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, 2005
                                              ------------------

                                    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 an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).

                               YES  X   NO
                                  -----   -----

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, 2005, 9,918,732 common shares, $1.00 par value, were
outstanding.

<PAGE>



                         HORIZON FINANCIAL CORP.

INDEX                                                            PAGE
-----                                                            ----

PART 1       FINANCIAL INFORMATION

Item 1       Condensed 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  7-9

Item 2       Management's Discussion and Analysis of Financial

             Condition and Results of Operations                 10-17

Item 3       Quantitative and Qualitative Disclosures About
                  Market Risk                                      18

Item 4       Controls and Procedures                               18


PART II      OTHER INFORMATION

Item 1       Legal Proceedings                                     19

Item 2       Unregistered Sales of Equity Securities and Use of
                  Proceeds                                         19

Item 3       Defaults Upon Senior Securities                       19

Item 4       Submission of Matters to a Vote of Security Holders   20

Item 5       Other Information                                     20

Item 6       Exhibits                                             20-21


               SIGNATURES                                          22


1


<PAGE>




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

                         HORIZON FINANCIAL CORP.
        Consolidated Statements of Financial Position (unaudited)

                                 ASSETS
                                              September 30,        March 31,
                                                  2005               2005
                                            --------------      -------------

Cash and cash equivalents                     $ 24,943,695      $  23,250,411
Interest-bearing deposits                        6,718,999          3,907,349
Investment securities
  Available-for-sale                            61,299,680         71,824,994
  Held-to-maturity                                 369,671            369,596
Mortgage-backed securities
  Available-for-sale                            20,602,135         18,510,439
  Held-to-maturity                                 622,476            885,137
Federal Home Loan Bank Stock                     7,247,400          7,217,900
Loans receivable, net of allowance of
  loan losses of $13,161,569 at September
  30 and $11,767,029 at March 31               867,735,111        804,980,578
Loans held for sale, at fair value               2,359,560          4,068,859
Investment in real estate in a joint venture    16,811,048         17,204,265
Accrued interest and dividends receivable        4,778,013          4,498,756
Bank premises and equipment, net                23,443,579         22,781,657
Deferred income tax receivables                  2,447,120          2,299,225
Income tax receivable                              944,119            330,862
Other assets                                    15,627,446         15,440,447
                                            --------------      -------------
TOTAL ASSETS                                $1,055,950,052      $ 997,570,475
                                            ==============      =============

                  LIABILITIES AND STOCKHOLDERS' EQUITY

Deposits                                    $  800,937,918      $ 746,849,411
Accounts payable and other liabilities           4,551,781          5,570,071
Other borrowed funds                           122,292,989        119,066,193
Borrowing related to investment in real
  estate in a joint venture                     17,456,290         16,720,745
Advances by borrowers for taxes and
  insurance                                        459,424            518,774
Deferred compensation                            1,858,194          1,821,094
                                            --------------      -------------
     Total liabilities                         947,556,596        890,546,288
                                            --------------      -------------
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; 9,918,707 and
   10,037,903 shares issued and outstanding,
   respectively                                  9,918,707         10,037,903
  Additional paid-in capital                    54,105,348         54,737,070
  Retained earnings                             41,346,545         38,939,268
  Unearned ESOP shares                             (72,101)           (72,101)
  Accumulated other comprehensive income,
   net of tax                                    3,094,957          3,382,047
                                            --------------      -------------
     Total stockholders' equity                108,393,456        107,024,187
                                            --------------      -------------
TOTAL LIABILITIES AND STOCKHOLDERS'
 EQUITY                                     $1,055,950,052      $ 997,570,475
                                            ==============      =============

               (See Notes to Consolidated Financial Statements)


2

<PAGE>




                            HORIZON FINANCIAL CORP.
                  Consolidated Statements of Income (unaudited)

                                                        Three months ended
                                                           September 30,
                                                      2005             2004
                                                   ------------  ------------
INTEREST INCOME
  Interest on loans                                $ 15,787,109  $ 11,833,129
  Interest on investments and
   mortgage-backed securities                           878,733     1,057,001
                                                   ------------  ------------
    Total interest income                            16,665,842    12,890,130
                                                   ------------  ------------
INTEREST EXPENSE
  Interest on deposits                                4,858,347     3,246,069
  Interest on other borrowings                        1,049,393       634,754
                                                   ------------  ------------
    Total interest expense                            5,907,740     3,880,823
                                                   ------------  ------------
    Net interest income                              10,758,102     9,009,307

