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, 2002

                                       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                           (I.R.S. Employer
 incorporation  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:
$7,001,079.

         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  6,
2002, was $5.69 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  6, 2002,  there were issued and  outstanding  753,182
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, 2002.

         Part III of Form  10-KSB - Proxy  Statement  for the Annual  Meeting of
Stockholders to be held in October 2002.

         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,  2002,  the  Company  had  $88.4  million  of  assets  and
stockholders' equity of $9.4 million (or 10.6% 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, 2002,  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, 2002,  the apartment  complex was 97.5% leased.  At June 30, 2002,  the
Company's  equity  investment in the project was $124,650,  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,


                                       2
<PAGE>

light industrial and retail economies. Its light industrial economy, however, is
mainly agricultural support.  Major employers in the area include the Clow Valve
Company, the Pella Corporation, Cargill, Vermeer Manufacturing, 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 not improving.  Some
area  employers are laying off employees and some are cutting  employees'  hours
from 40 to 32  hours  per  week.  Currently,  farm  prices  for both  grain  and
livestock are volatile but generally  better than at this time last year. We are
currently  experiencing  decline in some lines of retail business.  In the event
current  economic  and market  conditions  persist or  worsen,  loan  demand and
existing  loans may be  affected,  which could  adversely  affect the  financial
condition and results of operations of the Company and the Bank.

         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,  2002,  the Bank's net loan  portfolio  totaled  $65.1
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.

                                       3
<PAGE>


         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 unimpaired capital
and  surplus or  $500,000.  See  "Regulation  -- Federal  Regulation  of Savings
Banks." At June 30,  2002,  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 $1,159,000, however, at June 30, 2002 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,
                                         ------------------------------------------------------------------
                                                2002                   2001                    2000
                                         -----------------       -----------------       ------------------
                                         Amount    Percent       Amount    Percent       Amount     Percent
                                         ------    -------       ------    -------       ------     -------
                                                               (Dollars in Thousands)
<S>                                      <C>        <C>         <C>          <C>         <C>          <C>
Real Estate:
 One-to-four family .................    $38,553    58.7%       $41,515      63.0%       $39,704      63.2%
 Commercial real estate .............      7,020    10.7          6,703      10.1          6,636      10.6
 Multi-family .......................      1,363     2.1          1,458       2.2          1,234       1.9
 Residential construction ...........      1,475     2.2          1,381       2.1          1,245       2.0
                                         -------    ----        -------      ----        -------      ----
     Total real estate loans ........     48,411    73.7         51,057      77.4         48,819      77.7
                                         =======    ====        =======      ====        =======      ====

Other Loans:
 Consumer Loans:
  Automobile ........................      3,171     4.8          3,482       5.3          3,906       6.2
  Home improvement ..................        299      .5            361        .5            778       1.3
  Deposit account ...................        265      .4            198        .3            123        .2
  Other .............................      3,121     4.8          2,946       4.5          2,646       4.2
                                         -------    ----        -------      ----        -------      ----
     Total consumer loans ...........      6,856    10.5          6,987      10.6          7,453      11.9
 Commercial business loans ..........     10,386    15.8          7,856      12.0          6,548      10.4
                                         -------    ----        -------      ----        -------      ----
     Total other loans ..............     17,242    26.3         14,843      22.6         14,001      22.3
                                         -------    ----        -------      ----        -------      ----
     Total loans receivable, gross...     65,653   100.0%        65,900     100.0%        62,820     100.0%
                                                   =====                    =====                    =====

Less:
 Loans in process ...................         --                     --                       --
 Deferred fees and discounts ........         17                     85                       24
 Allowance for losses ...............        537                    369                      379
                                         -------                -------                  -------
 Total loans receivable, net ........    $65,099                $65,446                  $62,417
                                         =======                =======                  =======

</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,
                                                        ------------------------------------------------------------------
                                                              2002                   2001                    2000
                                                        -----------------       -----------------       ------------------
                                                        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 ..........................     $10,891     16.6%      $11,088       16.8%      $ 9,662       15.4%
      Commercial real estate ......................       2,882      4.4         2,760        4.2         2,539        4.0
      Multi-family ................................         854      1.3           897        1.4           653        1.0
      Residential construction ....................       1,475      2.2         1,244        1.9         1,165        1.9
                                                        -------    -----       -------      -----       -------      -----
         Total fixed-rate real estate loans .......      16,102     24.5        15,989       24.3        14,019       22.3

      Consumer ....................................       6,800     10.4         6,927       10.5         7,389       11.8
      Commercial business .........................       8,676     13.2         7,311       11.1         6,406       10.2
                                                        -------    -----       -------      -----       -------      -----
         Total fixed-rate loans ...................      31,578     48.1        30,227       45.9        27,814       44.3
                                                        -------    -----       -------      -----       -------      -----

Adjustable-Rate Loans:
   Real estate:
      One-to-four family ..........................      27,662     42.1        30,427       46.2        30,041       47.8
      Commercial real estate ......................       4,138      6.3         3,943        6.0         4,097        6.6
      Multi-family ................................         509       .8           561         .8           582         .9
      Residential construction ....................          --       --           137         .2            80         .1
                                                        -------    -----       -------      -----       -------      -----
         Total adjustable-rate real estate loans...      32,309     49.2        35,068       53.2        34,800       55.4

      Consumer ....................................          56       .1            60         .1            65         .1
      Commercial business .........................       1,710      2.6           545         .8           141         .2
                                                        -------    -----       -------      -----       -------      -----
         Total adjustable-rate loans ..............      34,075     51.9        35,673       54.1        35,006       55.7
                                                        -------    -----       -------      -----       -------      -----
         Total loans, receivable, gross ...........      65,653    100.0%       65,900      100.0%       62,820      100.0%
                                                                   =====                    =====                    =====
Less:
   Loans in process ...............................          --                     --                       --
   Deferred fees and discounts ....................          17                     85                       24
   Allowance for loan losses ......................         537                    369                      379
         Total loans receivable, net ..............     $65,099                $65,446                  $62,417
                                                        =======                =======                  =======

