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 June 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 June 30, 2001, 8,844,186 common shares, $1.00 par value, were
outstanding.

<PAGE>




                         HORIZON FINANCIAL CORP.

INDEX                                                               PAGE
-----                                                               ----

PART 1        FINANCIAL INFORMATION

Item     1    Financial Statements

              Independent Accountant's Report                       3

              Consolidated Statements of Financial Condition        4

              Consolidated Statements of Operations                 5

              Consolidated Statements of Stockholders' Equity       6

              Consolidated Statements of Cash Flows                 7

              Notes to Consolidated Financial Statements            8

Item     2    Management's Discussion and Analysis of Financial
                Condition and Results of Operations                 9-13


PART II       OTHER INFORMATION

Item     1    Legal Proceedings                                     14

Item     2    Changes in Securities                                 14

Item     3    Defaults Upon Senior Securities                       14

Item     4    Submission of Matters to a Vote of Security Holders   14

Item     5    Other Information                                     14

Item     6    Exhibits and Reports on Form 8-K                      14


              SIGNATURES


2

<PAGE>




                         INDEPENDENT ACCOUNTANT'S REPORT



Board of Directors and Stockholders'
Horizon Financial Corp.

We have reviewed the accompanying consolidated statements of financial
condition of Horizon Financial Corp. and subsidiaries as of June 30, 2001, and
the related consolidated statements of income, stockholders' equity, and cash
flows for the three months ended June 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, 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.

We have previously audited, in accordance with generally accepted auditing
standards, the consolidated balance sheet 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 balance
sheet as of March 31, 2001, is fairly presented, in all material respects, in
relation to the consolidated balance sheet from which it has been derived.



/s/ Moss Adams LLP


Bellingham, Washington
July 16, 2001

3

<PAGE>




                            HORIZON FINANCIAL CORP.
               Consolidated Statements of Financial Condition

                                    ASSETS
                                                   June 30,         March 31,
                                                     2001             2001
                                                 (unaudited)
                                                --------------   -------------
Cash and cash equivalents                       $   12,404,540   $ 11,947,606
Interest-bearing deposits                           58,115,012     12,560,012
Investment securities
  Available-for-sale                                22,040,239     21,251,635
  Held-to-maturity                                     369,027        368,989
Mortgage-backed securities
  Available-for-sale                                27,909,535     47,626,879
  Held-to-maturity                                   6,062,653      6,530,210
Federal Home Loan Bank Stock                         5,925,400      5,832,000
Loans receivable                                   579,545,814    597,382,353
Loans held for sale                                  3,032,640      2,382,225
Accrued interest and dividends receivable            4,595,098      4,623,914
Bank premises and equipment, net                    15,013,025     15,214,519
Real estate owned                                      -               -
Other assets                                         4,096,304      4,015,814
                                                --------------   ------------
TOTAL ASSETS                                    $  739,109,287   $729,736,156
                                                ==============   ============

                       LIABILITIES AND STOCKHOLDERS' EQUITY



Deposits                                        $  603,742,928   $595,913,667
Accounts payable and other liabilities               7,606,946      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          452,777      1,609,924
Income tax currently payable                         1,347,638        181,562
Net deferred income tax liabilities                  2,691,108      2,721,497
Deferred compensation                                1,471,251      1,470,451
                                                --------------   ------------
     Total liabilities                             640,250,648    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; 8,844,186 and
   8,861,238 issued and outstanding,
   respectively                                      8,844,186      8,861,238
  Additional paid-in capital                        62,252,612     62,380,016
  Retained earnings                                 24,198,745     23,046,017
  Unearned ESOP shares                                (360,517)      (360,517)
  Accumulated other comprehensive income             3,923,613      3,982,603
                                                --------------   ------------
     Total stockholders' equity                     98,858,639     97,909,357
                                                --------------   ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY      $  739,109,287   $729,736,156
                                                ==============   ============

                      (See Notes to Financial Statements)

4

<PAGE>




                           HORIZON FINANCIAL CORP.
                 CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)

                                                      3  months ended
                                                           June 30,

