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

                                   FORM 10-QSB

(Mark One)

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

For the quarterly period ended September 30, 2003

                                       or

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

For the transition period from ________________ to ________________

Commission File Number: 0-24036

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

Delaware
(State or other jurisdiction of incorporation or organization)

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

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

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

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

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

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

                     Common Stock                         769,071
                     ------------                   -----------------------
                        Class                       Shares Outstanding
                                                    as of October 31, 2003

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

<PAGE>

              HORIZON FINANCIAL SERVICES CORPORATION and SUBSIDIARY

                                      INDEX

Part I.  Financial Information                                             Page
                                                                           ----

         Item 1.  Financial Statements (Unaudited)

         Consolidated Balance Sheets at September 30, 2003 and
         June 30, 2003                                                         1

         Consolidated Statements of Operations for the three
         months ended September 30, 2003 and 2002                              2

         Consolidated Statements of Comprehensive Income for
         the three months ended September 30, 2003 and 2002                    3

         Consolidated Statements of Cash Flows for the three
         months ended September 30, 2003 and 2002                              4

         Notes to Consolidated Financial Statements                            5

         Item 2.  Management's Discussion and Analysis                         7

         Item 3.  Controls and Procedures                                     14

Part II. Other Information                                                    15

         Signatures                                                           16

         Index of Exhibits                                                    17


                                      -1-
<PAGE>

                                     PART I

ITEM 1. FINANCIAL STATEMENTS

              HORIZON FINANCIAL SERVICES CORPORATION and SUBSIDIARY
                           Consolidated Balance Sheets

<TABLE>
<CAPTION>
                                                                   September 30,          June 30,
Assets                                                                 2003                 2003
------                                                             ------------         ------------
                                                                    (Unaudited)
<S>                                                                <C>                  <C>
Cash and cash equivalents                                          $  5,672,795         $  5,303,912
Securities available-for-sale                                        15,724,074           17,176,190
Loans receivable, net                                                66,923,539           65,006,810
Real estate                                                             671,536              638,658
Stock in Federal Home Loan Bank, at cost                                436,100              509,200
Office property and equipment, net                                    2,021,152            1,971,871
Accrued interest receivable                                             610,065              567,301
Deferred tax asset                                                      141,925               60,000
Accrued income tax receivable                                                --               42,282
Prepaid expenses and other assets                                       162,600               46,109
                                                                   ------------         ------------

     Total assets                                                  $ 92,363,786         $ 91,322,333
                                                                   ============         ============

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

Deposits                                                           $ 74,958,363         $ 74,422,752
Advances from Federal Home Loan Bank                                  5,907,500            5,545,115
Advance payments by borrowers for taxes and insurance                    (3,080)             347,265
Accrued income taxes payable                                            146,169                   --
Accrued expenses and other liabilities                                  650,144              563,151
                                                                   ------------         ------------

     Total liabilities                                               81,659,096           80,878,283
                                                                   ------------         ------------

Stockholders' equity
--------------------
Preferred stock, $.01 par value, authorized 250,000
     shares; none issued                                                     --                   --
Common stock, $.01 par value, authorized 1,500,000
     shares; 1,046,198 shares issued                                     10,462               10,462
Additional paid-in capital                                            5,025,598            5,025,598
Retained earnings, substantially restricted                           7,806,129            7,498,305
Treasury stock, at cost, (282,187 and 297,267 shares
     at September 30, 2003 and June 30, 2003, respectively)          (2,147,630)          (2,237,884)
Accumulated other comprehensive gain- net
     unrealized gain on securities available-for-sale                    10,131              147,569
                                                                   ------------         ------------

     Total stockholders' equity                                      10,704,690           10,444,050
                                                                   ------------         ------------

Total liabilities and stockholders' equity                         $ 92,363,786         $ 91,322,333
                                                                   ============         ============
</TABLE>

See Notes to Consolidated Financial Statements.


