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

                                   FORM 10-QSB

(Mark One)

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

               For the quarterly period ended September 30, 2001

                                       or

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

      For the transition period from ________________ to ________________


                        Commission File Number: 0-24036
                                               ----------

                     Horizon Financial Services Corporation
--------------------------------------------------------------------------------
             (Exact name of registrant as specified 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
--------------------------------------------------------------------------------
 (Address of principal executive offices)                      (Zip Code)

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


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


Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for shorter  period that the registrant was required
to file such reports),  and (2) has been subject to such filing requirements for
the past 90 days. [ X ] YES    [   ] NO

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

                          Common Stock                   751,462
                          ------------           -----------------------
                             Class               Shares Outstanding
                                                 as of October 19, 2001

Transitional Small Business Disclosure Format (check one):
[   ] YES    [ X ] NO



<PAGE>


<TABLE>
<CAPTION>

              HORIZON FINANCIAL SERVICES CORPORATION and SUBSIDIARY

                                      INDEX


Part I. Financial Information                                                  Page
                                                                               ----
         <S>                                                                    <C>
         Item 1.  Financial Statements (Unaudited)

         Consolidated Balance Sheets at September 30, 2001 and June 30, 2001     1

         Consolidated Statements of Operations for the three months ended        2
         September 30, 2001 and 2000

         Consolidated Statements of Comprehensive Income for the three months    3
         ended September 30, 2001 and 2000

         Consolidated Statements of Cash Flows for the three months ended        4
         September 30, 2001 and 2000

         Notes to Consolidated Financial Statements                              5

         Item 2.  Management's Discussion and Analysis                           7



Part II. Other Information                                                      13

         Signatures                                                             14

         Index of Exhibits                                                      15
</TABLE>




<PAGE>



                                                      PART I

ITEM 1.  FINANCIAL STATEMENTS

              HORIZON FINANCIAL SERVICES CORPORATION and SUBSIDIARY
                           Consolidated Balance Sheets
<TABLE>
<CAPTION>

                                                             September 30,          June 30,
Assets                                                           2001                 2001
------                                                       ------------         ------------
                                                              (Unaudited)
<S>                                                          <C>                  <C>
Cash and cash equivalents                                    $  4,818,988         $  5,591,526
Securities available-for-sale                                  14,961,394           15,525,117
Loans receivable, net                                          65,986,625           65,445,714
Real estate                                                       351,925              280,458
Stock in Federal Home Loan Bank, at cost                          480,100              480,100
Office property and equipment, net                              1,260,161            1,253,741
Accrued interest receivable                                       746,079              682,183
Deferred tax assets                                                61,600               85,550
Prepaid expenses and other assets                                  75,463               71,499
                                                             ------------         ------------

     Total assets                                            $ 88,742,335         $ 89,415,888
                                                             ------------         ============

Liabilities and Stockholders' Equity
------------------------------------
Deposits                                                     $ 70,373,596         $ 69,871,926
Advances from Federal Home Loan Bank                            8,586,969            9,592,627
Advance payments by borrowers for taxes and insurance              15,371              393,550
Accrued income taxes                                              250,994              191,603
Accrued expenses and other liabilities                            821,160              919,996
                                                             ------------         ------------

     Total liabilities                                         80,048,090           80,969,702
                                                             ------------         ------------

Stockholders' equity
--------------------
Preferred stock, $.01 par value, authorized 250,000
     shares, none issued                                               --                   --
Common stock, $.01 par value, 1,500,000 shares
     authorized, 1,046,198 issued                                  10,462               10,462
Additional paid-in capital                                      5,022,511            5,022,511
Retained earnings, substantially restricted                     5,773,808            5,565,793
Treasury stock, at cost, 294,736 shares                        (2,129,894)          (2,129,894)
Accumulated other comprehensive income (loss)                      17,358              (22,686)
                                                             ------------         ------------

     Total stockholders' equity                                 8,694,246            8,446,186
                                                             ------------         ------------

Total liabilities and stockholders' equity                   $ 88,742,335         $ 89,415,888
                                                             ============         ============
</TABLE>


See Notes to Consolidated Financial Statements.

