SECURITIES AND EXCHANGE COMMISSION
                          Washington, D.C.  20549

                                FORM 10-Q

                               (Mark One)

[X]  Quarterly Report Pursuant to Section 13 or 15(d) of the Securities and
     Exchange Act of 1934

            For the quarterly period ended September 30, 2001
                                           ------------------
                                  OR

[ ]  Transition Report Pursuant to Section 13 or 15(d) of the Securities and
     Exchange Act of 1934

                       Commission file number 0-27062

                           Horizon Financial Corp.
                           -----------------------
            (Exact name of registrant as specified in its charter)

                      Chartered by the State of Washington
                      ------------------------------------
        (State or other jurisdiction of incorporation or organization)

                                  91-1695422
                                  ----------
                        (IRS Employer Identification No.)

                             1500 Cornwall Avenue
                             Bellingham, Washington
                             -----------------------
                    (Address of principal executive offices)

                                     98225
                                     -----
                                  (Zip Code)

Registrant's telephone number including area code:    (360) 733-3050
                                                      --------------
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 such 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.

                                 YES  X   NO
                                    -----   -----

As of  September 30, 2001,  8,681,991 common shares, $1.00 par value, were
outstanding.

1

<PAGE>



                                HORIZON FINANCIAL CORP.

INDEX                                                                   PAGE
-----                                                                   ----
PART 1   FINANCIAL INFORMATION

Item 1   Financial Statements

         Independent Accountant's Report                                  3

         Consolidated Statements of Financial Position                    4

         Consolidated Statements of Income                                5-6

         Consolidated Statements of Stockholders' Equity                  7

         Consolidated Statements of Cash Flows                            8

         Notes to Consolidated Financial Statements                       9

Item 2   Management's Discussion and Analysis of Financial
            Condition and Results of Operations                          10-14


PART II  OTHER INFORMATION

Item 1   Legal Proceedings                                               15

Item 2   Changes in Securities and Uses of Proceeds                      15

Item 3   Defaults Upon Senior Securities                                 15

Item 4   Submission of Matters to a Vote of  Security Holders            15

Item 5   Other Information                                               15

Item 6   Exhibits and Reports on Form 8-K                                15

         SIGNATURES

2

<PAGE>



                  INDEPENDENT ACCOUNTANT'S REPORT

Board of Directors and Stockholders'
Horizon Financial Corp.

We have reviewed the accompanying consolidated statement of financial position
of Horizon Financial Corp. and subsidiaries as of  September 30, 2001, and the
related consolidated statements of income, stockholders' equity, and cash
flows for the three and six months ended September 30, 2001. These financial
statements are the responsibility of Horizon Financial Corp.'s management.

We conducted our review in accordance with standards established by the
American Institute of Certified Public Accountants. A review of interim
financial information consists principally of applying analytical procedures
to financial data and making inquiries of persons responsible for financial
and accounting matters. It is substantially less in scope than an audit
conducted in accordance with generally accepted auditing standards in the
United States of America, the objective of which is the expression of an
opinion regarding the financial statements taken as a whole. Accordingly, we
do not express such an opinion.

Based on our review, we are not aware of any material modifications that
should be made to the consolidated financial statements referred to above for
them to be in conformity with generally accepted accounting principles in the
United States of America.

We have previously audited, in accordance with generally accepted auditing
standards in the United States of America, the consolidated statement of
financial position of Horizon Financial Corp. and subsidiaries as of March 31,
2001, and the related consolidated statements of income, stockholders' equity
and cash flows for the year then ended (which are not presented herein), and
in our report dated April 24, 2001, we expressed an unqualified opinion on
those consolidated financial statements. In our opinion, the information set
forth in the accompanying consolidated statement of financial position as of
March 31, 2001, is fairly presented, in all material respects, in relation to
the consolidated statement of financial position from which it has been
derived.


/s/ Moss Adams LLP

Bellingham, Washington
October 24, 2001

3

<PAGE>




                           HORIZON FINANCIAL CORP.
                Consolidated Statements of Financial Position

                               ASSETS
                                              September 30,      March 31,
                                                 2001              2001
                                              (unaudited)
                                            --------------    --------------

Cash and cash equivalents                   $   12,842,940    $   11,947,606
Interest-bearing deposits                       69,450,000        12,560,012
Investment securities
  Available-for-sale                            29,550,508        21,251,635
  Held-to-maturity                                 369,065           368,989
Mortgage-backed securities
  Available-for-sale                            26,760,643        47,626,879
  Held-to-maturity                               5,393,044         6,530,210
Federal Home Loan Bank Stock                     6,028,800         5,832,000
Loans receivable                               565,997,153       597,382,353
Loans held for sale                              2,287,200         2,382,225
Accrued interest and dividends receivable        4,515,924         4,623,914
Bank premises and equipment, net                15,592,498        15,214,519
Real estate owned                                  147,972              -
Other assets                                     4,313,689         4,015,814
                                            --------------    --------------
TOTAL ASSETS                                $  743,249,436    $  729,736,156
                                            ==============    ==============