</TABLE>

                                       6
<PAGE>


         The following table  illustrates  the interest rate  sensitivity of the
Bank's loan  portfolio  at June 30, 2002.  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
                        Amount  Average Rate  Amount  Average Rate  Amount  Average Rate  Amount  Average Rate Amount  Average Rate
                        ------  ------------  ------  ------------  ------  ------------  ------  ------------ ------  ------------
                                                                 (Dollars in Thousands)
   Due During
  Years Endin
    June 30,
--------------------
<C>                    <C>          <C>      <C>         <C>       <C>          <C>       <C>          <C>      <C>        <C>
2003(2)                $15,293      7.39%    $ 1,475     6.87%     $ 1,534      8.50%     $ 5,011      8.61%    $23,313    7.69%
2004 to 2007 ........   16,820      7.39          --       --        4,159      8.62        3,050      7.97      24,029    7.68
2008 and following...   14,823      7.87          --       --        1,163      8.52        2,325      7.68      18,311    7.89
                       -------               -------               -------                -------               -------
Total ...............  $46,936      7.54%    $ 1,475     6.87%     $ 6,856      8.58%     $10,386      8.21%    $65,653    7.74%
                       =======               =======               =======                =======               =======

</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,  2003  which  have
predetermined  interest rates is $24.6 million,  while the total amount of loans
due after such date which have  floating or adjustable  interest  rates is $17.7
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 Loans 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, 2002, the
Bank originated $7.3 million of adjustable-rate,  one-to-four family real estate
loans and $12.5 million of fixed-rate  one-to-four  family loans (including $3.5
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 $9.7 million of
fixed rate loans for sale during fiscal 2002.

         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  36.9% of the loans secured by  one-to-four  family
real estate  originated  by the Bank during  fiscal  2002 were  originated  with
adjustable rates of interest.  See  "Originations  of Loans and  Mortgage-Backed
Securities."


                                       8
<PAGE>

         At June 30, 2002, the Bank was not servicing any loans other than loans
it originated.  As of June 30, 2002, the Bank's  residential  ARM loan portfolio
totaled $27.7  million,  or 42.1% of the Bank's gross loan portfolio as compared
to the  residential  fixed-rate,  mortgage  loan  portfolio  which totaled $10.9
million,  or 16.6% 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  $4.9
million, $4.6 million and $4.0 million of mortgage-backed and related securities
during fiscal 2002, 2001 and 2000, 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, 2002, the Bank's construction
loan portfolio totaled $1.5 million, or 2.2% 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


                                       9
<PAGE>

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.

         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,
2002,  $1.4 million,  or 2.1%, of the Bank's gross loan  portfolio  consisted of
multi-family  loans  and $7.0  million,  or  10.7%,  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,  2002,  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 $684,500.  The Bank had only seven  commercial  and
multi-family  real estate loans which exceeded $300,000 at June 30, 2002, 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

                                       10
<PAGE>

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%.

         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, 2002,  the
Bank's  consumer  loans totaled $6.9 million,  or 10.5% 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, 2002, the  outstanding  balances on automobile  loans and home
improvement  totaled  $3.2 million and  $299,000,  or 4.8% 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, 2002,
the Bank had $39,000 of credit  card loans  outstanding  and  $247,000 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, 2002, non-performing consumer loans totaled $253,000, or
3.7% of total  consumer  loans and .4% of the Bank's gross loan  portfolio.  See
"Asset Quality - Non-Performing Assets."

                                       11
<PAGE>


         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.  Commercial  loans also involve the extension of revolving
credit for a  combination  of  equipment  acquisitions  and  working  capital in
expanding companies.  At June 30, 2002,  commercial business loans totaled $10.4
million, or 15.8% 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, 2002
were a  $800,000  business  line of credit to a builder  of  one-to-four  family
residential  properties  and a  $600,000  business  line  of  credit  loan to an
equipment manufacturer.  At June 30, 2002, these lines of credit were performing
in  accordance  with  their  repayment  terms.  The  Bank had  only  nine  other
commercial  business  loans in excess of $225,000 at June 30, 2002, 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.


                                       12
<PAGE>

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 each of the
years ended June 30, 2002,  2001 and 2000 the Bank's dollar volume of fixed rate
real estate loan  originations  exceeded  its  adjustable-rate  real estate loan
originations.

         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 2002, 2001 and 2000 the
Bank purchased $4.8, $4.6 and $4.0 million, respectively, of mortgage-backed and
related  securities.  During  fiscal  2002,  the Bank  funded its  purchases  of
mortgage-backed  and related  securities  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.

