal payments on advances from FHLB .....................       (6,037,970)       (5,531,214)
  Net proceeds from options exercised ..........................              659            11,734
  Payment of dividends .........................................          (77,091)          (69,354)
                                                                     ------------      ------------

Net cash provided by (used in) financing activities ............       (2,498,469)        1,930,057
                                                                     ------------      ------------

Net increase (decrease) in cash and cash equivalents ...........       (1,845,670)         (600,413)
Cash and cash equivalents at beginning of year .................        6,366,619         5,621,242
                                                                     ------------      ------------
Cash and cash equivalents at end of year .......................     $  4,520,949         5,020,829
                                                                     ============      ============

Supplemental disclosures of cash flow information:
  Cash paid for interest .......................................     $  2,192,632         2,040,032
  Cash paid for taxes ..........................................          369,685            20,521
                                                                     ============      ============


To mark assets available for sale to fair value:
  Change in fair value .........................................     $    782,967      $   (189,689)
  Less deferred taxes ..........................................         (292,014)           70,760
                                                                     ------------      ------------
  Change in valuation allowance ................................     $   (490,953)     $    118,929
                                                                     ============      ============
</TABLE>
                                       -4-

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


1.  BASIS OF PRESENTATION

The  consolidated  financial  statements  for the  three  and six  months  ended
December  31,  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 December 31, 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.

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
and six month periods ended December 31, 1998 and 1997:
<TABLE>
<CAPTION>
                                                                 3 Months      3 Months      6 Months     6 Months
                                                                   Ended        Ended         Ended         Ended
                                                                  12/31/98     12/31/97      12/31/98     12/31/97
                                                                ----------    ---------     ---------     --------
<S>                                                              <C>          <C>          <C>           <C>     
Net Earnings                                                     ($50.475)    $214,218     ($691,961)    $461,042
                                                                 =========    =========    ==========    ========


Basic earnings per share:
        Weighted average shares outstanding                       880,045      853,060       879,994      852,070

        Less unearned employee stock ownership plan shares        (20,266)     (32,834)      (21,803)     (34,435)
                                                                ----------    ---------     ---------     --------

Weighted average number of common shares outstanding              859,779      820,226       858,191      817,635
                                                                =========      =======     ==========     =======

Earnings (loss) per common share - basic                        ($   0.06) $      0.26   ($     0.81) $      0.56
                                                                ========== ===========   ============ ===========

Diluted earnings per share:
        Weighted average shares outstanding                       880,045      853,060       879,994      852,070
 
        Less unearned employee stock ownership plan shares        (20,266)     (32,834)      (21,803)     (34,435)

        Assumed incremental option shares
           using the treasury stock method                         24,237       36,440        25,364       32,945
                                                               ----------     --------     ----------   ---------

Common and common equivalent shares outstanding                   884,016      856,666       883,555      850,580
                                                                ==========     =======      =========    ========

Earnings (loss) per common share - diluted                    ($     0.06) $      0.25     ($   0.78)  $     0.54
                                                              ============ ===========     ==========  ==========

</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").
<PAGE>
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. 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.


FINANCIAL CONDITION

The Company's total assets at December 31, 1998 of $85.8 million  decreased $4.1
million, or 4.56%, from $89.9 million at June 30, 1998. Securities available for
sale decreased $2.4 million,  or 10.2%,  due to write-downs on certain  interest
only  mortgage-backed  securities  of  $1.5  million  and  a  $783,000  downward
adjustment in the fair value of the available for sale portfolio.  Cash and cash
equivalents  decreased $1.8 million, or 28.9%, due to a $1.6 million decrease in
deposits.  Total loans receivable,  net, decreased $766,000,  or 1.4%, from June
30, 1998 as a result of increased  prepayments due to the  refinancings of loans
moving into the secondary market.

