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

                                    FORM 10-Q

                                   (Mark One)

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

      For the quarterly period ended September 30, 2007
                                     ------------------

                                       OR

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

      For the transition period from ______________ to __________________


                         Commission file number 0-27062

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

                                   Washington
                                   ----------
         (State or other jurisdiction of incorporation or organization)

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

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

                                     98225
                                     -----
                                   (Zip Code)

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

Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
                         YES  X     NO
                               -          -
Indicate by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer.  See definition of "accelerated
filer and large accelerated file" in Rule 12b-2 of the Exchange Act(Check one):

Large accelerated filer       Accelerated filer  X    Non-accelerated filer
                          -                      --                          --

Indicate by check mark whether the registrant is a shell corporation (as defined
in Rule 12b-2 of the Exchange Act).
                         YES        NO  X
                               --       --
As of November 1, 2007, 12,102,180 common shares, $1.00 par value, were
outstanding.

<PAGE>
                            HORIZON FINANCIAL CORP.

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

Item 1     Financial Statements

           Consolidated Statements of Financial Position                  2

           Consolidated Statements of Income                             3-4

           Consolidated Statements of Stockholders' Equity                5

           Consolidated Statements of Cash Flows                          6

           Selected Notes to Consolidated Financial Statements           7-10

Item 2     Management's Discussion and Analysis of Financial
             Condition and Results of Operations                        11-23

Item 3     Quantitative and Qualitative Disclosures About
             Market Risk                                                 23

Item 4     Controls and Procedures                                       24


PART II    OTHER INFORMATION

Item 1     Legal Proceedings                                             25

Item 1A.   Risk Factors                                                  25

Item 2     Unregistered Sales of Equity Securities and Use of Proceeds   25

Item 3     Defaults Upon Senior Securities                               25

Item 4     Submission of Matters to a Vote of Security Holders           26

Item 5     Other Information                                             26

Item 6     Exhibits                                                      26

           SIGNATURES                                                    27






1
<PAGE>


PART I.      FINANCIAL INFORMATION
Item 1.      Financial Statements (unaudited)

                             HORIZON FINANCIAL CORP.
                  Consolidated Statements of Financial Position

                                     ASSETS
                                                       September 30,  March 31,
(In thousands, except share data)                          2007        2007
                                                       ------------   ---------
                                                       (unaudited)

Cash and cash equivalents                                $   18,457  $   40,833
Interest-bearing deposits                                     6,836       5,379
Investment securities
  Available-for-sale                                         51,652      52,865
  Held-to-maturity                                              370         370
Mortgage-backed securities
  Available-for-sale                                         31,865      26,233
  Held-to-maturity                                               78         148
Federal Home Loan Bank stock                                  7,247       7,247
Loans held for sale                                           1,571       4,493
Loans receivable, net of allowance of loan losses of
  $17,023 at September 30 and $15,889 at March 31         1,146,413   1,054,870
Investment in real estate in a joint venture                 17,406      17,169
Accrued interest and dividends receivable                     7,691       6,626
Bank premises and equipment, net                             28,551      27,631
Deferred income tax receivable                                3,683       3,733
Income tax receivable                                           794           -
Other real estate owned                                         725         725
Other assets                                                 22,792      22,005
                                                          ---------   ---------
TOTAL ASSETS                                             $1,346,131  $1,270,327
                                                          =========   =========

                       LIABILITIES AND STOCKHOLDERS' EQUITY

Deposits                                                 $  997,555  $  975,295
Accounts payable and other liabilities                        6,955       9,508
Other borrowed funds                                        189,738     138,715
Borrowing related to investment in real estate
   in a joint venture                                        21,419      20,243
Advances by borrowers for taxes and insurance                   417         454
Income tax currently payable                                      -         237
Deferred compensation                                         1,982       2,020
                                                          ---------   ---------
   Total liabilities                                      1,218,066   1,146,472
                                                          ---------   ---------
COMMITMENTS AND CONTINGENCIES                                     -           -

STOCKHOLDERS' EQUITY
  Serial preferred stock, $1 par value, 10,000,000
    shares, authorized; none issued or outstanding                -           -
  Common stock, $1 par value, 30,000,000 shares
    authorized; 12,123,595 and 12,254,476 issued and
    outstanding, respectively                                12,124      12,254
  Additional paid-in capital                                 51,199      51,489
  Retained earnings                                          61,207      56,770
  Accumulated other comprehensive income, net of tax          3,535       3,342
   Total stockholders' equity                               128,065     123,855
                                                          ---------   ---------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY               $1,346,131  $1,270,327
                                                          =========   =========

                 (See Notes to Consolidated Financial Statements)


2
<PAGE>


                             HORIZON FINANCIAL CORP.
                  Consolidated Statements of Income (unaudited)

                                                            Three months ended
                                                               September 30,
(In thousands, except share data)                            2007        2006
INTEREST INCOME                                             ------      ------
  Interest on loans                                       $ 24,881    $ 21,981
  Interest on investments and mortgage-backed securities     1,011       1,012
                                                          --------    --------
     Total interest income                                  25,892      22,993
                                                          --------    --------
INTEREST EXPENSE
  Interest on deposits                                       9,818       7,932
  Interest on other borrowings                               2,131       1,928
                                                          --------    --------
     Total interest expense                                 11,949       9,860
                                                          --------    --------
     Net interest income                                    13,943      13,133

PROVISION FOR LOAN LOSSES                                      800         700
                                                          --------    --------
     Net interest income after provision for loan losses    13,143      12,433
                                                          --------    --------
NONINTEREST INCOME
  Service fees                                                 918         784
  Net gain on sales of loans - servicing released              173         206
  Net gain on sales of loans - servicing retained                5           4
  Net gain on sale of investment securities                      -          14
  Other noninterest income                                     516         429
                                                          --------    --------
     Total noninterest income                                1,612       1,437
                                                          --------    --------
NONINTEREST EXPENSE
  Compensation and employee benefits                         4,296       4,107
  Building occupancy                                         1,177       1,014
  Data processing                                              238         213
  Advertising                                                  209         176
  Other expenses                                             1,532       1,366
                                                          --------    --------
     Total noninterest expense                               7,452       6,876
                                                          --------    --------
NET INCOME BEFORE PROVISION FOR INCOME TAX                   7,303       6,994

PROVISION FOR INCOME TAX                                     2,390       2,344
                                                          --------    --------
NET INCOME                                                $  4,913    $  4,650
                                                          ========    ========

BASIC EARNINGS PER SHARE                                  $   0.40    $   0.38
                                                          ========    ========
DILUTED EARNINGS PER SHARE                                $   0.40    $   0.37
                                                          ========    ========

                 (See Notes to Consolidated Financial Statements)

3

<PAGE>

                             HORIZON FINANCIAL CORP.
                 Consolidated Statements of Income (unaudited)

                                                              Six months ended
                                                                September 30,
(In thousands, except share data)                             2007        2006
INTEREST INCOME                                              ------      ------
  Interest on loans                                       $  48,765   $  42,152
  Investment and mortgage-backed securities                   2,026       2,024
                                                            -------     -------
     Total interest income                                   50,791      44,176
                                                            -------     -------
INTEREST EXPENSE
  Interest on deposits                                       19,285      14,524
  Interest on other borrowings                                4,122       3,837
                                                            -------     -------
     Total interest expense                                  23,407      18,361
                                                            -------     -------
     Net interest income                                     27,384      25,815

PROVISION FOR LOAN LOSSES                                     1,200       1,400
                                                            -------     -------
     Net interest income after provision for loan losses     26,184      24,415
                                                            -------     -------
NONINTEREST INCOME
  Net gain on sales of loans - servicing released               487         432
  Net gain on sales of loans - servicing retained                17           8
  Net gain on sale of investment securities                       -          19
  Service fees                                                1,799       1,651
  Other noninterest income                                    1,012         801
                                                            -------     -------
     Total noninterest income                                 3,315       2,911
                                                            -------     -------
NONINTEREST EXPENSE
  Compensation and employee benefits                          8,427       7,974
  Building occupancy                                          2,262       1,968
  Data processing                                               479         430
  Advertising                                                   415         351
  Other expenses                                              3,124       2,704
                                                            -------     -------
     Total noninterest expense                               14,707      13,427
                                                            -------     -------
NET INCOME BEFORE PROVISION FOR INCOME TAX                   14,792      13,899

PROVISION FOR INCOME TAX                                      4,863       4,667
                                                            -------     -------
NET INCOME                                                 $  9,929    $  9,232
                                                            =======     =======

BASIC EARNINGS PER SHARE                                   $   0.81    $   0.75
                                                            =======     =======
DILUTED EARNINGS PER SHARE                                 $   0.81    $   0.74
                                                            =======     =======


               (See Notes to Consolidated Financial Statements)

4

<PAGE>


                             HORIZON FINANCIAL CORP.
                  Consolidated Statements of Stockholders' Equity
                   Six Months Ended September 30, 2007 and 2006
                                   (unaudited)
<TABLE>

                                     Common Stock                        Accumulated
                                    --------------   Additional          Other         Treasury  Total
                                    Number of        Paid-In   Retained  Comprehensive Stock     Stockholders' Comprehensive
(In thousands, except share data)   Shares  At Par   Capital   Earnings  Income        at Cost   Equity        Income
                                    ------  ------   -------   --------  ------------  -------   ------------  -------------

                                 <c>     <c>      <c>       <c>       <c>           <c>       <c>           <c>
BALANCE, March 31, 2006              9,898  $9,898   $54,116    $45,991     $3,318      $    -    $  113,323
Comprehensive income
  Net income                             -                 -      9,232          -           -         9,232     $   9,232
  Other comprehensive income
    Change in unrealized gains on
    available-for-sale securities,
    net taxes of $209                    -       -         -          -        389           -           389           389
                                                                                                                     -----
    Total other comprehensive income     -       -         -          -          -           -             -           389
                                                                                                                     -----
Comprehensive income                     -       -         -          -          -           -             -     $   9,621
Cash dividends on common stock at                                                                                    =====
    $.275/sh                             -       -         -     (3,008)         -           -        (3,008)
5 for 4 stock split in the form of
  a 25% stock dividend               2,454   2,454    (2,454)         -          -           -             -
Stock options exercised                  9       9        62          -          -           -            71
Stock award plan                         -       -       111          -          -           -           111
Tax benefit associated with stock
  options                                -       -        12          -          -           -            12
Treasury stock purchased                 -       -         -          -          -      (2,280)       (2,280)
Retirement of treasury stock           (93)    (93)     (529)    (1,658)         -       2,280             -
                                    ------  ------   -------   --------  ------------  -------   ------------
BALANCE, September 30, 2006         12,268 $12,268   $51,318    $50,557     $3,707      $    -      $117,850
                                    ======  ======   =======   ========  ============  =======   ============
BALANCE, March 31, 2007             12,254 $12,254   $51,489    $56,770     $3,342           -      $123,855
Comprehensive income
  Net income                             -       -         -      9,929          -           -         9,929     $   9,929
  Other comprehensive income
    Change in unrealized gains on
    available-for-sale securities,
    net taxes of $104                    -       -         -          -        193           -           193           193
                                                                                                                    ------
    Total other comprehensive income     -       -         -          -          -           -             -           193
                                                                                                                    ------
Comprehensive income                     -       -         -          -          -           -             -     $  10,122
Cash dividends on common stock at                                                                                   ======
    $.26/sh                              -       -         -     (3,160)         -           -        (3,160)
Stock options exercised                 11      11        54          -          -           -            65
Stock award plan                         6       6       274          -          -           -           280
Tax benefit associated with stock
    options                              -       -        35          -          -           -            35
Treasury stock purchased                 -       -         -          -          -      (3,132)       (3,132)
Retirement of treasury stock          (147)   (147)     (653)    (2,332)         -       3,132             -
                                    ------  ------   -------   --------  ------------  -------   ------------
BALANCE, September 30, 2007         12,124 $12,124   $51,199    $61,207     $3,535      $    -      $128,065
                                    ======  ======   =======   ========  ============  =======   ============