                LIABILITIES AND STOCKHOLDERS' EQUITY

Deposits                                    $  606,906,162    $  595,913,667
Accounts payable and other liabilities           8,254,896         6,991,698
Securities sold under agreements
  to repurchase                                  5,938,000         5,938,000
Other borrowed funds                            17,000,000        17,000,000
Advances by borrowers for taxes
  and insurance                                  1,564,738         1,609,924
Income tax currently payable                       166,471           181,562
Net deferred income tax liabilities              3,046,956         2,721,497
Deferred compensation                            1,468,301         1,470,451
                                            --------------    --------------
   Total liabilities                           644,345,524       631,826,799
                                            --------------    --------------
COMMITMENTS AND CONTINGENCIES

STOCKHOLDERS' EQUITY
  Serial preferred stock, $1 par value,
    10,000,000 shares authorized; none
    issued or outstanding                             -                 -
  Common stock, $1 par value, 30,000,000
    shares authorized; 8,681,991 and
    8,861,238 issued and outstanding,
    respectively                                 8,681,991         8,861,238
  Additional paid-in capital                    61,041,197        62,380,016
  Retained earnings                             24,926,864        23,046,017
  Unearned ESOP shares                            (360,517)         (360,517)
  Accumulated other comprehensive income         4,614,377         3,982,603
                                            --------------    --------------
   Total stockholders' equity                   98,903,912        97,909,357
                                            --------------    --------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY  $  743,249,436    $  729,736,156
                                            ==============    ==============

                (See Notes to Consolidated Financial Statements)

4
<PAGE>



                          HORIZON FINANCIAL CORP.
                CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)

                                                  Three months ended
                                                     September 30,
                                                  2001              2000
                                            --------------    --------------

INTEREST INCOME
  Interest on loans                         $   11,884,840    $   12,270,764
  Investment and mortgage-backed securities      1,593,560         1,710,962
                                            --------------    --------------
       Total interest income                    13,478,400        13,981,726
                                            --------------    --------------
INTEREST EXPENSE
  Interest on deposits                           6,673,573         7,277,612
  Interest on other borrowings                     396,713           782,147
                                            --------------    --------------
       Total interest expense                    7,070,286         8,059,759
                                            --------------    --------------
       Net interest income                       6,408,114         5,921,967

PROVISION FOR LOAN LOSSES                          285,000            45,000
                                            --------------    --------------
       Net interest income after provision
         for loan losses                         6,123,114         5,876,967
                                            --------------    --------------
NONINTEREST INCOME
  Service fees                                     646,775           472,209
  Other                                            134,765           230,559
  Net gain (loss) on sales of loans -
    servicing released                             244,002              -
  Net gain (loss) on sales of loans -
    servicing retained                              49,708           (18,945)
  Net gain on sale of investment securities         59,682             5,654
                                            --------------    --------------
       Total noninterest income                  1,134,932           689,477
                                            --------------    --------------
NONINTEREST EXPENSE
  Compensation and employee benefits             1,891,630         1,788,899
  Building occupancy                               559,752           560,311
  Other expenses                                   799,406           738,383
  Data processing                                  234,862           224,661
  Advertising                                      163,120           192,946
                                            --------------    --------------
       Total noninterest expense                 3,648,770         3,505,200
                                            --------------    --------------
INCOME FROM CONTINUING OPERATIONS
BEFORE PROVISION FOR INCOME TAX                  3,609,276         3,061,244

PROVISION FOR INCOME TAX                         1,218,833         1,041,319
                                            --------------    --------------
NET INCOME                                $    2,390,443    $    2,019,925
                                            ==============    ==============

BASIC EARNINGS PER SHARE                         $  .27            $  .22*
                                                 ======            ======
DILUTED EARNINGS PER SHARE                       $  .27            $  .22*
                                                 ======            ======

*Restated for 15% stock dividend declared April 24, 2001

                  (See Notes to Consolidated Financial Statements)

5
<PAGE>



                           HORIZON FINANCIAL CORP.
                CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)

                                                   Six months ended
                                                     September 30,
                                                 2001              2000
                                            --------------    --------------
INTEREST INCOME
  Interest on loans                         $   24,336,998    $   24,118,723
  Investment and mortgage-backed securities      3,167,807         3,348,728
                                            --------------    --------------
       Total interest income                    27,504,805        27,467,451
                                            --------------    --------------
INTEREST EXPENSE
  Interest on deposits                          14,065,563        14,092,566
  Interest on other borrowings                     757,605         1,535,215
                                            --------------    --------------
       Total interest expense                   14,823,168        15,627,781
                                            --------------    --------------
       Net interest income                      12,681,637        11,839,670

