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

                                   FORM 10-KSB

[X]      ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
         EXCHANGE ACT OF 1934

                     For the fiscal year ended June 30, 2001

                                       OR

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

             For the transition period from __________ to __________

                         Commission file number 0-24036



                     HORIZON FINANCIAL SERVICES CORPORATION
--------------------------------------------------------------------------------
                 (Name of small business issuer in its charter)


                Delaware                                      42-1419757
----------------------------------------------        --------------------------
(State or other jurisdiction of incorporation              (I.R.S. Employer
 or organization)                                           Identification No.)

301 First Avenue East, Oskaloosa, Iowa                52577-0008
---------------------------------------------        ------------
(Address of principal executive offices)              (Zip Code)


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

           Securities Registered Pursuant to Section 12(b) of the Act:

                                      None
                                      ----

           Securities Registered Pursuant to Section 12(g) of the Act:
                     Common Stock, par value $0.01 per share
                     ---------------------------------------
                                (Title of class)

         Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the past 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 [   ].

         Check if there is no disclosure of delinquent filers in response to
Item 405 of Regulation S-B contained herein, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB. [ X ]

    State the issuer's revenues for its most recent fiscal year: $7,171,940.

         The aggregate market value of the voting stock held by non-affiliates
of the Registrant, computed by reference to the average of the closing bid and
asked price of such stock as reported on the Nasdaq System as of September 10,
2001, was $5.97 million. (The exclusion from such amount of the market value of
the shares owned by any person shall not be deemed an admission by the
Registrant that such person is an affiliate of the Registrant.)
         As of September 10, 2001, there were issued and outstanding 751,462
shares of the Registrant's Common Stock.

                       DOCUMENTS INCORPORATED BY REFERENCE

         Part II of Form 10-KSB - Annual Report to Stockholders for the fiscal
         year ended June 30, 2001. Part III of Form 10-KSB - Proxy Statement for
         the Annual Meeting of Stockholders to be held in October 2001.

        Transitional Small Business Disclosure Format:  YES [   ] ;  NO [ X ].



<PAGE>



                                     PART I

Item 1.  Description of Business

General

        The Company. Horizon Financial Services Corporation (the "Company"), a
Delaware corporation, was formed in March 1994 to act as the holding company for
Horizon Federal Savings Bank ("Horizon Federal" or the "Bank") upon the Bank's
conversion from the mutual to the stock form (the "Conversion"), which occurred
on June 28, 1994. All references to the Company, unless otherwise indicated, at
or before June 28, 1994 are to the Bank and its subsidiary on a consolidated
basis. The Company's common stock trades over-the-counter on the Nasdaq Bulletin
Board under the Symbol "HZFS".

        At June 30, 2001, the Company had $89.4 million of assets and
stockholders' equity of $8.4 million (or 9.4% of total assets).

        The executive offices of the Company are located at 301 First Avenue
East, Oskaloosa, Iowa 52577, and its telephone number at that address is (641)
673-8328.

        Horizon Federal. Horizon Federal, a wholly owned subsidiary of the
Company, is a federally chartered stock savings bank headquartered in Oskaloosa,
Iowa. Its deposits are insured up to applicable limits, by the Federal Deposit
Insurance Corporation (the "FDIC"), which is backed by the full faith and credit
of the United States. Horizon Federal's primary market area covers Mahaska
County, that portion of Marion County in and around Knoxville, Iowa and to a
lesser extent, Wapello County, Iowa. The Bank services its market area through
its three full service offices, two of which are located in Oskaloosa, Iowa and
one which is located in Knoxville, Iowa.

        The principal business of the Bank consists of attracting deposits from
the general public and using such deposits, together with borrowings and other
funds, primarily to originate one-to-four family residential mortgage loans. To
a lesser extent, the Bank also originates consumer loans, commercial business
loans, multi-family and commercial real estate loans and residential
construction loans. The Bank also invests in mortgage-backed and related
securities, as well as investment securities. See "-- Originations of Loans and
Mortgage-Backed Securities." At June 30, 2001, substantially all of the Bank's
real estate mortgage loans (excluding mortgage-backed securities) were secured
by properties located in Iowa.

        The Bank's revenues are derived principally from interest on mortgage
loans and securities, service fee income and dividends on Federal Home Loan Bank
("FHLB") stock. The Bank does not originate loans to fund leveraged buyouts and
has no loans to non-United States corporations or foreign governments.

        The Bank currently offers a variety of deposit accounts having a wide
range of interest rates and terms. The Bank's deposits include commercial
demand, savings, checking, money market and certificate accounts. The Bank only
solicits deposits in its primary market area and does not accept brokered
deposits.


                                        1

<PAGE>



        Horizon Federal's operations are materially affected by general economic
conditions, the monetary and fiscal policies of the federal government and the
policies of the various regulatory authorities, including the Office of Thrift
Supervision ("OTS") and the Board of Governors of the Federal Reserve System
("Federal Reserve Board").

        During fiscal 1995, the Company entered into a joint venture low income
apartment housing project to take advantage of certain tax benefits available
under Section 42 of the Internal Revenue Code of 1986, as amended. The apartment
housing project is composed of 62 units and is located in Des Moines, Iowa. At
June 30, 2001, the apartment complex was 100% leased. At June 30, 2001, the
Company's equity investment in the project was $144,000, representing a 16.5%
limited partnership interest in the project. The Company will receive tax
credits of approximately $42,000 per year through 2005.

Forward-Looking Statements

        When used in this Annual Report on Form 10-KSB or future filings by the
Company with the Securities and Exchange Commission, in the Company's press
releases or other public or shareholder communications, or in oral statements
made with the approval of an authorized executive officer, the words or phrases
"will likely result", "are expected to", "will continue", "is anticipated",
"estimate", "project", "believe" or similar expressions are intended to identify
"forward-looking statements" within the meaning of the Private Securities
Litigation Reform Act of 1995. The Company wishes to caution readers not to
place undue reliance on any such forward-looking statements, which speak only as
of the date made, and to advise readers that various factors--including regional
and national economic conditions, changes in levels of market interest rates,
credit risks of lending activities, and competitive and regulatory
factors--could affect the Company's financial performance and could cause the
Company's actual results for future periods to differ materially from those
anticipated or projected.

        The Company does not undertake--and specifically disclaims any
obligation--to publicly release the result of any revisions which may be made to
any forward-looking statements to reflect the occurrence of anticipated or
unanticipated events or circumstances after the date of such statements.

Market Area

        Horizon Federal primarily serves Mahaska County and that portion of
Marion County in and around Knoxville, Iowa. The Bank has three offices, two of
which are located in Oskaloosa, Iowa and one which is located in Knoxville,
Iowa, approximately 25 miles west of Oskaloosa. The Bank competes in loan
originations and in deposit gathering activities with the ten financial
institutions and three credit unions serving its primary market area. See " --
Competition." The Bank estimates its share of the savings market in its primary
market area to be approximately 15%.

        Oskaloosa, Iowa is located in Mahaska County, approximately 60 miles
southeast of Des Moines, Iowa. Mahaska County has a population of approximately
22,000 people. Oskaloosa, with a current population of approximately 10,500
persons, is the county seat and the largest city in Mahaska County. Oskaloosa
has primarily an agricultural economy and, to a lesser extent, light industrial
and retail economies. Its light industrial economy, however, is mainly
agricultural

                                        2

<PAGE>



support. Major employers in the area include the Clow Valve Company, the Pella
Corporation, Cargill, Vermeer Manuftacturing, the V.A. Medical Center, 3-M
Company, William Penn University and the Mahaska County Hospital.

        Local economic conditions in the Bank's market are declining. Currently
farm prices for both livestock and grain are better than at this time last year,
but this is more than offset by factory layoffs and some decline in retail
business. In addition, the Bank is experiencing difficulty, as are most
businesses in the area, in hiring and retaining experienced personnel as labor
shortages in the area continue to exist. Management believes that many of these
individuals are seeking employment in major cities where economic conditions are
stronger.

        These economic conditions and strong competition may affect the
financial condition and results of operations of the Company and the Bank. In
the event current economic and market conditions persist or worsen, loan demand
and existing loans may be affected. No assurances can be given that the Bank
will be able to maintain or increase its loan portfolio, which could adversely
affect the financial condition and results of operations of the Company and the
Bank.

Lending Activities of the Bank

        General. Historically, the Bank originated fixed-rate one-to-four family
mortgage loans. Since the early 1980s, however, the Bank has emphasized, subject
to market conditions, the origination and holding in portfolio of short- and
intermediate-term (one, three and five year) loans that convert to annual
adjustable-rate mortgage ("ARM") loans after their initial period. Management's
strategy has been to increase the percentage of assets in its portfolio with
more frequent repricing characteristics or shorter maturities. During periods of
low demand for one-to- four family loans, the Bank may seek to invest in
mortgage-backed and related securities. The Bank also originates for its loan
portfolio fixed-rate, first lien mortgages for certain budgeted amounts. The
Bank also originates and sells in the secondary market 15 year and 30 year
fixed-rate loans.

        The Bank primarily focuses its lending activities on the origination of
loans secured by first mortgages on owner-occupied, one-to-four family
residences. To a lesser extent, the Bank also originates consumer loans,
commercial business loans, commercial and multi-family real estate loans and
residential construction loans. See "- Originations of Loans and Mortgage-Backed
Securities." At June 30, 2001, the Bank's net loan portfolio totaled $65.4
million.

        Several loan officers of the Bank and all members of the Board of
Directors serve as Loan Committee members on a rotating basis. At any given
time, the approval of at least one outside director and two other members of the
Loan Committee is required to approve real estate loans over $240,000. Loan
Committee approval is currently required for unsecured and secured consumer
loans of more than $100,000 and $120,000, respectively, and unsecured and
secured commercial business loans of more than $50,000 and $100,000,
respectively. The Board of Directors must approve all commercial business loans
with a balance exceeding $240,000.

        The aggregate amount of loans that the Bank is permitted to make under
applicable federal regulations to any one borrower, including related entities,
or the aggregate amount that the Bank can invest in any one real estate project
is, with certain exceptions, generally the greater of 15% of

                                        3

<PAGE>



unimpaired capital and surplus or $500,000. See "Regulation -- Federal
Regulation of Savings Banks." At June 30, 2001, the maximum amount which the
Bank could lend to any one borrower and the borrower's related entities under
the applicable federal regulations was approximately $981,000, however, at June
30, 2001 the Board of Directors of the Bank had a self-imposed $800,000 general
limitation.

        The Bank reserves the right to change or discontinue lending programs to
respond to regulatory or competitive factors.

                                        4

<PAGE>



        Portfolio Composition. The following table presents the composition of
the Bank's loan portfolio in dollar amounts and in percentages (before
deductions for loans in process, deferred fees and discounts and allowances for
losses) as of the dates indicated.


<TABLE>
<CAPTION>
                                                                                  At June 30,
                                       --------------------------------------------------------------------------------------------
                                                      2001                            2000                           1999
                                       --------------------------------------------------------------------------------------------
                                              Amount         Percent           Amount         Percent         Amount       Percent
                                       --------------------------------------------------------------------------------------------
                                                                            (Dollars in Thousands)
<S>                                           <C>             <C>              <C>              <C>           <C>             <C>
 Real Estate:
------------
 One-to-four family....................       $41,515          63.0%           $39,704          63.2%         $35,397         62.6 %
 Commercial real estate................         6,703          10.1              6,636          10.6            5,428          9.6
 Multi-family..........................         1,458           2.2              1,234           1.9            1,339          2.4
 Residential construction .............         1,381           2.1              1,245           2.0              152           .3
                                              -------         -----            -------         -----          -------        -----
     Total real estate loans...........        51,057          77.4%            48,819          77.7           42,316         74.9
                                              -------         -----            -------         -----          -------        -----

Other Loans:
-----------
 Consumer Loans:
  Automobile...........................         3,482           5.3              3,906           6.2            3,990          7.1
  Home improvement.....................           361            .5                778           1.3            1,047          1.8
  Deposit account......................           198            .3                123            .2              149           .3
  Other................................         2,946           4.5              2,646           4.2            2,099          3.7
                                              -------         -----            -------         -----          -------        -----
     Total consumer loans..............         6,987          10.6              7,453          11.9            7,285         12.9
 Commercial business loans............          7,856          12.0              6,548          10.4            6,872         12.2
                                              -------         -----            -------         -----          -------        -----
     Total other loans.................        14,843          22.6             14,001          22.3           14,157         25.1
                                              -------         -----            -------         -----          -------        -----
     Total loans receivable, gross.....        65,900         100.0%           $62,820         100.0%         $56,473        100.0%
                                                              =====                            =====                         =====

Less:
----
 Loans in process......................           ---                              ---                            ---
 Deferred fees and discounts...........            85                               24                             64
 Allowance for losses..................           369                              379                            343
                                              -------                          -------                        -------
 Total loans receivable, net...........       $65,446                          $62,417                        $56,066
                                              =======                          =======                        =======
</TABLE>


                                                         5

<PAGE>



         The following table shows the composition of the Bank's loan portfolio
by fixed and adjustable rate at the dates indicated.