</TABLE>
               (See Notes to Consolidated Financial Statements)

5
<PAGE>


                             HORIZON FINANCIAL CORP.
                 Consolidated Statements of Cash Flows (unaudited)
                                                             Six Months Ended
(In thousands, except share data)                              September 30,
                                                             2007        2006
CASH FLOWS FROM OPERATING ACTIVITIES                        ------      ------
  Net income                                               $ 9,929     $ 9,232
Adjustments to reconcile net income to net
cash provided by operating activities
  Depreciation and amortization                                910         489
  Stock award plan compensation                                280         111
  Provision for deferred income tax                            (54)        (24)
  Provision for loan losses                                  1,200       1,400
  Excess tax benefits from the exercise of stock options       (35)        (12)
Changes in assets and liabilities
  Accrued interest and dividends receivable                 (1,065)       (973)
  Interest payable                                            (900)      1,530
  Net change in loans held for sale                          2,922       3,446
  Federal income tax (receivable) payable                   (1,031)        331
  Other assets                                                (753)     (2,110)
  Other liabilities                                         (1,772)       (227)
                                                           -------     -------
     Net cash flows from operating activities                9,631      13,193
                                                           -------     -------
CASH FLOWS FROM INVESTING ACTIVITIES
  Investment in interest-bearing deposits, net              (1,457)      6,317
  Purchases of investment securities- available-for-sale   (11,245)     (1,500)
  Proceeds from sales and maturities of
    investment securities- available-for-sale               12,768       5,149
  Purchases of mortgage-backed securities- available-
    for-sale                                                (8,714)     (9,384)
  Proceeds from maturities of mortgage-backed
    securities - available-for-sale                          3,070       5,900
  Proceeds from maturities of mortgage-backed
    securities - held-to-maturity                               70         194
  Net change in loans                                      (92,624)   (119,160)
  Purchases of bank premises and equipment                  (1,949)     (1,894)
  Net change in investment in joint venture                   (237)       (100)
                                                           -------     -------
    Net cash flows from investing activities              (100,318)   (114,478)
                                                           -------     -------
CASH FLOWS FROM FINANCING ACTIVITIES
  Net change in deposits                                    22,260      87,213
  Advances from other borrowed funds                       266,523     124,412
  Repayments of other borrowed funds                      (215,500)   (102,000)
  Advances on borrowing related to investment in real
   estate in a joint venture                                 1,176         917
  Common stock issued, net                                      65          71
  Tax benefit associated with stock options                     35          12
  Cash dividends paid                                       (3,116)     (2,909)
  Treasury stock purchased                                  (3,132)     (2,280)
                                                           -------     -------
     Net cash flows from financing activities               68,311     105,436
                                                           -------     -------
NET CHANGE IN CASH AND CASH EQUIVALENTS                    (22,376)      4,151

CASH AND CASH EQUIVALENTS, beginning of period              40,833      24,190
                                                           -------     -------
CASH AND CASH EQUIVALENTS, end of period                 $  18,457   $  28,341
                                                           =======     =======
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION

Cash paid during the period for interest                 $  24,307   $  16,831
                                                           =======     =======
Cash paid during the period for income tax               $   5,908   $   4,349
                                                           =======     =======

               (See Notes to Consolidated Financial Statements)
6
<PAGE>

                             HORIZON FINANCIAL CORP.
               SELECTED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                  THREE AND SIX MONTHS ENDED SEPTEMBER 30, 2007
                                   (unaudited)

NOTE 1 -  Basis of Presentation and Significant Accounting Policies

Basis of Presentation
---------------------
     The condensed consolidated financial statements as of and for the three and
six months ended September 30, 2007, include the accounts of Horizon Financial
Corp. (Horizon Financial or the Corporation), and its wholly-owned subsidiary
Horizon Bank (Horizon Bank or the Bank), and other subsidiaries of the Bank.
Significant intercompany balances and transactions have been eliminated in
consolidation. The Corporation has engaged in no significant activity other than
holding the stock of the Bank.

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

     The unaudited consolidated financial statements have been prepared in
accordance with accounting principles generally accepted in the United States of
America for interim financial information and with the instructions to the Form
10-Q and Rule 10-01 of Regulation S-X.  Accordingly, they do not include all of
the information and footnotes required by accounting principles generally
accepted in the United States of America for complete financial statements.  In
the opinion of management, all adjustments (consisting only of normal recurring
accruals) necessary for a fair presentation are reflected in the interim
financial statements.  The results of operations for the three and six month
periods ended September 30, 2007 and 2006 are not necessarily indicative of the
operating results for the full year.  For further information, refer to the
consolidated financial statements and footnotes thereto in the Horizon Financial
Corp. Annual Report on Form 10-K for the year ended March 31, 2007.

Reclassification
----------------
     Certain reclassifications have been made to prior financial statements to
conform with current presentation.  Such reclassifications have no effect on net
income, equity, or earnings per share.

Significant Accounting Policies
-------------------------------

Provision for Loan Losses

     Management estimates the provision for loan losses by evaluating known and
inherent risks in the loan portfolio. These factors include changes in the size
and composition of the loan portfolio, actual loan loss experience, current and
anticipated economic conditions, detailed analysis of individual loans for which
full collectibility may not be assured, and determination of the existence and
realizable value of the collateral and guarantees securing the loans. The
allowance for loan losses is based upon factors and trends identified by future
market factors beyond the Corporation's control, which may result in losses or
recoveries differing significantly from those provided for in the financial
statements.

     The majority of the Corporation's loan portfolio consists of commercial
loans and single-family residential loans secured by real estate in the Whatcom,
Skagit, Snohomish, and Pierce County areas of Washington. Real estate prices in
these markets are stable at this time. However, the ultimate collectibility of a
substantial portion of the Corporation's loan portfolio may be susceptible to
changes in local market conditions in the future.

     The allowance for loan losses is established as losses are estimated to
have occurred through the provision for loan losses charged to earnings. Loan
losses are charges against the allowance when management believes the
uncollectibility of a loan balance is confirmed. Subsequent recoveries, if any,
are credited to the allowance.

     While management uses available information to recognize losses on loans,
further reductions in the carrying amounts of loans may be necessary based on
changes in local economic conditions. In addition, regulatory agencies, as an
integral part of their examination process periodically review the estimated
losses on loans. Such agencies may require the Corporation to recognize
additional losses based on their judgment about information available to them at
the time of their examination.

7
<PAGE>

NOTE 1 -  Basis of Presentation and Significant Accounting Policies (continued)

Consolidation of Variable Interest Entities

     In January 2003, the Financial Accounting Standards Board (FASB) issued
FASB Interpretation No. ("FIN") 46, Consolidation of Variable Interest Entities.
FIN 46 explains the concept of a variable interest entity and requires
consolidation by the primary beneficiary where the variable interest entity does
not have sufficient equity at risk to finance its activities without additional
subordinated financial support from other parties.  This interpretation applies
immediately to variable interest entities in which an enterprise holds a
variable interest.  In October 2004, the Bank's wholly-owned subsidiary,
Westward Financial Services, Inc. ("Westward Financial"), entered into a real
estate development joint venture with Greenbriar Northwest LLC ("GBNW"), an
established residential land development company headquartered in Bellingham,
Washington.  The Corporation believes that GBNW is a variable interest entity.
Under FIN 46, GBNW is consolidated in the Corporation's consolidated balance
sheet.  The Corporation also accounts for the portion not owned by Westward
Financial, as a minority interest.  The investment in real estate is recorded as
an asset and the related debt is recorded as the Corporation's liability.  The
real estate joint venture has a carrying amount of $17.4 million, with a related
borrowing of $21.4 million.  No income is currently being recognized in the
Corporation's financial statements; however, in accordance with FIN 46, one-half
of the related funding expense is included in the Corporation's interest on
other borrowings expense which amounts to $147,000 and $133,000 for the three
months ended September 30, 2007 and 2006, respectively and  $291,000 and
$254,000 for the six months ended September 30, 2007 and 2006, respectively.

NOTE 2 -  Stockholders' Equity

Earnings Per Share
------------------
     The following table illustrates the reconciliation of weighted average
shares, as adjusted, used for earnings per share for the noted periods:

                                          Three months          Six months
                                              ended               ended
                                          September 30,         September 30,
                                         2007       2006       2007       2006
                                        ------     ------     ------     ------
Basic weighted average shares
  outstanding                       12,155,532 12,285,606 12,191,256 12,312,727
Incremental shares from unexercised
  stock options and unvested
  restricted stock awards              101,265    125,965    108,149    116,590
Diluted weighted average shares      ---------  ---------  ---------  ---------
  outstanding                       12,256,797 12,411,571 12,299,405 12,429,317
                                    ========== ========== ========== ==========
Anti-dilutive shares outstanding
  related to options to acquire the
  Corporation's common stock            24,047          -     12,630          -
                                    ========== ========== ========== ==========
Cash Dividend Declared
----------------------
     On September 26, 2007, the Corporation announced a quarterly cash dividend
of $0.13 per share payable on November 2, 2007 to stockholders of record on
October 11, 2007.

NOTE 3 -  Share Based Payment and Stock Option and Award Plans

     The Corporation adopted Statement of Financial Accounting Standard (SFAS or
Statement) No. 123R, Share-Based Payment, (SFAS 123R) on April 1, 2006 using the
"modified prospective" method.  Under this method, awards that are granted,
modified, or settled after March 31, 2006 are measured and accounted for in
accordance with Statement 123R.  Also under this method, expense is recognized
for unvested awards that were granted prior to April 1, 2006 based upon the fair
value determined at the grant date under Statement 123, Accounting for
Stock-based Compensation.  For the three and six months ended September 30,
2007, the Corporation recognized $188,000 and $275,000, respectively, in stock
option and restricted stock award compensation expense as a component of
salaries and benefits, compared to $92,000 and $111,000 for the three and six
months ended September 30, 2006.   As of September 30, 2007 and 2006 there was
approximately $870,000 and $631,000 respectively of total unrecognized
compensation cost related to nonvested options and restricted stock awards which
is scheduled to amortize over the next four years.