                                       -2-
<PAGE>

              HORIZON FINANCIAL SERVICES CORPORATION and SUBSIDIARY
                      Consolidated Statements of Operations

<TABLE>
<CAPTION>
                                                                   Three Months Ended
                                                                      September 30,
                                                                  2003              2002
                                                                  ----              ----
Interest income:                                                       (Unaudited)
<S>                                                            <C>               <C>
  Loans                                                        $1,264,779        $ 1,325,106
  Investment securities available-for-sale                        151,546            135,066
  Other interest income                                             6,120             22,889
                                                               ----------        -----------

Total interest income                                           1,422,445          1,483,061
                                                               ----------        -----------

Interest expense:
  Deposits                                                        348,938            478,779
  Advances from Federal Home Loan Bank                             74,246             71,144
                                                               ----------        -----------

Total interest expense                                            423,184            549,923
                                                               ----------        -----------

Net interest income                                               999,261            933,138

Provision for losses on loans                                      60,000             80,800
                                                               ----------        -----------

Net interest income after provision for losses on loans           939,261            852,338
                                                               ----------        -----------

Non-interest income:
  Fees, commissions and service charges                           178,745            161,261
  Gain on sale of securities, net                                 100,901             14,984
  Gain on sale of mortgage loans                                   29,028             12,636
  Impairment loss on equity securities                                 --           (161,662)
                                                               ----------        -----------

Total non-interest income                                         308,674             27,219
                                                               ----------        -----------

Non-interest expense:
  Compensation, payroll taxes and employee benefits               391,777            334,100
  Advertising                                                      35,443             15,560
  Office property and equipment                                   122,765             82,622
  Federal insurance premiums and special assessments                3,049              3,126
  Data processing services                                         49,900             55,493
  Other real estate                                                24,463             12,423
  Other                                                            76,083             83,940
                                                               ----------        -----------

Total non-interest expense                                        703,480            587,264
                                                               ----------        -----------

Earnings before taxes                                             544,455            292,293

Taxes                                                             188,450             93,000
                                                               ----------        -----------

Net earnings                                                   $  356,005        $   199,293
                                                               ==========        ===========

     Basic and diluted earnings per common share               $     0.47        $      0.26
                                                               ==========        ===========
</TABLE>

See Notes to Consolidated Financial Statements.


                                       -3-
<PAGE>

              HORIZON FINANCIAL SERVICES CORPORATION and SUBSIDIARY
                 Consolidated Statements of Comprehensive Income

<TABLE>
<CAPTION>
                                                                            Three Months Ended
                                                                               September 30,
                                                                           2003              2002
                                                                         ---------         --------
                                                                                (Unaudited)
<S>                                                                      <C>               <C>
Net income                                                               $ 356,005         $199,293

Other Comprehensive Income:
      Unrealized (losses) gains on securities available-for-sale:
          Unrealized holding (losses) gains arising
            during the period, net of tax                                  (74,173)           5,102
      Reclassification adjustment for net (gains) losses
            included in income, net of tax                                 (63,265)          91,967
                                                                         ---------         --------

Other comprehensive (loss) income, net of tax                             (137,438)          97,069
                                                                         ---------         --------

Comprehensive income                                                     $ 218,567         $296,362
                                                                         =========         ========
</TABLE>

See Notes to Consolidated Financial Statements.


                                       -4-
<PAGE>

              HORIZON FINANCIAL SERVICES CORPORATION and SUBSIDIARY
                      Consolidated Statements of Cash Flows

<TABLE>
<CAPTION>
                                                                                 Three months ended
                                                                                    September 30,
                                                                               2003                2002
                                                                               ----                ----
Cash flows from operating activities:                                                (Unaudited)
<S>                                                                        <C>                 <C>
Net earnings                                                               $   356,005         $   199,293
Adjustments to reconcile net income to net cash provided
by operating activities:
  Depreciation                                                                  49,696              27,844
  Amortization of fees, premiums, and accretion of discounts, net               45,904              17,582
  Provision for losses on loans                                                 60,000              80,800
  Loans originated for sale                                                 (5,590,590)         (2,515,280)
  Proceeds on sales of loans                                                 5,025,240           1,994,616
  Gain on sale of mortgage loans                                               (29,028)            (12,636)
  Gain on sale of securities                                                  (100,901)            (14,984)
  Gain on sale or disposal of fixed assets                                         (55)                 --
  Impairment losses on securities                                                   --             161,662
  Reinvested dividends                                                         (18,117)                 --
  (Increase) decrease in accrued interest receivable                           (42,764)             16,260
  Increase (decrease) in accrued taxes receivable/payable                      188,451            (238,134)
  Other, net                                                                   (29,498)            129,064
                                                                           -----------         -----------