PROVISION FOR LOAN LOSSES                               750,000       325,000
                                                   ------------  ------------
    Net interest income after provision
     for loan losses                                 10,008,102     8,684,307
                                                   ------------  ------------
NONINTEREST INCOME
  Service fees                                        1,008,352       816,812
  Other                                                 367,873       555,749
  Net gain on sales of loans - servicing
   released                                             306,336       204,607
  Net gain on sales of loans - servicing
   retained                                              38,332        45,441
  Net gain on sale of investment securities                -          152,440
                                                   ------------  ------------
    Total noninterest income                          1,720,893     1,775,049
                                                   ------------  ------------
NONINTEREST EXPENSE
  Compensation and employee benefits                  3,625,105     3,169,091
  Building occupancy                                    819,011       695,303
  Other expenses                                      1,424,152     1,420,189
  Data processing                                       217,735       241,553
  Advertising                                           187,106       187,172
                                                   ------------  ------------
    Total noninterest expense                         6,273,109     5,713,308
                                                   ------------  ------------
NET INCOME BEFORE PROVISION FOR INCOME TAX            5,455,886     4,746,048

PROVISION FOR INCOME TAX                              1,660,444     1,439,174
                                                   ------------  ------------
NET INCOME                                          $ 3,795,442  $  3,306,874
                                                   ============  ============

BASIC EARNINGS PER SHARE                               $  0.38       $ 0.32
                                                       =======       ======
DILUTED EARNINGS PER SHARE                             $  0.38       $ 0.32
                                                       =======       ======
             (See Notes to Consolidated Financial Statements)
3

<PAGE>




                               HORIZON FINANCIAL CORP.
                    Consolidated Statements of Income (unaudited)

                                                         Six months ended
                                                           September 30,
                                                       2005           2004
                                                   -----------     -----------
INTEREST INCOME
  Interest on loans                                $30,490,067     $22,898,683
  Investment and mortgage-backed securities          1,711,868       2,169,657
                                                   -----------     -----------
   Total interest income                            32,201,935      25,068,340
                                                   -----------     -----------
INTEREST EXPENSE
  Interest on deposits                               9,021,036       6,388,241
  Interest on other borrowings                       2,148,997       1,223,804
                                                   -----------     -----------
   Total interest expense                           11,170,033       7,612,045
                                                   -----------     -----------
   Net interest income                              21,031,902      17,456,295

PROVISION FOR LOAN LOSSES                            1,475,000         625,000
                                                   -----------     -----------
   Net interest income after provision for
    loan losses                                     19,556,902      16,831,295
                                                   -----------     -----------
NONINTEREST INCOME
  Service fees                                       1,754,775       1,661,230
  Other                                              1,035,058         817,911
  Net gain (loss) on sales of loans -
   servicing released                                  603,129         539,711
  Net gain (loss) on sales of loans -
   servicing retained                                   52,018          55,424
  Net gain on sale of investment securities             42,184         469,751
                                                   -----------     -----------
   Total noninterest income                          3,487,164       3,544,027
                                                   -----------     -----------
NONINTEREST EXPENSE
  Compensation and employee benefits                 7,056,716       6,180,015
  Building occupancy                                 1,638,098       1,344,007
  Other expenses                                     2,872,180       2,598,828
  Data processing                                      435,447         427,833
  Advertising                                          357,084         376,446
                                                   -----------     -----------
   Total noninterest expense                        12,359,525      10,927,129
                                                   -----------     -----------
NET INCOME BEFORE PROVISION FOR INCOME TAX          10,684,541       9,448,193

PROVISION FOR INCOME TAX                             3,176,742       2,866,961
                                                   -----------     -----------
NET INCOME                                         $ 7,507,799     $ 6,581,232
                                                   ===========     ===========

BASIC EARNINGS PER SHARE                              $ 0.75          $ 0.64
                                                      ======          ======
DILUTED EARNINGS PER SHARE                            $ 0.74          $ 0.63
                                                      ======          ======

             (See Notes to Consolidated Financial Statements)
4

<PAGE>




<TABLE>
                                       HORIZON FINANCIAL CORP.
                         Consolidated Statements of Stockholders' Equity
                           Six Months Ended September 30, 2005 and 2004
                                             (unaudited)