PROVISION FOR LOAN LOSSES                          445,000           140,000
                                            --------------    --------------
       Net interest income after provision
         for loan losses                        12,236,637        11,699,670
                                            --------------    --------------
NONINTEREST INCOME
  Service fees                                   1,239,245           980,778
  Other                                            282,990           443,332
  Net gain (loss) on sales of loans -
    servicing released                             546,658              -
  Net gain (loss) on sales of loans -
    servicing retained                            (252,984)          (57,942)
  Net gain on sale of investment securities        178,617            38,847
                                            --------------    --------------
       Total noninterest income                  1,994,526         1,405,015
                                            --------------    --------------
NONINTEREST EXPENSE
  Compensation and employee benefits             3,770,441         3,605,706
  Building occupancy                             1,136,669         1,158,589
  Other expenses                                 1,462,400         1,311,991
  Data processing                                  469,511           446,035
  Advertising                                      337,705           347,707
                                            --------------    --------------
       Total noninterest expense                 7,176,726         6,870,028
                                            --------------    --------------
INCOME FROM CONTINUING OPERATIONS
BEFORE PROVISION FOR INCOME TAX                  7,054,437         6,234,657

PROVISION FOR INCOME TAX                         2,384,909         2,090,865
                                            --------------    --------------
NET INCOME                                  $    4,669,528    $    4,143,792
                                            ==============    ==============

BASIC EARNINGS PER SHARE                         $  .53            $  .44*
                                                 ======            ======
DILUTED EARNINGS PER SHARE                       $  .52            $  .44*
                                                 ======            ======

*Restated for 15% stock dividend declared April 24, 2001

                 (See Notes to Consolidated Financial Statements)

6
<PAGE>


<PAGE>
<TABLE>

                                               HORIZON FINANCIAL CORP.
                                 Consolidated Statements of Stockholders' Equity
                                  Six Months Ended September 30, 2001 and 2000
                                                   (unaudited)


                       Common Stock
                  ----------------------    Additional                  Unearned      Other       Treasury
                  Number of                  Paid-In       Retained       ESOP     Comprehensive    Stock
                   Shares       At Par       Capital       Earnings      Shares    Income (Loss)   at Cost
                  ----------    --------   ------------  ------------  ----------  ------------- ----------

               <c>         <c>          <c>           <c>           <c>         <c>          <c>

BALANCE, March
 31, 2000         8,642,571   $8,642,571   $57,372,024   $33,325,068   $(432,621)  $  718,759   $(3,690,810)

Comprehensive
 income
  Net income              -            -             -     4,143,792           -            -             -
  Other compre-
  hensive income
   Change in un-
    realized gains
    on available-
    for-sale
    securities,
    net taxes of
    $624,684              -            -             -             -           -    1,212,622             -
   Total other
    comprehensive
    income                -            -             -             -           -            -             -
  Comprehensive
   income                 -            -             -             -           -            -             -
Unearned ESOP
 shares                   -            -             -             -           -            -             -
Cash dividends
 on common stock
 at $.12 per share        -            -             -    (1,929,275)          -            -             -
Stock options
 exercised           16,420       16,420        98,504             -           -            -             -
Treasury stock
 purchased                -            -             -             -           -            -    (4,898,256)
                  ---------   ----------   -----------   -----------   ---------   ----------   -----------
BALANCE, September
 30, 2000         8,658,991   $8,658,991   $57,470,528   $35,539,585   $(432,621)  $1,931,381   $(8,589,066)
                  =========   ==========   ===========   ===========   =========   ==========   ===========
BALANCE, March
 31, 2001         8,861,238   $8,861,238   $62,380,016   $23,046,017   $(360,517)  $3,982,603   $         -
Comprehensive
 income
  Net income              -            -             -     4,669,528           -            -             -
  Other compre-
  hensive income
   Change in un-
    realized gains
    on available-
    for-sale
    securities,
    net taxes of
    $325,459              -            -             -             -           -      631,774             -
  Total other
   comprehensive
   income                 -            -             -             -           -            -             -
 Comprehensive
  income                  -            -             -             -           -            -             -
Cash dividends on
 common stock at
 $.12 per share           -            -             -    (2,103,141)          -            -             -
15% stock dividend
  adjustment            424          424         4,251        (4,675)                                     -
Stock options
 exercised            8,071        8,071        48,474             -           -            -             -
Treasury stock
 purchased                -            -             -             -           -            -    (2,260,151)
Retirement of
 treasury stock    (187,742)    (187,742)   (1,391,544)     (680,865)          -            -     2,260,151
                  ---------   ----------   -----------   -----------   ---------   ----------   -----------
BALANCE, September
 30, 2001         8,681,991   $8,681,991   $61,041,197   $24,926,864   $(360,517)  $4,614,377   $         -
                  =========   ==========   ===========   ===========   =========   ==========   ===========
</TABLE>

<TABLE>


                                        <c>           <c>
BALANCE, March 31, 2000                    $95,934,991
Comprehensive income
 Net income                                  4,143,792    $4,143,792
 Other comprehensive income
 Change in unrealized gains on
   available-for-sale securities
   net of taxes of $624,684                  1,212,622     1,212,622
                                                          ----------
 Total other comprehensive income                    -     1,212,622
                                                          ----------
 Comprehensive income                                -    $5,356,414
                                                          ==========
Unearned ESOP shares                                 -
Cash dividends on common stock at
 $.12 per share                             (1,929,275)
Stock options exercised                        114,924
Treasury stock purchased                    (4,898,256)
                                           -----------
BALANCE, September 30, 2000                $94,578,798
                                           ===========