Net cash used in operating activities                                          (85,477)           (153,913)
                                                                           -----------         -----------

Cash flows from investing activities:
  Securities available-for-sale:
     Purchases                                                              (2,048,053)         (2,697,946)
     Proceeds from sale                                                      1,510,061             701,071
     Proceeds from maturity and principal collected                          1,843,859             932,331
  Loans to customers, net                                                   (1,415,229)           (366,738)
  Proceeds from sale of real estate                                                 --             190,386
  Proceeds from sale of Federal Home Loan Bank stock                            73,100                  --
  Purchases of office property and equipment                                   (98,922)            (51,271)
                                                                           -----------         -----------

Net cash used in investing activities                                         (135,364)         (1,292,167)
                                                                           -----------         -----------

Cash flows from financing activities:
  Increase in deposits                                                         535,611           1,683,471
  Principal payments on advances from Federal Home Loan Bank                  (345,115)             (7,951)
  Proceeds from advances from Federal Home Loan Bank                           707,500                  --
  Decrease in advance payments by borrowers for taxes and insurance           (350,345)           (364,329)
  Exercise of stock options                                                     83,489                  --
  Treasury stock acquired                                                       (1,300)                 --
  Payment of dividends                                                         (40,116)            (37,659)
                                                                           -----------         -----------

Net cash provided by financing activities                                      589,724           1,273,532
                                                                           -----------         -----------

Net increase (decrease) in cash and cash equivalents                           368,883            (172,548)

Cash and cash equivalents at beginning of period                             5,303,912           8,124,566
                                                                           -----------         -----------
Cash and cash equivalents at end of period                                 $ 5,672,795         $ 7,952,018
                                                                           ===========         ===========

Supplemental disclosures of cash flow information:
  Cash paid during the period for:
     Interest                                                              $   360,578         $   402,631
     Taxes                                                                          --             331,134
  Noncash investing and financing activities:
     Transfers from loans to real estate, net                              $    32,878         $        --
                                                                           ===========         ===========
</TABLE>

See Notes to Consolidated Financial Statements.


                                       -5-
<PAGE>

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                     HORIZON FINANCIAL SERVICES CORPORATION

1. BASIS OF PRESENTATION

The consolidated financial statements for the three months ended September 30,
2003 and 2002 are unaudited. In the opinion of management of Horizon Financial
Services Corporation (the "Registrant" or "Company"), these financial statements
reflect all adjustments, consisting only of normal occurring accruals, necessary
to present fairly the consolidated financial position of the Company at
September 30, 2003 and its results of operations and cash flows for the periods
presented. These consolidated financial statements do not purport to contain all
the necessary disclosures required by accounting principles generally accepted
in the United States of America that might otherwise be necessary in the
circumstances and should be read in conjunction with the consolidated financial
statements and notes therein included in the annual report of Horizon Financial
Services Corporation for the year ended June 30, 2003. The results of the
periods presented are not necessarily representative of the results of
operations and cash flows which may be expected for the entire year.

2. PRINCIPLES OF CONSOLIDATION

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


                                       -6-
<PAGE>

3. EARNINGS PER SHARE

The following provides a reconciliation of the amounts used in the determination
of basic and diluted earnings per share for the three month periods ended
September 30, 2003 and 2002:

<TABLE>
<CAPTION>
                                                               Three Months Ended
                                                                 September 30,
                                                              2003            2002
                                                            --------        --------
                                                                  (Unaudited)
<S>                                                         <C>             <C>
Net earnings                                                $356,005        $199,293
                                                            ========        ========

Basic earnings per share:

Weighted average number of common shares outstanding         753,549         753,182
                                                            --------        --------

Earnings per common share - basic                           $   0.47        $   0.26
                                                            ========        ========

Diluted earnings per share:
       Weighted average common shares outstanding            753,549         753,182