                                                                                                  Accumu-
                                                                                                  lated
                                                                                                  Other
                                 Common Stock                                                     Compre-
                             ----------------------    Additional                  Unearned       hensive
                             Number of                  Paid-In      Retained        ESOP         Income
                              Shares       At Par       Capital      Earnings       Shares        (Loss)
                             ---------  -----------   -----------   -----------    ---------    ----------

                          <c>         <c>          <c>           <c>            <c>          <c>

BALANCE, March 31, 2004      10,405,331  $10,405,331   $56,893,824  $36,925,836   $ (144,205)    $5,226,207
Comprehensive income
 Net income                           -            -             -    6,581,232            -              -
Other comprehensive income
 Change in unrealized
 losses on available-for
 -sale securities, net taxes
 (benefit) of $(551,948)              -            -             -            -            -     (1,071,429)
 Total other comprehensive
  income                              -            -             -            -            -              -
Comprehensive income                  -            -             -            -            -              -
Cash dividends on common
 stock at $.26/sh                     -            -             -   (2,661,248)           -              -
Stock options exercised          49,953       49,953       349,150            -            -              -
Treasury stock purchased              -            -             -            -            -              -
Retirement of treasury stock   (287,250)    (287,250)   (1,637,612)  (3,452,153)           -              -
                             ----------  -----------   -----------  -----------   ----------     ----------
BALANCE, September 30, 2004  10,168,034  $10,168,034   $55,605,362  $37,393,667   $ (144,205)    $4,154,778
                             ==========  ===========   ===========  ===========   ==========     ==========
BALANCE, March 31, 2005      10,037,903  $10,037,903   $54,737,070  $38,939,268   $  (72,101)    $3,382,047
Comprehensive income
 Net income                           -            -             -    7,507,799            -               -
 Other comprehensive income
  Change in unrealized
   gains on available-for-
   sale securities, net taxes
   of $147,894                        -            -             -            -            -       (287,090)
 Total other comprehensive
  income                              -            -             -            -            -               -

Comprehensive income                  -            -             -            -            -               -
Cash dividends on common
 stock at $.28/sh                     -            -             -   (2,782,016)           -               -
Tax benefit associated
 with stock options                   -            -        97,494            -            -               -
Stock options exercised          53,905       53,905       257,633            -            -               -
Treasury stock purchased              -            -             -            -            -               -
Retirement of treasury stock   (173,101)    (173,101)     (986,849)  (2,318,506)           -               -
                              ---------  -----------   -----------  -----------    ---------      ----------
BALANCE, September 30, 2005   9,918,707  $ 9,918,707   $54,105,348  $41,346,545    $ (72,101)     $3,094,957
                             ==========  ===========   ===========  ===========    =========      ==========
</TABLE>


<TABLE>
                                  Treasury                             Total
                                   Stock         Stockholders'      Comprehensive
                                  at Cost           Equity             Income
                               -------------     ------------       --------------

                            <c>               <c>                <c>

BALANCE, March 31, 2004        $        -       $ 109,306,993
Comprehensive income
 Net income                             -           6,581,232        $  6,581,232
 Other comprehensive income
  Change in unrealized
  losses on available-for
  -sale securities, net taxes
  (benefit) of $(551,948)               -          (1,071,429)         (1,071,429)
                                                                     ------------
  Total other comprehensive
   income                                                   -          (1,071,429)
                                                                     ------------
Comprehensive income                    -                   -        $  5,509,803
                                                                     ============
Cash dividends on common
 stock at $.26/sh                       -          (2,661,248)
Stock options exercised                 -             399,103
Treasury stock purchased       (5,377,015)         (5,377,015)
Retirement of treasury
 stock                          5,377,015                   -
                               ----------       -------------
BALANCE, September 30, 2004    $        -       $ 107,177,636
                               ==========       =============
BALANCE, March 31, 2005        $        -       $ 107,024,187
Comprehensive income
 Net income                             -           7,507,799       $  7,507,799
 Other comprehensive income
  Change in unrealized
   gains on available-for-
   sale securities, net taxes
   of $147,894                          -            (287,090)         (287,090)
                                                                   ------------
 Total other comprehensive
  income                                -                   -          (287,090)
                                                                   ------------
Comprehensive income                    -                   -      $  7,220,709
                                                                   ============
Cash dividends on common
 stock at $.28/sh                       -          (2,782,016)
Tax benefit associated
 with stock options                     -              97,494
Stock options exercised                 -             311,538
Treasury stock purchased       (3,478,456)         (3,478,456)
Retirement of treasury
 stock                          3,478,456                   -
                               ----------      --------------
BALANCE, September 30, 2005    $        -      $ 108,393,456
                               ==========      ==============
</TABLE>
             (See Notes to Consolidated Financial Statements)