<TABLE>
<CAPTION>
                                                                                     At June 30,
                                               -------------------------------------------------------------------------------------
                                                         2001                         2000                         1999
                                               -------------------------------------------------------------------------------------
                                                   Amount     Percent           Amount      Percent          Amount     Percent
                                               -------------------------------------------------------------------------------------
                                                                             (Dollars in Thousands)
<S>                                              <C>           <C>            <C>            <C>            <C>           <C>
Fixed Rate Loans:
----------------
 Real estate:
  One-to-four family..........................   $11,088       16.8%          $  9,662       15.4%          $  6,875      12.1%
  Commercial real estate......................     2,760        4.2              2,539        4.0              1,058       1.9
  Multi-family................................       897        1.4                653        1.0                680       1.2
  Residential construction....................     1,244        1.9              1,165        1.9                152        .3
                                                 -------      -----           --------      -----           --------     -----
     Total real estate loans..................    15,989       24.3             14,019       22.3              8,765      15.5

  Consumer....................................     6,927       10.5              7,389       11.8              7,201      12.7
  Commercial business.........................     7,311       11.1              6,406       10.2              6,536      11.6
                                                 -------      -----           --------      -----           --------     -----
     Total fixed-rate loans...................    30,227       45.9             27,814       44.3             22,502      39.8
                                                 -------      -----           --------      -----           --------     -----

Adjustable Rate Loans:
---------------------
 Real estate:
  One-to-four family..........................    30,427       46.2             30,041       47.8             28,522      50.5
  Commercial real estate......................     3,943        6.0              4,097        6.6              4,370       7.7
  Multi-family................................       561         .8                582         .9                659       1.2
  Residential construction....................       137         .2                 80         .1                ---       ---
                                                 -------      -----           --------      -----           --------     -----
     Total adjustable rate real estate loans..    35,068       53.2             34,800       55.4             33,551      59.4

  Consumer....................................        60         .1                 65         .1                 84        .2
  Commercial business.........................       545         .8                141         .2                336        .6
                                                 -------      -----           --------      -----           --------     -----
     Total adjustable rate loans..............    35,673       54.1             35,006       55.7             33,971      60.2
                                                 -------      -----           --------      -----           --------     -----
     Total loans, receivable, gross...........    65,900      100.0%            62,820      100.0%            56,473     100.0%
                                                              =====                         =====                        =====

Less:
----
 Loans in process.............................       ---                           ---                           ---
 Deferred fees and discounts..................        85                            24                            64
 Allowance for loan losses....................       369                           379                           343
                                                --------                    ----------                    ----------
     Total loans receivable, net..............   $65,446                       $62,417                       $56,066
                                                 =======                       =======                       =======
</TABLE>


                                                         6

<PAGE>



         The following table illustrates the interest rate sensitivity of the
Bank's loan portfolio at June 30, 2001. Mortgages which have adjustable or
renegotiable interest rates are shown as maturing in the period during which the
contract is due. The table does not reflect the effects of possible prepayments
or enforcement of due-on-sale clauses.

<TABLE>
<CAPTION>
                                                 Real Estate
                              ---------------------------------------------
                                                          Residential                              Commercial
                                   Mortgage (1)           Construction         Consumer             Business             Total
                              ---------------------   -------------------   ----------------    -----------------  ----------------
                                          Weighted              Weighted            Weighted            Weighted           Weighted
                                           Average               Average             Average             Average            Average
                                 Amount     Rate       Amount     Rate      Amount    Rate      Amount    Rate      Amount   Rate
                                -------   --------    --------  --------    ------    ----      ------    ----      ------   ----
                                                                       (Dollars in Thousands)
         Due During
        Years Ending
          June 30,
-----------------------------
<S>                             <C>         <C>       <C>        <C>        <C>       <C>      <C>        <C>       <C>       <C>
2002(2)......................   $16,227     7.84%     $1,381     7.59%      $1,609    9.39%    $2,927     9.21%     $22,144   8.12%
2003 to 2006.................    19,536     7.82          --       --        4,233    9.24      3,722     8.76       27,491   8.17
2007 and following...........    13,913     8.28          --       --        1,145    8.35      1,207     9.00       16,265   8.34
                                -------               ------                ------             ------               -------
   Total.....................   $49,676     7.96%     $1,381     7.59%      $6,987    9.13%    $7,856     8.96%     $65,900   8.20%
                                =======               ======                ======             ======               =======
</TABLE>



---------

(1)  Includes one-to-four family, multi-family and commercial real estate
     mortgage loans.
(2)  Includes demand loans and loans having no stated maturity.


                                        7

<PAGE>

         The total amount of loans due after June 30, 2002 which have
predetermined interest rates is $24.0 million, while the total amount of loans
due after such date which have floating or adjustable interest rates is $19.8
million.

         One-to-Four Family Residential Mortgage Lending. Residential loan
originations are generated by the Bank's marketing efforts (which include radio
ads, newspaper ads and direct mail), its present and walk-in customers, and
referrals from real estate brokers and builders. The Bank focuses its lending
efforts primarily on the origination of loans secured by first mortgages on
owner-occupied, single-family residences in its market area. See "--
Originations of Loan and Mortgage-Backed Securities."

         The Bank currently originates ARM loans and fixed-rate loans for
retention in the Bank's loan portfolio. During the year ended June 30, 2001, the
Bank originated $6.2 million of adjustable- rate, one-to-four family real estate
loans and $11.5 million of fixed-rate one-to-four family loans (including $2.3
million of residential construction loans). The Bank's one-to-four family
residential mortgage originations are primarily in its market area.

         The Bank currently originates adjustable-rate, one-to-four family
residential mortgage loans with a maximum term of 30 years. Fixed-rate loans
originated for its portfolio are generally originated up to a maximum term of 30
years. Fixed-rate mortgage loans originated by the Bank in excess of 15 years
are generally sold in the secondary market. The Bank originated $5.5 million of
fixed rate loans for sale during fiscal 2001.

         One-to-four family loan originations are generally made in amounts of
up to 95% of the appraised value or selling price of the security property,
whichever is less. For loans originated with loan-to-value ratios of greater
than 80%, the Bank typically requires private mortgage insurance to reduce the
Bank's exposure to 80% of the appraised value or selling price of the security
property.

         The Bank currently offers one-year, three-year and five-year balloon
loans that convert into ARM loans with annual adjustment after the initial term.
Rates are determined in accordance with market and competitive factors. The
Bank's ARM products generally carry interest rates which, pursuant to the terms
of the note, may be reset to a stated margin over the index utilized by the
Bank, which is currently the National Average Contract Rate for Previously Owned
Homes. The adjustable-rate loans currently originated by the Bank provide for a
maximum 2% annual cap, and a maximum 6% lifetime cap on the interest rate over
the rate in effect on the date of origination. The annual and lifetime caps on
interest rate increases reduce the extent to which these loans can help protect
the Bank against interest rate risk and may cause these loans not to be as
sensitive as the Bank's cost of funds. The Bank's ARM loans are not convertible
into fixed-rate loans. All of the Bank's one-to-four family loans are not
assumable, do not contain prepayment penalties and do not produce negative
amortization. Approximately 35.2% of the loans secured by one-to-four family
real estate originated by the Bank during fiscal 2001 were originated with
adjustable rates of interest. See "--Originations of Loans and Mortgage-Backed
Securities."

         At June 30, 2001, the Bank was not servicing any loans other than loans
it originated. As of June 30, 2001, the Bank's residential ARM loan portfolio
totaled $30.4 million, or 46.2% of the Bank's gross loan portfolio as compared
to the residential fixed-rate, mortgage loan portfolio which

                                        8

<PAGE>



totaled $11.1 million, or 16.8% of the Bank's gross loan portfolio. ARM loans
decrease the risk associated with changes in interest rates but involve other
risks, primarily because as interest rates rise, the payment by the borrower may
rise to the extent permitted by the terms of the loan, thereby increasing the
potential for default. At the same time, the market value of the underlying
property may be adversely affected by higher interest rates increasing potential
losses from defaults.

         In underwriting residential real estate loans, the Bank evaluates both
the borrower's ability to make monthly payments, employment history, credit
history and the value of the property securing the loan. Potential borrowers are
qualified for fixed-rate loans based upon the stated rate of the loan. Borrowers
on adjustable-rate loans are currently qualified at a rate then in effect for
five-year loans on one-to-four family residential property. Typically, the
spread between a one-year ARM and a five-year ARM has been 100 basis points or
more. The Bank generally requires that for mortgage loan applications an
appraisal of the security property be performed by an independent fee appraiser
approved by the Bank. In connection with origination of residential real estate
loans, the Bank generally requires an opinion from an attorney regarding the
title to the property, and fire and casualty insurance in an amount not less
than the amount of the loan.

         To supplement loan demand in the Bank's primary market area the Bank
purchases mortgage-backed and related securities. The Bank purchased $4.6
million, $4.0 million and $4.8 million of mortgage-backed and related securities
during fiscal 2001, 2000 and 1999, respectively.
See "-- Originations of Loans and Mortgage-Backed Securities."

         Residential Construction Lending. The Bank makes construction loans to
individuals for the construction of their residences and, from time to time, to
established builders and developers for the construction of residential homes
without an underlying sales contract. At June 30, 2001, the Bank's construction
loan portfolio totaled $1.4 million, or 2.1% of its gross loan portfolio. As of
that date substantially all of these loans were in the Company's primary market
area.

         Construction loans to individuals for their residences are structured
to be converted to permanent loans at the end of the construction phase which
typically runs from six months to one year. These construction loans have rates
and terms which match one-to-four family loans then offered by the Bank, except
that during the construction phase the borrower pays interest only. The maximum
loan-to-value ratio of owner occupied single family construction loans is 95%.
Residential construction loans are generally underwritten pursuant to the same
guidelines used for originating permanent one-to-four family residential loans.
The application process for construction loans includes a submission to the Bank
of the plans and costs of the project to be constructed. These items are used as
a basis to determine the appraised value of the subject property. Loans are
based on the lesser of current appraised value or the cost of construction (land
plus building).

         The uncertainties inherent in estimating construction costs and the
market for a project upon completion makes it relatively difficult to evaluate
accurately the total loan funds required to complete a project, the related
loan-to-value ratios and the likelihood of ultimate success of the project.
Construction loans to borrowers other than owner-occupants also involve many of
the same risks discussed below regarding commercial real estate loans and tend
to be more sensitive to general economic conditions than many other types of
loans.


                                        9

<PAGE>



         Multi-Family/Commercial Real Estate Lending. Horizon Federal also makes
real estate loans secured by multi-family and non-residential properties.
Horizon Federal's multi-family residential loans are primarily secured by
apartment buildings located within the Bank's market area. The commercial real
estate loans originated by the Bank are primarily secured by office buildings,
churches, storage facilities, and other income-producing properties. At June 30,
2001, $1.5 million, or 2.2%, of the Bank's gross loan portfolio consisted of
multi-family loans and $6.7 million, or 10.2%, of the Bank's gross loan
portfolio consisted of commercial real estate loans.

         Commercial real estate lending entails significant additional risks as
compared with residential property lending. Commercial real estate loans
typically involve large loan balances to single borrowers or groups of related
borrowers. The payment experience on such loans is typically dependent on the
successful operation of the real estate project and as such may be subject to a
greater extent than residential loans to adverse conditions in the economy
generally. In dealing with these risk factors, the Bank generally limits itself
to a real estate market and/or borrowers with which it has knowledge and
experience.

         Appraisals on properties securing multi-family and commercial real
estate property loans originated by the Bank are performed by an independent fee
appraiser approved by the Bank at the time the loan is made. All appraisals on
multi-family and commercial real estate loans are reviewed by the Bank's
management. In addition, the Bank's underwriting procedures generally require
verification of the borrower's credit history, income and financial statements,
banking relationships and income projections for the property. In recent years,
personal guarantees have been obtained for all or most of the Bank's
multi-family and commercial real estate loans. While the Bank continues to
monitor multi-family and commercial real estate loans on a regular basis after
origination, updated appraisals are not normally obtained after closing unless
the Bank believes that there are questions regarding the status of the loan or
the value of the collateral.

         At June 30, 2001, the Bank had no multi-family or commercial real
estate loans to one borrower, or group of borrowers, which had an existing
carrying value in excess of $600,000. At such date the Bank had only four
commercial and multi-family real estate loans which exceeded $300,000 at June
30, 2001, all of which were performing in accordance with their repayment terms.

         Multi-family and commercial real estate lending affords the Bank an
opportunity to receive interest at rates higher than those generally available
to one- to four-family residential lending. Nevertheless, loans secured by such
properties are generally larger and involve a greater degree of risk than one-
to-four family residential mortgage loans. Because payments on loans secured by
multi-family and commercial real estate properties are often dependent on the
successful operation or management of the properties, repayment of such loans
may be subject to adverse conditions in the real estate market or the economy.
If the cash flow from the project is reduced (for example, if leases are not
obtained or renewed), the borrower's ability to repay the loan may be impaired.
Horizon Federal's current lending guidelines generally require, in the case of
loans secured by multi-family or commercial income-producing property, that the
property securing such loans generate net cash flow of 125% of debt service
after payment of all operating expenses, excluding depreciation, and a
loan-to-value ratio of no more than 75%.