       Assumed incremental option shares
          using the treasury stock method                      8,788          17,935
                                                            --------        --------

Common and common equivalent shares outstanding              762,337         771,117
                                                            ========        ========

Earnings per common share - diluted                         $   0.47        $   0.26
                                                            ========        ========
</TABLE>


                                       -7-
<PAGE>

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS

GENERAL

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

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

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

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

Local economic conditions in the Bank's Mahaska and Marion County markets are
improving slightly during a sluggish period. Currently, farm prices for both
grain and livestock are improving, so farmers are not struggling. Mahaska and
Marion County markets are currently experiencing a decline in some lines of
retail business. Economic conditions in Polk County are better and offer the
Bank a good opportunity to extend its lending area through the Bank's new loan
production office in Pleasant Hill. However, in the event current economic and
market conditions persist or worsen in the Mahaska and Marion County markets,
loan demand and existing loans may be affected, which could adversely affect the
financial condition and the results of operations of the Company and the Bank.

DISCLOSURE REGARDING FORWARD LOOKING STATEMENTS

The Company, and its subsidiaries may from time to time make written or oral
"forward-looking statements", including statements contained in the Company's
filings with the Securities and Exchange Commission (including this Quarterly
Report on Form 10-QSB and the exhibits hereto and thereto), in its reports to


                                       -8-
<PAGE>

stockholders and in other communications by the Company, which are made in good
faith by the Company and the Bank pursuant to the "safe harbor" provisions of
the Private Securities Litigation Reform Act of 1995. These forward-looking
statements include statements with respect to the Company's and the Bank's
beliefs, plans, objectives, goals, expectations, anticipations, estimates and
intentions, that are subject to significant risks and uncertainties, and are
subject to change based on various factors (some of which are beyond the
Company's and the Bank's control). The words "may", "could", "should", "would",
"believe", "anticipate", "estimate", "expect", "intend", "plan" and similar
expressions are intended to identify forward-looking statements. The following
factors, among others, could cause the Company's and the Bank's financial
performance to differ materially from the plans, objectives, expectations,
estimates and intentions expressed in such forward-looking statements:

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

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

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

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

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

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

o     technological changes;

o     acquisitions;

o     changes in consumer spending and saving habits; and

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

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

FINANCIAL CONDITION

The Company's total assets increased $1.04 million, or 1.14%, from $91.3 million
at June 30, 2003 to $92.4 million at September 30, 2003. This increase is
primarily attributable to an increase in loans receivable, net, of $1.9 million,
from $65.0 million at June 30, 2003 to $66.9 million at September 30, 2003 and
an increase in cash and cash equivalents of $369,000. Offsetting this increase
was a decrease in securities available-for-sale of $1.4 million, or 8.56%, from
$17.2 million at June 30, 2003 to $15.7 million at September 30, 2003, as the
Bank's mortgage-backed securities in the available-for-sale portfolio
experienced large principal prepayments.

Total liabilities increased $781,000, or 1.0%, from $80.9 million at June 30,
2003 to $81.7 million at September 30, 2003 as deposits continued to increase
this quarter from $74.4 million at June 30, 2003 to $75.0 million at September
30, 2003, a $535,600 increase. Accompanying this increase was a $362,400
increase in advances from Federal Home Loan Bank ("FHLB") and increased accrued
income taxes of


                                       -9-
<PAGE>

$146,000. Offsetting this increase, in part, was a $350,000 decrease in advance
payments by borrowers for taxes and insurance. Total stockholders' equity
increased 2.5%, or $260,600, the result of increased retained earnings of
$308,000 and decreased treasury stock of $90,250. Accumulated other
comprehensive gain decreased $137,400. There were no other significant changes
in the components of the Company's balance sheet.