5

<PAGE>



                               HORIZON FINANCIAL CORP.
                  CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

                                                   Six Months Ended
                                                     September 30,
                                                 2005            2004
                                              -----------     -----------
CASH FLOWS FROM OPERATING ACTIVITIES
 Net income                                   $ 7,507,799     $ 6,581,232
Adjustments to reconcile net income to net
cash provided by operating activities
 Depreciation and amortization                    355,111         399,751
 Stock dividends - Federal Home Loan Bank
  stock                                           (29,500)       (140,100)
 Provision for loan losses                      1,475,000         625,000
Changes in assets and liabilities
 Accrued interest and dividends receivable       (279,257)       (128,295)
 Interest payable                                 985,088          51,260
 Net change in loans held for sale              1,709,299      (1,121,250)
 Federal income tax (receivable) payable         (613,257)     (1,441,039)
 Tax benefit associated with stock options         97,494            -
 Other assets                                    (186,999)         87,673
 Other liabilities                             (2,059,130)     (1,411,360)
                                              -----------     -----------
   Net cash flows from operating activities     8,961,648       3,502,872
                                              -----------     -----------
CASH FLOWS FROM INVESTING ACTIVITIES
 Net change in interest-bearing deposits       (2,811,650)     11,199,494
 Purchases of investment securities -
   available-for-sale                          (5,815,000)     (9,285,000)
 Proceeds from sales and maturities of
   investment securities - available-
   for-sale                                    16,080,176      11,803,678
 Purchases of mortgage-backed securities -
   available-for-sale                          (6,196,641)          -
 Proceeds from maturities of mortgage-backed
   securities - available-for-sale              3,930,099       6,658,592
 Proceeds from maturities of mortgage-backed
   securities - held-to-maturity                  262,586         287,545
 Net change in loans                          (63,780,268)    (47,003,792)
 Purchases of bank premises and equipment      (1,466,299)     (2,891,274)
 Net change in other real estate owned            393,217          63,432
                                              -----------     -----------
   Net cash flows from investing activities   (59,403,780)    (29,167,325)
                                              -----------     -----------
CASH FLOWS FROM FINANCING ACTIVITIES
 Net change in deposits                        54,088,507      15,723,477
 Advances from other borrowed funds             75,726,796      46,712,727
 Repayments of other borrowed funds           (72,500,000)    (28,000,000)
 Net change in borrowing related to
   investment in real estate in a joint
   venture                                        735,545           -
 Common stock issued, net                         311,538         399,103
 Cash dividends paid                           (2,748,514)     (2,640,071)
 Treasury stock purchased                      (3,478,456)     (5,377,015)
                                              -----------     -----------
   Net cash flows from financing activities    52,135,416      26,818,221
                                              -----------     -----------
NET CHANGE IN CASH AND CASH EQUIVALENTS         1,693,284       1,153,768
CASH AND CASH EQUIVALENTS, beginning of
  period                                       23,250,411      18,431,964
                                              -----------     -----------
CASH AND CASH EQUIVALENTS, end of period      $24,943,695     $19,585,732
                                              ===========     ===========

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
 Cash paid during the period for interest     $10,184,945     $ 7,560,785
                                              ===========     ===========
 Cash paid during the period for income
  tax                                         $ 3,790,000     $ 4,308,000
                                              ===========     ===========

        (See Notes to Consolidated Financial Statements)

6

<PAGE>



                             HORIZON FINANCIAL CORP.
                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
              THREE MONTHS AND SIX MONTHS ENDED SEPTEMBER 30, 2005
                                  (unaudited)

NOTE 1 -

Basis of Presentation
---------------------

     The condensed consolidated financial statements as of and for the three
and six months ended September 30, 2005 and 2004, include the accounts of
Horizon Financial Corp. (the Corporation), Horizon Bank (the Bank), and other
subsidiaries of the Bank.  Significant intercompany balances and transactions
have been eliminated in consolidation. The Corporation has engaged in no
significant activity other than holding the stock of the Bank.