8
<PAGE>


NOTE 3 -  Share Based Payment and Stock Option and Award Plans (continued)

     The Corporation measures the fair value of each stock option grant at the
date of grant, using the Black Scholes option pricing model.  The weighted
average fair value of options granted during the six months ended September 30,
2007 and 2006, was $4.63 and $4.18 per share, respectively.  The following
assumptions were used in arriving at the fair value of options granted during
the six months ended September 30, 2007 and 2006:

                                           Six Months Ended   Six Months Ended
                                          September 30, 2007 September 30, 2006
                                          ------------------ ------------------
     Risk-free interest rate                    4.95%              5.27%
     Dividend yield rate                        2.37%              2.417%
     Price volatility                          26.16%             24.77%
     Expected life of options                   3.51 years         3.78 years

     Prior to the adoption of Statement 123R, the Corporation recognized the
financial effects of stock options under the intrinsic value method as permitted
by Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to
Employees, and as such, previously recognized no compensation cost for employee
stock options.

     The Corporation may grant options and/or awards for a maximum of 937,500
shares, as adjusted, of authorized common stock to certain officers and key
employees under the 2005 Incentive Stock Plan.  Activity during the six months
ended September 30, 2007 also included options granted under the 1995 Stock
Option and Incentive Plan, which allowed for a maximum of 743,906 shares, as
restated, of authorized common stock to be awarded.  Options and awards are
granted at no less than fair market value and may or may not vest immediately
upon issuance based on the terms established by the Board of Directors.  Options
and awards are generally exercisable within one to five years from date of grant
and expire after ten years.

     The following table summarizes stock option and award activity for the six
months ended September 30, 2007 under both the 1995 and 2005 stock plans:

                                   Shares of Common Stock     Weighted Average
                                   Available for Outstanding       Price of
                                   Option/Award  Under Plan   Shares Under Plan
                                   ------------  ----------   -----------------
Balance, March 31, 2007                 862,013     184,475       $ 10.05
  Restricted stock awards               (28,500)          -       $ 21.97
  Options granted                       (24,362)     24,362       $ 21.97
  Options exercised                           -     (10,103)      $  6.39
  Lapsed                                  3,700      (2,032)      $ 19.28
  Expired                                     -           -
                                       --------    --------       -------
Balance, September 30, 2007             812,851     196,702       $ 11.62
                                       ========    ========       =======

The total intrinsic value, amount by which the fair value of the underlying
stock exceeds the exercise price of an option on exercise date, of options
exercised for the six months ended September 30, 2007 and 2006 was $143,000 and
$204,000, respectively.

9
<PAGE>


NOTE 3 -  Share Based Payment and Stock Option and Award Plans (continued)

Financial data pertaining to outstanding stock options and exercisable stock
options at September 30, 2007 is as follows:

Options Outstanding  Options Exercisable

                               Weighted
                               Average     Weighted                Weighted
     Range of                  Remaining   Average                 Average
     Exercise     Number       Contractual Exercise  Number        Exercise
      Prices      Outstanding    Life        Price   Exercisable   Price
 ---------------  -----------  ----------- --------  -----------   --------
$5.00  to $ 9.99    114,906    2.91 years    $ 6.77    114,906     $ 6.77
$10.00 to $14.99      9,376    5.57 years    $11.85      9,063     $11.76
$15.00 to $19.99     48,452    8.22 years    $17.96     19,458     $17.19
$20.00 to $25.00     23,968    9.74 years    $21.97          -     $    -
                    -------    ----------    ------    -------     ------
    Total           196,702    5.17 years    $11.62    143,427     $ 8.50
                    =======    ==========    ======    =======     ======

     At September 30, 2007 and 2006, the aggregate intrinsic value of options
outstanding was $1.8 million and $2.9 million, respectively.  The aggregate
intrinsic value of options exercisable at September 30, 2007 and 2006 was $1.7
million and $2.6 million, respectively.

NOTE 4 -  Impact of New Accounting Pronouncements

     In July 2006, the Financial Accounting Standards Board issued Financial
Interpretation No. 48, Accounting for Uncertainty in Income Taxes (an
interpretation of SFAS No. 109) (FIN 48).  Under FIN 48, a tax position shall
initially be recognized in the financial statements when it is more likely than
not the position will be sustained upon examination by the tax authorities.
Such tax positions shall initially and subsequently be measured as the largest
amount of tax benefit that is greater than 50% likely of being realized upon
ultimate settlement with the tax authority assuming full knowledge of the
position and all relevant facts.  The adoptions of FIN 48 on April 1, 2007, did
not have a material impact on the Corporation's consolidated financial
statements, results of operations or liquidity.

     In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements
(SFAS 157). SFAS 157 defines fair value, establishes a framework for measuring
fair value in generally accepted accounting principles (GAAP), and expands
disclosures about fair value measurements. This Statement applies to other
accounting pronouncements that require or permit fair value measurements.
Accordingly, this Statement does not require any new fair value measurements.
This Statement is effective for financial statements issued for fiscal years
beginning after November 15, 2007, and interim periods within those fiscal
years.

     In February 2007, the Financial Accounting Standards Board released
Statement No. 159, Fair Value Option for Financial Assets and Financial
Liabilities. This Statement permits entities to choose to measure many financial
instruments and certain other items at fair value. This Statement is effective
for financial statements issued for fiscal years beginning after November 15,
2007, and interim periods within those years.

10
<PAGE>

Item 2.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
         RESULTS OF OPERATIONS

     The following discussion is intended to assist in understanding the
financial condition and results of operations of the Corporation and its
subsidiaries. The information contained in this section should be read in
conjunction with the Consolidated Financial Statements and the accompanying
Notes contained herein.

Forward Looking Statements
--------------------------
     Management's Discussion and Analysis of Financial Condition and Results of
Operations and this Form 10-Q contain certain forward-looking statements which
are based on assumptions and describe future plans, strategies and expectations
of the Corporation.  Management desires to take advantage of the safe harbor
provisions of the Private Securities Litigation Reform Act of 1995 and is
including this statement for the express purpose of availing the Corporation of
the protections of the safe harbor with respect to all forward-looking
statements in this Form 10-Q.    These forward-looking statements are generally
identified by use of the word "believe," "expect," "intend," "anticipate,"
"estimate," "project," or similar words.  The Corporation's ability to predict
results of the actual effect of future plans or strategies is uncertain.
Factors which could have a material adverse effect on the Corporation's
operations include, but are not limited to, changes in interest rates, general
economic conditions, legislative/regulatory changes, monetary and fiscal
policies of the U.S. government, including policies of the U.S. Treasury and the
Federal Reserve Board, the quality or composition of the loan or investment
portfolios, demand for loan products, deposit flows, competition, demand for
financial services in the Corporation's market areas and accounting principles
and guidelines.  These risks and uncertainties should be considered in
evaluating forward-looking statements and you should not rely too much on these
statements.

General
-------
     The Bank was organized in 1922 as a Washington State chartered mutual
savings and loan association and converted to a federal mutual savings and loan
association in 1934.  In 1979, the Bank converted to a Washington State
chartered mutual savings bank, the deposits of which are insured by the Federal
Deposit Insurance Corporation (FDIC).  On August 12, 1986, the Bank converted to
a state chartered stock savings bank under the name "Horizon Bank, a savings
bank".  The Bank became a member of the Federal Home Loan Bank ("FHLB") of
Seattle in December 1998.  Effective March 1, 2000, the Bank changed its name to
its current name, "Horizon Bank".  Effective August 1, 2005, the Bank converted
from a state chartered savings bank to a state chartered commercial bank.

     The Bank's operations are conducted through 19 full-service office
facilities, four commercial loan centers, and four real estate loan centers,
located in Whatcom, Skagit, Snohomish, and Pierce counties in Northwest
Washington.  In April 2005, the Bank opened a full service office in Lakewood,
Washington, located in Pierce County, just south of Tacoma.  The Bank opened a
full service regional facility in June 2006, which replaced the Bank's existing
office and commercial banking center in south Everett.  During the quarter ended
June 30, 2007, the Bank opened a full service retail office and a real estate
loan center in Puyallup, Washington to expand its presence in Pierce County.

     The Corporation's results of operations depend primarily on revenue
generated as a result of its net interest income and noninterest income.  Net
interest income is the difference between the interest income the Corporation
earns on its interest-earning assets (consisting primarily of loans and
investment and mortgage-backed securities) and the interest the Corporation pays
on its interest-bearing liabilities (consisting primarily of customer savings
and money market accounts, time deposits and borrowings).  Noninterest income
consists primarily of service charges on deposit and loan accounts, gains on the
sale of loans and investments, and loan servicing fees. The Corporation's
results of operations are also affected by its provisions for loan losses and
other expenses.  Other expenses consist primarily of noninterest expense,
including compensation and benefits, occupancy, equipment, data processing,
marketing, automated teller machine costs and, when applicable, deposit
insurance premiums.  The Corporation's results of operations may also be
affected significantly by general and local economic and competitive conditions,
changes in market interest rates, governmental policies and actions of
regulatory authorities, as well as other factors identified under the caption
"Forward Looking Statements" above.

11
<PAGE>


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

Operating Strategy
------------------
     The Corporation serves as a holding company for the Bank and other
subsidiaries whereby it provides strategic oversight, management, access to
capital and other resources and activities typically performed by bank holding
companies.  The operating strategy of the Corporation has been to expand and
diversify its consolidated operations across a variety of companies and/or
operating units that are engaged in complementary, but different, businesses
and/or operating strategies.  This diversification strategy is expected to
continue as opportunities arise, although there are no specific acquisitions or
new business formations planned at this time.  The Bank currently has two
offices and one real estate loan center in Pierce County (south of King County),
with its remaining offices located north of King County.  Management has further
indicated that the market areas just outside King County (including, but not
necessarily limited to Snohomish, Pierce, Kitsap and Thurston counties) are
logical areas for potential future expansion, as these markets have
characteristics most similar to those in which the Bank has experienced previous
success.

     The primary business of the Bank is to acquire funds in the form of
deposits and wholesale funds, and to use the funds to make commercial, consumer,
and real estate loans in its primary market area.  In addition, and to a lesser
extent, the Bank invests in a variety of investment grade securities including,
but not necessarily limited to U.S. Government and federal agency obligations,
mortgage-backed securities, corporate debt, equity securities, and municipal
securities.  The Bank intends to continue to fund its assets primarily with
retail and commercial deposits, although, FHLB advances, brokered deposits, and
other wholesale borrowings, will also likely be used as a supplemental source of
funds.