                                                    2001            2000
                                               --------------   -------------
INTEREST INCOME
  Interest on loans                            $  12,452,158    $  11,847,959
  Investment and mortgage-backed securities        1,574,247        1,637,766
                                               --------------   -------------
     Total interest income                        14,026,405       13,485,725
                                               --------------   -------------

INTEREST EXPENSE
  Interest on deposits                             7,391,990        6,814,954
  Interest on other borrowings                       360,892          753,068
                                               --------------   -------------
     Total interest expense                        7,752,882        7,568,022
                                               --------------   -------------
     Net interest income                           6,273,523        5,917,703

PROVISION FOR LOAN LOSSES                            160,000           95,000
                                               --------------   -------------
     Net interest income after provision
      for loan losses                              6,113,523        5,822,703
                                               --------------   -------------

NONINTEREST INCOME
  Service fees                                       592,470          508,569
  Other                                              148,225          212,773
  Net gain (loss) on sales of loans -
   servicing released                                302,656            -
  Net gain (loss) on sales of loans -
   servicing retained                               (302,692)         (38,997)
  Net gain on sale of investment securities          118,935           33,193
                                               --------------   -------------
     Total noninterest income                        859,594          715,538
                                               --------------   -------------

NONINTEREST EXPENSE
  Compensation and employee benefits               1,878,811        1,816,807
  Building occupancy                                 576,917          598,278
  Other expenses                                     662,994          573,608
  Data processing                                    234,649          221,374
  Advertising                                        174,585          154,761
                                               --------------   -------------
     Total noninterest expense                     3,527,956        3,364,828
                                               --------------   -------------

INCOME BEFORE PROVISION FOR INCOME TAX             3,445,161        3,173,413

PROVISION FOR INCOME TAX                           1,166,076        1,049,546
                                               --------------   -------------
NET INCOME                                     $   2,279,085    $   2,123,867
                                               =============    =============
BASIC EARNINGS PER SHARE                           $  .26           $  .22*
                                                   ======           =======
DILUTED EARNINGS PER SHARE                         $  .25           $  .22*
                                                   ======           =======
*Restated for 15% stock dividend declared April 24, 2001

                    (See Notes to Financial Statements)

5

<PAGE>


                                   HORIZON FINANCIAL CORP.
                          Consolidated Statements of Stockholder's Equity
                             3 Months Ended June 30, 2001 and 2000
                                        (unaudited)
<TABLE>
                             Common Stock
                         ---------------------       Additional                    Unearned       Other
                         Number of                    Paid-In       Retained         ESOP      Comprehensive
                           Shares       At Par        Capital       Earnings        Shares        Income
                         ----------    --------     ------------  ------------    ----------  -------------

                      <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
Comprehensive income
  Net income                      -             -             -      2,123,867             -              -
  Other comprehensive income
   Change in unrealized
    gains on available-
    for-sale securities,
    net of taxes of $(161,866)    -             -             -              -             -       (314,209)

   Total other comprehensive
    income                        -             -             -              -             -              -

  Comprehensive income            -             -             -              -             -              -
Unearned ESOP shares              -             -             -              -             -              -
Cash dividends on common stock
 at $.12 per share                -             -             -       (993,407)            -              -
Stock options exercised      16,420        16,420        98,504              -             -              -
Treasury stock purchased          -             -              -             -             -              -
                          ---------   -----------   -----------   ------------   ------------   -----------

BALANCE, June 30, 2000    8,658,991   $ 8,658,991   $57,470,528    $34,455,528   $  (432,621)   $   404,550
                          =========   ===========   ===========   ============   ============   ===========

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                      -             -             -      2,279,085             -              -
  Other comprehensive income
   Change in unrealized
    gains on available-
    for-sale securities,
    net of taxes of $(30,389)     -             -             -              -             -        (58,990)

   Total other comprehensive
     income                       -             -             -              -             -              -

  Comprehensive income            -             -             -              -             -              -