                                       10

<PAGE>



         Consumer Lending. Management believes that offering consumer loan
products helps reinforce and expand the Bank's customer base. In addition,
because consumer loans generally have shorter terms to maturity and/or
adjustable rates and carry higher rates of interest than do residential mortgage
loans, they can be useful asset/liability management tools. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations --
Asset/Liability Management" in the Annual Report to Stockholders attached hereto
as Exhibit 13 (the "Annual Report"). The Bank currently originates substantially
all of its consumer loans in its primary market area. At June 30, 2001, the
Bank's consumer loans totaled $7.0 million, or 10.6% of the Bank's gross loan
portfolio.

         Horizon Federal offers a variety of consumer loans for various purposes
with terms up to 15 years. The majority of lending is for automobiles, home
improvement and other personal purposes. The Bank originates consumer loans on
both a direct and an indirect basis. Direct loans are made when the Bank extends
credit directly to the borrower. Indirect loans are obtained when the Bank
purchases loan contracts from retailers of goods or services which have extended
credit to their customers. Horizon Federal began its indirect lending program in
January 1993 with selected automobile dealers located in the Bank's lending
area. At June 30, 2001, the outstanding balances on automobile loans and home
improvement totaled $3.5 million and $360,000, or 5.3% and .5% of the Bank's
gross consumer loan portfolio, respectively.

         In addition, Horizon Federal commenced offering Visa and MasterCard
credit cards in April 1994. Both types of lending generally present more credit
risk to the Bank than one-to-four family residential lending. At June 30, 2001,
the Bank had $39,000 of credit card loans outstanding and $267,000 of unused
credit available under its credit card program.

         The underwriting standards employed by the Bank for consumer loans
include a determination of the applicant's payment history on other debts and an
assessment of the ability to meet existing obligations and payments on the
proposed loan. Although creditworthiness of the applicant is a primary
consideration, the underwriting process also includes a comparison of the value
of the security, if any, in relation to the proposed loan amount.

         Consumer loans may entail greater risk than do residential mortgage
loans, particularly in the case of consumer loans which are unsecured, or are
secured by rapidly depreciable assets such as automobiles. In such cases, any
repossessed collateral for a defaulted consumer loan may not provide an adequate
source of repayment of the outstanding loan balance as a result of the greater
likelihood of damage, loss or depreciation. In addition, consumer loan
collections are dependent on the borrower's continuing financial stability and
thus are more likely to be affected by adverse personal circumstances.
Furthermore, the application of various federal and state laws, including
bankruptcy and insolvency laws, may limit the amount which can be recovered on
such loans. At June 30, 2001, non-performing consumer loans totaled $253,000, or
3.6% of total consumer loans and .4% of the Bank's gross loan portfolio. See
"Asset Quality - Non-Performing Assets."

         Commercial Business Lending. The Bank also originates commercial
business loans. The Bank offers commercial business loans to service existing
customers, to consolidate its banking relationships with these customers, and to
further its asset/liability management goals. Most of the Bank's commercial
business loans have been extended to finance local businesses and include short-
term loans to finance machinery and equipment purchases, inventory and accounts
receivable.

                                       11

<PAGE>



Commercial loans also involve the extension of revolving credit for a
combination of equipment acquisitions and working capital in expanding
companies. At June 30, 2001, commercial business loans totaled $7.9 million, or
12.0% of the Bank's gross loan portfolio.

         The maximum term for loans extended on machinery and equipment is based
on the projected useful life of such machinery and equipment. Generally, the
maximum term on non- mortgage lines of credit is one year. The loan-to-value
ratio on such loans may not exceed 75% of the value of the collateral securing
the loan.

         The two largest commercial business loans outstanding at June 30, 2001
were a $800,000 business line of credit to a builder of one-to-four family
residential properties and a $606,000 secured commercial loan to a trucking
company. At June 30, 2001, these lines of credit were performing in accordance
with their repayment terms. The Bank had only five other commercial business
loans in excess of $225,000 at June 30, 2001, all of which were performing in
accordance with their repayment terms at such date.

         Unlike residential mortgage loans, which generally are made on the
basis of the borrower's ability to make repayment from his or her employment and
other income, and which are secured by real property whose value tends to be
more easily ascertainable, commercial business loans are of higher risk and
typically are made on the basis of the borrower's ability to make repayment from
the cash flow of the borrower's business. As a result, the availability of funds
for the repayment of commercial business loans may be dependent upon the success
of the business itself. The Bank's commercial business loans almost always
include personal guarantees and are usually, but not always, secured by business
assets, such as accounts receivable, equipment and inventory. However, the
collateral securing the loans may depreciate over time, may be difficult to
appraise and may fluctuate in value based on the success of the business.

         The Bank recognizes the generally increased credit risks associated
with commercial business lending. Horizon Federal's commercial business lending
policy emphasizes credit file documentation and analysis of the borrower's
character, management capabilities, capacity to repay the loan, the adequacy of
the borrower's capital and collateral. Analysis of the borrower's past, present
and future cash flows is also an important aspect of Horizon Federal's credit
analysis.

Originations of Loans and Mortgage-Backed Securities

         The Bank originates real estate loans through marketing efforts, the
Bank's customer base, walk-in customers and referrals from real estate brokers.
The Bank originates both adjustable-rate and fixed rate loans. Its ability to
originate loans is dependent upon the relative demand for fixed- rate or ARM
loans in the origination market, which is affected by the term structure
(short-term compared to long-term) of interest rates, as well as the current and
expected future level of interest rates and competition. During the years ended
June 30, 2001 and 2000 the Bank's dollar volume of fixed rate real estate loan
originations exceeded the same type of adjustable-rate loan originations, as
compared to the year ended June 30, 1999 in which the Bank's dollar volume of
adjustable-rate real estate loan originations and fixed-rate loan originations
were approximately the same.


                                       12

<PAGE>



         The Bank does not generally purchase loans or loan participations. In
times of low levels of loan demand, the Bank has invested its excess funds in
mortgage-backed and related securities. During fiscal 2001, 2000 and 1999 the
Bank purchased $4.6, $4.0 and $4.8 million, respectively, of mortgage-backed and
related securities. The Bank funded its purchases of mortgage-backed and related
securities, during fiscal 2001, primarily with sales and repayments of mortgage
loans and mortgage-backed and related securities. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations -- Asset/Liability
Management" in the Annual Report. The Bank continued to decrease its holdings of
collaterized mortgage obligations ("CMOs") during the fiscal year by primarily
selling CMOs that would increase the Bank's interest rate risk. Pursuant to an
agreement with the OTS, the Bank intends to maintain a moderate interest rate
risk position for its total portfolio. See "Regulation -- Supervisory
Agreement."



                                       13

<PAGE>



         The following table shows the loan origination, purchase and repayment
activities of the Bank for the periods indicated.

<TABLE>
<CAPTION>
                                                       Year Ended June 30,
                                             --------------------------------------
                                               2001           2000           1999
                                             --------       --------       --------
                                                      (Dollars in Thousands)
<S>                                          <C>            <C>            <C>
Originations by type:
 Adjustable rate:
  Real estate
   - One-to-four family ...............      $  6,234       $  6,847       $  6,637
   - Multi-family .....................            --             --            140
   - Commercial real estate ...........           782            240          1,415
   - Residential construction .........            --            315             --
  Non-real estate
   - Consumer .........................            --             --             35
   - Commercial business ..............           515             --            125
                                             --------       --------       --------
         Total adjustable-rate ........         7,531          7,402          8,352
                                             --------       --------       --------

 Fixed rate:
  Real estate
   - One-to-four family ...............         9,186          6,025          7,148
   - Multi-family .....................           387              2            596
   - Commercial real estate ...........           366            459            265
   - Residential construction .........         2,294          2,114            220
  Non-real estate
   - Consumer .........................         4,247          5,079          6,099
   - Commercial business ..............         3,618          2,378          2,714
                                             --------       --------       --------
         Total fixed-rate .............        20,098         16,057         17,042
                                             --------       --------       --------
         Total loans originated .......        27,629         23,459         25,394

Total loan purchases ..................           172          1,300             60
Total loan sales ......................        (5,150)        (2,775)        (8,613)
Total loan repayments .................       (20,779)       (19,119)       (21,118)
Increase (decrease) in other items, net         1,157          3,486          4,347
                                             --------       --------       --------
         Net increase .................      $  3,029       $  6,351       $     70
                                             ========       ========       ========
</TABLE>


                                       14

<PAGE>



         The following table shows the purchase, sale and repayment activities
of the Bank's mortgage-backed and related securities for the periods indicated.

<TABLE>
<CAPTION>
                                                          Year Ended June 30,
                                                -------------------------------------
                                                  2001           2000          1999
                                                -------------------------------------
                                                       (Dollars in Thousands)
<S>                                              <C>           <C>           <C>
Purchases:
  Mortgage-backed and related securities ..      $ 4,660       $ 4,004       $ 1,213
  CMOs ....................................           --            --         3,565
                                                 -------       -------       -------
         Total ............................      $ 4,660       $ 4,004       $ 4,778
                                                 =======       =======       =======

Sales:
  Mortgage-backed and related securities ..         (773)           --            --
  CMOs ....................................       (2,932)       (3,885)       (4,894)
         Total ............................       (3,705)       (3,885)       (4,894)
                                                 -------       -------       -------

Repayments:
  Mortgage-backed and related securities ..       (1,099)         (618)         (110)
  CMOs ....................................         (419)         (731)       (5,262)
  Net (Amortization)/Accretion MBS and CMOs          (11)           42            18
  Increase/(Decrease) in other items, net .          626           (12)         (795)
                                                 -------       -------       -------
         Net increase (decrease) ..........      $    52       $(1,317)      $(6,265)
                                                 =======       =======       =======
</TABLE>



Asset Quality

         General. When a borrower fails to make a required payment on a
residential loan, the Bank attempts to cause the delinquency to be cured by
contacting the borrower. In the case of loans secured by real estate, a late
notice is sent by the 11th of the month if payment for the prior month is not
received. If the delinquency is not cured by the 15th of the month, an attempt
to contact the borrower is made by telephone. Additional written and verbal
contacts are made with the borrower to the extent necessary, and if required a
personal visit by a loan officer of the Bank is arranged. If the delinquency is
not cured or a payment plan arranged by the 61st day of delinquency or shortly
thereafter, the matter is generally referred to the Bank's collection manager
and action to foreclose on the property is initiated. After 90 days of
delinquency, interest income on loans is reduced by the full amount of accrued
and uncollected interest. If foreclosed, the property is sold at a sheriff's
sale and may be purchased by the Bank. Delinquent consumer loans are handled in
a similar manner. The Bank's procedures for repossession and sale of consumer
collateral are subject to various requirements under Iowa consumer protection
laws.

         Real estate acquired by Horizon Federal as a result of foreclosure or
by deed in lieu of foreclosure is classified as real estate owned until it is
sold. When property is acquired, it is recorded at the lower of cost or
estimated fair value at the date of acquisition, and any write-down resulting
therefrom is charged to the allowance for losses on loans. After acquisition,
all costs incurred in maintaining the property are expensed. However, costs
relating to the development and improvement of the property are capitalized to
the extent of net realizable value.

                                       15

<PAGE>



         The following table sets forth the Bank's loan delinquencies by type,
by amount and by percentage of category at June 30, 2001. The amounts presented
represent the total remaining principal balances of the loans, rather than the
actual payment amounts which are overdue.


<TABLE>
<CAPTION>

                                                                  Loans Delinquent For:
                           ---------------------------------------------------------------------------------------------------------

                                    30-59 Days               60-89 Days              90 Days and Over             Total
                           ------------------------  -------------------------   ------------------------  -------------------------
                                            Percent                    Percent                    Percent                    Percent
                                              of                         of                         of                         of
                                             Loan                       Loan                       Loan                       Loan
                           Number  Amount  Catagory  Number   Amount  Category   Number  Amount  Category  Number  Amount  Catergory
                           ------  ------  --------  ------   ------  --------   ------  ------  --------  ------  ------  ---------
                                                                     (Dollars in Thousands)
<S>                          <C>     <C>      <C>       <C>     <C>      <C>       <C>     <C>      <C>      <C>    <C>       <C>
Real Estate:
One-to-four family ...       27      948      2.3%      8       316      .8%       26      966      2.3%     61     2,230     5.4%

Multi-family .........       --       --       --      --        --      --        --       --       --      --        --      --

Commercial real estate        1       90      1.4       2        41      .6         1      122      1.8       4       253     3.8

Consumer .............       20      117      1.7      12        75     1.1        31      253      3.6      63       445     6.4

Commercial business ..        1       64       .8       5       555     7.1         3       53       .7       9       672     8.6
                          -----    -----      ---   -----     -----     ---     -----    -----      ---   -----     -----     ---

     Total ...........       49    1,219      1.9%     27       987     1.5%       61    1,394      2.1%    137     3,600     5.5%
                          =====    =====      ===   =====     =====     ===     =====    =====      ===   =====     =====     ===

</TABLE>



                                                        16

<PAGE>



         Non-Performing Assets. The table below sets forth the amounts and
categories of non-performing assets in the Bank's loan portfolio. Loans are
placed on non-accrual status when the collection of principal and/or interest
becomes doubtful. As a matter of policy, the Bank does not generally accrue
interest on loans past due 90 days or more. For all periods presented, the Bank
has had no troubled debt restructurings (which involve forgiving a portion of
interest or principal on any loans or making loans at a rate materially less
than that of market rates). Foreclosed assets include assets acquired in
settlement of loans.