                                                    Year Ended June 30,
                                            ----------------------------------
                                              2002         2001         2000
                                            --------     --------     --------
                                                  (Dollars in Thousands)
Originations by type:
 Adjustable-rate:
  Real estate
   - One-to-four family ..................  $  7,296     $  6,234     $  6,847
   - Multi-family ........................        --           --           --
   - Commercial real estate ..............     1,504          782          240
   - Residential construction ............        --           --          315
  Non-real estate
   - Consumer ............................        --           --           --
   - Commercial business .................     1,238          515           --
                                            --------     --------     --------
         Total adjustable-rate ...........    10,038        7,531        7,402
                                            --------     --------     --------

 Fixed-rate:
  Real estate
   - One-to-four family ..................     8,980        9,186        6,025
   - Multi-family ........................        --          387            2
   - Commercial real estate ..............     1,338          366          459
   - Residential construction ............     3,520        2,294        2,114
  Non-real estate
   - Consumer ............................     5,556        4,247        5,079
   - Commercial business .................     4,882        3,618        2,378
                                            --------     --------     --------
         Total fixed-rate ................    24,276       20,098       16,057
                                            --------     --------     --------
         Total loans originated ..........    34,314       27,629       23,459

Total loan purchases .....................        --          172        1,300
Total loan sales .........................   (11,055)      (5,150)      (2,775)
Total loan repayments ....................   (23,852)     (20,779)     (19,119)
Increase (decrease) in other items, net...       246        1,157        3,486
                                            --------     --------     --------
         Net (decrease) increase .........  $   (347)    $  3,029     $  6,351
                                            ========     ========     ========


                                       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.


                                                     Year Ended June 30,
                                              ----------------------------------
                                                2002        2001         2000
                                              --------    --------     --------
                                                   (Dollars in Thousands)
Purchases:
  Mortgage-backed and related securities ....  $ 4,855     $ 4,660      $ 4,004
  Collateralized Mortgage Obligation ........       --          --           --
                                               -------     -------      -------
         Total ..............................  $ 4,855     $ 4,660      $ 4,004
                                               =======     =======      =======

Sales:
  Mortgage-backed and related securities ....     (430)       (773)          --
  Collateralized Mortgage Obligation ........   (2,970)     (2,932)      (3,885)
         Total ..............................   (3,400)     (3,705)      (3,885)
                                               -------     -------      -------
Repayments:
  Mortgage-backed and related securities ....   (3,284)     (1,099)        (618)
  Collateralized Mortgage Obligation ........     (605)       (419)        (731)
  Net (Amortization)/Accretion MBS and CMOs..      (60)        (11)          42
  (Decrease)/increase in other items, net ...     (117)        626         (129)
                                               -------     -------      -------
         Net (decrease)/increase ............  $(2,611)    $    52      $(1,317)
                                               =======     =======      =======

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, 2002. 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 of                  Percent of                 Percent of                Percent of
                                           Loan                        Loan                        Loan                      Loan
                         Number  Amount  Category   Number  Amount   Category   Number  Amount   Category  Number  Amount  Category
                         ------  ------  --------   ------  ------   --------   ------  ------   --------  ------  ------  --------
                                                           (Dollars in Thousands)
<S>                        <C>  <C>         <C>        <C>  <C>          <C>      <C>  <C>         <C>       <C>   <C>         <C>
Real Estate:

One-to-four family ......  17   $  761      2.0%       6    $  196       .5%      32   $1,383      3.6%      55    $2,340      6.1%

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

Commercial real estate...  --       --       --        2        42       .6       --       --       --        2        42       .6

Consumer ................  31      300      4.4       19        71      1.0       33      253      3.7       83       624      9.1

Commercial business .....   5      400      3.9       --        --       --        8      281      2.7       13       681      6.6
                           --   ------      ---       --    ------       --       --   ------      ---      ---    ------      ---

   Total ................  53   $1,461      2.2%      27    $  309       .5%      73   $1,917      2.9%     153    $3,687      5.6%
                           ==   ======                ==    ======                ==   ======               ===    ======
</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,
                                            ----------------------------
                                             2002       2001       2000
                                            ------     ------     ------
                                              (Dollars in Thousands)
Non-accruing loans:
   One-to-four family ..................    $1,383     $  966     $  622
   Commercial real estate ..............        --        122        137
   Consumer ............................       252        253        266
   Commercial business .................       282         53         74
                                            ------     ------     ------

         Total .........................     1,917      1,394      1,099
                                            ------     ------     ------

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

Foreclosed assets:
   One-to-four family ..................       206         45         --
   Commercial real estate ..............        --         --         --
   Consumer ............................         4          5         56
                                            ------     ------     ------
         Total .........................       210         50         56
                                            ------     ------     ------

Total non-performing assets ............    $2,127     $1,444     $1,155
                                            ======     ======     ======
Total as a percentage of total assets...      2.41%      1.61%      1.39%
                                            ======     ======     ======



         For the fiscal year ended June 30, 2002,  gross  interest  income which
would have been recorded had the  non-accruing  loans been current in accordance
with their original terms amounted to $198,000, of which $92,000 was included in
interest income for such period.

         At June  30,  2002,  there  were no  non-performing  loans  to a single
borrower or group of related borrowers in excess of $211,300.  At June 30, 2002,
there were no non-accruing  loans contained in the foregoing table which are not
described in "Other Loans of Concern" or "Classified Assets" below.

         Other Loans of Concern.  In addition to the  non-performing  assets set
forth in the table above,  as of June 30,  2002,  there was also an aggregate of
$245,000 in net book value of loans  secured by other  commercial  business 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.

         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

                                       17
<PAGE>

"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,
2002,  the  Bank  had  classified  a  total  of  $2,220,000  of  its  assets  as
substandard,  $111,000 as doubtful  and $42,000 as loss.  All portions of a loan
which are classified as loss are reserved for at a rate of 100%.

         At June 30, 2002, total  classified  assets  comprised  $2,373,000,  or
25.2% of the Bank's capital, or 2.7% 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, 2002,  the
Bank had an allowance  for loan losses of  $537,000,  or  approximately  .82% 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.