Cash dividends on common
 stock at $.12 per share          -             -             -     (1,061,302)            -              -
15% stock dividend adjustment   424           424         4,251         (4,675)
Stock options exercised       4,724         4,724        32,891              -             -              -
Treasury stock purchased          -             -             -              -             -              -
Retirement of treasury
 stock                      (22,200)      (22,200)     (164,546)       (60,380)            -              -
                          ---------   -----------   -----------   ------------   ------------   -----------
BALANCE, June 30, 2001    8,844,186    $ 8,844,186  $62,252,612    $24,198,745   $  (360,517)   $ 3,923,613
                          =========   ===========   ===========   ============   ============   ===========

</TABLE>

<TABLE>

                                Treasury                                 Total
                                 Stock          Shareholders'        Comprehensive
                                at Cost            Equity                Income
                              -----------      ---------------      ---------------

                           <c>              <c>                  <c>
Comprehensive income
  Net income                           -          2,123,867         $   2,123,867
  Other comprehensive income
   Change in unrealized
    gains on available-
    for-sale securities,
    net of taxes of $(161,866)         -           (314,209)             (314,209)
                                                                    -------------
   Total other comprehensive
    income                             -                  -              (314,209)
                                                                    -------------
  Comprehensive income                 -                  -         $   1,809,658
                                                                    =============
Unearned ESOP shares                   -                  -
Cash dividends on common stock
 at $.12 per share                     -           (993,407)
Stock options exercised                -            114,924
Treasury stock purchased        (130,344)          (130,344)
                            ------------       ------------

BALANCE, June 30, 2000      $ (3,821,154)      $ 96,735,822
                            ============       ============

BALANCE, March 31, 2001     $          -       $ 97,909,357
Comprehensive income
  Net income                           -          2,279,085         $   2,279,085
Change in unrealized
    gains on available-
    for-sale securities,
    net of taxes of $(30,389)          -            (58,990)              (58,990)
                                                                    -------------

Total other comprehensive
     income                            -                  -               (58,990)
                                                                    -------------

Comprehensive income                   -                  -         $   2,220,095
                                                                    =============


Cash dividends on common
 stock at $.12 per share               -         (1,061,302)
15% stock dividend adjustment


Stock options exercised                -             37,615
Treasury stock purchased        (247,126)          (247,126)
Retirement of treasury
 stock                           247,126                  -
                            ------------       ------------

BALANCE, June 30, 2001      $          -       $ 98,858,639
                            ============       ============

                                                   (See Notes to Financial Statements)

6

</TABLE>
<PAGE>


                                HORIZON FINANCIAL CORP.
                        CONSOLIDATED STATEMENT OF CASH FLOWS

                                                      3  months ended
                                                           June 30,

                                                    2001            2000
                                               --------------   -------------

CASH FLOWS FROM OPERATING ACTIVITIES

  Net income                                   $   2,279,085    $   2,123,867
Adjustments to reconcile net income to net
cash provided by operating activities
  Depreciation and amortization                      459,623          275,139
  Stock dividends - Federal Home Loan Bank stock     (93,400)         (84,900)
  Provision for loan losses                          160,000           95,000
Changes in assets and liabilities
  Interest and dividends receivable                   28,816         (200,074)
  Interest payable                                   (27,879)         200,415
  Net change in loans held for sale                 (650,415)          -
  Federal income tax (receivable) payable          1,166,076        1,150,472
  Other assets                                       (80,490)        (177,720)
  Other liabilities                                 (467,801)      (4,807,283)
                                               --------------   -------------
    Net cash flows from operating activities       2,773,615       (1,425,084)
                                               --------------   -------------

CASH FLOWS FROM INVESTING ACTIVITIES

  Investment in interest-bearing deposits, net   (45,555,000)       1,342,900
  Purchases of investment securities -
   available-for-sale                             (1,000,000)      (3,855,050)
  Proceeds from sales and maturities of
   investment securities - available-for-sale        468,218        1,990,007
  Purchases of mortgage-backed securities -
   available-for-sale                                 -               384,988
  Proceeds from maturities of mortgage-backed
   securities - available-for-sale                19,371,605        6,106,817
  Proceeds from maturities of mortgage-backed
   securities - held-to-maturity                     467,057          434,080
  Purchase of Federal Home Loan Bank stock            -              (217,900)
  Net change in loans                             17,507,000      (19,434,943)
  Purchases of bank premises and equipment           (88,590)         (56,102)
  Net change in other real estate owned               -               323,468
                                               --------------   -------------
    Net cash flows from investing activities      (8,829,710)     (12,981,735)
                                               --------------   -------------