                                       -1-

<PAGE>



              HORIZON FINANCIAL SERVICES CORPORATION and SUBSIDIARY
                      Consolidated Statements of Operations
<TABLE>
<CAPTION>
                                                                       Three Months
                                                                     Ended September 30,
                                                                   2001              2000
                                                                   ----              ----
                                                               (Unaudited)
<S>                                                            <C>                <C>
Interest income:
  Interest and fees on loans                                   $ 1,364,367        $ 1,357,162
  Interest on securities available-for-sale                        205,667            257,139
  Other interest income                                             37,464             17,873
                                                               -----------        -----------

Total interest income                                            1,607,498          1,632,175
                                                               -----------        -----------

Interest expense:
  Interest on deposits                                             762,393            807,016
  Interest on FHLB advances and other borrowings                   120,115            139,580
                                                               -----------        -----------

Total interest expense                                             882,508            946,596
                                                               -----------        -----------

Net interest income                                                724,990            685,579

Provision for losses on loans                                       29,000             24,000
                                                               -----------        -----------

Net interest income after provision for losses on loans            695,990            661,579
                                                               -----------        -----------

Non-interest income:
  Fees, commissions and service charges                            173,861            153,780
  Gain (loss) on sale of securities, net                            29,634            (36,350)
                                                               -----------        -----------

Total non-interest income                                          203,495            117,430
                                                               -----------        -----------

Non-interest expense:
  Compensation, payroll taxes and employee benefits                296,245            298,568
  Advertising                                                       14,723             14,401
  Office property and equipment                                     65,417             84,785
  Federal deposit insurance premiums                                 8,733              7,893
  Data processing services                                          44,192             42,715
  Other real estate                                                  7,081              2,246
  Other                                                            102,064             76,509
                                                               -----------        -----------

Total non-interest expense                                         538,455            527,317
                                                               -----------        -----------

Earnings before taxes on income                                    361,030            251,692

Taxes on income                                                    119,200             87,500
                                                               -----------        -----------

Net earnings                                                   $   241,830        $   164,192
                                                               ===========        ===========


     Basic and diluted earnings per common share               $      0.32        $      0.19
                                                               -----------        ===========
</TABLE>


See Notes to Consolidated Financial Statements.


                                       -2-

<PAGE>



              HORIZON FINANCIAL SERVICES CORPORATION and SUBSIDIARY
                 Consolidated Statements of Comprehensive Income
<TABLE>
<CAPTION>

                                                                                Three Months
                                                                              Ended September 30,
                                                                            2001              2000
                                                                            ----              ----
                                                                                 (Unaudited)
<S>                                                                      <C>               <C>
Net income                                                               $ 241,830         $ 164,192

Other Comprehensive Income:
      Unrealized gains (losses) on securities available for sale:
          Unrealized holding gains (losses) arising
            during the period, net of tax                                   58,625           128,171
      Reclassification adjustment for net (gains) losses
            included in net income, net of tax                             (18,581)           22,791
                                                                         ---------         ---------

Other comprehensive income, net of tax                                      40,444           150,962
                                                                         ---------         ---------


Comprehensive income                                                     $ 281,874         $ 315,154
                                                                         =========         =========
</TABLE>


See Notes to Consolidated Financial Statements.