BALANCE, March 31, 2001                    $97,909,357

Comprehensive income
 Net income                                  4,669,528    $4,669,528
 Other comprehensive income
 Change in unrealized gains on
   available-for-sale securities
   net of taxes of $325,459                    631,774       631,774
                                                          ----------
 Total other comprehensive income                    -       631,774
                                                          ----------
 Comprehensive income                                -    $5,301,302
                                                          ==========
Cash dividends on common stock
 at $.12 per share                          (2,103,141)
15% stock dividend adjustment                        -
Stock options exercised                         56,545
Treasury stock purchased                    (2,260,151)
Retirement of treasury stock                         -
                                           -----------
BALANCE, September 30, 2001                $98,903,912
                                           ===========
</TABLE>
                             (See Notes to Consolidated Financial Statements)

7
<PAGE>




                          HORIZON FINANCIAL CORP.
                   CONSOLIDATED STATEMENTS OF CASH FLOWS

                                                     Six months ended
                                                       September 30,
                                                   2001              2000
                                                ------------     ------------

CASH FLOWS FROM OPERATING ACTIVITIES
 Net income                                     $  4,669,528     $  4,143,792
Adjustments to reconcile net income to net
cash provided by operating activities
  Depreciation and amortization                    1,120,434          782,876
  Stock dividends - Federal Home Loan Bank
    stock                                           (196,800)        (174,000)
  Provision for loan losses                          445,000          140,000
Changes in assets and liabilities
  Interest and dividends receivable                  107,990         (366,282)
  Interest payable                                      (385)          98,139
  Net change in loans held for sale                   95,025             -
  Federal income tax (receivable) payable            (15,091)         261,791
  Other assets                                      (297,875)          58,838
  Other liabilities                                1,099,059       (1,334,948)
                                                ------------     ------------
     Net cash flows from operating activities      7,026,885        3,610,206
                                                ------------     ------------
CASH FLOWS FROM INVESTING ACTIVITIES
  Investment in interest-bearing deposits, net   (56,889,988)      (1,158,000)
  Purchases of investment securities -
    available-for-sale                           (10,060,000)      (7,312,429)
  Proceeds from sales and maturities of
    investment securities - available-for-sale     2,309,094        3,118,993
  Purchases of mortgage-backed securities -
    available-for-sale                                  -            (102,333)
  Proceeds from maturities of mortgage-backed
    securities - available-for-sale               21,275,927       13,398,031
  Proceeds from maturities of mortgage-backed
    securities - held-to-maturity                  1,136,665          908,071
  Purchase of Federal Home Loan Bank stock              -            (217,900)

  Net change in loans                             30,398,085      (36,281,409)
  Purchases of bank premises and equipment          (956,298)        (160,853)
  Net change in other real estate owned             (147,972)         323,468
                                                ------------     ------------
     Net cash flows from investing activities    (12,934,487)     (27,484,361)
                                                ------------     ------------
CASH FLOWS FROM FINANCING ACTIVITIES
  Net change in deposits                          10,992,495       15,136,471
  Advances from securities sold under agree-
    ments to repurchase                                 -          30,071,000
  Repayments of securities sold under
    agreements to repurchase                            -         (29,703,000)
  Advances from other borrowed funds              10,000,000       56,000,000
  Repayments of other borrowed funds             (10,000,000)     (46,000,000)
  Common stock issued, net                            56,545          114,924
  Cash dividends paid                             (1,985,953)      (1,929,275)
  Treasury stock purchased                        (2,260,151)      (4,898,256)
                                                ------------     ------------
     Net cash flows from financing activities      6,802,936       18,791,864
                                                ------------     ------------
NET CHANGE IN CASH AND CASH EQUIVALENTS              895,334       (5,082,291)

CASH AND CASH EQUIVALENTS, beginning of period    11,947,606       16,043,055
                                                ------------     ------------

CASH AND CASH EQUIVALENTS, end of period        $ 12,842,940     $ 10,960,764
                                                ============     ============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
  Cash paid during the period for interest      $ 14,823,553     $ 15,529,642
                                                ============     ============
  Cash paid during the period for income tax    $  2,400,000     $  1,930,000
                                                ============     ============

                  (See Notes to Consolidated Financial Statements)

8
<PAGE>



                               HORIZON FINANCIAL CORP.
                    NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
               THREE MONTHS AND SIX MONTHS ENDED SEPTEMBER 30, 2001
                                     (unaudited)


NOTE A - Basis of Presentation
-------------------------------

The consolidated financial statements for the three and six months ended
September 30, 2001, include the accounts of Horizon Financial Corp. (the
Corporation), Horizon Bank (the Bank), and other subsidiaries of the Bank.
Significant intercompany balances and transactions have been eliminated in
consolidation. The Corporation has engaged in no significant activity other
than holding the stock of the Bank.