                                                       At June 30,
                                            --------------------------------
                                             2001         2000         1999
                                            ------       ------       ------
                                                  (Dollars in Thousands)
Non-accruing loans:
  One-to-four family .................      $  966       $  622       $  755
  Commercial real estate .............         122          137          116
  Consumer ...........................         253          266          186
  Commercial business ................          53           74          103
                                            ------       ------       ------
     Total ...........................       1,394        1,099        1,160
                                            ------       ------       ------

Accruing loans 90 days or more:
  One-to-four family .................          --           --           --
  Commercial .........................          --           --           --
                                            ------       ------       ------
      Total ..........................          --           --           --
                                            ------       ------       ------

Foreclosed assets:
  One-to-four family .................          45           --           --
  Commercial real estate .............          --           --           --
  Consumer ...........................           5           56           --
                                            ------       ------       ------
     Total ...........................          50           56           --
                                            ------       ------       ------

Total non-performing assets ..........      $1,444       $1,155       $1,160
                                            ======       ======       ======
Total as a percentage of total  assets        1.61%        1.39%        1.36%
                                            ======       ======       ======

         For the fiscal year ended June 30, 2001, gross interest income which
would have been recorded had the non-accruing loans been current in accordance
with their original terms amounted to $170,000, of which $78,000 was included in
interest income for such period.

         At June 30, 2001, there were no non-performing loans to a single
borrower or group of related borrowers in excess of $220,000. At June 30, 2001,
there were approximately $171,000 of non-accruing loans contained in the
foregoing table which are not described in "Other Loans of Concern" or
"Classified Assets" below. These loans are not required to be classified by the
OTS and are adequately capitalized such that management does not anticipate any
losses relating to these loans.

        Other Loans of Concern. In addition to the non-performing assets set
forth in the table above, as of June 30, 2001, there was also an aggregate of
$145,000 in net book value of loans ($76,000 secured by single family
residences, $52,000 secured by other commercial business and $17,000 in secured
consumer loans) with respect to which known information about the possible
credit problems of the borrowers have caused management to have doubts as to the
ability of the borrowers to comply with present loan repayment terms and which
may result in the future inclusion of such items in the non-performing asset
categories.


                                       17

<PAGE>

         Classified Assets. Federal regulations provide for the classification
of loans and other assets, such as debt and equity securities considered by the
OTS to be of lesser quality, as "substandard," "doubtful" or "loss." An asset is
considered "substandard" if it is inadequately protected by the current net
worth and paying capacity of the obligor or of the collateral pledged, if any.
"Substandard" assets include those characterized by the "distinct possibility"
that the insured institution will sustain "some loss" if the deficiencies are
not corrected. Assets classified as "doubtful" have all of the weaknesses
inherent in those classified "substandard" with the added characteristic that
the weaknesses present make "collection or liquidation in full" on the basis of
currently existing facts, conditions and values, "highly questionable and
improbable." Assets classified as "loss" are those considered "uncollectible"
and of such little value that their continuance as assets without the
establishment of a specific loss reserve is not warranted.

         When an insured institution classifies problem assets as either
substandard or doubtful, it may establish general allowances for loan losses in
an amount deemed prudent by management. General allowances represent loss
allowances which have been established to recognize the inherent risk associated
with lending activities, but which, unlike specific allowances, have not been
allocated to particular problem assets. When an insured institution classifies
problem assets as "loss," it is required either to establish a specific
allowance for losses equal to 100% of that portion of the asset so classified or
to charge-off such amount. An institution's determination as to the
classification of its assets and the amount of its valuation allowances is
subject to review by the regulatory authorities, who may order the establishment
of additional general or specific loss allowances.

         In connection with the filing of its periodic reports with the OTS and
in accordance with its classification of assets policy, the Bank regularly
reviews problem loans and real estate acquired through foreclosure to determine
whether such assets require classification in accordance with applicable
regulations. On the basis of management's review of its assets, at June 30,
2001, the Bank had classified a total of $1,241,000 of its assets as
substandard, $2,000 as doubtful and $41,000 as loss. All portions of a loan
which are classified as loss are reserved for at a rate of 100%.

         At June 30, 2001, total classified assets comprised $1,284,000, or
15.2% of the Bank's capital, or 1.4% of the Bank's total assets.

         Allowance for Loan Losses. The allowance for loan losses is established
through a provision for loan losses based on management's evaluation of the risk
inherent in its loan portfolio and changes in the nature and volume of its loan
activity. Such evaluation, which includes a review of all loans for which full
collectibility may not be reasonably assured, considers among other matters, the
estimated fair value of the underlying collateral, economic conditions,
historical loan loss experience and other factors that warrant recognition in
providing for an adequate loan loss allowance. Although management believes it
uses the best information available to make such determinations, future
adjustments to the allowance may be necessary, and net income could be
significantly affected, if circumstances differ substantially from the
assumptions used in making the initial determinations. At June 30, 2001, the
Bank had an allowance for loan losses of $369,000,

                                       18

<PAGE>



or approximately .56% of total loans. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations -- Results of Operations --
Provision for Losses on Loans" in the Annual Report.

         The following table sets forth an analysis of the Bank's allowance for
losses on loans.

<TABLE>
<CAPTION>
                                                                 Year Ended June 30,
                                                          -----------------------------------

                                                            2001        2000        1999
                                                          -----------------------------------
                                                                (Dollars in Thousands)

<S>                                                        <C>          <C>          <C>
Balance at beginning of period ......................      $ 379        $ 343        $ 348


Charge-offs:
  One-to-four family ................................         (2)          --          (84)
  Commercial real estate ............................         --           --           --
  Commercial business ...............................       (161)         (21)         (24)
  Consumer ..........................................       (127)         (41)         (60)
                                                           -----        -----        -----
    Total charge-offs ...............................       (290)         (62)        (168)
                                                           -----        -----        -----

Recoveries:
  Commercial business ...............................         --           --           19
  Consumer ..........................................          4            2            5
                                                           -----        -----        -----
    Total recoveries ................................          4            2           24
                                                           -----        -----        -----

Net charge-offs .....................................       (286)         (60)        (144)
Additions charged to operations .....................        276           96          139
                                                           -----        -----        -----
Balance at end of period ............................      $ 369        $ 379        $ 343
                                                           =====        =====        =====

Ratio of net charge-offs during the period to average

 loans outstanding during the period ................        .44%         .10%         .26%
                                                           =====        =====        =====
</TABLE>


         During the fiscal years ended June 30, 2001, 2000 and 1999, management
recorded provisions for loan losses of $276,000, $96,000 and $139,000,
respectively. These provisions were primarily the result of charge-offs on loans
and foreclosed assets incurred during the periods, as well as a result of
management's assessment of additional credit risk associated with the increased
level of the Bank's consumer and commercial business portfolios during such
periods. In fiscal 2001, additional provisions were applied in response to a
$161,000 charge-off of an unsecured commercial line of credit.



                                       19

<PAGE>



         The distribution of the Bank's allowance for losses on loans at the
dates indicated is summarized as follows:


<TABLE>
<CAPTION>
                                                               At June 30,
                               ---------------------------------------------------------------------------
                                        2001                      2000                      1999
                               ---------------------------------------------------------------------------
                                           Percent                   Percent                    Percent
                                           of Loans                 of Loans                    of Loans
                                           in Each                   in Each                    in Each
                                           Category                 Category                    Category
                                           to Total                 to Total                    to Total
                                 Amount     Loans          Amount     Loans           Amount     Loans
                               ---------------------------------------------------   ---------------------
                                                          (Dollars in Thousands)
<S>                              <C>          <C>          <C>          <C>           <C>          <C>
One-to-four family...........    $  62        63.0%       $ 110         63.2%         $  69        62.6%
Multi-family.................        2         2.2            2          1.9              3         2.4
Commercial real estate.......       44        10.1           46         10.6             27         9.6
Residential construction.....        5         2.1            4          2.0              1          .3
Consumer.....................      113        10.6          109         11.9             91        12.9
Commercial business..........       61        12.0          101         10.4            138        12.2
Unallocated..................       82         ---            7          ---             14         ---
                                 -----       -----        -----        -----          -----       -----
     Total...................    $ 369       100.0%       $ 379        100.0%         $ 343       100.0%
                                 =====       =====        =====        =====          =====       =====
</TABLE>


Investment Activities

         Horizon Federal must maintain investments that qualify as liquid assets
in order to meet the safety and soundness standards under OTS regulations.
Liquidity may increase or decrease depending upon the availability of funds and
comparative yields on investments in relation to the return on loans.
Historically, the Bank has maintained liquid assets at levels above the minimum
requirements previously imposed by OTS regulations and at levels believed
adequate to meet the requirements of normal operations, including repayments of
maturing debt and potential deposit outflows. Cash flow projections are
regularly reviewed and updated to assure that adequate liquidity is maintained.
At June 30, 2001, the Bank's liquidity ratio (liquid assets as a percentage of
net withdrawable savings deposits and current borrowings) was 10.4%. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" in the Annual Report.

         Federally chartered savings institutions have the authority to invest
in various types of liquid assets, including U.S. treasury obligations,
securities of various federal agencies, certain certificates of deposit of
insured banks and savings institutions, certain bankers' acceptances, repurchase
agreements and federal funds. Subject to various restrictions, federally
chartered savings institutions may also invest their assets in commercial paper,
investment grade corporate debt securities and mutual funds whose assets conform
to the investments that a federally chartered savings institution is otherwise
authorized to make directly.

         Generally, the investment policy of the Bank, as established by the
Board of Directors, is to invest funds among various categories of investments
and maturities based upon the Bank's liquidity needs, asset/liability management
policies, investment quality, marketability and performance objectives. Subject
to the Board's direction, the Investment Committee meets monthly to review the
Bank's investments and objectives for its investment portfolio. The Bank's
investment policy

                                       20

<PAGE>


has established methods and strategies for each type of security. It is the
Bank's general policy to purchase investment securities which are U.S.
government securities or federal agency obligations or other issues that are
rated investment grade.

         The Bank has a portfolio of mortgage-backed and related securities and
has utilized such investments to complement its mortgage lending activities. At
June 30, 2001, the Bank's mortgage-backed and related securities totaled $12.1
million, or 13.6% of total assets. For information regarding market values of
the Bank's mortgage-backed and related securities portfolio, see Note 2 of the
Notes to Consolidated Financial Statements in the Annual Report.

         Historically, most of the Bank's mortgage-backed securities were
long-term, fixed-rate securities. In more recent years, the Bank has begun to
purchase other types of mortgage-backed and related securities consistent with
its asset/liability management objectives. In this regard, the Bank emphasizes
the purchase of adjustable-rate, mortgage-backed and related securities for
asset/liability management purposes and in order to supplement the Bank's
origination of ARM loans. At June 30, 2001 primarily all of the Bank's
mortgage-backed and related securities carried adjustable rates of interest.

         The Bank's portfolio of Government National Mortgage Association
("GNMA"), FNMA and Federal Home Loan Mortgage Corporation ("FHLMC") certificates
are modified pass-through mortgage-backed securities that generally represent
undivided interests in underlying pools of fixed- rate, or certain types of
adjustable rate, single-family residential mortgages issued by these
government-sponsored entities. GNMA's guarantee to the holder of timely payments
of principal and interest is backed by the full faith and credit of the U.S.
government. FNMA and FHLMC provide the certificate holder a guarantee of timely
payments of interest and scheduled principal payments, whether or not they have
been collected. Under the OTS risk-based capital requirements, GNMA
mortgage-backed securities have a zero percent risk weighting and FNMA, FHLMC
and "AA" or higher-rated mortgage-backed securities have a 20% risk weighting,
in contrast to the 50% risk weighting carried by one-to-four family performing
residential mortgage loans.

         At June 30, 2001 the Bank held $4.1 million of collateralized mortgage
obligations ("CMOs") having estimated lives which ranged from less than three
years up to fourteen years. CMOs are special types of pass-through debt in which
the stream of principal and interest payments on the underlying mortgages or
mortgage-backed securities is used to create classes with different maturities
and, in some cases, amortization schedules, as well as a residual interest, with
each such class possessing different risk characteristics. Management believes
these securities may represent attractive alternatives relative to other
investments due to the wide variety of maturity and repayment options available
through such investments. Management has opted to invest in CMO's, including
interest only and principal only CMOs, as opposed to straight mortgage-backed
securities, in an effort to improve or maintain spreads. The Bank has leveraged
its capital by using FHLB advances to purchase some of these securities.
Management believes that the increased net income resulting from this type of
investing can provide high enough returns to justify the increased vulnerability
of sudden and unexpected interest rate changes. See "Management's Discussion and
Analysis and Results of Operations" in the Annual Report.