RESULTS OF OPERATIONS

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

Comparison of three month periods ended September 30, 2003 and September 30,
2002

GENERAL

Net earnings increased $156,700 to $356,000 for the three month period ended
September 30, 2003 from $199,300 for the three month period ended September 30,
2002. This 78.6% increase in net earnings for the three month period ended
September 30, 2003 over the comparable period in 2002 was primarily attributable
to the recognition of a $161,660 impairment loss in the 2002 period of an equity
security. Net interest income increased, both before and after provisions for
losses on loans, as interest paid on deposits declined, but was offset in part
by decreased interest income. As a result, net interest income improved by
$66,000, increasing from $933,000 for the three month period ended September 30,
2002 to $999,000 for the three month period ended September 30, 2003.
Non-interest expense increased 19.8%, rising from $587,300 to $703,500 for the
two comparable periods, respectively. Basic and fully-diluted earnings per
common share increased 80.77% from $.26 for the three month period ended
September 30, 2002 to $.47 for the three month period ended September 30, 2003.
This increase is primarily due to increased net earnings. The Company's
outstanding shares of common stock increased from 748,931 to 764,011 during the
period.

INTEREST INCOME

Interest income decreased $60,600 to $1,422,400 for the three month period ended
September 30, 2003 compared to $1,483,000 for the three month period ended
September 30, 2002. The decrease was primarily the result of a 44 basis point
decrease in the weighted average yield on average interest-earning assets to
6.49% for the three month period ended September 30, 2003 as compared to 6.93%
for the same period in 2002. Average net loans receivable increased $539,400,
but the weighted average yield on loans decreased 43 basis points to 7.64% from
8.07% resulting in an overall decrease in interest on loans of $60,300. Other
interest income decreased $16,800 to $6,000 for the three month period ended
September 30, 2003 compared to $22,900 for the three month period ended
September 30, 2002. The average outstanding balance of other interest earning
assets decreased $2.07 million for the three month period ended September 30,
2003 as compared to the same period in 2002. The weighted average yield on other
interest earning assets decreased 120 basis points from 1.45% to .25% for the
period ended September 30, 2003 as compared to


                                      -10-
<PAGE>

the 2002 period.

Interest on securities available-for-sale increased $16,500, or 12.2%, as
average balances increased $3.7 million for the three month period ended
September 30, 2003 to $16.0 million from $12.3 million for the same period in
2002. Weighted average yield for the September 30, 2003 period decreased 36
basis points to 3.78% from 4.14% for the comparable period in 2002 as a result
of large principal prepayment on mortgage-backed securities, sale and purchase
activities in the available-for-sale portfolio and reduced rates on investments
due to market conditions.

INTEREST EXPENSE

Interest expense decreased $127,000, or 23.1%, to $423,000 for the three month
period ended September 30, 2003 compared to $550,000 for the three month period
ended September 30, 2002. Weighted average interest-bearing liabilities
increased $2.2 million for the three month period ended September 30, 2003 as
compared to the same period in 2002, but a reduced weighted average rate of 61
basis points for the 2003 period as compared to the same period in 2002 created
the decrease in interest expense for the quarter. Interest on deposits decreased
$130,000 for the three month period ended September 30, 2003 to $349,000 from
$479,000 for the same period ended September 30, 2002. Weighted average rate
paid on deposits for the three month period ended September 30, 2003 was 1.87%
compared to 2.63% for the period ended 2002.

Interest on FHLB advances and other borrowings increased slightly to $74,000
from $71,000 for the three month period ended September 30, 2003 as compared to
the same period in 2002. Average borrowings increased $244,000 for the three
month period ended September 30, 2003 as compared to the same period in 2002 and
the weighted average rate paid on borrowings remained constant at 5.11%.

NET INTEREST INCOME

Net interest income increased $66,000 to $999,000 for the three month period
ended September 30, 2003 from $933,000 for the three month period ended
September 30, 2002. The Company's annualized net interest margin for the three
month period ended September 30, 2003 was 4.56% compared to 4.36% for the period
ended September 30, 2002. The ratio of the Company's average interest-earning
assets to average interest-bearing liabilities decreased to 109.01% for the
three month period ended September 30, 2003 from 109.44% for the three month
period ended September 30, 2002. The interest rate spread between
interest-earning assets and interest-bearing liabilities for the three month
period ended September 30, 2003 was 4.39% and the interest rate spread for the
comparable period ended September 30, 2002 was 4.12%.