CASH FLOWS FROM FINANCING ACTIVITIES
  Net change in deposits                           7,829,261        5,132,631
  Advances from securities sold under
   agreements to repurchase                           -            20,000,000
  Repayments of securities sold under
   agreements to repurchase                           -           (20,000,000)
  Advances from other borrowed funds                  -            11,850,000
  Repayments of other borrowed funds                  -            (6,853,000)
  Common stock issued, net                          (144,456)         114,924
  Cash dividends paid                               (924,650)        (993,407)
  Treasury stock purchased                          (247,126)        (130,344)
                                               --------------   -------------
  Net cash flows from financing activities         6,513,029        9,120,804
                                               --------------   -------------
NET CHANGE IN CASH AND CASH EQUIVALENTS              456,934       (5,286,015)

CASH AND CASH EQUIVALENTS, beginning of period    11,947,606       16,043,055
                                               --------------   -------------
CASH AND CASH EQUIVALENTS, end of period       $  12,404,540    $  10,757,040
                                               ==============   =============

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
  Cash paid during the period for interest     $    7,780,761   $   7,367,607
                                               ==============   =============
  Cash paid during the period for income tax   $       -        $      -
                                               ==============   =============

                     (See Notes to Financial Statements)
7

<PAGE>




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


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

The consolidated financial statements for the three months ended June 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 generally 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 June 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 June 30, 2001 and 2000 are
calculated on the basis of 8,857,270 and 9,521,305 weighted average shares
outstanding. Diluted earnings per share for the three months ended June 30,
2001 and 2000 are calculated on the basis of 8,950,230 and 9,552,563 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.

8

<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 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.  At June 30, 2001, the Corporation had total
assets of $739.1 million, total deposits of $603.7 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 may provide

9

<PAGE>




additional growth opportunities.  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
quarter ended June 30, 2001, the Corporation repurchased 22,200 shares of its
Common Stock, compared to the repurchase of 15,640 shares, as restated under
the previous plan, during the prior year's quarter.

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 savings
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 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.

10

<PAGE>




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 June 30, 2001,
compared to March 31, 2001.  Total consolidated assets for the Corporation as
of June 30, 2001, were $739,109,287, a slight increase from the March 31,
2001, level of $729,736,156.  Total liabilities also increased slightly to
$640,250,648 at June 30, 2001, from $631,826,799 at March 31, 2001.
Stockholders' equity showed a small increase to $98,858,639 at June 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 June 30, 2001, the Bank had liquid assets
(cash and marketable securities with maturities of one year or less) with a
book value of $80,752,882.

As of June 30, 2001, the total book value of investments and mortgage-backed
securities was $50,436,586 compared to a market value of  $56,559,113,
resulting in an unrealized gain of $6,122,527.  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 June 30, 2001 was $98,858,639 or 13.38% 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 June 30, 2001 was 21.18%, compared to March 31, 2001 of
21.21%.  These figures are well above the well-capitalized minimum of 10%
required by the FDIC.

11

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



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

Net interest income for the three months ended June 30, 2001, increased 6.01%
to $6,273,523 from $5,917,703 in the same time period of the previous year.
Interest on loans for the quarter ended June 30, 2001, increased 5.10% to
$12,452,158, from $11,847,959.  This increase was due in part to an overall
effort to shift the concentration of loans receivable from primarily
residential first mortgages to commercial loans, along with an increased
impact from loan sales during the quarter.  When loans are sold or paid off,
the remaining fees associated with these loans flow into interest income.
Therefore, significant refinance or loan sales activity typically results in
increased deferred fee income recognition.  Additional details regarding loan
sale activity are included below, in the discussion on Non-Interest Income.
Interest and dividends on investments and mortgage-backed securities decreased
3.88% to $1,574,247, from $1,637,766 for the comparable quarter a year ago.
This decrease is due in part to the sale of selected long-term fixed rate
mortgage-backed securities during the quarter, which shifted a portion of the
investment portfolio into liquid, short-term assets with less interest rate
risk.  Total interest income increased 4.01% to $14,026,405 from $13,485,725
due to the reasons stated above.