                                       21

<PAGE>



         OTS guidelines regarding investment portfolio policy and accounting
require insured institutions to categorize securities and certain other assets
as held for "investment," "sale," or "trading." The portion of the investment
securities portfolio which is held with the intent to hold to maturity is
accounted for on an amortized cost basis. Securities which are categorized as
available for sale are carried at fair value. At June 30, 2001, all of the
Bank's investment, mortgage- backed and related securities were classified as
available for sale.

         The following table sets forth the composition of the Bank's portfolio
of investment and mortgage-backed securities at the dates indicated.

<TABLE>
<CAPTION>
                                                                                 At June 30,
                                                 -----------------------------------------------------------------------------
                                                        2001                        2000                     1999
                                                ------------------------------------------------------------------------------
                                                 Carrying       % of         Carrying       % of        Carrying        % of
                                                  Value         Total          Value        Total        Value          Total
                                                ------------------------------------------------------------------------------
                                                                              (Dollars in Thousands)
Investment Securities:
<S>                                              <C>             <C>          <C>             <C>       <C>             <C>
  U.S. government securities ..............      $    --            --%        $   --            --%    $    --            --%
  Federal agency obligations ..............          996          16.9            867          15.2         844           8.5
  Small business administration loans .....          693          11.7            692          12.1         739           7.4
  Equity securities(1) ....................        1,714          29.0          2,041          35.8       2,127          21.5
                                                 -------        ------        -------        ------     -------        ------
     Subtotal .............................        3,403          57.6          3,600          63.1       3,710          37.4
FHLB stock ................................          480           8.1            703          12.3       1,203          12.2
                                                 -------        ------        -------        ------     -------        ------
     Total investment securities and FHLB .        3,883          65.7          4,303          75.4       4,913          49.6
        stock

Other Interest-Earning Assets:
  Interest-bearing deposits with banks ....        2,028          34.3          1,406          24.6       5,000          50.4
                                                 -------        ------        -------        ------     -------        ------
     Total ................................      $ 5,911         100.0%       $ 5,709         100.0%    $ 9,913         100.0%
                                                 =======        ======        =======        ======     =======        ======

Average remaining life or term to repricing
 of investment securities and other
interest-earning assets excluding FNMA
stock and FHLB stock ......................     2.18 years                      3.86 years                    2.46 years

Mortgage-Backed and Related Securities:
  CMOs ....................................      $ 4,129          34.0%       $ 7,132          59.1%    $10,701          80.0%
  FHLMC ...................................          437           3.6            494           4.1         606           4.5
  FNMA ....................................          696           5.7          1,601          13.2          --            --
  GNMA ....................................        6,859          56.6          2,840          23.5       1,126           8.4
  Other(2) ................................            1            .1              3            .1         954           7.1
                                                 -------        ------        -------        ------     -------        ------
    Total mortgage-backed and related

       securities .........................      $12,122         100.0%       $12,070         100.0%    $13,387         100.0%
                                                 =======        ======        =======        ======     =======        ======
</TABLE>

-------------------
(1)  Consists primarily of stocks of publicly traded thrift institutions and
     thrift holding companies, and mutual funds.

(2)  Consists of interest only stripped mortgage-backed security. See Footnote 2
     of Notes to Consolidated Financial Statements contained in the Annual
     Report.

                                       22

<PAGE>



         The composition and maturities of the debt investment securities
portfolio, excluding equity securities and FHLB stock, are indicated in the
following table.

<TABLE>
<CAPTION>
                                                                At June 30, 2001
                                  -----------------------------------------------------------------------------
                                   Less Than     1 to 5      5 to 10       Over 10       Total Debt Investment
                                     1 Year      Years        Years         Years             Securities
                                  -----------------------------------------------------------------------------
                                    Carrying    Carrying    Carrying      Carrying        Book         Market
                                     Value       Value        Value         Value        Value         Value
                                  -----------------------------------------------------------------------------
                                                              (Dollars in Thousands)
<S>                                <C>          <C>          <C>          <C>           <C>           <C>
U.S. government securities ..      $  --        $   --       $  --        $   --        $   --        $   --
Federal agency obligations ..         --           996          --            --           996           996
Small business administration
   loans ....................         --            --          --           693           693           693

       Total ................      $  --        $  996       $  --        $  693        $1,689        $1,689
                                   -----        ------       -----        ------        ------        ------

Weighted average yield ......         --%         4.08%         --%        7.88%         5.64%         5.64%
                                   =====        ======       =====        ======        ======        ======

</TABLE>

         The following table sets forth the contractual maturities of the Bank's
mortgage-backed and related securities at June 30, 2001; however, the expected
average life to maturity of this portfolio is generally two to 10 years.


<TABLE>
<CAPTION>
                                                  Due in
                        ------------------------------------------------------      At
                                                         5 to                    June 30,
                                          One to      Less than      10 and        2001
                           Less than    Less than 5      10            Over       Balance
                           One Year       Years         Years         Years     Outstanding
                        -------------  ------------   ----------   -----------  ------------
                                                (Dollars in Thousands)

<S>                        <C>          <C>           <C>           <C>          <C>
FHLMC ...............      $    --      $    --       $    --       $   437      $   437
FNMA ................           --           --            --           696          696
GNMA ................           --           --            --         6,859        6,859
CMOs ................           --           --         1,010         3,119        4,129
Other - FNMA Stripped           --           --             1            --            1

 Total ..............      $    --      $    --       $ 1,011       $11,111      $12,122
                           =======      =======       =======       =======      =======
</TABLE>


         At June 30, 2001, the Bank's portfolio of investment and
mortgage-backed securities contained no securities of any issuer with an
aggregate book value in excess of 10% of the Bank's stockholders' equity,
excluding those issued by the U.S. government or its agencies.

         For additional information on the Bank's investment and mortgage-backed
securities, see Note 2 of the Notes to Consolidated Financial Statements in the
Annual Report.

Sources of Funds

        General. The Bank's primary sources of funds are deposits, amortization
and repayment of loan principal (including mortgage-backed securities), sales or
maturities of investment securities,

                                       23

<PAGE>



mortgage-backed securities and short-term investments, FHLB advances and funds
provided from operations.

         Borrowings, primarily FHLB advances, are used to compensate for
seasonal reductions in deposits or deposit inflows at less than projected
levels, and may be used on a longer-term basis to support lending activities
including purchases of mortgage-backed securities. At June 30, 2001, the Bank
had total FHLB advances of $9.6 million.

         Deposits. Horizon Federal offers a variety of deposit accounts having a
wide range of interest rates and terms. The Bank's deposits consist of
commercial demand, savings, checking, money market and certificate accounts. The
certificate accounts currently range in terms from six months to five years. The
Bank relies primarily on advertising (including radio, newspaper and direct
mail), competitive pricing policies and customer service to attract and retain
these deposits. Horizon Federal solicits deposits from its market area only and
does not use brokers to obtain deposits. The flow of deposits is influenced
significantly by general economic conditions, changes in money market and
prevailing interest rates and competition. The composition of the Bank's
deposits is set forth in Note 8 of the Notes to Consolidated Financial Statement
in the Annual Report.

         The deposit accounts marketed by the Bank have allowed it to be
competitive in obtaining funds and to respond with flexibility to changes in
consumer demand. The Bank has become more susceptible to short-term fluctuations
in deposit flows as customers have become more interest rate conscious. The Bank
endeavors to manage the pricing of its deposits in keeping with its
asset/liability management and profitability objectives. The ability of the Bank
to attract and maintain savings accounts and certificates of deposit, and the
rates paid on these deposits, has been and will continue to be significantly
affected by market conditions.


                                       24

<PAGE>



         The following table sets forth the dollar amount of savings deposits in
the various types of deposit programs offered by the Bank for the periods
indicated.

<TABLE>
<CAPTION>
                                                                             At June 30,
                                              -----------------------------------------------------------------------
                                                       2001                    2000                     1999
                                              -----------------------------------------------------------------------
                                                Amount     Percent     Amount       Percent       Amount     Percent
                                              -----------------------------------------------------------------------
                                                                      (Dollars in Thousands)
Transactions and Savings Deposits:
---------------------------------
<S>                                            <C>            <C>      <C>              <C>       <C>           <C>
Commercial Demand ...................          $   942        1.4%     $   811          1.3%      $ 1,061       1.8%
Checking Accounts (0.0% to 4.8%) ....            7,737       11.1        7,724         11.9         6,305      10.6
Savings Accounts (2.0% to 4.9%) .....           23,681       33.9       23,380         36.1        23,443      39.3
Money Market Accounts (1.75% to 2.5%)              313         .4          343           .5           463        .8
                                               -------      -----      -------        -----       -------     -----

Total Non-Certificates ..............           32,673       46.8       32,258         49.8        31,272      52.5
                                               -------      -----      -------        -----       -------     -----

Certificates:
------------

 0.00 - 3.99%                                    1,486        2.1%          38           .1%           11        .1%
 4.00 - 4.99%                                    8,893       12.7        8,703         13.4        10,251      17.1
 5.00 - 5.99%                                    7,695       11.0        9,933         15.3        13,505      22.7
 6.00 - 6.99%                                   14,147       20.3       10,610         16.4         4,360       7.2
 7.00 - 7.99%                                    4,978        7.1        3,213          4.9           163        .2
 8.00 - 8.99%                                       --         --            6           .1             6        .1
 9.00% and above ....................               --         --           --           --             8        .1
                                               -------      -----      -------        -----       -------     -----

Total Certificates ..................           37,199       53.2       32,503         50.2        28,304      47.5
                                               -------      -----      -------        -----       -------     -----
Total Deposits ......................          $69,872      100.0%     $64,761        100.0%      $59,576     100.0%
                                               =======      =====      =======        =====       =======     =====
</TABLE>


         The following table shows rate and maturity information for the Bank's
certificates of deposit as of June 30, 2001.

<TABLE>
<CAPTION>
                                         0.00-       4.00-      5.00-       6.00-      7.00%                 Percent
                                         3.99%       4.99%      5.99%       6.99%     or more     Total      of Total
                                      ----------  ---------   ---------   --------  ----------  ---------  ------------
                                                                    (Dollars in Thousands)
Certificate accounts maturing
in quarter ending              :
-------------------------------
<S>                                     <C>        <C>        <C>        <C>          <C>        <C>         <C>
September 30, 2001..................     1,060      1,031      2,922       4,697       4,629      14,339      38.55%
December 31, 2001...................       426      1,831      1,398       3,772         128       7,555      20.31
March 31, 2002......................         0      1,286        918       1,959           0       4,163      11.19
June 30, 2002.......................         0      1,170        780         271          88       2,309       6.21
September 30, 2002..................         0        580        383         689         114       1,766       4.75
December 31, 2002...................         0        675        399         822           0       1,896       5.10
March 31, 2003......................         0        757        111         886          19       1,773       4.76
June 30, 2003......................          0        316        147         461           0         924       2.48
Thereafter..........................         0      1,247        637         590           0       2,474       6.65

Total...............................    $1,486     $8,893     $7,695     $14,147      $4,978     $37,199     100.0%
                                        ------     ------     ------     -------      ------     -------     =====

   Percent of total.................      3.99%     23.91%     20.69%      38.03%      13.38%      100.0%
                                          ----      -----      -----       -----       -----       =====
</TABLE>

                                       25

<PAGE>


         The following table indicates the amount of the Bank's certificates of
deposit and other deposits by time remaining until maturity as of June 30, 2001.


<TABLE>
<CAPTION>
                                                                            Maturity
                                             -------------------------------------------------------------------------
                                                                  Over         Over
                                                  3 Months       3 to 6       6 to 12          Over
                                                  or Less        Months       Months         12 months       Total
                                             -------------------------------------------------------------------------
                                                                     (Dollars in Thousands)
<S>                                                 <C>            <C>          <C>             <C>          <C>
Certificates of deposit of less
 than $100,000..............................        $10,195        $5,977       $6,099          $8,294       $30,565

Certificates of deposit of
 $100,000 or more...........................          1,944         1,428          373             539         4,284

Public funds(1).............................          2,200           150            0               0         2,350
                                                    -------        ------       ------          ------       -------

Total certificates of
 deposit....................................        $14,339        $7,555       $6,472          $8,833       $37,199
                                                    =======        ======       ======          ======       =======
</TABLE>

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

(1)  Deposits from governmental and other public entities.

         Borrowings. Although deposits are the Bank's primary source of funds,
the Bank's policy has been to utilize borrowings, primarily FHLB advances, when
they are a less costly source of funds or can be invested at a profitable
interest rate spread. In addition, the Bank may rely upon borrowings for
short-term liquidity needs.

         Horizon Federal may obtain advances from the FHLB of Des Moines upon
the security of its capital stock in the FHLB of Des Moines and certain of its
mortgage loans. Such advances may be made pursuant to several different credit
programs, each of which has its own interest rate and range of maturities.

         The following table sets forth the maximum month-end balance and
average balance of FHLB advances.