PROVISION FOR LOSSES ON LOANS

The provision for losses on loans is based on management's periodic analysis of
the adequacy of the Company's allowance for losses on loans. The Company's
provision for losses on loans was $60,000 for the three month period ended
September 30, 2003 compared to $80,800 for the same period ended September 30,
2002. As of September 30, 2003, non-performing assets totaled $3,463,000 or
3.75% of total assets, compared to $2,998,000 or 3.28% of total assets as of
June 30, 2003. As of September 30, 2003, the Company's allowance for losses on
loans was $594,000, representing 17.2% of non-performing assets and .89% of net
loans receivable.


                                      -11-
<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 to maintain the allowance
for loan losses at a level consistent with the Company's loss experience and
considering, among other factors, the composition of the Company's loan
portfolio, the level of the Company's classified and non-performing assets and
their estimated 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. In addition, federal regulators may require
additional reserves as a result of their examination of the Company. The
allowance for losses on loans reflects what the Company currently believes is an
adequate level of reserves, although there can be no assurance that future
losses will not exceed the estimated amounts, thereby adversely affecting future
results of operations.

NON-INTEREST INCOME

Non-interest income increased $281,500 to $308,700 for the three months ended
September 30, 2003 from $27,200 for the same period ended September 30, 2002.
The increase was primarily attributable to a $161,662 impairment write down in
the period ended September 30, 2002 of an equity security which had a fair value
loss that was deemed to be other than temporary. Additionally, for the three
month period ended September 30, 2003 gain on sale of securities increased
$86,000, to $101,000 from $15,000 for the three month period ended September 30,
2002. Fees, service charges and commissions for the period ended September 30,
2003 increased $17,500 over the same period ended 2002 and gain on sale of
mortgage loans increased $16,400, or 129.8%.

NON-INTEREST EXPENSE

Total non-interest expense increased $116,200 from $587,300 for the three months
ended September 30, 2002 to $703,500 for the three months ended September 30,
2003. The increase was primarily attributable to compensation, payroll taxes and
employee benefits increase of $58,000, for the three month period ended
September 30, 2003 compared to the same period in 2002. The compensation and
related expense increase was primarily due to the hiring of additional personnel
and increased benefits costs. There were also increases in office property and
equipment of $40,000 and advertising expense of $20,000 for the 2003 period.
Other real estate expense increased $12,000 for the three month period ended
2003.

TAXES ON INCOME

The Company had a $95,500 increase in taxes on earnings for the three month
period ended September 30, 2003 as a result of increased net earnings. The
effective tax rate for the three month period ended September 30, 2003 is 34.6%
compared to 31.8% for the three month period ended September 30, 2002.

COMMITMENTS AND CONTINGENCIES

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


                                      -12-
<PAGE>

CRITICAL ACCOUNTING POLICIES

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

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

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

LIQUIDITY AND CAPITAL RESOURCES

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

The Bank has historically maintained its liquidity ratio at, or above, the level
needed to meet its operational needs. The Bank's liquidity ratio was 9.12% on
September 30, 2003 and 9.14% on June 30, 2003.

At September 30, 2003, the Company had advances of $5.91 million outstanding
from the FHLB. The Company uses its liquidity resources principally to meet
ongoing commitments, to fund maturing certificates of deposit and deposit
withdrawals, and to meet operating expenses. At September 30, 2003, the Company
had outstanding commitments to extend credit which amounted to $5,555,000
(including $1,143,000 in available revolving commercial lines of credit). At
September 30, 2003, certificates of deposit scheduled to mature in one year or
less totaled $16.6 million. Management believes, based on its experience to
date, that a significant portion of these funds will remain with the Company.
Management believes that loan repayments and other sources of funds will be
adequate to meet the Company's foreseeable liquidity needs.

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

At September 30, 2003, the Bank had tangible and core capital of $8.5 million,
or 9.4% of adjusted total assets, which was approximately $7.2 million and $4.9
million above the minimum requirements of 1.5% and 4.0%, respectively, of the
adjusted total assets in effect on that date. At September 30, 2003, the Bank
had risk-based capital of $9.1 million (including $8.5 million in core capital),
or 14.0% of risk-weighted assets of $64.8 million. This amount was $3.9 million
above the 8.0% requirement in effect on that date. The Bank is considered to be
"well-capitalized" under Federal regulatory guidelines.