The preparation of the financial statements in conformity with accounting
principles generally accepted in the United States requires management to make
estimates and assumptions that affect amounts reported in the consolidated
financial statements. Changes in these estimates and assumptions are
considered reasonably possible and may have a material impact on the financial
statements and thus actual results could differ from the amounts reported and
disclosed herein.

The unaudited consolidated financial statements have been prepared in
accordance with general accepted accounting principles for interim financial
information and with the instructions to the Form 10-Q and Rule 10-01 of
Regulation S-X.  Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements.  In the opinion of management, all adjustments
(consisting only of normal recurring accruals) necessary for a fair
presentation are reflected in the interim financial statements.  The results
of operations for the periods ended September 30, 2001 and 2000 are not
necessarily indicative of the operating results for the full year.  For
further information, refer to the consolidated financial statements and
footnotes thereto in the Horizon Financial Corp. annual report for the year
ended March 31, 2001.

NOTE B - Reclassification
-------------------------

Certain reclassifications have been made to prior financial statements to
conform with current presentation.  Such reclassifications have no effect on
net income.

NOTE C - Net Income Per Share
-----------------------------

Basic earnings per share for the three months ended September 30, 2001 and
2000 are calculated on the basis of 8,807,815 and 9,237,632 weighted average
shares outstanding. Diluted earnings per share for the three months ended
September 30, 2001 and 2000 are calculated on the basis of 8,930,571 and
9,268,747 weighted average share outstanding, respectively.  Diluted EPS
figures are computed by determining the number of additional shares that are
deemed outstanding due to stock options and warrants under the treasury stock
method.

9

<PAGE>



                               HORIZON FINANCIAL CORP.
                        MANAGEMENT'S DISCUSSION AND ANALYSIS




Forward Looking Statements
---------------------------

Management's Discussion and Analysis and other portions of this report contain
certain "forward looking statements" within the meaning of the Private
Securities Litigation Reform Act of 1995.  This statement is for the express
purpose of availing Horizon Financial Corp. ("the Corporation") to the
protections of such safe harbor provisions of said Act with respect to all
"forward looking statements."  Horizon Financial has used "forward looking
statements" to describe future plans and strategies, including expectations of
Horizon Financial's potential future financial results.  Management's ability
to predict results or the effect of future plans and strategies is inherently
uncertain.  Factors that could affect results include, but are not limited to:
the future level of interest rates, industry trends, general economic
conditions, loan delinquency rates, and changes in state and federal
regulations.  These factors should be considered when evaluating the "forward
looking statements" and undue reliance should not be placed on such
statements.

General
-------

The Corporation was formed under Washington law on May 22, 1995, and became
the holding company of the Bank, effective October 13, 1995.  Effective June
19, 1999 the Corporation completed the acquisition of Bellingham
Bancorporation, whose wholly-owned subsidiary, Bank of Bellingham, was merged
with and into Horizon Bank ("the Bank").  At September 30, 2001, the
Corporation had total assets of $743.2 million, total deposits of $606.9
million and total equity of $98.9 million.  The Corporation's business
activities generally are limited to passive investment activities and
oversight of its investment in the Bank.  Accordingly, the information set
forth herein, including the consolidated financial statements and related
data, relates primarily to the Bank and its subsidiary.

The Bank was organized in 1922 as a Washington state-chartered mutual savings
and loan association and converted to a federal mutual savings and loan
association in 1934. In 1979, the Bank converted to a Washington
state-chartered mutual savings bank, the deposits of which are insured by the
Federal Deposit Insurance Corporation ("FDIC"). On August 12, 1986, the Bank
then converted to a state-chartered stock savings bank under the name "Horizon
Bank, a savings bank".  The Bank became a member of the Federal Home Loan Bank
("FHLB") of Seattle in December 1998.  Effective March 1, 2000, the Bank
changed its name to its current title "Horizon Bank".

The Bank's operations are conducted through 15 full-service office facilities,
located in Whatcom, Skagit and Snohomish counties in Northwest Washington.
The acquisition of Bellingham Bancorporation increased Horizon Financial's and
Horizon Bank's presence in Whatcom County.  During fiscal 2000, the Bank
opened an additional office in Whatcom County, located in the Barkley Village
area of Bellingham, in the northeast portion of the city.  In addition to
serving the growing population in this area, this new office (approximately
15,000 square feet) serves as an operation center to support additional growth
for the Corporation.  The Bank also completed construction of a new office
building at Murphy's Corner near Mill Creek, which replaced the bank's leased
location in that area.  During fiscal 2000, the Bank purchased a bank site in
Marysville, which will provide additional growth opportunities.  In August
2001, the Bank purchased a building (formerly operated as

10

<PAGE>



a bank office) in Lynnwood, Washington, and plans to renovate the office are
under way.  The Bank's management continues to research sites for future
development, with emphasis on locations in the growing Snohomish County
markets.