     The Corporation's profitability depends primarily on its net interest
income, which is the difference between the income it receives on the Bank's
loan and investment portfolio and the Bank's cost of funds, which consists of
interest paid on deposits and borrowings. The Bank reviews its opportunities
with respect to both assets and liabilities.  In the past few  years, for
example, the Bank chose to concentrate its commercial lending efforts on growing
its Prime based loan portfolio, at a time when many lenders were offering fixed
rate real estate loans at levels significantly below prime.  In this regard, the
Bank's loan portfolio growth was heavily concentrated in the active real estate
development and construction markets in the Puget Sound region.  Through its
excellent relationships with established real estate developers and builders,
the Bank's experienced loan officers were successful at growing this portion of
the Bank's portfolio, which is primarily Prime based business.  This has been
beneficial in recent years, with the Federal Reserve's Open Market Committee's
("FOMC") efforts to increase short terms interest rates, which have in turn
increased the Prime lending rate.  With the FOMC's 50 basis point reduction on
September 18, 2007 and 25 basis point reduction on October 31, 2007, the
Corporation will likely experience a decline in its net interest margin.  The
results of this strategy are discussed in more detail in the section entitled
"Comparison of Operating Results for the Three and Six Months Ended September
30, 2007 and September 30, 2006".  On the liability side of the balance sheet,
these changing rates also impact the Bank's earnings.  Management acknowledges
that there is a lag effect in this regard, in both increasing and decreasing
rate environments as the rates on the Bank's certificate of deposit liabilities
do not adjust instantly, rather the impact occurs more gradually as the
certificates of deposit mature and reprice in a changing interest rate
environment.

     Net interest income is also affected by the relative amounts of
interest-earning assets and interest-bearing liabilities.  When interest-earning
assets equal or exceed interest-bearing liabilities, any positive interest rate
spread will generate net interest income. The Corporation's profitability is
also affected by the level of the Bank's other income and expenses.  Other
noninterest income includes income associated with the origination and sale of
mortgage loans, loan servicing fees, deposit account related fees, and net gains
and losses on sales of interest-earning assets.  This portion of the Bank's
income is heavily dependent on the Bank's success at originating and selling
one-to-four family mortgage loans into the secondary market.  In addition, the
Bank's ability to generate fee income on its deposit accounts impacts this
portion of the Bank's income stream.  In fiscal 2006, the Bank introduced an
Overdraft Protection service, which increased the deposit related fee income and
is discussed in more detail in the section entitled "Comparison of Operating
Results for the Three and Six Months Ended September 30, 2007 and September 30,
2006."


12
<PAGE>


     Other noninterest expenses include compensation and benefits, occupancy and
equipment expenses, deposit insurance premiums, data servicing expenses and
other operating costs.  In fiscal 2006, the Bank began a Bank-wide efficiency
initiative, soliciting input from all employees and implementing many of the
suggestions it received.  This is an ongoing process, as management continues to
look for ways to improve efficiency. To encourage employees to participate in
this initiative, the Bank has added a profitability component to the incentive
portion of the employee's pay, and efficiency accounts for one-third of this
profitability component.  Also during fiscal 2006, the Bank formed a Core Data
Processor task team to analyze ways to best utilize its new data processing
system.  At the time of the data processing conversion in November 2004, the
focus was appropriately on converting the data from the previous system.
Subsequently, the focus shifted to ensuring that the Bank was taking advantage
of the benefits offered by the new system, and this is a process that will
continue in future years along with the efficiency initiative discussed above.

     Finally, the Corporation's results of operations are also significantly
affected by general economic and competitive conditions, particularly changes in
market interest rates, government legislation, regulation, and monetary and
fiscal policies.

Financial Condition
-------------------
     Total consolidated assets for the Corporation at September 30, 2007,
increased to $1.3 billion, reflecting an increase of 5.9% from March 31, 2007.
This increase in assets was primarily a result of the growth in loans
receivable, which increased 8.7% to $1.1 billion at September 30, 2007 from $1.0
billion at March 31, 2007.  The growth in loans receivable was primarily
attributable to a $72.6 million, or 13.2%, increase in the balance of
construction and land development and commercial business loan categories since
March 31, 2007.  The Bank continued to focus on expanding its relationships with
established residential real estate developers and one-to-four family
residential builders, which resulted in the continued growth in this component
of loans receivable during the period.  Also increasing during the period was
the commercial loan category, as the Bank continues to focus on increasing its
commercial lines of credit balances to diversify its loan portfolio and expand
its relationships with businesses in its markets.  Commercial real estate loans,
primarily consisting of loans with initial fixed rate periods of three to five
years, moderated during the period as the Bank continued its trend away from the
lower returns available in this segment in favor of the returns available in the
construction and land development category.  One-to-four family mortgage loans
increased 15.6% to $143.2 million at September 30, 2007 from $123.9 million at
March 31, 2007.  Mortgage loan originations were strong in the second quarter of
fiscal 2008, and the Bank chose to retain certain short term mortgage loans
rather than sell them into the secondary market.  However, even with the
retention of these short term loans, the Bank continued its practice of selling
most of its single-family long term fixed rate loan production into the
secondary market.  The Bank sold $46.3 million of single-family real estate
loans during the six months ended September 30, 2007, compared to $40.6 million
during the six months ended September 30, 2006 as a result of increased activity
from the Bank's single family mortgage division.

The following is an analysis of the loan portfolio by major type of loans:

                                                  September 30,     March 31,
(In thousands)                                        2007            2007
                                                     ------          ------
1-4 mortgage loans
  1-4 family                                       $159,824        $149,885
  1-4 family construction                            34,032          28,576
  Less participations sold                          (50,655)        (54,592)
                                                  ---------       ---------
     Net 1-4 family mortgage loans                  143,201         123,869
Construction and land development                   458,838         405,348
Multi family residential                             46,631          52,727
Commercial real estate                              296,453         292,212
Commercial business loans                           165,356         146,265
Home equity secured                                  44,971          45,307
Other consumer loans                                  7,986           5,031
                                                  ---------       ---------
     Subtotal                                     1,020,235         946,890
                                                  ---------       ---------
Total loans receivable                            1,163,436       1,070,759
Less:                                             ---------       ---------
     Allowance for loan losses                      (17,023)        (15,889)
                                                  ---------       ---------
     Net loans receivable                        $1,146,413      $1,054,870
                                                  =========       =========

Net residential loans                              $142,031  12%   $122,839  12%
Net commercial business loans                       162,402  14     143,604  13
Net commercial real estate loans (1)                789,882  69     738,861  70
Net consumer loans (2)                               52,098   5      49,566   5
                                                  --------- ----  --------- ----
                                                 $1,146,413 100% $1,054,870 100%
                                                  ========= ====  ========= ====
(1) Includes construction and development, multi-family and commercial real
     estate loans.
(2) Includes home equity and other consumer loans.


13
<PAGE>


     As reflected in the table above, approximately 69% of our net loan
portfolio consists of commercial real estate and construction and development
loans.  These types of loans afford the Bank an opportunity to receive interest
at rates higher than those generally available from single family residential
lending.  These loans, however, also typically are greater in amount, more
difficult to evaluate and monitor and, therefore, involve a greater degree of
risk than single family residential mortgage loans.  Because payments on loans
secured by commercial real estate often depend upon the successful operation and
management of the properties, repayment of such loans may be affected by adverse
conditions in the real estate market or the economy.  The Bank seeks to minimize
these risks by limiting the maximum loan-to-value ratio to between 75 and 85%
and carefully reviewing the financial condition of the borrower, the quality of
the collateral and the management of the property securing the loan.

     Construction and land development lending generally involves a higher
degree of risk than permanent financing for a finished residence or commercial
building, because of the inherent difficulty in estimating both the estimated
cost of the project and the property's value at completion.  If the estimated
cost of construction proves to be inaccurate, the Bank may be required to
advance funds beyond the amount originally committed to complete the project.
To address this risk, and because of the level of construction loans in the
Bank's portfolio, the Bank has personnel dedicated specifically to monitoring
the progress of its construction projects, and making on-site inspections of the
properties.  In addition, in an effort to monitor the available inventory in its
markets, the Bank also regularly reviews the overall building and development
activity in its markets.  Also, to mitigate the risks related to construction
lending, the Bank primarily deals with experienced builders, with acceptable
credit histories, sound financial statements, and a proven track record in the
industry.  In addition, the Bank utilizes the services of experienced inspectors
to monitor the progress and draw process in the more complex construction
projects.  The Bank also has an experienced appraisal staff, and members of
senior management with related appraisal education and experience, who regularly
review the appraisals utilized by the Bank in analyzing prospective construction
projects.  Finally, members of the Bank's senior management and loan committees
also have a significant amount of experience in the areas of construction
lending, appraisals, and loan underwriting, further mitigating the Bank's risk
in this area.

     The Bank actively originates construction loans through its Mortgage Loan
Division and its Commercial Loan Division.  The Bank's Mortgage Loan Division
generally oversees the single family custom construction loans, and to a lesser
extent, speculative construction loans (i.e., loans for homes that do not have a
contract with a buyer for the purchase of the home upon completion of the
construction) to smaller contractors building a limited number of speculative
homes per year.  These construction loans are further broken down in the first
two lines of the table below (speculative construction one-to-four family and
custom construction one-to-four family). The Bank's Commercial Lending Division
is responsible for the speculative construction projects for the Bank's larger
builders (including large one-to-four family developments), in addition to the
Bank's multi-family construction loans, non-residential commercial construction
loans, and the Bank's land development loans.

     The following table is provided to show additional details on the
Corporation's construction and land development loan portfolio:


                                                  September 30,      March 31,
                                                      2007             2007
(In thousands)                                   Amount Percent   Amount Percent
                                                 ------ -------   ------ -------
Speculative construction one-to-four family     $11,030    2.2%  $13,694    3.2%
Custom construction one-to-four family           23,002    4.7    14,882    3.4
                                                 ------ -------   ------ -------
   Total one-to-four family construction         34,032    6.9    28,576    6.6

Commercial speculative construction 1-4 family  228,305   46.3   177,602   40.9
Commercial construction multi family              9,326    1.9     6,986    1.6
Commercial construction                          49,019   10.0    47,490   11.0
Commercial land development                     172,188   34.9   173,270   39.9
                                                 ------ -------   ------ -------
   Total construction and land development      458,838   93.1   405,348   93.4

   Total construction loans                    $492,870  100.0% $433,924  100.0%
                                                =======  =====   =======  =====


14
<PAGE>


     The tables below display the characteristics of the available for sale
(AFS) and held-to-maturity (HTM) portfolios as of September 30, 2007:

                                                              Net     Estimated
                                                Amortized  Unrealized   Fair
                                                   Cost    Gain/(Loss)  Value
(In thousands)                                   -------    --------   -------
AFS Securities
  State and political subdivisions and U.S.
    government agency securities               $  40,829      $  (85) $ 40,744
  Marketable equity securities                       323       5,741     6,064
  Mutual funds                                     5,000        (156)    4,844
  Mortage-backed securities and
    Collateralized mortgage obligations(CMOs)     31,863           2    31,865
                                                 -------     -------   -------
    Total available-for-sale securities           78,015       5,502    83,517
                                                 -------     -------   -------
HTM Securities
  State and political subdivisions and U.S.
    government agency securities                     370           -       370
  Mortgage-backed securities and CMOs                 78           5        83
                                                 -------     -------   -------
    Total held-to-maturity securities                448           5       453
                                                 -------     -------   -------
    Total securities                             $78,463      $5,507   $83,970
                                                 =======     =======   =======

                          Maturity Schedule of Securities at September 30, 2007
                          -----------------------------------------------------
                                  Available-For-Sale     Held-To-Maturity
                          -----------------------------------------------------
                                 Amortized  Estimated   Amortized  Estimated
(In thousands)                      Cost    Fair Value     Cost    Fair Value
                                  -------   ----------   -------   ----------
Maturities:
  Less than one year            $  16,982    $  16,921      $ 16         $ 16
  One to five years                11,280       11,296       417          418
  Over five to ten years           16,250       16,195         6            8
  Over ten years                   28,180       28,197         9           11
                                  -------      -------     -----        -----
                                   72,692       72,609       448          453
Mutual funds and marketable       -------      -------     -----        -----
  equity securities (liquid)        5,323       10,908         -            -
                                  -------      -------     -----        -----
Total investment securities     $  78,015    $  83,517     $ 448        $ 453
                                  =======      =======     =====        =====

     Total liabilities increased 6.2% to $1.2 billion at September 30, 2007,
from $1.1 billion at March 31, 2007.    This increase in liabilities was
primarily the result of growth in the balance of deposits, which increased 2.3%
to $997.6 million at September 30, 2007 from $975.3 million at March 31, 2007.