                                       -3-

<PAGE>



              HORIZON FINANCIAL SERVICES CORPORATION and SUBSIDIARY
                      Consolidated Statements of Cash Flows

<TABLE>
<CAPTION>

                                                                              Three months ended
                                                                                September 30,
                                                                            2001               2000
                                                                            ----               ----
                                                                                   (Unaudited)
<S>                                                                     <C>                 <C>
Cash flows from operating activities:
Net earnings                                                            $   241,830         $   164,192
Adjustments to reconcile net earnings to net cash provided
by operating activities:
  Depreciation                                                               23,526              29,317
  Amortization of fees, premiums and accretion of discounts, net             14,225                   7
  Provision for losses on loans                                              29,000              24,000
  Loans originated for sale                                              (3,088,962)           (618,425)
  Proceeds on sales of loans                                              2,956,321             481,253
  (Gain) loss on sale of securities                                         (29,634)             36,350
  Reinvested dividends                                                         (935)            (10,455)
  Increase in accrued interest receivable                                   (63,896)            (91,171)
  Increase in accrued income taxes                                           59,391              45,500
  Amortization of stock compensation plans                                       --               5,593
  Other, net                                                               (102,801)            367,351
                                                                        -----------         -----------

Net cash provided by operating activities                                    38,065             433,512
                                                                        -----------         -----------

Cash flows from investing activities:
  Securities available-for-sale:
     Purchases                                                           (3,987,867)           (197,875)
     Proceeds from sale                                                   3,737,523             224,313
     Proceeds from maturity and principal collected                         894,406             219,404
  Loans to customers, net                                                  (508,737)         (2,844,983)
  Purchase of office property and equipment, net                            (29,946)           (286,956)
                                                                        -----------         -----------

Net cash provided by (used in) investing activities                         105,379          (2,886,097)
                                                                        -----------         -----------

Cash flows from financing activities:
  Increase in deposits                                                      501,670           2,619,567
  Proceeds from advances from Federal Home Loan Bank                             --           1,000,000
  Principal payments on advances from Federal Home Loan Bank             (1,005,658)            (23,839)
  Decrease advance payments by borrowers for taxes and insurance           (378,179)           (365,108)
  Payment of dividends                                                      (33,815)            (37,999)
  Treasury stock acquired                                                        --            (136,239)
                                                                        -----------         -----------

Net cash (used in) provided by financing activities                        (915,982)          3,056,382
                                                                        -----------         -----------

Net (decrease) increase in cash and cash equivalents                       (772,538)            603,797

Cash and cash equivalents at beginning of period                          5,591,526           1,981,511
                                                                        -----------         -----------
Cash and cash equivalents at end of period                              $ 4,818,988         $ 2,585,308
                                                                        ===========         ===========

Supplemental disclosures of cash flow information:
  Cash paid during the period for:
     Interest                                                           $   933,381         $   801,820
     Taxes                                                                   59,809              42,000
  Noncash investing and financing activities:
     Transfers from loans to other real estate                               71,467                  --
                                                                        ===========         ===========
</TABLE>


See Notes to Consolidated Financial Statements.

                                       -4-

<PAGE>


                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                     HORIZON FINANCIAL SERVICES CORPORATION


1.  BASIS OF PRESENTATION

The consolidated financial statements for the three months ended September 30,
2001 are unaudited. In the opinion of management of Horizon Financial Services
Corporation (the "Registrant" or "Company"), these financial statements reflect
all adjustments, consisting only of normal occurring accruals, necessary to
present fairly the consolidated financial position of the Company at September
30, 2001 and its results of operations and cash flows for the periods presented.
These consolidated financial statements do not purport to contain all the
necessary disclosures required by generally accepted accounting principles that
might otherwise be necessary in the circumstances and should be read in
conjunction with the consolidated financial statements and notes therein
included in the annual report of Horizon Financial Services Corporation for the
year ended June 30, 2001. The results of the periods presented are not
necessarily representative of the results of operations and cash flows which may
be expected for the entire year.


2.  PRINCIPLES OF CONSOLIDATION

The consolidated financial statements include the accounts of the Company and
its wholly owned subsidiary, Horizon Federal Savings Bank (the "Bank"), and the
Bank's wholly owned subsidiary, Horizon Investment Services, Inc. The principal
business activity of Horizon Investment Services, Inc. is to sell credit life
insurance to customers of the Bank. All material intercompany accounts and
transactions have been eliminated.