At its October 24, 2000 meeting, the Board of Directors authorized the
repurchase of up to 10% (approximately 897,000 shares, as restated) of the
Corporation's outstanding Common Stock over a 24 month period.  During the six
months ended September 30, 2001, the Corporation repurchased 187,742 shares of
its Common Stock, compared to the repurchase of 568,215 shares, as restated
under the previous plan, of Common Stock during the same quarter in the prior
year.  As of September 30, 2001, 303,317 shares have been repurchased under
the current plan.

Acquisition
-----------

On June 19, 1999, the Corporation completed the acquisition of Bellingham
Bancorporation, a Washington corporation, headquartered in Bellingham,
Washington.  The acquisition was accomplished in an all stock transaction
valued at approximately $15.5 million, including the assumption of outstanding
Bellingham Bancorporation stock options and warrants.  The Corporation
exchanged 3.15 shares, as restated, of its Common Stock for each Bellingham
Bancorporation share. In this regard, Horizon Financial issued approximately
1,298,654 shares, as restated, of its Common Stock in the transaction.  The
acquisition was accounted for as a pooling of interests.

Prior to the acquisition, Bellingham Bancorporation was a $64.3 million bank
holding company for the Bank of Bellingham, its primary subsidiary.  The Bank
of Bellingham was founded in 1992 by a group of local business people for the
purpose of providing commercial banking services to the local community, and
operated three full-service banking facilities in Bellingham.

Operating Strategy
-------------------

The primary business of the Bank is to acquire funds in the form of deposits
and wholesale funds, and to use the funds to make consumer, real estate, and
commercial loans in the Bank's primary market area.  In addition, the Bank
invests in U.S. Government and federal agency obligations, mortgage-backed
securities, equity securities, and municipal securities.  The Bank intends to
continue to fund its assets primarily with retail and commercial deposits,
although FHLB advances, and other wholesale borrowings, may be used as a
supplemental source of funds.

The Bank's profitability depends primarily on its net interest income, which
is the difference between the income it receives on its loan and investment
portfolio and its cost of funds, which consists of interest paid on deposits.

Net interest income is also affected by the relative amounts of
interest-earning assets and interest-bearing liabilities.  When interest-
earning assets equal or exceed interest-bearing liabilities, any positive
interest rate spread will generate net interest income. The  Bank's
profitability is also affected by the level of other income and expenses.
Other income includes income associated with the origination and sale of
mortgage loans, loan servicing fees, and net gains and losses on sales of
interest-earning assets.  Other expenses include compensation and benefits,
occupancy and equipment expenses, deposit insurance premiums, data servicing
expenses and other operating costs.  The Bank's results of operations are also
significantly affected by general economic and competitive conditions,
particularly changes in market interest rates, government legislation and
regulation and monetary and fiscal policies.

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The Bank's business strategy is to operate as a well-capitalized, profitable
and independent community bank, dedicated to commercial lending, home mortgage
lending, consumer lending, small business lending and providing quality
financial services to local personal and business customers.  The Bank
has sought to implement this strategy by: (i) focusing on commercial banking
opportunities, subsequent to its acquisition of a commercial bank in 1999;
(ii) continuing efforts towards the origination of residential mortgage loans,
including one- to- four family residential construction loans; (iii) providing
high quality, personalized financial services to individuals and business
customers and communities served by its branch network; (iv) selling fixed
rate mortgages to the secondary market; (v) improving asset quality; (vi)
containing operating expenses; and (vii) maintaining capital in excess
of regulatory requirements combined with prudent growth.

Financial Condition
--------------------

The balance sheet for the Corporation was little changed at September 30,
2001, compared to March 31, 2001.  Total consolidated assets for the
Corporation as of September 30, 2001, were $743,249,436, a slight increase
from the March 31, 2001, level of $729,736,156.  Total liabilities also
increased slightly to $644,345,524 at September 30, 2001, from $631,826,799 at
March 31, 2001.  Stockholders' equity showed a small increase to $98,903,912
at September 30, 2001, from $97,909,357 at March 31, 2001.

Liquidity and Capital Resources
-------------------------------

The Bank maintains liquid assets in the form of cash and short-term
investments to provide a source to fund loans, savings withdrawals and other
short-term cash requirements.  At September 30, 2001, the Bank had liquid
assets (cash and marketable securities with maturities of one year or less)
with a book value of $100,780,305.

As of September 30, 2001, the total book value of investments and
mortgage-backed securities was $50,081,780 compared to a market value of
$57,355,832, resulting in an unrealized gain of $7,274,052.  On March 31,
2001, the book value of investments and mortgage-backed securities was
$82,303,478 compared to a market value of $88,539,702 resulting in an
unrealized gain of $6,236,224.

The Bank's primary sources of funds are cash flow from operations, which
consist mainly of mortgage loan repayments; deposit increases; loan sales;
borrowings; and cash received from the maturity or sale of investment
securities.  The Bank's liquidity fluctuates with the supply of funds and
management believes that the current level of liquidity is adequate at this
time.  If additional liquidity is needed, the Bank's options include, but are
not necessarily limited to: 1) selling additional loans in the secondary
market; 2) entering into reverse repurchase agreements; 3) borrowing from the
Federal Home Loan Bank of Seattle;  4) accepting additional jumbo and/or
public funds deposits; or 5) accessing the discount window of the Federal
Reserve Bank of San Francisco.