     The following is an analysis of the deposit portfolio by major type of
deposit at September 30, 2007 and March 31, 2007:

(In thousands)                                 Sept 30, 2007   March 31, 2007
Demand deposits                                -------------   --------------
  Savings                                          $  19,183        $  21,628
  Checking                                            77,129           78,294
  Checking (noninterest-bearing)                      76,472           91,703
  Money Market                                       217,790          187,912
                                                    --------         --------
                                                     390,574          379,537
Time certificates of deposit                        --------         --------
  Less than $100,000                                 277,848          273,022
  Greater than or equal to $100,000                  260,534          243,346
  Brokered certificates of deposit                    68,599           79,390
                                                    --------         --------
                                                     606,981          595,758
                                                    --------         --------
Total deposits                                     $ 997,555        $ 975,295
                                                    ========         ========


15
<PAGE>


     Also contributing to the growth in liabilities during the six month period
was an increase of 36.8% in other borrowed funds to $189.7 million at September
30, 2007 from $138.7 million at March 31, 2007.  Contributing to this increase
was a decline in brokered certificate of deposit balances as rates were higher
than the rates available at the FHLB. During the quarter the Bank borrowed
additional funds from the FHLB to support asset growth and help manage interest
rate risk.

     The September 30, 2007 balance sheet also includes an investment in real
estate for a joint venture and the corresponding borrowing.  During the year
ended March 31, 2005, Westward Financial, as a 50% partner in GBNW (Greenbriar
Northwest LLC), purchased an 85 acre parcel of land in Bellingham for future
development.  GBNW intends to develop the property in future years into a
neighborhood community to be known as Fairhaven Highlands.   The $17.4 million
reflected on the Corporation's Consolidated Statements of Financial Position as
an asset at September 30, 2007 represents the current level of the investment in
real estate joint ventures, including the Fairhaven Highlands joint venture.
This amount also includes the remaining net investment in a residential
development joint venture that has since been completed and closed. The $21.4
million shown in the liability section of the Consolidated Statements of
Financial Position represents the corresponding wholesale borrowing used to fund
the investment in the Fairhaven Highlands joint venture.  At this time, the
partnership is in the process of meeting with the appropriate public and private
entities in connection with its preliminary planning efforts relating to the
future development of the property.

     Stockholders' equity at September 30, 2007 increased 3.4% to $128.1 million
from $123.9 million at March 31, 2007.  This increase was primarily attributable
to net income of $9.9 million for the six months ended September 30, 2007.  This
change also included the effects from the Corporation's share repurchase
program.  Repurchases of common stock totaled $3.1 million for the six months
ended September 30, 2007 compared to $2.3 million for the six months ended
September 30, 2006.  The Corporation's capital position remains strong, with a
stockholder equity-to-assets ratio of 9.5% at September 30, 2007, compared to
9.8% at March 31, 2007.

Comparison of Operating Results for the Three Months Ended September 30, 2007
and September 30, 2006
-----------------------------------------------------------------------------

     General.  Net income increased 5.7% to $4.9 million for the three months
ended September 30, 2007 from $4.7 million for the three months ended September
30, 2006.  Diluted earnings per share for the three months ended September 30,
2007 was $0.40 on weighted average shares outstanding of 12,256,797, compared to
diluted earnings per share of $0.37 on weighted average shares of 12,411,571 for
the three months ended September 30, 2006.

     Net Interest Income.  Net interest income before provision for loan losses
for the three months ended September 30, 2007 increased 6.2% to $13.9 million
from $13.1 million for the comparable period in 2006.  Interest on loans for the
quarter ended September 30, 2007 increased 13.2% to $24.9 million, from $22.0
million for the comparable quarter a year ago.  This increase was a result of a
combination of factors, including the growth in loans receivable, as the Bank
experienced loan growth during the quarter, increasing the loan portfolio to
$1.1 billion at September 30, 2007 compared to $1.0 billion at September 30,
2006.

     Also included in interest income for the period ended September 30, 2007
and 2006 were approximately $1.2 million and $1.1 million, respectively, of
deferred fee income recognition.  Most of these fees were related to the Bank's
commercial loan portfolio as a result in large part of the success in increasing
the real estate development loan portfolio.  These development loans typically
are shorter term in nature so the deferred fee recognition during the life of
the loan is greater than what would be recognized for a comparable loan fee on a
longer amortizing loan.  The table below presents an analysis of deferred fee
recognition for the three months ended September 30, 2007 and 2006:

                                            For the quarter ended September 30,
                                                  2007              2006
(In thousands)                                   ------            ------
Commercial loan deferred fees                   $ 1,070           $   941
One-to-four real estate mortgage loan
  deferred fees                                     162               151
                                                 ------            ------
Total                                           $ 1,232           $ 1,092
                                                 ======            ======

     Interest on investments and mortgage-backed securities for the three months
ended September 30, 2007 remained relatively unchanged at $1.0 million.  Total
interest income increased 12.6% to $25.9 million at September 30, 2007 from
$23.0 million in the comparable period one year ago as a result of the factors
discussed above.

     Total interest paid on deposits increased 23.8% to $9.8 million for the
quarter ended September 30, 2007 from $7.9 million for the quarter ended
September 30, 2006, as a result of increased growth in average deposits
outstanding to $992.5


16
<PAGE>


million for the three months ended September 30, 2007 compared to $906.2 million
for the three months ended  September 30, 2006.  Also contributing to the
increase was a higher level of interest rates during most of the period which
resulted in an increase in interest expense, including interest paid on the
Bank's deposits.  At September 30, 2007, approximately 61% of the Bank's
deposits were in the form of certificates of deposit, including $68.6 million in
brokered certificates of deposit.  As such, an increasing interest rate
environment affects the Bank's deposit interest expense more dramatically than
if a larger portion of the Bank's funding were in the form of lower cost
checking and liquid savings accounts.  While management continues its efforts to
increase core deposits as a funding source, the competitive marketplace for core
deposit dollars has resulted in only moderate success in this regard.

     Interest on borrowings increased 10.5% to $2.1 million during the quarter
ended September 30, 2007, compared to $1.9 million for the comparable period one
year ago.  The increased expense in the current year was a result of the
increasing interest rate environment.  The Bank continues to carry wholesale
borrowings in order to further leverage its balance sheet as an alternative
liquidity source and to better manage its interest rate risk profile.

     The following tables are presented to further illustrate the changes in the
primary factors impacting the Bank's net interest income:

                                            For the quarter ended September 30,
Average balances:                                   2007          2006
   (In thousands)                                  ------        ------
   Loans                                       $1,114,386    $1,008,100
   Investments                                     90,469        93,101
                                                ---------     ---------
   Total interest-earning assets                1,204,855     1,101,201

   Deposits                                      $992,531      $906,228
   Borrowings                                     172,738       161,466
                                                ---------     ---------
   Total interest-bearing liabilities           1,165,269     1,067,694

   Average assets                              $1,324,836    $1,211,989
   Average stockholders' equity                $  126,850    $  116,125

                                            For the quarter ended September 30,
Weighted average interest rates:                    2007          2006
                                                   ------        ------
   Yield on loans                                    8.93%         8.72%
   Yield on investments                              4.47%         4.35%
                                                ---------     ---------
   Yield on interest-earning assets                  8.60%         8.35%

   Cost of deposits                                  3.96%         3.50%
   Cost of borrowings                                4.93%         4.78%
                                                ---------     ---------
   Cost of interest-bearing liabilities              4.10%         3.69%

   Net interest spread                               4.49%         4.66%
   Net interest margin                               4.63%         4.77%







17
<PAGE>


     Provision for Losses on Loans. Provisions for loan losses are charges to
earnings to bring the total allowance for loan losses to a level considered by
management as adequate to provide for known and inherent risks in the loan
portfolio, based on management's continuing analysis of factors underlying the
quality of the loan portfolio.  These factors include changes in portfolio size
and composition, actual loss experience, current economic conditions, detailed
analysis of individual loans for which full collectibility may not be assured,
and determination of the existence and realizable value of the collateral and
guarantees securing the loans.

                                            For the quarter ended September 30,
Allowance for Loan Losses                              2007        2006
(In thousands)                                        ------      ------
Allowance at  beginning of period                  $  16,262   $  14,854
Provision for loan losses                                800         700
Charge offs (net of recoveries)                          (39)        (43)
                                                      ------      ------
Allowance at  end of period                        $  17,023   $  15,511
Allowance for loan losses as a percentage of          ======      ======
  net loans receivable at the end of the period         1.48%       1.50%

Net charge-offs as a percentage of average
  loans outstanding during the period                   0.003%      0.004%

     The provision for loan losses was $800,000 for the quarter ended September
30, 2007 compared to $700,000 for the quarter ended September 30, 2006.  These
provisions reflect management's ongoing analysis of changes in loan portfolio
composition by collateral categories, balances outstanding, overall credit
quality of the portfolio, peer group analysis, historical industry loss
experience, and current economic conditions.  The allowance for loan losses was
$17.0 million, or 1.48% of net loans receivable at September 30, 2007, compared
to $15.5 million, or 1.50% of net loans receivable at September 30, 2006.  The
increase in the allowance to $17.0 million resulted from continued loan
portfolio growth in the higher-risk lending categories of construction and land
development, commercial real estate, and commercial business loans during the
period, which amounted to $952.3 million at September 30, 2007, versus $862.8
million at September 30, 2006.

     In addition, commercial and multi-family loans have larger individual loan
amounts, which have a greater single impact on the total portfolio quality in
the event of delinquency or default.  The Corporation considers the allowance
level to be appropriate, as a result of the changing portfolio mix and the
current economic environment.  While the Bank believes it has established its
existing allowance for loan losses in accordance with accounting principles
generally accepted in the United States, there can be no assurance that
regulators, in reviewing the Bank's loan portfolio, will not request the Bank to
significantly increase or decrease its allowance for loan losses.  In addition,
because future events affecting borrowers and collateral cannot be predicted
with certainty, there can be no assurance that the existing allowance for loan
losses is adequate or that substantial increases will not be necessary should
the quality of any loans deteriorate as a result of the factors discussed
elsewhere in this document.  Any material increase in the allowance for loan
losses may adversely affect the Bank's financial condition and results of
operations.