                                       -5-

<PAGE>



3.  EARNINGS PER SHARE

The following provides a reconciliation of the amounts used in the determination
of basic and diluted earnings per share for the three month periods ended
September 30, 2001 and 2000:

<TABLE>
<CAPTION>

                                                                    Three Months Ended
                                                                        September 30,
                                                                   2001              2000
                                                                   ----              ----
<S>                                                              <C>              <C>
Net earnings                                                     $ 241,830        $ 164,192
                                                                 =========        =========


Basic earnings per share:
       Weighted average common shares outstanding                  751,462          852,111

       Less unearned employee stock ownership plan shares               --             (945)
                                                                 ---------        ---------

Weighted average number of common shares outstanding               751,462          851,166
                                                                 =========        =========

Earnings per common share - basic                                $    0.32        $    0.19
                                                                 =========        =========

Diluted earnings per share:
       Weighted average common shares outstanding                  751,462          852,111

       Less unearned employee stock ownership plan shares               --             (945)

       Assumed incremental option shares
          using the treasury stock method                           11,681            9,571
                                                                 ---------        ---------

Common and common equivalent shares outstanding                    763,143          860,737
                                                                 =========        =========

Earnings per common share - diluted                              $    0.32        $    0.19
                                                                 =========        =========
</TABLE>

                                       -6-

<PAGE>



ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS


GENERAL

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

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

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

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

Local economic conditions in the Bank's market are declining. Currently, farm
prices for both livestock and grain are better than at this time last year, but
are declining somewhat. We are currently experiencing factory layoffs and some
decline in 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.


DISCLOSURE REGARDING FORWARD LOOKING STATEMENTS

The Company, and its subsidiaries may from time to time make written or oral
"forward-looking statements", including statements contained in the Company's
filings with the Securities and Exchange Commission (including this Quarterly
Report on Form 10-QSB and the exhibits hereto and thereto), in its reports to
stockholders and in other communications by the Company, which are made in good
faith by the Company and the Bank pursuant to the "safe harbor" provisions of
the Private Securities Litigation Reform Act of 1995.


                                       -7-

<PAGE>



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

o        the strength of the United States economy in general and the strength
         of the local economies in which the Company and the Bank conduct their
         operations;
o        the effects of, and changes in, trade, monetary and fiscal policies and
         laws, including interest rate policies of the Federal Reserve Board,
         inflation, interest rate, market and monetary fluctuations;
o        the timely development of and acceptance of new products and services
         of the Bank and the perceived overall value of these products and
         services by users, including the features, pricing and quality compared
         to competitors' products and services;
o        the willingness of users to substitute competitors' products and
         services for the Bank's products and services;
o        the success of the Bank in gaining regulatory approval of its products
         and services, when required;
o        the impact of changes in financial services' laws and regulations
         (including laws concerning taxes, banking, securities and insurance);
o        technological changes;
o        acquisitions;
o        changes in consumer spending and saving habits; and
o        the success of the Company and the Bank at managing the risks involved
         in the foregoing.

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


FINANCIAL CONDITION

The Company's total assets at September 30, 2001 of $88.7 million decreased
$674,000, or .75%, from $89.4 million at June 30, 2001. This decrease was
attributed to a cash and cash equivalents decrease of $773,000, or 13.8%, from a
balance of $5.6 million at June 30, 2001 to $4.8 million at September 30, 2001,
and a decrease in securities available-for-sale of $564,000, or 3.64%, from
$15.5 million to $15.0 million. The decrease in total assets was offset in part
by a $541,000, or .83% increase in net loans receivable from $65.4 million at
June 30, 2001 to $66.0 million at September 30, 2001.

Total liabilities decreased $922,000, or 11.4%, to $80.1 million at September
30, 2001 from $81.0 million at June 30, 2001. This is a result of a $1.0 million
decrease in advances from the Federal Home Loan Bank and a $378,000 decrease in
advance payments by borrowers for taxes and insurance. Deposits continued to
increase this quarter from $69.9 million at June 30, 2001 to $70.4 million at
September 30, 2001, a $502,000 increase or .72%. Total stockholders' equity
increased 2.9%, or $248,000, the result of increased retained earnings of
$208,000 and increased other comprehensive income on unrealized gains securities
available-for-sale of $40,000. There were no other significant changes in the
components of the Company's balance sheet.