                                       18
<PAGE>


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


<TABLE>
<CAPTION>
                                                                   Year Ended June 30,
                                                               ---------------------------
                                                                2002       2001       2000
                                                               -----      -----      -----
                                                                 (Dollars in Thousands)

<S>                                                            <C>        <C>        <C>
Balance at beginning of period ............................    $ 369      $ 379      $ 343


Charge-offs:
   One-to-four family .....................................     (108)        (2)        --
   Commercial real estate .................................       --         --         --
   Commercial business ....................................       (2)      (161)       (21)
   Consumer ...............................................      (55)      (127)       (41)
                                                               -----      -----      -----
      Total charge-offs ...................................     (165)      (290)       (62)
                                                               -----      -----      -----

Recoveries:
   Commercial business ....................................       --         --         --
   Consumer ...............................................        1          4          2
                                                               -----      -----      -----
      Total recoveries ....................................        1          4          2
                                                               -----      -----      -----

Net charge-offs ...........................................     (164)      (286)       (60)
Additions charged to operations ...........................      332        276         96
                                                               -----      -----      -----
Balance at end of period ..................................    $ 537      $ 369      $ 379
                                                               =====      =====      =====

Ratio of net charge-offs during the period to average loans
outstanding during the period .............................      .25%       .44%       .10%
                                                                 ===        ===        ===
</TABLE>



         During the fiscal years ended June 30, 2002, 2001 and 2000,  management
recorded  provisions  for  loan  losses  of  $331,500,   $276,000  and  $96,000,
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.



                                       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,
                                ----------------------------------------------------------------------
                                        2002                   2001                      2000
                                -------------------    -------------------        -------------------
                                           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 ........      $100       58.7%       $ 62         63.0%          $110       63.2%
Multi-family ..............         3        2.1           2          2.2              2        1.9
Commercial real estate ....        22       10.7          44         10.1             46       10.6
Residential construction...         4        2.2           5          2.1              4        2.0
Consumer ..................       170       10.5         113         10.6            109       11.9
Commercial business .......       168       15.8          61         12.0            101       10.4
Unallocated ...............        70         --          82           --              7         --
   Total ..................      $537      100.0%       $369        100.0%          $379      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, 2002, the Bank's  liquidity  ratio (liquid assets as a percentage of
net  withdrawable  savings  deposits  and  current  borrowings)  was 12.2%.  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  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.

                                       20
<PAGE>

         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, 2002, the Bank's  mortgage-backed  and related  securities totaled $9.5
million,  or 10.8% 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.

         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.

         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,  2002,  all of the
Bank's  investment,  mortgage-backed  and related  securities were classified as
available for sale.


                                       21
<PAGE>

         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,
                                                              ---------------------------------------------------------------
                                                                     2002                 2001                  2000
                                                              ------------------  --------------------   --------------------
                                                              Carrying      % of   Carrying      % of    Carrying      % of
                                                               Value       Total     Value       Total    Value        Total
                                                               -----       -----     -----       -----    -----        -----
                                                                                 (Dollars in Thousands)
<S>                                                            <C>          <C>     <C>          <C>     <C>          <C>
Investment Securities:
   U.S. government securities .............................    $    --         --%  $    --         --%  $    --         --%
   Federal agency obligations .............................         --         --       996       16.9       867       15.2
   Small business administration loans ....................        667        8.9       693       11.7       692       12.1
   Equity securities (1) ..................................      1,908       25.6     1,714       29.0     2,041       35.8
                                                               -------      -----   -------      -----   -------      -----
      Subtotal ............................................      2,575       34.5     3,403       57.6     3,600       63.1
   FHLB stock .............................................        509        6.8       480        8.1       703       12.3
                                                               -------      -----   -------      -----   -------      -----
      Total investment securities and FHLB stock...........      3,084       41.3     3,883       65.7     4,303       75.4

Other Interest-Earning Assets:
   Interest-bearing deposits with banks ...................      4,374       58.7     2,028       34.3     1,406       24.6
                                                               -------      -----   -------      -----   -------      -----
      Total ...............................................    $ 7,458      100.0%  $ 5,911      100.0%  $ 5,709      100.0%
                                                               =======      =====   =======      =====   =======      =====

    Average remaining life or term to repricing of
    investment securities and other interest-earning assets
    excluding FHLB stock ..................................   1.20 years            2.18 years         3.86 years

Mortgage-Backed and Related Securities:
   CMOs ...................................................    $   462        4.9%  $ 4,129       34.0%  $ 7,132       59.1%
   FHLMC ..................................................         --         --       437        3.6       494        4.1
   FNMA ...................................................      3,077       32.3       696        5.7     1,601       13.2
   GNMA ...................................................      5,972       62.8     6,859       56.6     2,840       23.5
   Other (2) ..............................................         --         --         1         .1         3         .1
                                                               -------      -----   -------      -----   -------      -----
      Total mortgage-backed and related securities ........    $ 9,511      100.0%  $12,122      100.0%  $12,070      100.0%
                                                               =======      =====   =======      =====   =======      =====
</TABLE>

(1)  Consists primarily of stocks of publicly traded financial  institutions and
     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, 2002
                                      -------------------------------------------------------------------
                                         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.............       --         --        --         --        --        --
Small business administration loans....       --         --        --        667       667       667

Total..................................    $  --    $    --    $   --       $667      $667      $667
                                          ------    -------    ------       ----      ----      ----
Weighted average yield.................       --%        --%       --%      7.88%     7.88%     7.88%
                                          ======    =======    ======       ====      ====      ====
</TABLE>


         The following table sets forth the contractual maturities of the Bank's
mortgage-backed and related securities at June 30, 2002;  however,  the expected
average life to maturity of this portfolio is generally two to 10 years.