<TABLE>
<CAPTION>
                                               Year Ended June 30,
                                   --------------------------------------------
                                       2001          2000            1999
                                   --------------------------------------------
                                            (Dollars in Thousands)
<S>                                   <C>            <C>            <C>
Maximum Balance:
---------------
  FHLB advances....................   $10,006        $16,599        $20,636

Average Balance:
---------------
  FHLB advances....................    $9,756        $13,265        $19,038

</TABLE>


                                       26

<PAGE>




         The following table sets forth certain information as to the Bank's
FHLB advances at the dates indicated. For additional information on the Bank's
advances, see Note 9 of the Notes to Consolidated Financial Statements in the
Annual Report.


                                                       At June 30,
                                      ------------------------------------------
                                        2001             2000             1999
                                      ------------------------------------------
                                                  (Dollars in Thousands)

FHLB advances......................    $9,593           $9,014          $16,606
                                       ======           ======          =======

Weighted average interest
 rate of FHLB advances.............      5.49%            5.67%            5.07%

Subsidiary Activities

         As a federally chartered savings bank, Horizon Federal is permitted by
OTS regulations to invest up to 2% of its assets, or $1.8 million at June 30,
2001, in the stock of, or loans to, service corporation subsidiaries. As of such
date, the net book value of Horizon Federal's investment in its service
corporation was approximately $73,000. Horizon Federal may invest an additional
1% of its assets in service corporations where such additional funds are used
for inner-city or community development purposes and up to 50% of its total
capital in conforming loans to service corporations in which it owns more than
10% of the capital stock. In addition to investments in service corporations,
federal associations are permitted to invest an unlimited amount in operating
subsidiaries engaged solely in activities in which a federal association may
engage.

         Horizon Federal has one service corporation, Horizon Investment
Services, Inc. ("HISI"), an Iowa corporation, located in Oskaloosa, Iowa. HISI,
which changed its corporate name in August 1995 from SEI Service Corporation,
was organized by the Bank in 1983 in order to offer a variety of investment
products to customers of Horizon Federal. For the fiscal year ended June 30,
2001, HISI had a net increase of $17,200.

Regulation

         General. Horizon Federal is a federally chartered savings bank, the
deposits of which are federally insured and backed by the full faith and credit
of the U.S. government up to applicable limits set by the FDIC. Accordingly, the
Bank is subject to broad federal regulation and oversight extending to all of
its operations. Horizon Federal is a member of the FHLB of Des Moines and is
subject to certain limited regulation by the Board of Governors of the Federal
Reserve System ("Federal Reserve Board"). As the savings and loan holding
company of the Bank, the Company also is subject to federal regulation and
oversight. The purpose of the regulation of the Company and other holding
companies is to protect subsidiary savings associations. The Bank is a member of
the Savings Association Insurance Fund ("SAIF"), which together with the Bank
Insurance Fund (the "BIF") are the two deposit insurance funds administered by
the FDIC, and the deposits of the Bank are insured by the FDIC. As a result, the
FDIC has certain regulatory and examination authority over the Bank.


                                       27

<PAGE>



         Certain of these regulatory requirements and restrictions are discussed
below or elsewhere in this document.

         Federal Regulation of Savings Associations. The OTS has extensive
authority over the operations of savings associations. As part of this
authority, the Bank is required to file periodic reports with the OTS and is
subject to periodic examinations by the OTS and the FDIC. The last regular OTS
and FDIC examinations of the Bank were as of March 31, 2000 and June 30, 2001,
respectively. Under agency scheduling guidelines, it is likely that another
examination will be initiated in the near future. When these examinations are
conducted by the OTS and the FDIC, the examiners may require the Bank to provide
for higher general or specific loan loss reserves. All savings associations are
subject to a semi-annual assessment, based upon the savings association's total
assets, to fund the operations of the OTS. The Bank's OTS assessment for the
fiscal year ended June 30, 2001 was $36,500.

         The OTS also has extensive enforcement authority over all savings
institutions and their holding companies, including the Bank and the Company.
This enforcement authority includes, among other things, the ability to assess
civil money penalties, to issue cease-and-desist or removal orders and to
initiate injunctive actions. In general, these enforcement actions may be
initiated for violations of laws and regulations and unsafe or unsound
practices. Other actions or inactions may provide the basis for enforcement
action, including misleading or untimely reports filed with the OTS. Except
under certain circumstances, public disclosure of final enforcement actions by
the OTS is required.

         In addition, the investment, lending and branching authority of the
Bank is prescribed by federal law, and it is prohibited from engaging in any
activities not permitted by such laws. For instance, no savings institution may
invest in non-investment grade corporate debt securities. In addition, the
permissible level of investment by federal associations in loans secured by non-
residential real property may not exceed 400% of total capital, except with
approval of the OTS. Federal savings associations are also generally authorized
to branch nationwide. The Bank is in compliance with the noted restrictions.

         The Bank's general permissible lending limit for loans-to-one-borrower
is equal to the greater of $500,000 or 15% of unimpaired capital and surplus
(except for loans fully secured by certain readily marketable collateral, in
which case this limit is increased to 25% of unimpaired capital and surplus). At
June 30, 2001, the Bank's lending limit under this restriction was approximately
$981,000.

         The OTS, as well as the other federal banking agencies, has adopted
guidelines establishing safety and soundness standards on such matters as loan
underwriting and documentation, asset quality, earnings standards, internal
controls and audit systems, interest rate risk exposure and compensation and
other employee benefits. Any institution which fails to comply with these
standards must submit a compliance plan. A failure to submit a plan or to comply
with an approved plan will subject the institution to further enforcement
action.

        Insurance of Accounts and Regulation by the FDIC. Horizon Federal is a
member of the SAIF, which is administered by the FDIC. Deposits are insured up
to applicable limits by the FDIC

                                       28

<PAGE>



and such insurance is backed by the full faith and credit of the U.S.
government. As insurer, the FDIC imposes deposit insurance premiums and is
authorized to conduct examinations of and to require reporting by FDIC-insured
institutions. It also may prohibit any FDIC-insured institution from engaging in
any activity the FDIC determines by regulation or order to pose a serious risk
to the SAIF of the BIF. The FDIC also has the authority to initiate enforcement
actions against savings associations, after giving the OTS an opportunity to
take such action, and may terminate the deposit insurance if it determines that
the institution has engaged in unsafe or unsound practices, or is in an unsafe
or unsound condition.

         The FDIC's deposit insurance premiums are assessed through a risk-based
system under which all insured depository institutions are placed into one of
nine categories and assessed insurance premiums based upon their level of
capital and supervisory evaluation. Under the system, institutions classified as
well capitalized (i.e., a core capital ratio of at least 5%, a ratio of Tier 1
or core capital to risk-weighted assets ("Tier 1 risk-based capital") of at
least 6% and a risk-based capital ratio of at least 10%) and considered healthy
pay the lowest premium while institutions that are less than adequately
capitalized (i.e., core or Tier 1 risk-based capital ratios of less than 4% or a
risk-based capital ratio of less than 8%) and considered of substantial
supervisory concern pay the highest premium. Risk classification of all insured
institutions will be made by the FDIC for each semi-annual assessment period. As
of June 30, 2001, the Bank was classified as a well-capitalized institution.

         The FDIC is authorized to increase assessment rates, on a semi-annual
basis, if it determines that the reserve ratio of the SAIF will be less than the
designated reserve ratio of 1.25% of SAIF insured deposits. In setting these
increased assessments, the FDIC must seek to restore the reserve ratio to that
designated reserve level, or such higher reserve ratio as established by the
FDIC. The FDIC may also impose special assessments on SAIF members to repay
amounts borrowed from the U.S. Treasury or for any other reason deemed necessary
by the FDIC.

         Regulatory Capital Requirements. Federally insured savings
associations, such as the Bank, are required to maintain a minimum level of
regulatory capital. The OTS has established capital standards, including a
tangible capital requirement, a leverage ratio (or core capital) requirement and
a risk-based capital requirement applicable to such savings associations. These
capital requirements must be generally as stringent as the comparable capital
requirements for national banks. The OTS is also authorized to impose capital
requirements in excess of these standards on individual associations on a
case-by-case basis.

         The capital regulations require tangible capital of at least 1.5% of
adjusted total assets (as defined by regulation). Tangible capital generally
includes common stockholders' equity and retained income, and certain
noncumulative perpetual preferred stock and related income. In addition, all
intangible assets, other than a limited amount of purchased mortgage servicing
rights, must be deducted from tangible capital for calculating compliance with
the requirement. At June 30, 2001, the Bank did not have any intangible assets
or purchased mortgage servicing rights.

         The OTS regulations establish special capitalization requirements for
savings associations that own subsidiaries. In determining compliance with the
capital requirements, all subsidiaries engaged solely in activities permissible
for national banks or engaged in certain other activities

                                       29

<PAGE>



solely as agent for its customers are "includable" subsidiaries that are
consolidated for capital purposes in proportion to the association's level of
ownership. For excludable subsidiaries the debt and equity investments in such
subsidiaries are deducted from assets and capital. All subsidiaries of the Bank
are includable subsidiaries.

         At June 30, 2001, the Bank had tangible capital of $6.2 million, or
7.1% of adjusted total assets, which is approximately $4.9 million above the
minimum requirement of 1.5% of adjusted total assets in effect on that date.

         The capital standards also effectively require core capital equal to at
least 3% to 4% of adjusted total assets. Core capital generally consists of
tangible capital plus certain intangible assets, including a limited amount of
purchased credit card receivables. At June 30, 2001, the Bank had no intangible
assets which were subject to these tests. At June 30, 2001, the Bank had core
capital equal to $6.2 million, or 7.1% of adjusted total assets, which is $2.7
million above the minimum leverage ratio requirement of 4% as in effect on that
date.

          The OTS risk-based requirement requires savings associations to have
total capital of at least 8% of risk-weighted assets. Total capital consists of
core capital, as defined above, and supplementary capital. Supplementary capital
consists of certain permanent and maturing capital instruments that do not
qualify as core capital and general valuation loan and lease loss allowances up
to a maximum of 1.25% of risk-weighted assets. Supplementary capital may be used
to satisfy the risk-based requirement only to the extent of core capital. The
OTS is also authorized to require a savings association to maintain an
additional amount of total capital to account for concentration of credit risk
and the risk of non-traditional activities. At June 30, 2001, the Bank had no
capital instruments that qualify as supplementary capital, and $328,000 of
general loss reserves, which was less than 1.25% of risk-weighted assets.

         Certain exclusions from capital and assets are required to be made for
the purpose of calculating total capital. Such exclusions consist of equity
investments (as defined by regulation) and that portion of land loans and
nonresidential construction loans in excess of an 80% loan-to- value ratio and
reciprocal holdings of qualifying capital instruments. Horizon Federal had a
$9,000 exclusion from capital and assets at June 30, 2001.

         In determining the amount of risk-weighted assets, all assets,
including certain off-balance sheet items, will be multiplied by a risk weight,
ranging from 0% to 100%, based on the risk inherent in the type of asset. For
example, the OTS has assigned a risk weight of 50% for prudently underwritten
permanent one-to-four family first lien mortgage loans not more than 90 days
delinquent and having a loan-to-value ratio of not more than 80% at origination
unless insured to such ratio by an insurer approved by the FNMA or FHLMC.

         On June 30, 2001, the Bank had total capital of $6.5 million (including
$6.2 million in core capital and $328,000 in qualifying supplementary capital)
and risk-weighted assets of $54.6 million (including $1.3 million in converted
off-balance sheet assets); or total capital of 12.0% of risk- weighted assets.
This amount was $2.2 million above the 8% requirement in effect on that date.


                                       30

<PAGE>



         The OTS and the FDIC are authorized and, under certain circumstances
required, to take certain actions against savings associations that fail to meet
their capital requirements. The OTS is generally required to take action to
restrict the activities of an "undercapitalized association" (generally defined
to be one with less than either a 4% core capital ratio, a 4% Tier 1
risked-based capital ratio or an 8% risk-based capital ratio). Any such
association must submit a capital restoration plan and until such plan is
approved by the OTS may not increase its assets, acquire another institution,
establish a branch or engage in any new activities, and generally may not make
capital distributions. The OTS is authorized to impose the additional
restrictions that are applicable to significantly undercapitalized associations.
As a condition to the approval of the capital restoration plan, any company
controlling an undercapitalized association must agree that it will enter into a
limited capital maintenance guarantee with respect to the institution's
achievement of its capital requirements.

         Any savings association that fails to comply with its capital plan or
is "significantly undercapitalized" (i.e., Tier 1 risk-based or core capital
ratios of less than 3% or a risk-based capital ratio of less than 6%) must be
made subject to one or more of additional specified actions and operating
restrictions, which may cover all aspects of its operations and include a forced
merger or acquisition of the association. An association that becomes
"critically undercapitalized" (i.e., a tangible capital ratio of 2% or less) is
subject to further mandatory restrictions on its activities in addition to those
applicable to significantly undercapitalized associations. In addition, the OTS
must appoint a receiver (or conservator with the concurrence of the FDIC) for a
savings association, with certain limited exceptions, within 90 days after it
becomes critically undercapitalized. Any undercapitalized association is also
subject to the general enforcement authority of the OTS and the FDIC, including
the appointment of a conservator or a receiver. The OTS is also generally
authorized to reclassify an association into a lower capital category and impose
the restrictions applicable to such category if the institution is engaged in
unsafe or unsound practices or is in an unsafe or unsound condition.