Total liabilities  decreased $3.0 million, or 3.7%, to $78.5 million at December
31, 1998 from $81.5  million at June 30, 1998,  primarily due to a $1.6 million,
or 2.7%,  decrease  in  deposits  from $60.1  million at June 30,  1998 to $58.5
million at December 31, 1998.  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  decreased
$588,000,  or 2.9%,  due to  repayments  made on the advances as a result of the
corresponding decrease in loans receivable. Total stockholders' equity decreased
$1.2  million,  or 13.6%,  from $8.5 million at June 30, 1998 to $7.3 million at
December 31, 1998 due to loss of earnings and an increase in  unrealized  losses
on securities available for sale.
<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.


                                       -8-

<PAGE>
Comparison  of three month and six month  periods  ended  December  31, 1998 and
December 31, 1997

GENERAL

Net earnings for the three months ended December 31, 1998 decreased  $265,000 to
($51,000)  from $214,000 for the three month period ended December 31, 1997. For
the six months ended December 31, 1998, net earnings  decreased  ($1,153,000) to
($692,000) from $461,000 for the comparable period in 1997. The decrease for the
three and six month periods ended December 31, 1998 compared to the same periods
ended December 31, 1997 was primarily attributable to substantial write-downs on
interest only mortgage-backed securities as further described below.

INTEREST INCOME

Interest  income  decreased  $123,000 to $1.6 million for the three month period
ended  December  31, 1998  compared to $1.7  million for the three month  period
ended  December  31, 1997 and  $107,000 to $3.2 million for the six month period
ended December 31, 1998 compared to $3.3 million for the comparable period ended
December   31,   1997.   The   decrease   was  due  to  a  decrease  in  average
interest-earning  assets,  consisting primarily of mortgage loans and securities
available for sale, of approximately $1.9 million and $1.0 million for the three
and six months  ended  December  31,  1998,  respectively,  over the  comparable
periods  in 1997  and a  decrease  in the  weighted  average  yield  on  average
interest-earning assets to 7.86% for the six months ended December 31, 1998 from
8.02% for the same  period in 1997.  The  decrease in average  interest  earning
assets is the result of borrowers  prepaying  loans in order to obtain new loans
that are subsequently  sold to the secondary  market.  Also  contributing to the
decrease in interest  earning  assets is  managements  decision,  at the current
time, not to invest in lower-yielding  mortgage-backed securities with leveraged
FHLB advances.

INTEREST EXPENSE

Interest  expense  decreased  $89,000 to $920,000 from  $1,009,000 for the three
month period and decreased  $99,000 to $1,880,000  from  $1,979,000  for the six
month  period  ended  December 31, 1998 as compared to the same periods in 1997.
The decrease in interest  expense was  attributable to the interest rate on FHLB
advances  decreasing  to 5.35% for the six months  ended  December 31, 1998 from
5.80% for the same period in 1997. The weighted  average  interest rates paid on
average interest bearing liabilities decreased to 4.85% for the six months ended
December 31, 1998 from 5.08% for the same period in 1997.

NET INTEREST INCOME

Net  interest  income was $639,000 and $1.3 million for the three months and six
months  ended  December 31,  1998,  respectively,  compared to $673,000 and $1.3
million for the comparable  periods in 1997. 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 3.01% for the
six month period ended  December 31, 1998  compared to 2.94% for the same period
in 1997.
<PAGE>
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 six
month period ended December 31, 1998 the Company's provision for losses on loans
was $48,000  compared to $46,000 for the six month  period  ended  December  31,
1997.  During the three month period ended  December  31,  1998,  the  Company's
provision  for loan losses was  $24,000  compared to $18,000 for the three month
period ended  December 31, 1997.  As of December 31, 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 1.44% of total  assets,  compared to $922,000 or 1.02% of total
assets as of June 30, 1998. As of December 31, 1998 the Company's  allowance for
losses on loans was $401,000,  representing  32.5% of non-performing  assets and
 .73% 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 (LOSS)