     The preparation of the financial statements in conformity with accounting
principles generally accepted in the United States 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 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, 2005 are not necessarily indicative of the
operating results for the full year ending March 31, 2006.  For further
information, refer to the consolidated financial statements and footnotes
thereto in the Corporation's Annual Report on Form 10-K for the year ended
March 31, 2005.

Reclassification
----------------

     Certain reclassifications have been made to prior financial statements to
conform with current presentation.  Such reclassifications have no effect on
net income.

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

     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 our
liability.  The real estate joint venture has a carrying amount of
approximately $16.8 million, with a related borrowing of approximately $17.5
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 approximately $81,000 for the three months
ended September 30, 2005 and $148,000 for the six  months ended September 30,
2005.

7

<PAGE>



Net Income Per Share
--------------------

     Basic earnings per share (EPS) for the three months ended September 30,
2005 and 2004 are calculated on the basis of 9,944,017 and 10,251,020 weighted
average shares outstanding, respectively. Diluted EPS for the three months
ended September 30, 2005 and 2004 are calculated on the basis of 10,037,504
and 10,403,892 weighted average shares outstanding, respectively.  Basic
earnings per share for the six months ended September 30, 2005 and 2004 are
calculated on the basis of 9,976,109 and 10,305,522 weighted average shares
outstanding, respectively. Diluted earnings per share for the six months ended
September 30, 2005 and 2004 are calculated on the basis of 10,079,552 and
10,464,462 weighted average shares outstanding, respectively. Diluted EPS
figures are computed by determining the number of additional shares that are
deemed outstanding due to stock options under the treasury stock method.

Stock Options
-------------

     In December 2004, the FASB issued Statement of Financial Accounting
Standard (Statement) No. 123(R), Share-Based Payment, which is a revision of
Statement No. 123, Accounting for Stock-Based Compensation.  Statement 123(R)
supersedes Accounting Principles Board Opinion No. 25, Accounting for Stock
Issued to Employees, and amends Statement No. 95, Statement of Cash Flows.
Generally, the approach in Statement 123(R) is similar to the approach
described in Statement 123.  However, Statement 123(R) requires all
share-based payments to employees, including grants of employee stock options,
to be recognized in the income statement based on their fair values.  Pro
forma disclosure is no longer an alternative.  The SEC's new rule allows
public companies to implement Statement 123(R) at the beginning of their next
fiscal year, instead of the next reporting period, after June 15 or December
15, 2005, as applicable.  The SEC's new rule does not change the accounting
required by Statement 123(R); only the compliance deadlines have been altered.
With the recent extension, the Corporation expects to adopt Statement 123(R)
on April 1, 2006.

     As permitted by Statement 123, the Corporation currently recognizes the
financial effects of stock options under the intrinsic value method and, as
such, generally recognizes no compensation cost for employee stock options.
Accordingly, the adoption of Statement 123(R)'s fair value method may have a
significant impact on our results of operations, although it will have no
impact on our overall financial position.  The impact of adoption of Statement
123(R) cannot be predicted at this time because it will depend on levels of
share-based payments granted in the future.  However, had the Corporation
adopted Statement 123(R) in prior periods, the impact of that standard would
have approximated the impact of Statement 123 as described in the disclosure
of pro forma net income and earnings per share below.  Statement 123(R) also
requires the benefits of tax deductions in excess of recognized compensation
cost to be reported as a financing cash flow, rather than as an operating cash
flow as required under current literature.  This requirement will reduce net
operating cash flows and increase net financing cash flows in periods after
adoption.


8

<PAGE>



     Under APB 25, options issued in this manner do not result in the
recognition of employee compensation in the Corporation's financial
statements. Disclosures required by Statement No. 123, Accounting for
Stock-Based Compensation, as amended are as follows:

Pro forma disclosures:

                          For the Quarter Ended      For the Six Months Ended
                               September 30,               September 30,
                            2005           2004         2005          2004
                         ----------    -----------   -----------   -----------

Net income as reported   $3,795,442    $ 3,306,874   $ 7,507,799  $ 6,581,232
Additional compensation
 for fair value of stock
 options                     (2,369)        (1,150)      (18,959)     (13,082)
                         ----------    -----------   -----------  -----------
Pro forma net income     $3,793,073    $ 3,305,724   $ 7,488,840  $ 6,568,150
                         ==========    ===========   ===========  ===========
Earnings per share

Basic

  As reported              $ 0.38        $  0.32        $ 0.75       $ 0.64
                           ======        =======        ======       ======