                                                                       At
                  -----------------------------------------------   June 30,
                                 1 to         5 to       10 and       2002
                  Less than   Less than 5   Less than     Over      Balance
                   1 Year        Years      10 Years     Years    Outstanding
                  --------    -----------  ----------   -------   -----------
                                     (Dollars in Thousands)
FHLMC.........    $  --        $   --        $   --      $   --         --
FNMA..........       --            --            --       3,077      3,077
GNMA..........       --            --            --       5,972      5,972
CMOs..........       --            --           462          --        462
                  -----        ------        ------      ------     ------
Total.........    $  --        $   --        $  462      $9,049     $9,511
                  =====        ======        ======      ======     ======


         At  June  30,   2002,   the  Bank's   portfolio   of   investment   and
mortgage-backed  securities  contained  two mutual  funds of one issuer  with an
aggregate  book  value of $1.2  million,  or 13.2% of the  Bank's  stockholders'
equity.  There were no other  securities  of any issuer with an  aggregate  book
value in excess of 10% of the Bank's stockholders' equity,  excluding securities
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,  mortgage-backed  securities and short-term
investments, FHLB advances and funds provided from operations.


                                       23
<PAGE>

         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, 2002, the Bank
had total FHLB advances of $5.6 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,
                                           -------------------------------------------------------------------
                                                 2002                      2001                   2000
                                           -----------------       -------------------    --------------------
                                           Amount    Percent       Amount      Percent    Amount       Percent
                                           ------    -------       ------      -------    ------       -------
                                                                  (Dollars in Thousands)
Transactions and Savings Deposits:
----------------------------------
<S>                                       <C>           <C>        <C>           <C>      <C>            <C>
Commercial Demand .................       $ 1,315       1.8%       $   942       1.4%     $   811        1.3%
Checking Accounts (0.0% to 2.1%)...         9,151      12.7          7,737      11.1        7,724       11.9
Savings Accounts (1.0% to 2.1%)....        31,754      44.2         23,681      33.9       23,380       36.1
Money Market Accounts (1.0%) ......           362        .5            313        .4          343         .5
                                          -------      ----        -------      ----      -------       ----
Total Non-Certificates ............        42,582      59.2         32,673      46.8       32,258       49.8
                                          -------      ----        -------      ----      -------       ----
Certificates:
-------------

0.00 - 3.99% ......................        13,197      18.3%         1,486       2.1%          38         .1%
4.00 - 4.99% ......................         8,499      11.8          8,893      12.7        8,703       13.4
5.00 - 5.99% ......................         4,171       5.8          7,695      11.0        9,933       15.3
6.00 - 6.99% ......................         3,485       4.8         14,147      20.3       10,610       16.4
7.00 - 7.99% ......................            20        .1          4,978       7.1        3,213        4.9
8.00 - 8.99% ......................            --        --             --        --            6         .1
9.00% and above ...................            --        --             --        --           --         --
                                          -------     -----        -------     -----      -------      -----

Total Certificates ................        29,372      40.8         37,199      53.2       32,503       50.2
                                          -------     -----        -------     -----      -------      -----
Total Deposits ....................       $71,954     100.0%       $69,872     100.0%     $64,761      100.0%
                                          =======     =====        =======     =====      =======      =====

</TABLE>


         The following table shows rate and maturity  information for the Bank's
certificates of deposit as of June 30, 2002.


<TABLE>
<CAPTION>
                                            0.00-      3.00-      4.00-       5.00-        6.00%                  Percent of
                                            2.99%      3.99%      4.99%       5.99%      or more       Total        Total
                                           -------   --------   ---------   ---------   ----------   ----------   ----------
                                                                        (Dollars in Thousands)
<S>                                        <C>          <C>        <C>        <C>          <C>         <C>          <C>
Certificate accounts maturing
in quarter ending:

September 30, 2002......................   $ 1,687      $ 625      $ 533      $ 388        $ 709       $ 3,942      13.42%
December 31, 2002.......................     4,265        298        682        376          842         6,463      22.00
March 31, 2003..........................     2,176         20      1,545        109          895         4,745      16.15
June 30, 2003...........................     1,293        165      1,285         65          463         3,271      11.14
September 30, 2003......................       200        108      2,872         97          160         3,437      11.70
December 31, 2003.......................       244        815         87         --          380         1,526       5.20
March 31, 2004..........................       321        253        215         --           56           845       2.88
June 30, 2004...........................       191        143        120         48           --           502       1.71
Thereafter..............................         2        391      1,160      3,088           --         4,641      15.80

Total...................................  $ 10,379    $ 2,818    $ 8,499    $ 4,171      $ 3,505      $ 29,372     100.0%
                                          --------    -------    -------    -------      -------      --------     =====

   Percent of total.....................    35.34%       9.59%     28.94%     14.20%       11.93%        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, 2002.

<TABLE>
<CAPTION>
                                                                             Maturity
                                                      --------------------------------------------------------
                                                         3          Over       Over
                                                       Months      3 to 6    6 to 12      Over 12
                                                      or Less      Months     Months      Months        Total
                                                      -------     -------     -------    --------     --------
                                                                   (Dollars in Thousands)
<S>                                                   <C>         <C>         <C>         <C>         <C>
Certificates of deposit of less than  $100,000...     $ 2,812     $ 5,540     $ 7,586     $10,225     $26,163

Certificates of deposit of
$100,000 or more ................................         680         923         430         726       2,759

Public funds(1) .................................         450          --          --          --         450
                                                      -------     -------     -------     -------     -------

Total certificates of deposit ...................     $ 3,942     $ 6,463     $ 8,016     $10,951     $29,372
                                                      =======     =======     =======     =======     =======
</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.