Stockholders' equity as of September 30, 2001 was $98,903,912 or 13.31% of
assets, compared to $97,909,357 or 13.42% of assets at March 31, 2001.  The
Bank continues to exceed the 5.0% minimum tier one capital required by the
FDIC in order to be considered well capitalized.  The Bank's total
risk-adjusted capital ratio as of September 30, 2001 was 20.72%, compared to
March 31, 2001 of 21.21%.  These figures are well above the well-capitalized
minimum of 10% required by the FDIC.

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                          Comparative Results of Operations
                      For the Three Months and Six Months Ended
                             September 30, 2001 and 2000

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

Net Interest Income
-------------------

Net interest income for the three months ended September 30, 2001, increased
8.21% to $6,408,114 from $5,921,967 in the same time period of the previous
year.  Interest on loans for the quarter ended September 30, 2001, decreased
3.15% to $11,884,840, from $12,270,764.  This decrease was due primarily to
the decrease in loans receivable resulting from the sale of mortgage loans in
the secondary market.  Interest and dividends on investments and
mortgage-backed securities decreased 6.86% to $1,593,560, from $1,710,962 for
the comparable quarter a year ago.  This decrease is due to the shift of
proceeds from the sale of selected mortgage-backed securities to
interest-bearing deposits.  Total interest income decreased 3.60% to
$13,478,400 from $13,981,726 due to the reasons stated above.

Total interest paid on deposits decreased 8.30% to $6,673,573 from $7,277,612.
This decrease in interest expense is due to an overall decline in interest
rates.  Interest on borrowings decreased to $396,713 during the quarter,
compared to $782,147 for the comparable period one year ago.  The increased
expense in the prior year was due to a higher level of borrowings outstanding
and a higher level of interest rates.  During the quarter, the bank continued
to carry wholesale borrowings in order to further leverage its balance sheet
and better manage its interest rate risk profile.

Net interest income for the six-month period ended September 30, 2001
increased 7.11% to $12,681,637 from $11,839,670 for the comparable period one
year ago.  Total interest income increased slightly to $27,504,805 from
$27,467,451.  Total interest expense for the six-month period decreased 5.15%
to $14,823,168 from $15,627,781 due to reasons stated above.

Provision for losses on loans
------------------------------

The provision for losses on loans for the three months ended September 30,
2001, increased 533.33% to $285,000 from $45,000 in the same time period of
the previous year.  At September 30, 2001, the loan loss reserve balance was
$5,399,727.  This represents .95% of loans receivable, compared to .80% as of
September 30, 2000.   The Bank's management considers this additional
provision during the quarter to be prudent given the current economic
uncertainties.  As of September 30, 2001, the Bank had $996,234 in loans over
90 days delinquent compared to $1,149,298 at September 30, 2000.

Non Interest Income
-------------------

Non interest income for the three months ended September 30, 2001, increased
64.61% to $1,134,932 from $689,477 for the same time period a year ago.
Service fee income increased 36.97% to $646,775 from $472,209. The net
gain/loss on the sale of loans servicing released increased to $244,002 from
$-0- in the comparable period one year ago.  In February of 2001, the Bank
began selling many of its new long-term fixed rate mortgages into the
secondary market on a servicing released basis.  Separately, the net gain/loss
on the sale of loans on a servicing retained basis (loans sold from the
Bank's portfolio) showed a slight gain of $49,708 during the quarter, compared
to a loss of $18,945 in the comparable period one year ago. When the Bank
sells loans from its portfolio, the remaining outstanding fees associated with
these mortgages flow to the income statement as interest income.  The
proceeds directly related to the loan balances, however, are reflected as
non-interest income. Therefore,

13

<PAGE>

even when the sale of loans generate an overall profit to the Bank (including
the recognition of the fee income), the non-interest portion of the sale may
reflect a loss, due to the pricing of the loans at the time of the sale as it
did one year ago.    The net gain/loss on sales of investment securities
increased to $59,682 for the quarter ended September 30, 2001 from $5,654 for
the comparable period one year ago.  These gains in the current period were
due primarily to the sale of selected common stocks and mortgage backed
securities from the Bank's investment portfolio.  Other non-interest
income for the quarter decreased 41.55% to $134,765 from $230,559. The
increased income in the prior year was due to the receipt of approximately
$125,000 for a trademark infringement settlement.