  Pro forma                $ 0.38        $  0.32        $ 0.75       $ 0.64
                           ======        =======        ======       ======
Diluted

  As reported              $ 0.38        $  0.32        $ 0.74       $ 0.63
                           ======        =======        ======       ======

  Pro forma                $ 0.38        $  0.32        $ 0.74       $ 0.63
                           ======        =======        ======       ======

Recent Accounting Pronouncements
--------------------------------

Statement of Financial Accounting Standard (SFAS) No. 154, Accounting for
Changes and Error Corrections - replacement of APB Opinion No. 20 and FASB
Statement No. 3.  This Statement replaces APB Opinion No. 20, Accounting
Changes, and FASB Statement No. 3, Reporting Accounting Changes in Interim
Financial Statements, and changes the requirements for the accounting for and
reporting of a change in accounting principle. This Statement applies to all
voluntary changes in accounting principle. It also applies to changes required
by an accounting pronouncement in the unusual instance that the pronouncement
does not include specific transition provisions. When a pronouncement includes
specific transition provisions, those provisions should be followed.

9

<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
subsidiary. 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 and other portions of this report
contain certain "forward looking statements" within the meaning of the Private
Securities Litigation Reform Act of 1995.  This statement is for the express
purpose of availing the Corporation of the protections of such safe harbor
provisions of said Act with respect to all "forward looking statements."  The
Corporation has used "forward looking statements" to describe future plans and
strategies, including expectations of its potential future financial results.
Management's ability to predict results or the effect of future plans and
strategies is inherently uncertain.  Factors that could affect results
include, but are not limited to: the future level of interest rates, loan
demand, industry trends, general economic conditions, loan delinquency rates,
and changes in state and federal regulations.  These factors should be
considered when evaluating the "forward looking statements" and undue reliance
should not be placed on such statements.

General
-------

     The 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 title, "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 18 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.  The acquisition of Bellingham Bancorporation in June 1999
increased Horizon Financial's and Horizon Bank's presence in Whatcom County.
In fiscal 2002, the Bank acquired a bank site in Lynnwood, which was remodeled
and opened for business in March 2003.  The Bank opened commercial
banking/loan centers in Bellingham and Everett, Washington, and expanded its
operations in Burlington, Washington during the first quarter of fiscal 2004.
In November 2004, the Bank opened a full service office in Marysville,
Washington.  In April 2005, the Bank opened a full service office in Lakewood,
Washington, located in Pierce County, just south of Tacoma.  Future plans for
the Bank include the opening of a full service regional facility in the first
quarter of calendar 2006, which will replace the Bank's existing office and
commercial banking center in south Everett.

     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 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 Statement" above.

10

<PAGE>



Operating Strategy
-----------------

     The Corporation does not presently engage in any activities outside of
holding the common stock of the Bank and effecting repurchases of the
Corporation's common stock.

     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, 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, and to a lesser extent FHLB advances and other
wholesale borrowings.

     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.

     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 and net gains
and losses on sales of interest-earning assets.  Other noninterest expenses
include compensation and benefits, occupancy and equipment expenses, deposit
insurance premiums, data servicing expenses and other operating costs.  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.

     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 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 to 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.

Financial Condition
-------------------

     Total consolidated assets for the Corporation as of September 30, 2005,
were $1.1 billion, a 5.8% increase from the March 31, 2005 level of $997.6
million.  This increase in assets was primarily a result of the growth in
loans receivable, which increased 7.8% to $867.7 million at September 30, 2005
from $805.0 million at March 31, 2005.  This growth was primarily attributable
to the growth in commercial loans during this period, as the Bank continued
its practice of selling most of its single-family fixed rate loan production
into the secondary market.  The Bank sold $28.3 million of real estate loans
during the quarter ended September 30, 2005, compared to $19.7 million during
the quarter ended September 30, 2004.