                                                Year Ended June 30,
                                     ----------------------------------------
                                         2002           2001          2000
                                     ------------   ------------  ------------
                                              (Dollars in Thousands)

        Maximum Balance:
             FHLB advances .........      $8,591       $10,006      $16,599
                                          ======       =======      =======

        Average Balance:
             FHLB advances .........      $6,747        $9,756      $13,265



                                       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,
                                              ----------------------------------
                                               2002         2001         2000
                                              ------       ------       ------
                                                   (Dollars in Thousands)

           FHLB advances ..................   $5,571       $9,593       $9,014
                                              ======       ======       ======

           Weighted average interest
           rate of FHLB advances ..........     5.21%        5.49%        5.67%

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,
2002, 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 $93,000.  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,
2002, HISI had a net income of $19,000.

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.  The Bank is
subject  to broad  federal  regulation  and  oversight  extending  to all of its
operations,  principally  by its primary  federal  regulator,  the OTS.  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,  principally by the
OTS. 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. As a
result, the FDIC has certain regulatory and examination authority over the Bank.

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

                                       27
<PAGE>


         Federal  Regulation  of  Savings  Associations.  The OTS has  extensive
authority over the operations of savings banks, such as Horizon Federal. 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 30, 2000 and June
30, 2001,  respectively.  Under agency scheduling guidelines,  another review is
scheduled for September 2002 for examination of June 30, 2002 information.  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, 2002 was $36,000.

         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. See "Supervisory Agreement."

         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 example,  the  permissible  level of
investment   by  federal   associations,   subject   to  safety  and   soundness
restrictions,  (1) in loans  secured by  non-residential  real  property may not
exceed  400% of total  capital,  (2) in  commercial  loans may not exceed 20% of
assets,  provided  that  amounts  in excess  of 10% of assets  may only be small
business loans,  (3) in loans related to leasing of tangible  personal  property
may not  exceed  10% of  assets,  and (4) in  loans  for  personal,  family  and
household  purposes,  when combined  with  commercial  paper and corporate  debt
securities,  may not exceed 35% of assets. Federal savings associations are also
generally  authorized to branch  nationwide.  The Bank is in compliance with the
noted restrictions.  Federal  associations such as Horizon Federal may designate
under which  investment  authority  (or basket) it made a loan or  investment if
that loan or investment is authorized under different sections of the law.

         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, 2002, the Bank's lending limit under this restriction was approximately
$1.2 million.

         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.

                                       28
<PAGE>

         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 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, 2002, 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, 2002, the Bank did not have any intangible  assets
or purchased mortgage servicing rights.

                                       29
<PAGE>


         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  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, 2002,  the Bank had tangible  capital of $7.2  million,  or
8.4% of adjusted  total assets,  which is  approximately  $5.9 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, 2002, the Bank had no intangible
assets which were subject to these  tests.  At June 30, 2002,  the Bank had core
capital equal to $7.2 million,  or 8.4% of adjusted total assets,  which is $3.8
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, 2002, the Bank had no
capital  instruments  that  qualify as  supplementary  capital,  and $495,000 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, 2002.

         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, 2002, the Bank had total capital of $7.7 million (including
$7.2 million in core capital and $495,000 in qualifying  supplementary  capital)
and  risk-weighted  assets of $55.3  million  (including  $942,000 in  converted
off-balance  sheet assets);  or total capital of 14.0%


                                       30
<PAGE>

of risk-weighted  assets.  This amount was $3.3 million above the 8% requirement
in effect on that date.

         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.  The Bank will remain subject to the Supervisory  Agreement until it
is  terminated,  modified or suspended in writing by the OTS acting  through its
director or regional director.

                                       31
<PAGE>

         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 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.

         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,  2002,  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."


                                       32
<PAGE>

         Community  Reinvestment  Act.  Under  the  Community  Reinvestment  Act
("CRA"),  every  FDIC  insured  institution  has a  continuing  and  affirmative
obligation  consistent  with safe and sound  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."  The Bank is
scheduled to be examined for CRA  compliance in September 2002 based on June 30,
2002 information.

         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


                                       33
<PAGE>

(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 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, 2002,  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, 2002, the Bank had $509,200 in FHLB stock, which
was in compliance with this  requirement.  In past years,  the Bank has received
substantial  dividends on its FHLB



                                       34
<PAGE>

stock. For the years ended June 30, 2002 and 2001, dividends paid by the FHLB of
Des Moines to Horizon  Federal  totaled  $17,000 and $37,000  respectively.  The
$3,800  dividend  received  in June 2002 for FHLB's  quarter  ended May 31, 2002
reflects an annualized  rate of 3.0%,  3.1% below the rate for fiscal 2001. Over
the past five fiscal years such dividends have averaged 5.88%.

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 recaptured that portion of the reserve that exceeded the amount
that could have been taken under the experience  method for post-1987 tax years.
The recapture was  approximately  $56,000 per year over a six-year  period which
began in fiscal 1997 and ended in fiscal 2002.  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 years ending before 2001 and
100% for years ending 2001 and 2002.

         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)


                                       35
<PAGE>

or for any other  purpose  (except  to absorb bad debt  losses).  As of June 30,
2002, the Bank's Excess for tax purposes totaled approximately $1.3 million.

         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

         In July 2001,  the Federal  Accounting  Standards  Board (FASB)  issued
Statement No. 141,  Business  Combinations,  and Statement No. 142, Goodwill and
Other Intangible Assets.  Statement No. 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 No. 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 No. 142 will require
that goodwill and intangible  assets with  indefinite  useful lives no longer be
amortized,  but instead  tested for  impairment at least  annually in accordance
with the  provisions of Statement  No. 142.  Statement No. 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  Statement of Financial  Accounting
Standards (SFAS) No. 121, Accounting for the Impairment of Long-Lived Assets and
for Long-Lived Assets to Be Disposed Of.