Total interest paid on deposits increased 8.47% to $7,391,990 from $6,814,954.
This increase in interest expense is due to an overall growth in deposits.
Interest on borrowings decreased to $360,892 during the quarter, compared to
$753,068 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 in the prior year period.  During the quarter ended
June 30, 2001, the Bank continued to carry wholesale borrowings in order to
further leverage its balance sheet and better manage its interest rate risk
profile.

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

The provision for losses on loans for the three months ended June 30, 2001,
increased 68.42% to $160,000 from $95,000 in the same time period of the
previous year.  The increase is primarily attributable to the growing
percentage of commercial and consumer loans on the Bank's balance sheet.  At
June 30, 2001, the loan loss reserve balance was $5,129,059.  This represents
 .88% of loans receivable, compared to .81% as of June 30, 2000.  The Bank's
management considers this to be an adequate level of reserves at this time.

As of June 30, 2001, the Bank had $1,016,889 in loans over 90 days delinquent
compared to $934,005 at June 30, 2000.  This is due in part to the changing
mix of loans on the Bank's balance sheet, which now includes more commercial,
consumer, VISA and other unsecured loans.

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

Non interest income for the three months ended June 30, 2001, increased 20.13%
to $859,594 from $715,538 for the same time period a year ago.  Service fee
income increased 16.50% to $592,470 from $508,569.  The net gain/loss on the
sale of loans servicing released showed a gain of $302,656 in the

12

<PAGE>




 current quarter, compared to $-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.  The
quarter ended June 30, 2001 marked the completion of the first full quarter of
operation under this new strategy.   Separately, 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 $302,692 during the quarter, compared to a loss of $38,997 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,
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
reflects a loss, due to the pricing of the loans at the time of the sale.  For
example, the deferred fees recognized as a result of these servicing retained
loan sales totaled $497,192 during the quarter ended June 30, 2001, well in
excess of the $302,692 loss shown in the non-interest income category.  The
net gain/loss on sales of investment securities increased to $118,935 for the
quarter ended June 30, 2001 from $33,193 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
30.34% to $148,225 from $212,773.  The higher level of income in the prior
year was due primarily to a $50,000 reversal of a Real Estate Owned reserve,
which was determined to be unnecessary after the sale of the property.

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

Non interest expense for the three months ended June 30, 2001, increased 4.85%
to $3,527,956 from $3,364,828.  Compensation and employee benefits increased
3.41% for the quarter ended June 30, 2001, to $1,878,811 from $1,816,807.
This is due primarily to the overall growth in employment at the Bank from the
prior year period.  Building occupancy for the quarter ended June 30, 2001
decreased 3.57% to $576,917 from $598,278.  Contributing to this decrease was
the closure of the former Bank of Bellingham Fountain Branch in Bellingham,
Washington.  Data processing expenses increased 6.00% to $234,649 from
$221,374.  Advertising expenses for the quarter ended June 30, 2001 increased
12.81% to $174,585 from $154,761.  This increase is due primarily to the
Bank's additional marketing efforts to communicate its expanded commercial
product lines and services.  Other non-interest expenses increased 15.58% to
$662,994 from $573,608 due to the overall growth of the bank, and an increased
mortgage servicing portfolio that results in increased amortization of the
associated mortgage servicing asset.

13

<PAGE>




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

14

<PAGE>




                                    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:    August 13, 2001
                                           ------------------------

15

<PAGE>



                                  Exhibit 15

                       Awareness Letter from Accountants

<PAGE>



114 W. Magnolia Street Suite 301
Bellingham, Washington 98225-4318
(360) 676-1920

July 16, 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 July 16, 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
        Moss Adams LLP

<PAGE>