     As of September 30, 2007, there were no loans in the loan portfolio over 90
days delinquent and accruing and one loan on nonaccrual status.  At September
30, 2007, total non-performing loans were $6,000.  The Bank had one property in
the real estate owned category totaling $725,000 at September 30, 2007.  Total
non-performing assets represented $731,000, or 0.05% of total assets at
September 30, 2007 compared to $2.2 million or 0.18% of total assets at
September 30, 2006.

                                                       As of September 30,
Non-Performing Assets                                    2007        2006
(In thousands)                                          ------      ------
Accruing loans - 90 days past due                      $     -     $   611
Non-accrual loans                                            6       1,557
Total non-performing loans                                   6       2,168
Total non-performing loans/net loans                      0.00%       0.21%
Real estate owned                                          725           -
Total non-performing assets                                731       2,168
Total non-performing assets/total assets                  0.05%       0.18%

     Noninterest Income.  Noninterest income for the three months ended
September 30, 2007 increased 12.2% to $1.6 million as compared to $1.4 million
for the same period a year ago. Service fee income increased 17.1% to $918,000
for the quarter ended September 30, 2007 from $784,000 for the same quarter in
the prior period.  The net gain on the sale of loans servicing released
decreased 16.2% to $173,000 for the quarter ended September 30, 2007 from
$206,000 in the comparable


18
<PAGE>


period one year ago. Mortgage loan originations were strong in the second
quarter of fiscal 2008, and the Bank chose to retain certain short term mortgage
loans rather than sell them into the secondary market.  Other noninterest income
for the quarter increased 20.2% to $516,000 for the quarter ended September 30,
2007 from $429,000 for the three months ended September 30, 2006.  The primary
reason for the increase from the prior period was additional income related to
the purchase of approximately $2.5 million of bank owned life insurance.

     Noninterest Expense.  Noninterest expense for the three months ended
September 30, 2007 increased 8.4% to $7.5 million from $6.9 million for the
comparable quarter one year ago.  Compensation and employee benefits increased
4.6% for the quarter ended September 30, 2007 to $4.3 million from $4.1 million
for the comparable quarter one year ago.  Building occupancy for the quarter
ended September 30, 2007 increased 16.0% to $1.2 million from $1.0 million for
the quarter ended September 30, 2006.  Increases in compensation and employee
benefits and building and occupancy expenses resulted from the opening of a full
service retail facility and mortgage loan center in Puyallup, Washington in June
2007.  Other noninterest expense increased 12.1% to $1.5 million for the quarter
ended September 30, 2007 from $1.4 million in the quarter ended September 30,
2006 as a result of increased printing and supplies expense related to the
opening of the Bank's Puyallup retail office and loan center, consulting
expenses, and increased Business & Occupation tax as a result of the growth in
the loan portfolio of taxable commercial loans.


Comparison of Operating Results for the Six Months Ended September 30, 2007
and September 30, 2006
---------------------------------------------------------------------------

     General.  Net income increased 7.6% to $9.9 million for the six months
ended September 30, 2007 from $9.2 million for the six months ended September
30, 2006.  Diluted earnings per share for the six months ended September 30,
2007 was $0.81 on weighted average shares outstanding of 12,299,405, compared to
diluted earnings per share of $0.74 on weighted average shares of 12,429,317 for
the six months ended September 30, 2006.

     Net Interest Income.  Net interest income before provision for loan losses
for the six months ended September 30, 2007 increased 6.1% to $27.4 million from
$25.8 million for the comparable period in 2006.  Interest on loans for the six
months ended September 30, 2007 increased 15.7% to $48.8 million, from $42.2
million for the comparable period a year ago.  This increase was a result of a
combination of factors, including the growth in loans receivable, as the Bank
experienced loan growth during the period, increasing the loan portfolio to $1.1
billion at September 30, 2007 compared to $1.0 billion at September 30, 2006.

     Also included in interest income for the period ended September 30, 2007
and 2006 were $2.6 million and $2.2 million, respectively, of deferred fee
income recognition.  Most of these fees were related to the Bank's commercial
loan portfolio for the period ended September 30, 2007 and 2006, that resulted
in large part from the success in increasing the real estate development loan
portfolio.  These development loans typically are shorter term in nature, so the
deferred fee recognition during the life of the loan is greater than what would
be recognized for a comparable loan fee on a longer amortizing loan.  The table
below presents an analysis of deferred fee recognition for the six months ended
September 30, 2007 and 2006:

                                          For the six months ended September 30,
                                                  2007              2006
(In thousands)                                   ------            ------
Commercial loan deferred fees                   $ 2,216           $ 1,897
One-to-four real estate mortgage loan
  deferred fees                                     359               310
                                                 ------            ------
     Total                                      $ 2,575           $ 2,207
                                                 ======            ======
     Interest on investments and mortgage-backed securities for the six months
ended September 30, 2007 remained relatively unchanged at $2.0 million.  Total
interest income increased 15.0% to $50.8 million at September 30, 2007 from
$44.2 million in the comparable period one year ago as a result of the factors
discussed above.

     Total interest paid on deposits increased 32.8% to $19.3 million for the
six months ended September 30, 2007 from $14.5 million for the six months ended
September 30, 2006, as a result of increased growth in average deposits
outstanding to $981.6 million at September 30, 2007 compared to $874.9 million
at September 30, 2006.  Also contributing to the increase was the rising level
of interest rates during the six months ended September 30, 2007 which increased
interest paid on the Bank's deposits.  At September 30, 2007, approximately 61%
of the Bank's deposits were in the form of certificates of deposit, including
$68.6 million in brokered certificates of deposit.  As such, an increasing
interest rate environment affects the Bank's deposit interest expense more
dramatically than if a larger portion of the Bank's funding were in the form of
lower


19
<PAGE>


cost checking and liquid savings accounts.  While management continues its
efforts to increase core deposits as a funding source, the competitive
marketplace for core deposit dollars has resulted in only moderate success in
this regard.

     Interest on borrowings increased 7.4% to $4.1 million during the six months
ended September 30, 2007, compared to $3.8 million for the comparable period one
year ago.  The increased expense in the current year was a result of the
increasing interest rate environment.  The Bank continues to carry wholesale
borrowings in order to further leverage its balance sheet as an alternative
liquidity source and to better manage its interest rate risk profile.

     The following tables are presented to further illustrate the changes in the
primary factors impacting the Bank's net interest income:

                                         For the six months ended September 30,
Average balances:                                    2007        2006
  (In thousands)                                    ------      ------
  Loans                                         $1,095,313   $ 982,481
  Investments                                       90,736      93,827
  Total interest-earning assets                  1,186,049   1,076,308

  Deposits$981,618$874,962
  Borrowings166,779166,065
  Total interest-bearing liabilities1,148,3971,041,027

  Average assets1,306,6671,180,235
  Average stockholders' equity125,852115,191

                                         For the six months ended September 30,
Weighted average interest rates:                     2007        2006
                                                    ------      ------
  Yield on loans                                      8.90%       8.58%
  Yield on investments                                4.46%       4.32%
                                                    ------      ------
  Yield on interest-earning assets                    8.56%       8.21%

  Cost of deposits                                    3.93%       3.32%
  Cost of borrowings                                  4.94%       4.62%
                                                    ------      ------
  Cost of interest-bearing liabilities                4.08%       3.53%

  Net interest spread                                 4.49%       4.68%
  Net interest margin                                 4.62%       4.80%




20
<PAGE>


     Provision for Losses on Loans. Provisions for loan losses are charges to
earnings to bring the total allowance for loan losses to a level considered by
management as adequate to provide for known and inherent risks in the loan
portfolio, based on management's continuing analysis of factors underlying the
quality of the loan portfolio.  These factors include changes in portfolio size
and composition, actual loss experience, current economic conditions, detailed
analysis of individual loans for which full collectibility may not be assured,
and determination of the existence and realizable value of the collateral and
guarantees securing the loans.

                                         For the six months ended September 30,
Allowance for Loan Losses                              2007        2006
(In thousands)                                        ------      ------
Allowance at  beginning of period                   $ 15,889    $ 14,184
Provision for loan losses                              1,200       1,400
Charge offs (net of recoveries)                          (66)        (73)
                                                     -------     -------
Allowance at  end of period                         $ 17,023    $ 15,511
                                                     =======     =======
Allowance for loan losses as a percentage of
  net loans receivable at the end of the period         1.48%       1.50%

Net charge-offs as a percentage of average
  loans outstanding during the period                   0.006%      0.007%

     The provision for loan losses was $1.2 million for the six months ended
September 30, 2007 compared to $1.4 million for the six months ended September
30, 2006.  These provisions reflect management's ongoing analysis of changes in
loan portfolio composition by collateral categories, balances outstanding,
overall credit quality of the portfolio, peer group analysis, historical
industry loss experience, and current economic conditions.

     Noninterest Income.  Noninterest income for the six months ended September
30, 2007 increased 13.9% to $3.3 million as compared to $2.9 million for the
same period a year ago.  Service fee income increased 8.9% to $1.8 million for
the six months ended September 30, 2007 from $1.7 million for the same six
months in the prior period.  The net gain on the sale of loans servicing
released increased 12.8% to $487,000 for the six months ended September 30, 2007
from $432,000 in the comparable period one year ago. A moderately more active
mortgage market was the primary reason for the increased amount during the
period.  Other noninterest income increased 26.3% to $1.0 million for the six
months ended September 30, 2007 from $801,000 for the six months ended September
30, 2006.  The primary reason for the increase from the prior period was
additional income related to the purchase of approximately $5.0 million of bank
owned life insurance.

     Noninterest Expense.  Noninterest expense for the six months ended
September 30, 2007 increased 9.5% to $14.7 million from $13.4 million for the
comparable six months one year ago.  Compensation and employee benefits
increased 5.7% for the six months ended September 30, 2007 to $8.4 million from
$8.0 million for the comparable six months one year ago.  Building occupancy for
the six months ended September 30, 2007 increased 14.9% to $2.3 million from
$2.0 million for the six months ended September 30, 2006.  Increases in
compensation and employee benefits and building and occupancy expenses resulted
from the opening a full service regional facility in Everett, Washington in June
2006, as well as a full service retail facility and mortgage loan center in
Puyallup, Washington in June 2007.  Other noninterest expense increased 15.6% to
$3.1 million from $2.7 million in the six months ended September 30, 2006 as a
result of real estate owned expenses incurred, increased printing and supplies
expense related to the opening of our Puyallup retail office and loan center, as
well as increased Business & Occupation tax due to the growth in the loan
portfolio of taxable commercial loans.


21
<PAGE>


Average Balances, Interest and Average Yields/Costs
---------------------------------------------------
     The following table presents at the date and for the periods indicated,
the total dollar amount of interest income and interest expense, as well as
the resulting yields earned and rates paid.