Non interest income for the six months ended September 30, 2001 increased
41.96% to $1,994,526 from $1,405,015.  The net gain/loss on the sale of loans
servicing released increased to $546,658 from $-0- in the comparable period
one year ago.  The net gain/loss on the sale of loans on a servicing
retained basis (loans sold from the Bank's portfolio) showed a loss of
$252,984 during the six-months ended September 30, 2001, compared to a loss of
$57,942 in the prior period.  The primary reasons for these differences year
over year are discussed above in the discussion of the quarterly results.  The
net gain/loss on sales of investment securities increased 359.80% to $178,617
from $38,847 for the comparable period one year ago. The gains in the current
period were due primarily to the sale of selected common stocks and mortgage
backed securities from the Bank's investment portfolio.  Other non interest
income for the six-month period decreased 36.17% to $282,990 from $443,332,
due primarily to the reasons stated in the discussion above regarding the
trademark infringement.

Non Interest Expense
--------------------

Non interest expense for the three months ended September 30, 2001, increased
4.10% to $3,648,770 from $3,505,200.  Compensation and employee benefits
increased 5.74% for the quarter ended September 30, 2001, to $1,891,630 from
$1,788,899.  This is due primarily to the overall growth in employment at the
Bank from the prior year period.  Building occupancy for the quarter ended
September 30, 2001 decreased slightly to $559,752 from $560,311.  Data
processing expenses increased 4.54% to $234,862 from $224,661.  Advertising
expenses for the quarter ended September 30, 2001 decreased 15.46% to $163,120
from $192,946.  The expenses in the prior year were due primarily to the
Bank's additional marketing efforts to communicate its expanded commercial
product lines and services.  Other non-interest expenses increased 8.26% to
$799,406 from $738,383 due to the overall growth of the Bank, and an increased
mortgage servicing portfolio which results in increased amortization of the
associated mortgage servicing asset.

Noninterest expense for the six months ended September 30, 2001 increased
4.46% to $7,176,726 from $6,870,028.  Compensation and employee benefits
increased 4.57% to $3,770,441 from $3,605,706.  Building occupancy expenses
for the six months decreased slightly to $1,136,669 from $1,158,589.  Other
expenses increased 11.46% to $1,462,400 at September 30, 2001 compared to
$1,311,991 for the prior period due primarily to the reasons stated in the
discussion above regarding the quarterly results.

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PART II.  OTHER INFORMATION

Item 1.  Legal Proceedings
           Horizon Financial Corporation has certain litigation and/or
           negotiations in progress resulting from activities arising from
           normal operations.  In the opinion of management, none of these
           matters is likely to have a materially adverse effect on the
           Corporation's financial position or results of operation.

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
         --------
         (3.1)     Articles of Incorporation of Horizon Financial, Corp.
             (incorporated by reference to Exhibit 3.1 to the
  Registrant's Current Report on Form 8-K dated October 13,
                   1995)
         (3.2)     Bylaws of Horizon Financial Corp. (incorporated by
          reference to Exhibit 3.2 to the Registrant's Current Report
          on Form 8-K dated October 13, 1995)
         (9.1)     Amended and Restated Employment Agreement with V. Lawrence
                  Evans (incorporated by reference to the Registrant's Annual
                  Report on Form 10-K for the year ended March 31, 1996)
         (9.2)     Deferred Compensation Plan (incorporated by reference to
                the Registrant's Annual Report on Form 10-K for the year
             ended March 31, 1996)
         (9.3)     1986 Stock Option and Incentive Plan (incorporated by
             reference to Exhibit 99.1 to the Registrant's Registration
            Statement on Form S-8 (File No. 33-99780))
         (9.4)     1995 Stock Option Plan (incorporated by reference to
            Exhibit 99.2 to the Registrant's Registration Statement on
           Form S-8 (File No. 33-99780))
         (9.5)     Bank of Bellingham 1993 Employee Stock Option Plan
          (incorporated by reference to Exhibit 99 to the
       Registrant's Registration Statement on Form S-8
    (File No. 33-88571))
          (15)     Awareness Letter from Accountants
          (21)     Subsidiaries of the Registrant (incorporated by reference
                 to the Registrant's Annual Report on Form 10-K for the
            fiscal year ended March 31, 2001)

(b)      Reports on Form 8-K:

           None

15

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                                 SIGNATURES


Pursuant to the requirements 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 CORP.



                                  By:    V. Lawrence Evans
                                     --------------------------
                                     V. Lawrence Evans
                                     President and Chief Executive Officer


                                  By:    Richard P. Jacobson
                                     --------------------------
                                     Richard P. Jacobson
                                     Chief Financial Officer


                                  Dated:    October 24, 2001
                                        -----------------------

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                                   Exhibit 15

                        Awareness Letter from Accountants


2200 Rimland Drive Suite 300
Bellingham, Washington 98226-6641
(360) 676-1920

October 24, 2001

Securities and Exchange Commission
450 fifth Street, N.W.
Washington, D.C. 20549

Dear Sirs:

We are aware that Horizon Financial Corporation has incorporated our report
dated October 24, 2001 (issued pursuant to the provisions of Statement on
Auditing Standards No. 71 by reference in its Registration Statements on Forms
S-8 (No. 33-99780, 33-88571).  We are also aware of our responsibilities under
the Securities Act of 1933.

Yours very truly,

/s/Moss Adams LLP

17

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