                                       -8-

<PAGE>


RESULTS OF OPERATIONS

The Company's results of operations depend primarily on the level of its net
interest income and non-interest income and the level of its operating
expenses. Net interest income depends upon the volume of interest-earning assets
and interest-bearing liabilities and interest rates earned or paid on such
assets or liabilities, respectively. The Company's non-interest income consists
primarily of fees charged on transaction accounts which help to offset the costs
associated with establishing and maintaining these accounts.

Comparison of three month periods ended September 30, 2001 and September 30,
2000


GENERAL

Net earnings increased $78,000 to $242,000 for the three month period ended
September 30, 2001 from $164,000 for the three month period ended September 30,
2000. The 47.3% increase in net earnings for the three month period ended
September 30, 2001 over the comparable period in 2000 was primarily attributable
to increases in both net interest income and non-interest income as interest on
deposits and FHLB advances declined and income from fees, service charges and
commissions increased. Additionally, net gain on sale of securities increased
$66,000, for the three month period ended September 30, 2001 as compared to the
same period ended 2000. Earnings per common share increased 68.4% from $.19 for
the three month period ended September 30, 2000 to $.32 for the same period
ended September 30, 2001. This considerable increase is due to an increase in
net earnings and the Company's common stock repurchase activities over the prior
comparable period.


INTEREST INCOME

Interest income decreased $25,000 to $1,607,000 for the three month period ended
September 30, 2001 compared to $1,632,000 for the three month period ended
September 30, 2000. The decrease was primarily the result of a 53 basis point
decrease in the weighted average yield on average interest-earning assets to
7.45% for the three month period ended September 30, 2001 as compared to 7.98%
for the same period in 2000. Average net loans receivable increased $1.7
million, but the weighted average yield on loans decreased 17 basis points to
8.32% resulting in a slight overall increase in interest on loans of $7,000.
Interest on securities available-for-sale had a greater impact on interest
income as average balance and weighted average yield decreased. Average balance
for securities available-for-sale decreased $734,000 for the three month period
ended September 30, 2001 to $14.9 million from $15.6 million for the same period
in 2000. Weighted average yield for the September 30, 2001 period decreased 106
basis points to 5.53% from 6.59% for the comparable period in 2000 as a result
of sale and purchase activities in the available-for-sale portfolio and reduced
rates on investments due to market conditions. The decrease in interest on
securities available-for-sale for the three month period ended September 30,
2001 compared to the same period in 2000 was $51,000, or 20.0%. Other interest
income increased $19,600 to $37,500 for the three month period ended September
30, 2001 compared to $17,900 for the three month period ended September 30,
2000. The average outstanding balance of other interest earning assets increased
$3.8 million for the three month period ended September 30, 2001 as compared to
the identical period in 2000.

The substantial growth in other interest earning assets is primarily the result
of increased investment in short-term liquid assets acquired with funds received
from the large customer deposit growth in the third quarter of the Company's
fiscal year ended June 30, 2001. The weighted average yield on other interest
earning assets increased 111 basis points from 1.4% to 2.5% for the three month
period ended September 30, 2001 as compared to the same period in 2000.


                                       -9-

<PAGE>



INTEREST EXPENSE

Interest expense decreased $64,000, to $883,000 for the three month period ended
September 30, 2001 compared to $947,000 for the three month period ended
September 30, 2000. Although weighted average interest-bearing liabilities
increased $4.2 million, or 5.6% for the three month period ended September 30,
2001 as compared to the same period in 2000, a reduced weighted average rate of
58 basis points, or 11.2% for the 2001 period had a greater impact on overall
interest expense. Interest on deposits decreased $45,000 for the three month
period ended September 30, 2001 to $762,000 from $807,000 for the same period
ended September 30, 2000. Weighted average rate paid on deposits for the three
month period ended September 30, 2001 was 4.31% compared to 4.92% for the same
period ended 2000.