         In June  2001,  the FASB  issued  SFAS No.  143,  Accounting  for Asset
Retirement  Obligations.  SFAS No. 143  requires  the Company to record the fair
value of an asset retirement obligation as a liability in the period in which it
incurs a legal obligation  associated with the



                                       36
<PAGE>

retirement  of tangible  long-lived  assets  that  result from the  acquisition,
construction,  development and/or normal use of assets. The Company also records
a  corresponding  asset  which is  depreciated  over the life of the asset.  The
Company is required to adopt SFAS No. 143 for fiscal years  beginning after June
15, 2002. The Company does not expect this  statement to have a material  effect
on its consolidated financial statements.

         In August  2001,  the FASB  issued  SFAS No.  144,  Accounting  for the
Impairment or Disposal of Long-Lived  Assets.  SFAS No. 144 supersedes  SFAS No.
121 and the  accounting  and  reporting  provision of APB Opinion No. 30 for the
disposal of a segment of a business. SFAS No. 144 addresses financial accounting
and reporting for the  impairment or disposal of long-lived  assets and requires
that long-lived assets be reviewed for impairment  whenever events or changes in
circumstances  indicate  that  the  carrying  amount  of an  asset  may  not  be
recoverable.  Recoverability  of  assets  to be held and used is  measured  by a
comparison of the carrying  amount of an asset to future net cash flows expected
to be generated by the asset.  If the  carrying  amount of an asset  exceeds its
estimated future cash flows, an impairment charge is recognized by the amount by
which the carrying amount of the asset exceeds the fair value of the asset. SFAS
No. 144 requires  companies to separately  report  discontinued  operations  and
extends that reporting to a component of an entity that either has been disposed
of (by sale,  abandonment,  or in a distribution  to owners) or is classified as
held for  sale.  Assets  to be  disposed  of are  reported  at the  lower of the
carrying  amount of fair value less costs to sell.  The  Company is  required to
adopt SFAS No. 144 for fiscal years  beginning  after  December  15,  2001.  The
adoption of this statement will not have a material  effect on the  consolidated
financial statements.

         SFAS  No.  145,  Rescission  of FASB  Statements  No.  4,  44,  and 64,
Amendment of FASB Statement No. 13, and Technical Corrections,  was issued April
2002.  This Statement  rescinds FASB Statement No. 4, Reporting Gains and Losses
from Extinguishment of Debt, and an amendment of that Statement,  FASB Statement
No. 64, Extinguishments of Debt Made to Satisfy Sinking-Fund Requirements.  This
Statement also rescinds FASB Statement No. 44,  Accounting for Intangible Assets
of Motor Carriers.  This Statement amends FASB Statement No. 13,  Accounting for
Leases,  to  eliminate an  inconsistency  between the  required  accounting  for
sale-leaseback  transactions  and the  required  accounting  for  certain  lease
modifications  that have  economic  effects  that are similar to  sale-leaseback
transactions.   This  Statement   also  amends  other   existing   authoritative
pronouncements  to make various  technical  corrections,  clarify  meanings,  or
describe their applicability under changed conditions.

         The provisions of this Statement related to the rescission of Statement
No. 4 shall be  applied  in  fiscal  years  beginning  after May 15,  2002.  The
provisions in paragraphs 8 and 9(c) of this  Statement  related to Statement No.
13 shall be effective for  transactions  occurring after May 15, 2002. All other
provisions of this Statement shall be effective for financial  statements issued
on or after May 15, 2002. The effects of implementation are not material.

         SFAS No. 146,  Accounting  for Costs  Associated  with Exit or Disposal
Activities was issued June 2002. This Statement addresses  financial  accounting
and  reporting  for  costs  associated  with  exit or  disposal  activities  and
nullifies   Emerging  Issues  Task  Force  (EITF)  Issue  No.  94-3,   Liability
Recognition for Certain Employee Termination Benefits and Other Costs to Exit an
Activity (including Certain Costs Incurred in a Restructuring).

                                       37
<PAGE>

         The  provisions  of this  Statement are effective for exit and disposal
activities that are initiated after December 31, 2002.

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, 2002,  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 41, 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.

         Kent R.  Frankenfeld  - Mr.  Frankenfeld,  age 45,  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.

                                       38
<PAGE>

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,
2002. 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, 2002 was approximately $1.35 million. See Note 6 of Notes
to Consolidated Financial Statements in the Annual Report.

<TABLE>
<CAPTION>

                                           Date            Total Approximate         Net Book Value at
             Location                    Acquired           Square Footage             June 30, 2002
----------------------------------     ------------      ---------------------     ----------------------
<S>                                        <C>                   <C>                     <C>
Main Office:
   301 First Avenue East                   1964                  4,230                   $253,000
   Oskaloosa, Iowa

Branch Offices:
    509 A Avenue, West                     1992                  3,277                   $528,000
    Oskaloosa, Iowa

    1022 West Pleasant Street              1979                  3,029                   $570,000
    Knoxville, Iowa

</TABLE>


         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.

         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, 2002 was approximately $127,000.

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, 2002.


                                       39
<PAGE>

                                     PART II

Item 5.    Market for Common Equity and Related Stockholder Matters
           --------------------------------------------------------

         Page  45  of  the  attached  2002  Annual  Report  to  Stockholders  is
incorporated herein by reference.


Securities Authorized for Issuance Under Equity Compensation Plan.

         The following table provides information as of June 30, 2002 related to
our equity compensation plans in effect at that time.