                                      -13-
<PAGE>

EFFECT OF NEW ACCOUNTING STANDARDS

In January 2003, the FASB issued Interpretation No. 46, Consolidation of
Variable Interest Entities (FIN 46). FIN 46 addresses consolidation by business
enterprises of variable interest entities that have certain characteristics. It
requires a business enterprises that has a controlling interest in a variable
interest entity (as defined by FIN 46) to include the assets, liabilities, and
results of the activities of the variable interest entity in the consolidated
financial statements of the business enterprise. FIN 46 applies immediately to
variable interest entities created after January 31, 2003, and to variable
interest entities in which an enterprise obtains an interest after that date.
For variable interest acquired before February 1, 2003, it applies in the first
fiscal year or interim period beginning after June 15, 2003. The impact of
adopting FIN 46 will not be material as the Company does not presently have any
variable interest entities.

In April 2003, the FASB issued SFAS No 149, Amendment of SFAS No. 133 on
Derivative Instruments and Hedging Activities. SFAS No. 149 amends SFAS No. 133
for decisions made (1) as part of the Derivatives Implementation Group process
that effectively required amendments to SFAS No. 133, (2) in connection with
other FASB projects dealing with financial instruments, and (3) in connection
with implementation issues raised in relation to the application of the
definition of a derivative, in particular, the meaning of "an initial net
investment tat is smaller than would be required for other types of contract
that would be expected to have a similar response to changes in market factors,"
the meaning of "underlying," and the characteristics of a derivative that
contains financing components. SFAS No. 149 is generally effective for contracts
entered into or modified after June 30, 2003 and for hedging relationships
designated after June 30, 2003. The Company adopted SFAS No. 149 as indicated
above and such adoption did not have a material effect on its financial position
or results of operations.

In May 2003, the FASB issued Statement of Financial Accounting Standards No.
150, "Accounting for Certain Financial Instruments with Characteristics of both
Liabilities and Equity," ("SFAS #150") which requires issuers of financial
instruments to classify as liabilities certain freestanding financial
instruments that embody obligations for the issuer. SFAS No.150 was effective
for all freestanding financial instruments entered into or modified after May
31, 2003 and was otherwise effective at the beginning of the first interim
period beginning after June 15, 2003. On October 29, 2003, the FASB voted to
defer for an indefinite period the application of the guidance in SFAS No.150,
to non-controlling interests that are classified as equity in the financial
statements of a subsidiary but would be classified as a liability on the
parent's financial statements. The adoption of the sections of this Statement
that have not been deferred did not have a significant impact on our financial
condition or results of operations. The section noted above that has been
deferred indefinitely is not expected to have a significant impact on our
financial condition or results of operations.


                                      -14-
<PAGE>

ITEM 3. CONTROLS AND PROCEDURES

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

Disclosure Controls and Procedures

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

Internal Control Over Financial Reporting

There have not been any changes in the Company's internal control over financial
reporting (as such term is defined in Rules 13a-15(f) and 15d- 15(f) under the
Exchange Act) during the fiscal quarter to which this report relates that have
materially affected, or are reasonably likely to materially affect, the
Company's internal control over financial reporting.


                                      -15-
<PAGE>

                                     PART II
                                OTHER INFORMATION

ITEM 1. Legal Proceedings

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

ITEM 2. 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)   The following is a description of the Form 8-K furnished during the
            three months ended September 30, 2003:

            On August 29, 2003, a current report on Form 8-K was furnished to
            announce the Company's earnings for the quarter and fiscal year
            ended June 30, 2003.


                                      -16-
<PAGE>

                                   SIGNATURES

Pursuant to the requirement of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.

                                   HORIZON FINANCIAL SERVICES CORPORATION
                                   Registrant


Date: November 13, 2003            /s/ Robert W. DeCook
                                   ---------------------------------------------
                                   Robert W. DeCook
                                   President and Chief Executive Officer


Date: November 13, 2003            /s/ Vicki Hladik
                                   ---------------------------------------------
                                   Vicki Hladik
                                   Chief Financial Officer


                                      -17-
<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 3 of
            the Registrant's Notes to Consolidated Financial Statements
            contained herein)

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

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

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


                                      -18-