         The imposition by the OTS or the FDIC of any of these measures on the
Company or the Bank may have a substantial adverse effect on the Company's
operations and profitability.

         Supervisory Agreement. The Bank was required to enter into a
Supervisory Agreement with the OTS on August 27, 1999. The Supervisory Agreement
generally required the Bank to (i) comply with specified federal laws and
regulations regarding management and financial policies, the establishment and
maintenance of records and interest-risk management policies and procedures and
to (ii) take certain corrective actions regarding the disposal of certain of the
Bank's securities classified as high-risk, the maintenance of at least a
moderate level of interest rate risk, the prior receipt of a "no objection" from
the OTS before the Bank buys, exchanges or otherwise changes positions with any
security it owns, and the development of loan underwriting policies and
procedures. In addition, the Bank is required to obtain prior written approval
of the OTS before it may pay any dividends to the holding company.

         Limitations on Dividends and Other Capital Distributions. OTS
regulations impose various restrictions on savings associations with respect to
their ability to make distributions of capital, which include dividends, stock
redemptions or repurchases, cash-out mergers and other transactions charged to
the capital account. OTS regulations also prohibit a savings association from
declaring

                                       31

<PAGE>



or paying any dividends or from repurchasing any of its stock if, as a result,
the regulatory capital of the association would be reduced below the amount
required to be maintained for the liquidation account established in connection
with its mutual to stock conversion.

         Assuming the absence of supervisory problems, savings associations that
before and after the proposed distribution remain well-capitalized, may make
capital distributions during any calendar year equal to the greater of 100% of
net income for the year-to-date plus retained net income for the two preceding
years (less any dividends paid). However, an institution deemed to be in need of
more than normal supervision by the OTS may have its dividend authority
restricted by the OTS. The Bank may pay dividends in accordance with this
general authority. Pursuant to the Supervisory Agreement, the Bank must obtain
prior written permission from OTS before paying dividends.

         Savings associations proposing to make any capital distribution need
only submit written notice to the OTS 30 days prior to such distribution.
Savings associations that do not, or would not meet their current minimum
capital requirements following a proposed capital distribution, however, must
obtain OTS approval prior to making such distribution. The OTS may object to the
distribution during that 30-day period based on safety and soundness concerns.
See "Regulation -- Supervisory Agreement."

         Qualified Thrift Lender Test. All savings associations, including the
Bank, are required to meet a qualified thrift lender ("QTL") test to avoid
certain restrictions on their operations. This test requires a savings
association to have at least 65% of its portfolio assets (as defined by
regulation) in qualified thrift investments on a monthly average for nine out of
every 12 months on a rolling basis. As an alternative, the savings association
may maintain 60% of its assets in those assets specified in Section 7701(a)(19)
of the Internal Revenue Code of 1986, as amended (the "Code"). Such assets
primarily consist of residential housing related loans and investments. At June
30, 2001, the Bank met the test and has always met the test since its
effectiveness.

         Any savings association that fails to meet the QTL test must convert to
a national bank charter, unless it requalifies as a QTL and thereafter remains a
QTL. If an association does not requalify and converts to a national bank
charter, it must remain SAIF-insured until the FDIC permits it to transfer to
the BIF. If such an association has not yet requalified or converted to a
national bank, its new investments and activities are limited to those
permissible for both a savings association and a national bank, and it is
limited to national bank branching rights in its home state. In addition, the
association is immediately ineligible to receive any new FHLB borrowings and is
subject to national bank limits for payment of dividends. If such association
has not requalified or converted to a national bank within three years after the
failure, it must divest of all investments and cease all activities
impermissible for a national bank. In addition, it must repay promptly any
outstanding FHLB borrowings, which may result in prepayment penalties. If any
association that fails the QTL test is controlled by a holding company, then
within one year after the failure, the holding company must register as a bank
holding company and become subject to all restrictions on bank holding
companies. See "- Holding Company Regulation."

        Community Reinvestment Act. Under the Community Reinvestment Act
("CRA"), every FDIC insured institution has a continuing and affirmative
obligation consistent with safe and sound

                                       32

<PAGE>



banking practices to help meet the credit needs of its entire community,
including low and moderate income neighborhoods. The CRA does not establish
specific lending requirements or programs for financial institutions nor does it
limit an institution's discretion to develop the types of products and services
that it believes are best suited to its particular community, consistent with
the CRA. The CRA requires the OTS, in connection with the examination of the
Bank, to assess the institution's record of meeting the credit needs of its
community and to take such record into account in its evaluation of certain
applications, such as a merger or the establishment of a branch, by the Bank. An
unsatisfactory rating may be used as the basis for the denial of an application
by the OTS.

         The federal banking agencies, including the OTS, have recently revised
the CRA regulations and the methodology for determining an institution's
compliance with the CRA. Due to the heightened attention being given to the CRA
in the past few years, the Bank may be required to devote additional funds for
investment and lending in its local community. The Bank was examined for CRA
compliance in March, 1998 and received a rating of "satisfactory."

         Transactions with Affiliates. Generally, transactions between a savings
association or its subsidiaries and its affiliates are required to be on terms
as favorable to the association as transactions with non-affiliates. In
addition, certain of these transactions, such as loans to an affiliate, are
restricted to a percentage of the association's capital. Affiliates of the Bank
include the Company and any company which is under common control with the Bank.
In addition, a savings association may not lend to any affiliate engaged in
activities not permissible for a bank holding company or acquire the securities
of most affiliates. The Bank's subsidiaries are not deemed affiliates; however,
the OTS has the discretion to treat subsidiaries of savings associations as
affiliates on a case by case basis.

         Certain transactions with directors, officers or controlling persons
are also subject to conflict of interest regulations enforced by the OTS. These
conflict of interest regulations and other statutes also impose restrictions on
loans to such persons and their related interests. Among other things, such
loans must be made on terms substantially the same as for loans to unaffiliated
individuals.

         Holding Company Regulation. The Company is a unitary savings and loan
holding company subject to regulatory oversight by the OTS. As such, the Company
is required to register and file reports with the OTS and is subject to
regulation and examination by the OTS. In addition, the OTS has enforcement
authority over the Company and its non-savings association subsidiaries which
also permits the OTS to restrict or prohibit activities that are determined to
be a serious risk to the subsidiary savings association.

         As a unitary savings and loan holding company that has been in
existence prior to May 4, 1999, the Company generally is not subject to activity
restrictions. If the Company acquires control of another savings association as
a separate subsidiary, it would become a multiple savings and loan holding
company, and the activities of the Company and any of its subsidiaries (other
than the Bank or any other SAIF-insured savings association) would become
subject to such restrictions.

        If the Bank fails the QTL test, the Company must obtain the approval of
the OTS prior to continuing after such failure, directly or through its other
subsidiaries, any business activity other than those approved for multiple
savings and loan holding companies or their subsidiaries. In

                                       33

<PAGE>



addition, within one year of such failure, the Company must register as, and
will become subject to, the restrictions applicable to bank holding companies.
The activities authorized for a bank holding company are more limited than are
the activities authorized for a unitary or multiple savings and loan holding
company. See "--Qualified Thrift Lender Test."

         Federal Securities Law. The stock of the Company is registered with the
SEC under the Securities Exchange Act of 1934, as amended (the "Exchange Act").
The Company is subject to the information, proxy solicitation, insider trading
restrictions and other requirements of the SEC under the Exchange Act.

         Company stock held by persons who are affiliates (generally officers,
directors and principal stockholders) of the Company may not be resold without
registration or unless sold in accordance with certain resale restrictions. For
example, if the Company meets specified current public information requirements,
each affiliate of the Company is able to sell in the public market, without
registration, a limited number of shares in any three-month period.

         Federal Reserve System. The Federal Reserve Board requires all
depository institutions to maintain non-interest bearing reserves at specified
levels against their transaction accounts (primarily checking, NOW and Super NOW
checking accounts). At June 30, 2001, the Bank was in compliance with these
reserve requirements. The balances maintained to meet the reserve requirements
imposed by the Federal Reserve Board may be used to satisfy liquidity
requirements that may be imposed by the OTS.

         Savings associations are authorized to borrow from the Federal Reserve
Bank "discount window," but Federal Reserve Board regulations require
associations to exhaust other reasonable alternative sources of funds, including
FHLB borrowings, before borrowing from the Federal Reserve Bank.

         Federal Home Loan Bank System. The Bank is a member of the FHLB of Des
Moines, which is one of 12 regional FHLBs that administer the home financing
credit function of savings associations. Each FHLB serves as a reserve or
central bank for its members within its assigned region. Each is funded
primarily from proceeds derived from the sale of consolidated obligations of the
FHLB System. It makes loans to members (i.e., advances) in accordance with
policies and procedures, established by the board of directors of the FHLB,
which are subject to the oversight of the Federal Housing Finance Board. All
advances from the FHLB are required to be fully secured by sufficient collateral
as determined by the FHLB. In addition, all long-term advances are required to
provide funds for residential home financing.

         As a member, the Bank is required to purchase and maintain stock in the
FHLB of Des Moines. At June 30, 2001, the Bank had $480,100 in FHLB stock, which
was in compliance with this requirement. In past years, the Bank has received
substantial dividends on its FHLB stock. For the years ended June 30, 2001 and
2000, dividends paid by the FHLB of Des Moines to Horizon Federal totaled
$37,000 and $70,000 respectively. The $6,000 dividend received in June 2001 for
FHIB's quarter ended May 31, 2001 reflects an annualized rate of 4.56%, 2.00%
below the rate for fiscal 2000. Over the past five fiscal years such dividends
have averaged 6.59%.


                                       34

<PAGE>



Federal and State Taxation

         Federal Taxation. For years prior to 1997, savings associations such as
the Bank that meet certain definitional tests relating to the composition of
assets and other conditions prescribed by the Code, were permitted to establish
reserves for bad debts and to make annual additions thereto which may, within
specified formula limits, be taken as a deduction in computing taxable income
for federal income tax purposes. The amount of the bad debt reserve deduction
for "non-qualifying loans" was computed under the experience method. The amount
of the bad debt reserve deduction for "qualifying real property loans"
(generally loans secured by improved real estate) was computed under either the
experience method or the percentage of taxable income method (based on an annual
election). Under the experience method, the bad debt reserve deduction is an
amount determined under a formula based generally upon the bad debts actually
sustained by the savings association over a period of years.

         In August 1996, legislation was enacted that repealed the reserve
method of accounting (including the percentage of taxable income method which
was used in prior years) used by many thrifts to calculate their bad debt
reserve for federal income tax purposes. Thrift institutions with $500 million
or less in assets may, however, continue to use the experience method. As a
result, the Bank must recapture that portion of the reserve that exceeds the
amount that could have been taken under the experience method for post-1987 tax
years. At June 30, 2001, the Bank's post- 1987 excess reserves amounted to
approximately $56,000. The recapture will be approximately $56,000 per year and
will occur over a six-year period which began in fiscal 1997. The legislation
also requires thrift institutions to account for bad debts for federal income
tax purposes on the same basis as commercial banks for tax years beginning after
December 31, 1995. As a result, the Company computes its bad debt deduction on
the experience method.

         In addition to the regular income tax, corporations, including savings
associations such as the Bank, generally are subject to a minimum tax. An
alternative minimum tax is imposed at a minimum tax rate of 20% on alternative
minimum taxable income, which is the sum of a corporation's regular taxable
income (with certain adjustments) and tax preference items, less any available
exemption. The alternative minimum tax is imposed to the extent it exceeds the
corporation's regular income tax and net operating losses can offset no more
than 90% of alternative minimum taxable income. For taxable years beginning
after 1986 and before 1996, corporations, including savings associations such as
the Bank, were also subject to an environmental tax equal to 0.12% of the excess
of alternative minimum taxable income for the taxable year (determined without
regard to net operating losses and the deduction for the environmental tax) over
$2 million.


         To the extent earnings appropriated to a savings association's bad debt
reserves for "qualifying real property loans" and deducted for federal income
tax purposes exceed the allowable amount of such reserves computed under the
experience method and to the extent of the association's supplemental reserves
for losses on loans ("Excess"), such Excess may not, without adverse tax
consequences, be utilized for the payment of cash dividends or other
distributions to a shareholder (including distributions on redemption,
dissolution or liquidation) or for any other purpose (except to absorb bad debt
losses). As of June 30, 2001, the Bank's Excess for tax purposes totaled
approximately $1.3 million.

                                       35

<PAGE>



         The Company, the Bank and its subsidiary file consolidated federal
income tax returns on a fiscal year basis using the accrual method of
accounting.

         The federal income tax returns of the Company for the last three years
are open to possible audit by the Internal Revenue Service (the "IRS"). No
returns are being audited by the IRS at the current time. In the opinion of
management, any examination of still open returns (including returns of
subsidiary and predecessors of, or entities merged into, the Bank) would not
result in a deficiency which could have a material adverse effect on the
financial condition of the Bank and its subsidiary.