<TABLE>
<CAPTION>

                            Equity Compensation Plan Information
----------------------------------------------------------------------------------------------------------
    Plan Category                 Number of Securities     Weighted-average         Number of securities
                                   to be Issued Upon       Exercise Price of        Remaining Available
                                     Exercise of          Outstanding Options,      for Future Issurance
                                  Outstanding Options,    Warrants and Rights          Under Equity
                                  Warrants and Right                                Compensation Plans
------------------------------- ------------------------ ---------------------- --------------------------
<S>                                       <C>                     <C>
 Equity Compensation
 Plans Approved by
  Security Holders                        42,740                  $5.55                       ---
------------------------------- ------------------------ ---------------------- --------------------------
 Equity Compensation
 Plans Not Approved
 by Security Holders                        ---                     ---                       ---
------------------------------- ------------------------ ----------------------- -------------------------
                 Total                    42,740                  $5.55                       ---
------------------------------- -----------------------  ----------------------- -------------------------
</TABLE>


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

         Pages 4 through 17 of the attached 2002 Annual  Report to  Stockholders
are incorporated herein by reference.

Item 7.    Financial Statements
           --------------------

         The following information appearing in the Company's 2002 Annual Report
to  Stockholders  for the year ended June 30, 2002,  is  incorporated  herein by
reference.


Annual Report Section                                    Pages in Annual Report
---------------------                                    ----------------------
Independent Auditors' Report                                      19

Consolidated Balance Sheets as of June 30, 2002 and 2001          20

Consolidated Statements of Operations for the Years Ended
June 30, 2002, 2001 and 2000                                      21


                                       40
<PAGE>

Consolidated Statements of Changes in Stockholders' Equity
and Comprehensive Income for Years Ended
June 30, 2002, 2001 and 2000                                      22

Consolidated Statements of Cash Flows for Years Ended
June 30, 2002, 2001 and 2000                                      23

Notes to Financial Statements                                     24

         With the  exception of the  aforementioned  information,  the Company's
Annual  Report to  Stockholders  for the year ended June 30, 2002, 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.

                                    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  24,  2002,  a copy of which  was  filed on
September 24, 2002.

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 24,
2002, a copy of which was filed on September 24, 2002.


                                       41
<PAGE>

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  24,  2002,  a copy of which  was  filed on
September 24, 2002.

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 24, 2002,
a copy of which was filed on September 24, 2002.

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 24, 2002, a copy of which
was filed on September 24, 2002.

Item 13.   Exhibits and Reports on Form 8-K
           --------------------------------

           (a)  Exhibits -- See Index to Exhibits.

           (b)  Reports on Form 8-K - The following is a description of the
                Form 8-K filed during the three-month period ended June 30,
                2002:

                    On April 24, 2002, a current report on Form 8-K was filed to
                    announce the Company's earnings for the three month and nine
                    month periods ended March 31, 2002.




                                       42
<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 30, 2002             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 30, 2002                   Date: September 30, 2002
     ------------------------------------         -----------------------------

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


Date: September 30, 2002                     Date: September 30, 2002
    ------------------------------------          -----------------------------

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


Date: September 30, 2002                     Date: September 30, 2002
    ------------------------------------          -----------------------------


                                       43
<PAGE>


                                 CERTIFICATIONS
                  (PURSUANT TO THE REQUIREMENTS OF RULE 13a-14
                     OF THE SECURITES EXCHANGE ACT OF 1934)


I, Robert W. DeCook, certify that:

1.   I have  reviewed  this annual  report on Form  10-KSB of Horizon  Financial
     Services Corporation;

2.   Based on my  knowledge,  this  annual  report  does not  contain any untrue
     statement of a material fact or omit to state a material fact  necessary to
     make the statements made, in light of the  circumstances,  under which such
     statements  were made, not misleading with respect to the period covered by
     this annual report; and

3.   Based on my  knowledge,  the  financial  statements,  and  other  financial
     information included in this annual report,  fairly present in all material
     respects the financial  condition,  results of operations and cash flows of
     the registrant as of, and for, the periods presented in this annual report.


Date: September 30, 2002                                /s/ Robert W. DeCook
                                                       -----------------------
                                                       Chief Executive Officer


I, Vicki Hladik, certify that:

1.   I have  reviewed  this annual  report on Form  10-KSB of Horizon  Financial
     Services Corporation;

2.   Based on my  knowledge,  this  annual  report  does not  contain any untrue
     statement of a material fact or omit to state a material fact  necessary to
     make the statements made, in light of the  circumstances,  under which such
     statements  were made, not misleading with respect to the period covered by
     this annual report; and

4.   Based on my  knowledge,  the  financial  statements,  and  other  financial
     information included in this annual report,  fairly present in all material
     respects the financial  condition,  results of operations and cash flows of
     the registrant as of, and for, the periods presented in this annual report.

Date: September 30, 2002                               /s/ Vicki Hladik
                                                      --------------------------
                                                      Treasurer and Comptroller


                                       44
<PAGE>

                                 CERTIFICATIONS
           (PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002)


I, Robert W. DeCook, certify that:

(1)  this annual report on Form 10-KSB of Horizon Financial Services Corporation
     fully  complies with the  requirements  of section 13(a) of the  Securities
     Exchange Act of 1934; and

(2)  the  information  contained in this annual report fairly  presents,  in all
     material  respects,  the  financial  condition and results of operations of
     Horizon Financial Services Corporation.

Date: September 30, 2002                               /s/ Robert W. DeCook
                                                       ------------------------
                                                       Chief Executive Officer


I, Vicki Hladik, certify that:

(2)  this annual report on Form 10-KSB of Horizon Financial Services Corporation
     fully  complies with the  requirements  of section 13(a) of the  Securities
     Exchange Act of 1934; and

(2)  the  information  contained in this annual report fairly  presents,  in all
     material  respects,  the  financial  condition and results of operations of
     Horizon Financial Services Corporation.


Date: September 30, 2002                              /s/ Vicki Hladik
                                                      -------------------------
                                                      Treasurer and Comptroller


                                       45
<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