Interest on FHLB advances and other borrowings decreased $20,000, to $120,000
from $140,000 for three month period ended September 30, 2001 as compared to the
identical period in 2000. Average borrowings decreased $912,000 for the three
month period ended September 30, 2001 as compared to the same period in 2000 and
the weighted average rate paid on borrowings decreased 29 basis points to 5.44%
for the three months ended September 30, 2001 compared to 5.73% for the period
ended September 30, 2000.


NET INTEREST INCOME

Net interest income increased $39,000 from $686,000 for the three month period
ended September 30, 2000 to $725,000 for the three month period ended September
30, 2001. The Company's annualized net interest margin for the periods being
compared were similar at 3.35% for the three month period ended September 30,
2000 and 3.36% for the same period ended September 30, 2001. The ratio of the
Company's average interest-earning assets to average interest-bearing
liabilities decreased slightly from 108.50% for the three month period ended
September 30, 2000 to 108.42% for the three month period ended September 30,
2001. The interest rate spread between interest-earning assets and
interest-bearing liabilities for the three month period ended September 30, 2001
was 3.02% and the interest rate spread for the comparable period ended September
30, 2000 was 2.96%.


PROVISION FOR LOSSES ON LOANS

The provision for losses on loans is a result of management's periodic analysis
of the adequacy of the Company's allowance for losses on loans. The Company
recorded a provision for losses on loans of $29,000 for the three month period
ended September 30, 2001 and $24,000 for the three month period ended September
30, 2000. As of September 30, 2001, the Company's non-performing assets,
consisting of nonaccrual loans, accruing loans 90 days or more delinquent, real
estate owned and repossessed consumer property, totaled $1,639,000 or 1.85% of
total assets, compared to $1,443,000 or 1.61% of total assets as of June 30,
2001. As of September 30, 2000, the Company's allowance for losses on loans was
$356,000, representing 21.7% of non-performing assets and .54% of net loans
receivable.

The Company continues to monitor and adjust its allowance for losses on loans as
management's analysis of its loan portfolio and economic conditions dictate. The
Company believes it has taken an appropriate approach to maintain the allowance
for loan losses at a level consistent with the Company's loss experiences and
considering, among other factors, the composition of the Company's loan
portfolio, the level of the Company's classified and non-performing assets and
their estimated value. Future additions to the Company's allowance for losses on
loans and any change in the related ratio of the allowance for losses on loans
to non-performing loans are dependent upon the economy, changes in real estate
values and interest rates. In addition, federal regulators may require
additional reserves as a result of their

                                      -10-

<PAGE>



examination of the Company. The allowance for losses on loans reflects what the
Company currently believes is an adequate level of reserves, although there can
be no assurance that future losses will not exceed the estimated amounts,
thereby adversely affecting future results of operations.


NON-INTEREST INCOME

Non-interest income increased $86,000 to $203,000 for the three months ended
September 30, 2001 from $117,000 for the same period ended September 30, 2000.
The increase was primarily attributable to a gain on sale of securities of
$30,000 for the three month period ended September 30, 2001 compared to a
$36,000 loss on sale of securities for the same period ended September 30, 2000.
Contributing to the increase in non-interest income was an increase in fees,
service charges and commission of $20,000, or 13.0%, for the three month period
ended September 30, 2001 as compared to the identical period in 2000 as the
Company continues its growth in fee-based accounts and services charge
collections. Fees, service charges and commissions for the three month periods
ended September 30, 2001 and 2000 were $174,000 and 154,000, respectively.