<TABLE>
                                                      For the six months ended September 30,
                                                       2007                             2006
                                           ---------------------------      --------------------------
                                                               Average                         Average
                                           Average              Yield/      Average             Yield/
(In thousands)                             Balance   Interest    Cost       Balance   Interest   Cost
                                           -------   --------   ------      -------   --------  ------

                                      <c>         <c>        <c>         <c>       <c>       <c>
Interest-earning assets:
  Loans receivable                      $1,095,313   $ 48,765    8.90%    $ 982,481   $ 42,152   8.58%
  Investment securities                     59,765      1,237    4.17        66,485      1,350   4.06
  Mortgage-backed securities                30,971        789    5.04        27,342        674   4.93
                                         ---------    -------   -----     ---------    -------  -----
    Total interest-earning assets        1,186,049     50,791    8.56     1,076,308     44,176   8.21


Interest-bearing liabilities:
  Deposits                                 981,618     19,285    3.93       874,962     14,524   3.32
  Borrowings                               166,779      4,122    4.94       166,065      3,837   4.62
                                         ---------    -------   -----     ---------    -------  -----
    Total interest-bearing liabilities   1,148,397     23,407    4.08     1,041,027     18,361   3.53
                                                      -------                          -------
Net interest income                                  $ 27,384                         $ 25,815
                                                      =======                          =======
Interest rate spread                                             4.49%                           4.68%
Net interest margin                                              4.62%                           4.80%

Ratio of average interest-earning
  assets to average interest-
  bearing liabilities                                          103.28%                         103.39%

</TABLE>

Rate/Volume Analysis
--------------------
     The table below sets forth certain information regarding changes in
interest income and interest expense for the Corporation for the periods
indicated.  For each category of interest-earning asset and interest-bearing
liability, information is provided on changes attributable to (1) changes in
volume (change in volume multiplied by old rate); (2) changes in rates (change
in rate multiplied by old volume); (3) changes to rate-volume (changes in rate
multiplied by the change in volume); and (4) the total changes (the sum of the
prior columns).

                                                 Six months ended September 30,
                                                         2007 vs. 2006
                                                   Increase (Decrease) Due to
                                                                Rate/
(In thousands)                                Volume    Rate    Volume    Total
                                              ------   ------   ------    -----
Interest income:
  Interest and fees on loans                 $ 4,841  $ 1,590   $  182  $ 6,613
  Investment securities and other
     interest-bearing securities                 (67)      70       (1)       2
                                              ------   ------   ------   ------
Total interest-earning assets                $ 4,774  $ 1,660   $  181  $ 6,615
                                              ======   ======   ======   ======
Interest expense:
Deposit accounts                             $ 1,770  $ 2,666   $  325  $ 4,761
Borrowings                                        17      267        1      285
                                              ------   ------   ------   ------
Total interest-bearing liabilities           $ 1,787  $ 2,933   $  326  $ 5,046
                                              ======   ======   ======   ======


22
<PAGE>


Liquidity and Capital Resources
-------------------------------
     The Bank maintains liquid assets in the form of cash and short-term
investments to provide a source to fund loans, savings withdrawals, and other
short-term cash requirements.  At September 30, 2007, the Bank had liquid assets
(cash and marketable securities with maturities of one year or less) with an
amortized cost of $47.9 million.

     As of September 30, 2007, the total amortized cost of investments and
mortgage-backed securities was $78.5 million compared to a market value of $84.0
million with an unrealized gain of $5.5 million.  As of March 31, 2007, the
total amortized cost of investments and mortgage-backed securities was $74.4
million, compared to a market value of $79.6 million with an unrealized gain of
$5.2 million.   The Bank does not foresee any factors that would impair its
ability to hold debt securities to maturity.

     As indicated on the Corporation's Consolidated Statement of Cash Flows, the
Bank's primary sources of funds are cash flows from operations, which consist
primarily of mortgage loan repayments, deposit increases, loan sales, borrowings
and cash received from the maturity or sale of investment securities.  The
Corporation's liquidity fluctuates with the supply of funds and management
believes that the current level of liquidity is adequate at this time.  If
additional liquidity is needed, the Corporation's options include, but are not
necessarily limited to: (i) selling additional loans in the secondary market;
(ii) entering into reverse repurchase agreements; (iii) borrowing from the FHLB
of Seattle; (iv) accepting additional jumbo, brokered and/or public funds
deposits; or (v) accessing the discount window of the Federal Reserve Bank of
San Francisco.

     Stockholders' equity as of September 30, 2007 was $128.1 million, or 9.5%
of assets, compared to $123.9 million, or 9.8% of assets at March 31, 2007.  The
Bank continues to exceed the 5.0% minimum tier one capital required by the FDIC
in order to be considered well-capitalized.  The Bank's total risk-adjusted
capital ratio as of September 30, 2007 was 11.4%, compared to 12.0% as of March
31, 2007.  These figures are well above the well-capitalized minimum of 10% set
by the FDIC.

     The Corporation has conducted various stock buy-back programs since August
1996.  In March 2007, the Board of Directors approved a new stock repurchase
plan that runs concurrent with the 2008 fiscal year, allowing the Corporation to
repurchase up to 5% of total shares outstanding, or approximately 600,000
shares.  This marked the Corporation's ninth stock repurchase plan.  During the
six months ended September 30, 2007, the Corporation repurchased 147,200 shares
at an average price of $21.23.

     Management intends to continue its stock buy-back programs from time to
time as long as repurchasing the stock is perceived to contribute to the overall
growth of shareholder value.   The number of shares of stock to be repurchased
and the price to be paid is the result of many factors, several of which are
outside of the control of the Corporation. The primary factors, however, are
market and economic factors such as the price at which the stock is trading in
the market, the number of shares available in the market; the attractiveness of
other investment alternatives in terms of the rate of return and risk involved
in the investment; the ability to increase the value and/or earnings per share
of the remaining outstanding shares; the Corporation's liquidity and capital
needs; and regulatory requirements.  Presently, it is management's belief that
purchases made under the current Board approved plan will not materially affect
the Corporation's capital or liquidity position.

Item 3.  Quantitative and Qualitative Disclosures About Market Risk

     The Corporation continues to be exposed to interest rate risk.  Currently,
the Corporation's assets and liabilities are not materially exposed to foreign
currency or commodity price risk.  At September 30, 2007, the Corporation had no
significant off-balance sheet derivative financial instruments, nor did it have
a trading portfolio of investments.  At September 30, 2007, there were no
material changes in the Corporation's market risk from the information provided
in the Form 10-K for the fiscal year ended March 31, 2007.
23
<PAGE>

Item 4.  Controls and Procedures

     An evaluation of the Corporation's disclosure controls and procedures (as
defined in Rule 13(a)-15(e) of the Securities Exchange Act of 1934 (the "Act"))
was carried out under the supervision and with the participation of the
Corporation's Chief Executive Officer, Chief Financial Officer, and several
other members of the Corporation's senior management as of the end of the period
preceding the filing date of this quarterly report.  The Corporation's Chief
Executive Officer and Chief Financial Officer concluded that, as of September
30, 2007, the Corporation's disclosure controls and procedures were effective in
ensuring that the information required to be disclosed by the Corporation in the
reports it files or submits under the Act is (i) accumulated and communicated to
the Corporation's management (including the Chief Executive Officer and Chief
Financial Officer) in a timely manner, and (ii) recorded, processed, summarized,
and reported within the time periods specified in the SEC's rules and forms.

     In the three and six months ended September 30, 2007, the Corporation did
not make any changes in its internal control over financial reporting (as
defined in Rule 13a-15(f) of the Exchange Act) that has materially affected, or
is reasonably likely to materially affect, the Corporation's internal control
over financial reporting.  While the Corporation believes the present designs of
its disclosure controls and procedures and internal control over financial
reporting are effective to achieve their goals, future events affecting its
business may cause the Corporation to modify its disclosure controls and
procedures and/or internal control over financial reporting.

     The Corporation does not expect that its disclosure controls and procedures
and internal control over financial reporting will prevent all error and fraud.
A control procedure, no matter how well conceived and operated, can provide only
reasonable, not absolute, assurance that the objectives of the control procedure
are met.  Because of the inherent limitations in all control procedures, no
evaluation of controls can provide absolute assurance that all control issues
and instances of fraud, if any, within the Corporation have been detected.
These inherent limitations include the realities that judgments in
decision-making can be faulty, and that breakdowns in controls or procedures can
occur because of simple error or mistake.  Additionally, controls can be
circumvented by the individual acts of some persons, by collusion of two or more
people, or by management override of the control.  The design of any control
procedure is based in part upon certain assumptions about the likelihood of
future events, and there can be no assurance that any design will succeed in
achieving its stated goals under all potential future conditions; over time,
controls become inadequate because of changes in conditions, or the degree of
compliance with the policies or procedures may deteriorate.  Because of the
inherent limitations in a cost-effective control procedure, misstatements due to
error or fraud may occur and not be detected.




24
<PAGE>


PART II.  OTHER INFORMATION


Item 1.   Legal Proceedings

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

Item 1A.  Risk Factors

      There have been no material changes in the risk factors previously
disclosed in the Corporation's Annual Report on Form 10-K for the year ended
March 31, 2007.

Item 2.   Unregistered Sales of Equity Securities and Use of Proceeds

      The Corporation's common stock is traded on the NASDAQ Global Securities
Market under the symbol "HRZB".  As of November 1, 2007, there were 12,102,180
shares of common stock outstanding.

Stock Repurchases

      Bank holding companies, except for certain "well-capitalized" and highly
rated bank holding companies, are required to give the Federal Reserve prior
written notice of any purchase or redemption of its outstanding equity
securities if the gross consideration for the purchase or redemption, when
combined with the net consideration paid for all such purchases or redemptions
during the preceding 12 months, is equal to 10% or more of their consolidated
net worth.  The Federal Reserve may disapprove such a purchase or redemption if
it determines that the proposal would constitute an unsafe or unsound practice
or would violate any law, regulation, Federal Reserve order, or any condition
imposed by, or written agreement with, the Federal Reserve.

      The Corporation is "well-capitalized" in accordance with regulatory
standards.  The Corporation has had various stock buy-back programs since August
1996.  In March 2007, the Board of Directors approved a new stock repurchase
plan that runs concurrent with the 2008 fiscal year, allowing the Corporation to
repurchase up to 5% of total shares outstanding, or approximately 600,000
shares.  This marked the Corporation's ninth stock repurchase plan.  During the
quarter ended September 30, 2007, the Corporation repurchased 66,600 shares at
an average price of $20.09.



      The following table sets forth information, as adjusted, about the
Corporation's purchases of its outstanding Common Stock during the quarter
ended September 30, 2007.

<TABLE>
                                                                                                (d) Maximum Number
                                        (a) Total                       (c)Total Number of      (or approximate Dollar
                                        Number of                         Shares (or Units)      Value) of shares (or
                                          Shares     (b) Average Price   Purchased as Part of    Units) that May Yet Be
                                        (or Units)      Paid per Share   Publicly Announced      Purchased Under the
     Period                             Purchased (1)     (or Unit)      Plans or Programs       Plans or Programs
--------------------------------------  ---------        -----------       -----------           -----------------

                                     <c>              <c>               <c>                   <c>
July 1, 2007 - July 30, 2007              24,600           20.217            105,200              494,800
August 1, 2007 - August 31, 2007          24,100           20.143            129,300              470,700
September 1, 2007 - September 30, 2007    17,900           19.860            147,200              452,800
                                          ------           ------            -------              -------
Total                                     66,600           20.094            147,200              452,800

(1) Of these shares, no shares were purchased other than through
     a publicly announced program.