Noninterest  income  decreased to ($173,000) and  ($1,352,000) for the three and
six months  ended  December  31, 1998  respectively,  compared  to $203,000  and
$444,000 for the same  periods  ended  December  31, 1997.  The decrease for the
three month period was  attributable to a $296,000 loss on assets  available for
sale  (including a $220,000 loss  recognized on securities) at December 31, 1998
compared to a $86,000  gain at  December  31,  1997 and a $1.6  million  loss on
assets  available  for  sale  (including  a  $1.5  million  loss  recognized  on
securities)  for the six month period  ended  December 31, 1998 as compared to a
$194,000 gain for the same period in 1997. The loss recognized on securities for
the three and six month  periods  ended in 1998 of  $220,000  and $1.5  million,
respectively,  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  continue  to
increase. The Bank cannot predict interest rates or prepayment speeds.

NONINTEREST EXPENSE

Total  noninterest  expense was  $523,000 and $1.0 million for the three and six
months  ended  December 31,  1998,  respectively,  compared to $531,000 and $1.0
million for the same periods in 1997, reflecting decreases of $8,000 and $5,000,
respectively.  Compensation,  payroll taxes and employee  benefits,  the largest
component of non-interest  expense,  increased  $2,000 and $21,000 for the three
and six month periods  ended  December 31, 1998,  respectively,  compared to the
same period during 1997. The increase in compensation expense for the six months
ended December 31, 1998 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.  Office  property  and
equipment decreased $9,000 and $29,000 for the three and six month periods ended
December 31,  1998,  respectively,  compared to the same period  during 1997 and
data processing  services  increased $15,000 for the three and six month periods
ended December 31, 1998 due to expenses involved in the conversion to a new data
processing  service  bureau.  There  were no other  significant  changes  in the
components of non-interest expense.
<PAGE>
TAXES ON INCOME

The Company received a tax benefit of $31,000 and $404,000 for the three and six
month periods ended December 31, 1998, respectively, as a result of the net loss
for  the  periods  due to the  $220,000  and  $1.5  million  write-downs  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
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 7.31%
on December 31, 1998 and 10.41% on June 30, 1998.

At December 31, 1998, the Company had advances of $19.5 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
December 31, 1998,  the Company had  outstanding  commitments  to extend  credit
which  amounted to  $2,061,000  (including  $1,235,000  in  available  revolving
commercial  lines of credit).  At December  31,  1998,  certificates  of deposit
scheduled  to  mature  in one year or less  totaled  $23.4  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 December 31, 1998 the Bank had tangible and core capital of $5.9 million,  or
6.9% of adjusted  total assets,  which was  approximately  $4.6 million and $2.5
million above the minimum  requirements of 1.5% and 4.0%,  respectively,  of the
adjusted  total assets in effect on that date. At December 31, 1998 the Bank had
risk-based capital of $6.2 million (including $5.9 million in core capital),  or
12.3% of  risk-weighted  assets of $50.1  million.  This amount was $2.1 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  commenced
testing in December 1998. If 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.  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.

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.  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.


                                      -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
             ---------------------------------------------------

                  (a) Annual meeting date:  October 22, 1998
                  (b) Not required
                  (c) The matters  approved by  stockholders  at the Meeting and
                      number of votes cast for,  against or withheld (as well as
                      the number of abstentions and broker non-votes, if any) as
                      to each matter are set forth below:

                      Proposal                                  Number of Votes
                      --------                                  ---------------

                                                              For       Withheld
                                                              ---       --------

Election of the following director for a three year term:

             1) Dwight L. Groves                             797,378       6,000
             2) Gary L. Rozenboom                            797,328       6,050

                                                 For       Against       Abstain
Ratification of the appointment of  KPMG Peat  -------     -------       -------
Marwick LLP as the Company's auditors for the  803,328       None           400
fiscal year ending June 30, 1999


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


                                      -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: February 12,1999                /s/ Robert W. DeCook
      ----------------                --------------------
                                      Robert W. DeCook
                                      President and Chief Executive Officer




Date: February 12, 1999               /s/ Sharon McCrea
      --------------------            ------------------
                                      Sharon McCrea
                                      Vice President and Chief Financial Officer








                                      -14-

<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)


                                      -15-