NON-INTEREST EXPENSE

Total non-interest expense increased $11,000 from $527,000 for the three months
ended September 30, 2000 to $538,000 for the three month period ended September
30, 2001. The increase was primarily attributable to an other operating expense
increase of $26,000, for the three month period ended September 30, 2001
compared to the same period in 2000. The increase was comprised of increases in
loan expense, telephone expense, postage, and audit and accounting expense.
Other real estate expense increased $5,000 for the three month periods being
compared, the result of increased expenses for taxes, insurance and maintenance.
Offsetting this increase was a decrease in advertising expense of $19,000 and a
decrease in compensation, payroll taxes and employee benefits of $2,000 for the
comparable three month periods.


TAXES ON INCOME

The Company had a $32,000 increase in taxes on earnings for the three month
period ended September 30, 2001 as a result of increased net earnings. The
effective tax rate for the three month period ended September 30, 2001 is 33.0%
compared to 34.8% for the three month period ended September 30, 2000.


LIQUIDITY AND CAPITAL RESOURCES

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

The Bank has historically maintained its liquidity ratio at, or above, the level
needed to meet its operational needs. The Bank's liquidity ratio was 10.61% on
September 30, 2001 and 10.35% on June 30, 2001.

At September 30, 2001, the Company had advances of $8.6 million from the FHLB of
Des Moines outstanding. The Company uses its liquidity resources principally to
meet ongoing commitments, to fund maturing certificates of deposit and deposit
withdrawals, and to meet operating expenses. The Company

                                      -11-

<PAGE>



anticipates that it will have sufficient funds available to meet current loan
commitments. At September 30, 2001, the Company had outstanding commitments to
extend credit which amounted to $4,155,000 (including $1.1 million in available
revolving commercial lines of credit). At September 30, 2001, certificates of
deposit scheduled to mature in one year or less totaled $21.6 million.
Management believes, based on its experience to date, that a significant portion
of these funds will remain with the Company. Management believes that loan
repayments and other sources of funds will be adequate to meet the Company's
foreseeable liquidity needs.

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

At September 30, 2001, the Bank had tangible and core capital of $6.5 million,
or 7.5% of adjusted total assets, which was approximately $5.2 million and $3.0
million above the minimum requirements of 1.5% and 4.0%, respectively, of the
adjusted total assets in effect on that date. At September 30, 2001, the Bank
had risk-based capital of $6.8 million (including $6.5 million in core capital),
or 12.0% of risk- weighted assets of $54.2 million. This amount was $2.5 million
above the 8.0% requirement in effect on that date.


                                      -12-

<PAGE>







                                     PART II
                                OTHER INFORMATION

ITEM 1.  Legal Proceedings

         None

ITEM 2.  Changes in Securities

         None

ITEM 3.  Defaults Upon Senior Securities

         None

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

         None

ITEM 5.  Other Information

         None

ITEM 6.  Exhibits and Reports on Form 8-K.

         (a)   Exhibits:
               See Index to Exhibits

         (b)   The following is a description of the Form 8-K filed during
               the three months ended September 30, 2001:

               On August 27, 2001, a current report on Form 8-K was filed
               to announce the Company's earnings for the quarter and
               fiscal year ended June 30, 2001.



                                      -13-

<PAGE>









                                   SIGNATURES


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


                                    HORIZON FINANCIAL SERVICES CORPORATION
                                    Registrant


Date: November 7,2001                /s/ Robert W. DeCook
      -----------------             ---------------------------------------
                                    Robert W. DeCook
                                    President and Chief Executive Officer




Date: November 7, 2001               /s/ Vicki Hladik
      -------------------           ---------------------------------------
                                    Vicki Hladik
                                    Chief Financial Officer









                                      -14-

<PAGE>


                                INDEX TO EXHIBITS

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

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

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

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

   10.2    1994 Stock Option and Incentive Plan, filed as Exhibit 10.3 in
           Registrant's Report on Form 10-KSB for the fiscal year ended June 30,
           1994 (File No. 0-24036), is incorporated herein by reference.

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

   11      Statement re computation of earnings per share (See Footnote 3 of the
           Registrant's Notes to Consolidated Financial Statements contained
           herein)






                                      -15-