         Iowa Taxation. Iowa imposes a franchise tax on the taxable income of
both mutual and stock savings banks. The tax rate is 5%, which may effectively
be increased, in individual cases, by application of a minimum tax provision.
Taxable income under the franchise tax is generally similar to taxable income
under the federal corporate income tax, except that, under the Iowa franchise
tax, no deduction is allowed for Iowa franchise tax payments and taxable income
includes interest on state and municipal obligations. Interest on U.S.
obligations is taxable under the Iowa franchise tax and under the federal
corporate income tax. For Iowa state tax purposes, the Company and SEI file
income tax returns and the Bank files a franchise tax return.

         Delaware Taxation. As a Delaware holding company, the Company is
exempted from Delaware corporate income tax but is required to file an annual
report with and pay an annual fee to the State of Delaware. The Company is also
subject to an annual franchise tax imposed by the State of Delaware.

Effect of New Accounting Standards

        Statement of Financial Accounting Standards (SFAS) No. 133, "Accounting
for Derivative Instruments and Hedging Activities" - SFAS No. 133 required
companies to record derivatives on the balance sheet as assets or liabilities,
measured at fair value. Gains or losses resulting from changes in the values of
those derivatives would be accounted for depending on the use of the derivative
and whether it qualifies for hedge accounts. The key criterion for hedge
accounting is that the hedging relationship must be highly effective in
achieving offsetting changes in fair value or cash flows. SFAS No. 133 does not
allow hedging of a security which is classified as held to maturity.
Accordingly, upon adoption of SFAS No. 133, companies may reclassify any
security from held to maturity to available for sale if they wish to be able to
hedge the security in the future. SFAS No. 133, as amended by SFAS No. 137 and
SFAS No. 138, will be effective for the Company beginning July 1, 2000. The
adoption of SFAS No. 133, SFAS No. 137 and SFAS No. 138 did not have a
significant impact on the Company's financial statements.

         In July 2001, the FASB issued Statement No. 141, Business Combinations,
and Statement No. 142, Goodwill and Other Intangible Assets. Statement 141
requires that the purchase method of accounting be used for all business
combinations initiated after July 30, 2001 as well as all purchase method
business combinations completed after June 30, 2001. Statement 141 also
specifies criteria intangible assets acquired in a purchase method business
combination must meet to be recognized and reported apart from goodwill, noting
that any purchase price allocable to an assembled workforce may not be accounted
for separately. Statement 142 will require that goodwill and intangible assets
with indefinite useful lives no longer be amortized, but instead tested for

                                       36

<PAGE>


impairment at least annually in accordance with the provisions of statement 142.
Statement 142 will also require that intangible assets with definite useful
lives be amortized over their respective estimated useful lives to their
estimated residual values, and reviewed for impairment in accordance with SFAS
No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of.

Competition

         Horizon Federal faces strong competition, both in originating real
estate loans and in attracting deposits. Competition in originating real estate
loans comes primarily from commercial and savings banks, and to a lesser extent,
credit unions located in the Bank's market area. Commercial banks, savings
banks, credit unions and finance companies provide vigorous competition in
consumer lending. The Bank competes for real estate and other loans principally
on the basis of the quality of services it provides to borrowers, the interest
rates it charges, loan fees it charges, and the types of loans it originates.
See "-- Lending Activities."

         The Bank attracts all of its deposits through its retail banking
offices, primarily from the communities in which those retail banking offices
are located. Therefore, competition for those deposits is principally from
commercial banks, savings banks, credit unions and investment banking firms
located in these communities. The Bank competes for these deposits by offering a
variety of account alternatives at competitive rates and by providing convenient
business hours, branch locations and interbranch deposit and withdrawal
privileges at each.

         The Bank serves Mahaska County and that portion of Marion County in and
around Knoxville, Iowa. There are nine commercial banks, one savings bank, other
than Horizon Federal, and three credit unions which compete for deposits and
loans in Horizon Federal's primary market area. The Bank estimates its share of
the savings market in its primary market area to be approximately 15%.

Employees

         At June 30, 2001, the Bank had a total of 27 full-time and 7 part-time
employees. The Bank's employees are not represented by any collective bargaining
group. Management considers its employee relations to be good.

         The following information as to the business experience during the past
five years is supplied with respect to executive officers of the Company and the
Bank who do not serve on the Company's Board of Directors. There are no
arrangements or understandings between the persons named and any other person
pursuant to which such officers were selected.

        Vicki Hladik - Ms. Hladik, age 40, joined Horizon Federal in 1995 as
Assistant Treasurer and was promoted to Controller and Treasurer of the Bank in
2001. Ms. Hladik is in charge of the accounting department of the Bank.


                                       37

<PAGE>


        Kent R. Frankenfeld - Mr. Frankenfeld, age 44, joined the Bank in
October 1994, as Vice President in charge of Marketing and Product Development.
Mr. Frankenfeld was the Vice President of a savings bank located in Des Moines,
Iowa prior to joining the Bank.

Item 2. Description of Property

         The Bank conducts its business through its three offices, two of which
are located in Oskaloosa, Iowa and one in Knoxville, Iowa. The following table
sets forth information relating to each of the Bank's offices as of June 30,
2001. The total net book value of the Bank's premises and equipment (including
land, buildings and leasehold improvements and furniture, fixtures and
equipment) at June 30, 2001 was approximately $1.25 million. See Note 6 of Notes
to Consolidated Financial Statements in the Annual Report.


                                 Date      Total Approximate   Net Book Value at
       Location                Acquired      Square Footage     June 30, 2001
--------------------------------------------------------------------------------


Main Office:                     1964            4,230              $190,000
 301 First Avenue East
 Oskaloosa, Iowa

Branch Offices:                  1992            3,277              $511,000
 509 A Avenue, West
 Oskaloosa, Iowa

 1022 West Pleasant Street       1979            1,598              $553,000
 Knoxville, Iowa


         Horizon Federal believes that its current facilities are adequate to
meet the present and foreseeable needs of the Bank and the Company in Oskaloosa
and Knoxville, Iowa with the completion of our expansion in Knoxville in
September of 2000.

         The Bank maintains an on-line data base with a service bureau servicing
financial institutions. The net book value of the data processing and computer
equipment utilized by the Bank at June 30, 2001 was approximately $60,000.

Item 3.       Legal Proceedings

         Horizon Federal is involved, from time to time, as plaintiff or
defendant in various legal actions arising in the normal course of their
businesses. While the ultimate outcome of these proceedings cannot be predicted
with certainty, it is the opinion of management, after consultation with counsel
representing Horizon Federal in the proceedings, that the resolution of these
proceedings should not have a material effect on Horizon Federal's results of
operations.

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

         No matter was submitted to a vote of security holders through the
solicitation of proxies or otherwise during the fourth quarter of the fiscal
year ended June 30, 2001.


                                       38

<PAGE>



                                     PART II

Item 5. Market for Common Equity and Related Stockholder Matters

         Page 40 of the attached 2001 Annual Report to Stockholders is
incorporated herein by reference.

Item 6. Management's Discussion and Analysis or Plan of Operation

         Pages 4 through 14 of the attached 2001 Annual Report to Stockholders
are incorporated herein by reference.

Item 7. Financial Statements

         The following information appearing in the Company's 2001 Annual Report
to Stockholders for the year ended June 30, 2001, is incorporated herein by
reference.


Annual Report Section                                    Pages in Annual Report
---------------------                                    ----------------------

Independent Auditors' Report                                       15

Consolidated Balance Sheets as of June 30, 2001 and 2000           16

Consolidated Statements of Operations for the Years Ended
 June 30, 2001, 2000 and 1999                                      17

Consolidated Statements of Changes in Stockholders' Equity
 and Comprehensive Income for Years Ended
 June 30, 2001, 2000 and 1999                                      18

Consolidated Statements of Cash Flows for Years Ended
 June 30, 2001, 2000 and 1999                                      19

Notes to Consolidated Financial Statements                         20-41


         With the exception of the aforementioned information, the Company's
Annual Report to Stockholders for the year ended June 30, 2001, is not deemed
filed as part of this Annual Report on Form 10-KSB.

Item 8.       Changes in and Disagreements with Accountants on Accounting and
              Financial Disclosure

         There has been no Current Report on Form 8-K filed within 24 months
prior to the date of the most recent financial statements reporting a change of
accountants and/or reporting disagreements on any matter of accounting principle
or financial statement disclosure.

                                       39

<PAGE>


                                    PART III


Item 9. Directors, Executive Officers, Promoters and Control Persons; Compliance
        with Section 16(a) of the Exchange Act

Directors

         Information concerning Directors of the Company is incorporated herein
by reference from the definitive proxy statement for the Annual Meeting of
Stockholders to be held on October 25, 2001, a copy of which was filed on
September 25, 2001.

Executive Officers

Information regarding the business experience of the executive officers of the
Company and the Bank contained in Part I under the caption "Employees" of this
Form 10-KSB is incorporated herein by reference.

Compliance with Section 16(a)

         Information concerning compliance with Section 16(a) of the Securities
Exchange Act of 1934 is incorporated herein by reference from the definitive
Proxy Statement for the Annual Meeting of Stockholders to be held on October 25,
2001, a copy of which was filed on September 25, 2001.

Item 10. Executive Compensation

         Information concerning executive compensation is incorporated herein by
reference from the definitive Proxy Statement for the Annual Meeting of
Stockholders to be held on October 25, 2001, a copy of which was filed on
September 25, 2001.

Item 11. Security Ownership of Certain Beneficial Owners and Management

         Information concerning security ownership of certain beneficial owners
and management is incorporated herein by reference from the definitive Proxy
Statement for the Annual Meeting of Stockholders to be held on October 25, 2001,
a copy of which was filed on September 25, 2001.

Item 12. Certain Relationships and Related Transactions

         Information concerning certain relationships and related transactions
is incorporated herein by reference from the definitive Proxy Statement for the
Annual Meeting of Stockholders to be held on October 25, 2001, a copy of which
was filed on September 25, 2001.

Item 13. Exhibits and Reports on Form 8-K

              (a)  Exhibits -- See Index to Exhibits.

              (b) Reports on Form 8-K -- No reports on Form 8-K were filed
              during the three-month period ended June 30, 2001.

                                       40

<PAGE>



                                   SIGNATURES

         Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Report to be signed on
its behalf by the undersigned, thereunto duly authorized.

                                 HORIZON FINANCIAL SERVICES
                                 CORPORATION



Date: September 28, 2001         By: /s/ Robert W. DeCook
      ------------------             ------------------------------------
                                     Robert W. DeCook, President and
                                     Chief Executive Officer
                                     (Duly Authorized Representative)


         Pursuant to the requirements of the Securities Exchange Act of 1934,
this Report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.



/s/ Robert W. DeCook                          /s/ Thomas L. Gillespie
-----------------------------------------     ----------------------------------
Robert W. DeCook, Director, President and     Thomas L. Gillespie, Director and
Chief Executive Officer (Principal            Vice President
 Executive Officer)

Date: September 28, 2001                      Date: September 28, 2001
      -----------------------------------           ----------------------------


/s/ Gary L. Rozenboom                         /s/ Dwight L. Groves
-----------------------------------------     ----------------------------------
Gary L. Rozenboom, Director                   Dwight L. Groves, Director


Date: September 28, 2001                      Date: September 28, 2001
      -----------------------------------           ----------------------------

/s/ Norman P. Zimmerman                       /s/ Vicki Hladik
-----------------------------------------     ----------------------------------
Norman P. Zimmerman, Director                 Vicki Hladik, Treasurer and
                                              Comptroller,  (Principal Financial
                                              and Accounting Officer)

Date: September 28, 2001                      Date: September 28, 2001
      -----------------------------------           ----------------------------


                                       41

<PAGE>




                                Index to Exhibits


 Exhibit
 Number                          Document
--------  ----------------------------------------------------------------------

   3      The Articles of Incorporation and Bylaws, filed on March 18,
          1994 as exhibits 3.1 and 3.2, respectively, to Registrant's
          Registration Statement on Form S-1 (File No. 33-76674), are
          incorporated herein by reference.

   4      Registrant's Specimen Stock Certificate, filed on March 18, 1994 as
          Exhibit 4 to Registrant's Registration Statement on Form S-1
          (File No. 33-76674), is incorporated herein by reference.

 10.1     Registrant's Employee Stock Ownership Plan, filed on March 18, 1994 as
          Exhibit 10.3 to Registrant's Registration Statement on Form S-1
          (File No. 33-76674), is incorporated herein by reference.

 10.2     Employment Agreements between the Bank and Messrs. DeCook and
          Gillespie, filed as Exhibits 10.1 and 10.2, respectively, to
          Registrant's Annual Report on Form 10-KSB for the fiscal year
          ended June 30, 1994 (File No. 0-24036), are incorporated
          herein by reference.

 10.3     1994 Stock Option and Incentive Plan, filed as Exhibit 10.3 to
          Registrant's Annual Report on Form 10-KSB for the fiscal year
          ended June 30, 1994 (File No. 0-24036), is incorporated herein
          by reference.

 10.4     Recognition and Retention Plan, filed as Exhibits 10.4 to Registrant's
          Annual Report on Form 10-KSB for the fiscal year ended June 30, 1994
          (File No. 0-24036), is incorporated herein by reference.

 13       Annual Report to Stockholders

 21       Subsidiaries of the Registrant

 23       Consent of KPMG


                                       42