</TABLE>



Item 3.   Defaults Upon Senior Securities
           None



25
<PAGE>

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

      The Corporation's 2007 Annual Meeting of Shareholders was held on July 24,
2007 at the Fox Hall located at 1661 W. Bakerview Road, Bellingham, Washington.
The results of the vote on the items presented at the meeting was as follows:

Election of Directors:

Shareholders elected the following nominees to the Board of Directors for a
three-year term ending in 2010 by the following vote:


                    FOR:                          WITHHELD:
                    ---------------------------   ---------------------------
                    Number of Votes  Percentage   Number of Votes  Percentage
                    ---------------  ----------   ---------------  ----------
Dennis C. Joines          9,464,450       94.8%           522,579        5.2%
James A. Strengholt       9,649,147       96.6%           337,882        3.4%


The following directors, who were not up for re-election at the Annual Meeting
of Shareholders, will continue to serve as directors:  Robert C. Diehl, Fred R.
Miller, Gary E. Goodman, Robert C. Tauscher, Richard R. Haggen, and V. Lawrence
Evans.

Item 5.   Other Information
           None

Item 6.   Exhibits

(a)       Exhibits
          --------
         (3.1)   Articles of Incorporation of Horizon Financial, Corp.
                 (incorporated by reference to Exhibit 3.1 to the Registrant's
                 Current Report on Form 8-K dated October 13, 1995)
         (3.2)   Bylaws of Horizon Financial Corp. (incorporated by reference
                 to Exhibit 3.2 to the Registrant's Current Report on Form 8-K
                 dated October 13, 1995)
         (10.1)  Amended and Restated Employment Agreement with V. Lawrence
                 Evans (incorporated by reference to the Registrant's Annual
                 Report on Form 10-K for the year ended March 31, 1996)
         (10.2)  Deferred Compensation Plan (incorporated by reference to the
                 Registrant's Annual Report on Form 10-K for the year ended
                 March 31, 1996)
         (10.3)  Bank of Bellingham 1993 Employee Stock Option Plan
                 (incorporated by reference to Exhibit 99 to the Registrant's
                 Registration Statement on Form S-8 (File No. 33-88571))
         (10.4)  Severance Agreement with Dennis C. Joines (incorporated by
                 reference to the Registrant's Annual Report on Form 10-K for
                 the year ended March 31, 2004)
         (10.5)  Severance Agreement with Richard P. Jacobson (incorporated by
                 reference to the Registrant's Quarterly Report on Form 10-Q
                 for the quarter ended September 30, 2002)
         (10.6)  Severance Agreement with Steven L. Hoekstra (incorporated by
                 reference to the Registrant's Quarterly Report on Form 10-Q
                 for the quarter ended September 30, 2002)
         (10.7)  Stock Incentive Plan (incorporated by reference to Exhibit 99
                 to the Registrant's Registration Statement on Form S-8 (File
                 No. 333-127178))
         (10.8)  Form of Incentive Stock Option Award Agreement under the 2005
                 Stock Incentive Plan (incorporated by reference to Exhibit
                 99.1 contained in the Registrant's Current Report on Form 8-K
                 dated July 27, 2005)
         (10.9)  Form of Non-qualified Stock Option Award Agreement under the
                 2005 Stock Incentive Plan (incorporated by reference to
                 Exhibit 99.1 contained in the Registrant's Current Report on
                 Form 8-K dated July 27, 2005)
         (10.10) Form of Restricted Stock Award Agreement under the 2005 Stock
                 Incentive Plan (incorporated by reference to Exhibit 99.1
                 contained in the Registrant's Current Report on Form 8-K dated
                 July 27, 2005)
         (14)    Code of Ethics (incorporated by reference to the Registrant's
                 Annual Report on Form 10-K for the year ended March 31, 2007)
         (31.1)  Certification of Chief Executive Officer Pursuant to Section
                 302 of the Sarbanes-Oxley Act
         (31.2)  Certification of Chief Financial Officer Pursuant to Section
                 302 of the Sarbanes-Oxley Act
         (32)    Certification of Chief Executive Officer and Chief Financial
                 Officer Pursuant to Section 906 of the Sarbanes-Oxley Act



26
<PAGE>




                                  SIGNATURES


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



                           HORIZON FINANCIAL CORP.



                           By: /s/V. Lawrence Evans
                               --------------------
                               V. Lawrence Evans
                               Chairman, President, and Chief Executive Officer


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



                           Dated:     November  7, 2007
                                     -------------------



27
<PAGE>



                                  Exhibit Index
                                  -------------
Exhibit 31.1   Certification of Chief Executive Officer Pursuant to Section 302
                of the Sarbanes-Oxley Act
Exhibit 31.2   Certification of Chief Financial Officer Pursuant to Section 302
                of the Sarbanes-Oxley Act
Exhibit 32     Certification of Chief Executive Officer and Chief Financial
                Officer Pursuant to Section 906 of the Sarbanes-Oxley Act






28
<PAGE>


                                  Exhibit 31.1

                                 Certification

I, V. Lawrence Evans, certify that:

1.   I have reviewed this Quarterly Report on  Form 10-Q of Horizon Financial
     Corp;

2.   Based on my knowledge, this 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
     report;

3.   Based on my knowledge, the financial statements, and other financial
     information included in this 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 report;

4.   The registrant's other certifying officer(s) and I are responsible for
     establishing and maintaining disclosure controls and procedures (as defined
     in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over
     financial reporting (as defined in Exchange Act Rules 13a-15(f) and
     15d-15(f)) for the registrant and have:

     (a)   Designed such disclosure controls and procedures, or caused such
           disclosure controls and procedures to be designed under our
           supervision, to ensure that material information relating to the
           registrant, including its consolidated subsidiaries, is made known
           to us by others within those entities, particularly during the
           period in which this report is being prepared;

     (b)   Designed such internal control over financial reporting, or caused
           such internal control over financial reporting to be designed under
           our supervision, to provide reasonable assurance regarding the
           reliability of financial reporting and the preparation of financial
           statements for external purposes in accordance with generally
           accepted accounting principles.

     (c)   Evaluated the effectiveness of the registrant's disclosure controls
           and procedures and presented in this report our conclusions about
           the effectiveness of the disclosure controls and procedures, as of
           the end of the period covered by this report based on such
           evaluation; and

     (d)   Disclosed in this report any change in the registrant's internal
           control over financial reporting that occurred during the
           registrant's most recent fiscal quarter (the registrant's fourth
           fiscal quarter in the case of an annual report) that has materially
           affected, or is reasonably likely to materially affect, the
           registrant's internal control over financial reporting; and

5.   The registrant's other certifying officer(s) and I have disclosed, based
     on our most recent evaluation of internal control over financial reporting,
     to the registrant's auditors and the audit committee of the registrant's
     board of directors (or persons performing the equivalent functions):

     (a)   All significant deficiencies and material weaknesses in the design
     or operation of internal control over financial reporting which are
     reasonably likely to adversely affect the registrant's ability to record,
     process, summarize and report financial information; and

     (b)   Any fraud, whether or not material, that involves management or other
     employees who have a significant role in the registrant's internal control
     over financial reporting.

Date:  November 7, 2007        /s/V.Lawrence Evans
                               -----------------------------
                               V. Lawrence Evans
                               Chairman, President, and Chief Executive Officer

29
<PAGE>


                                   Exhibit 31.2

                                  Certification

I, Richard P. Jacobson, certify that:

1.   I have reviewed this Quarterly Report on  Form 10-Q of Horizon Financial
     Corp;

2.   Based on my knowledge, this 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
     report;

3.   Based on my knowledge, the financial statements, and other financial
     information included in this 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 report;

4.   The registrant's other certifying officer(s) and I are responsible for
     establishing and maintaining disclosure controls and procedures (as defined
     in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over
     financial reporting (as defined in Exchange Act Rules 13a-15(f) and
     15d-15(f)) for the registrant and have:

     (a)   Designed such disclosure controls and procedures, or caused such
           disclosure controls and procedures to be designed under our
           supervision, to ensure that material information relating to the
           registrant, including its consolidated subsidiaries, is made known
           to us by others within those entities, particularly during the
           period in which this report is being prepared;

     (b)   Designed such internal control over financial reporting, or caused
           such internal control over financial reporting to be designed under
           our supervision, to provide reasonable assurance regarding the
           reliability of financial reporting and the preparation of financial
           statements for external purposes in accordance with generally
           accepted accounting principles.

     (c)   Evaluated the effectiveness of the registrant's disclosure controls
           and procedures and presented in this report our conclusions about
           the effectiveness of the disclosure controls and procedures, as of
           the end of the period covered by this report based on such
           evaluation; and

     (d)   Disclosed in this report any change in the registrant's internal
           control over financial reporting that occurred during the
           registrant's most recent fiscal quarter (the registrant's fourth
           fiscal quarter in the case of an annual report) that has materially
           affected, or is reasonably likely to materially affect, the
           registrant's internal control over financial reporting; and

5.   The registrant's other certifying officer(s) and I have disclosed, based
     on our most recent evaluation of internal control over financial reporting,
     to the registrant's auditors and the audit committee of the registrant's
     board of directors (or persons performing the equivalent functions):

     (a)   All significant deficiencies and material weaknesses in the design
     or operation of internal control over financial reporting which are
     reasonably likely to adversely affect the registrant's ability to record,
     process, summarize and report financial information; and

     (b)   Any fraud, whether or not material, that involves management or other
     employees who have a significant role in the registrant's internal control
     over financial reporting.

Date:  November 7, 2007        /s/Richard P. Jacobson
                               -------------------------
                               Richard P. Jacobson
                               Chief Financial Officer, EVP


30
<PAGE>



                                  Exhibit 32


     CERTIFICATION OF CHIEF EXECUTIVE OFFICER AND CHIEF FINANCIAL OFFICER OF
                           HORIZON FINANCIAL CORP.
           PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002


      Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C.
Section 1350), each of the undersigned hereby certifies in his capacity as an
officer of Horizon Financial Corp. (the "Company") and in connection with this
Quarterly Report on Form 10-Q ("Report"), that:

      1. the report fully complies with the requirements of Sections 13(a) and
         15(d) of the Securities Exchange Act of 1934, as amended, and

      2. the information contained in the report fairly presents, in all
         material respects, the Company's financial condition and results of
         operations, as of the dates and for the periods presented in the
         financial statements included in the Report.

 /s/ V. Lawrence Evans                               /s/ Richard P. Jacobson
 -----------------------------------                 -------------------------
 V. Lawrence Evans                                   Richard P. Jacobson
 Chairman, President, and Chief Executive Officer    Chief Financial Officer

 Dated:  November 7, 2007


31
<PAGE>