11

<PAGE>




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

                                            September 30,        March 31,
                                                2005               2005
                                           --------------      ------------
                                                      (In thousands)
 First mortgage loans
   1-4 Family                                 $ 175,947         $ 174,458
   1-4 Family construction                       16,931            16,464
   Less participations sold                     (60,107)          (65,125)
                                              ---------         ---------
     Net first mortgage loans                   132,771           125,797
 Construction and land development              206,841           161,006
 Residential commercial real estate              69,519            73,397
 Non-residential commercial real estate         332,838           323,464
 Commercial loans                                88,876            91,210
 Home equity secured                             43,995            35,913
 Other consumer loans                             6,056             5,961
                                              ---------         ---------
     Subtotal                                   748,125           690,951
                                              ---------         ---------
   Total Loans receivable                       880,896           816,748
                                              ---------         ---------
Less:
   Allowance for loan losses                    (13,161)          (11,767)
                                              ---------         ---------
   Net Loans receivable                       $ 867,735         $ 804,981
                                              =========         =========

 Net residential loans                        $ 131,623    15%  $ 124,745  16%
 Net commercial loans                            87,194    10%     89,542  11%
 Net commercial real estate loans               599,691    69%    549,506  68%
 Net consumer loans                              49,227     6%     41,188   5%
                                              ---------   ----  --------- ----
                                              $ 867,735   100%  $ 804,981 100%
                                              =========   ====  ========= ====

Also contributing to the change in assets was the decline in available for
sale (AFS) investment securities, which decreased 14.6% to $61.3 million at
September 30, 2005 from $71.8 million at March 31, 2005.

The tables below display the characteristics of the available for sale (AFS)
and held to maturity (HTM) portfolios as of September 30, 2005:


                                                        Estimated
                                Amortized       Net       Fair
                                  Cost      Gain/(Loss)   Value
                               ----------- -----------  ----------
                                          (In thousands)
AFS Securities
 State and political
   subdivisions and U.S.
   government agency
   securities                    $ 47,686    $  (779)    $ 46,907
 Marketable equity securities       1,824      5,645        7,469
 Mutual funds                       5,000       (111)       4,889
 Corporate debt securities          2,021         14        2,035
 Mortage-backed securities and
   Collateralized mortgage
   obligations (CMOs)              20,620        (18)      20,602
                                 --------    -------     --------
   Total available-for-sale
    securities                     77,151      4,751       81,902
                                 --------    -------     --------
HTM Securities
 State and political subdivisions
   and U.S. government agency
   securities                         370         10          380
 Mortgage-backed securities and
   CMOs                               622         28          650
                                 --------    -------     --------
   Total held-to-maturity
    securities                        992         38        1,030
                                 --------    -------     --------
   Total securities              $ 78,143    $ 4,789     $ 82,932
                                 ========    =======     ========

12

<PAGE>




                     Maturity Schedule of Securities at September 30, 2005
                   ---------------------------------------------------------
                         Available-For-Sale         Held-To-Maturity
                   -------------------------    ----------------------------
                     Amortized    Estimated      Amortized     Estimated
                        Cost      Fair Value       Cost       Fair Value
                   ------------  ------------   ------------ ---------------
                                        (In thousands)
Maturities:
 One year or less    $  8,740       $  8,755        $   -       $    -

 Over one to five
  years                37,065         36,390           938          963
 Over five to ten
  years                 6,614          6,532             8            9
 Over ten years        17,908         17,867            46           58
                     --------       --------        ------      -------
                       70,327         69,544           992        1,030
                     --------       --------        ------      -------
Mutual funds and
 marketable equity
 securities (liquid)    6,824         12,358             -            -
                     --------       --------        ------      -------
Total investment
 securities          $ 77,151       $ 81,902        $  992      $ 1,030
                     ========       ========        ======      =======

     Total liabilities also increased 6.4% to $947.6 million at September 30,
2005, from $890.5 million at March 31, 2005.  This increase in liabilities was
the result, in large part, of growth in deposits, which increased 7.2% to
$800.9 million at September 30, 2005 from $746.8 million at March 31, 2005 as
the result of gains in money market and checking accounts as shown below as
well as approximately in $8.0 million dollars in brokered deposit balance
growth.  The following is an analysis of the deposit portfolio by major type
of deposit at September 30, 2005 and March 31, 2005:

                               September 30, 2005      March 31, 2005
                               ------------------     ----------------
                                             (In thousands)
Demand deposits
 Savings                         $  35,543               $  40,863
 Checking                           78,789                  83,268
 Checking (noninterest-bearing)     84,463                  63,503
 Money Market                      145,254                 134,761
                                 ---------               ---------
                                   344,049                 322,395
                                 ---------               ---------
Time certificates of deposit
 Less than $100,000                241,581                 240,178
 Greater than or equal to
  $100,000                         215,308                 184,276
                                 ---------               ---------
                                   456,889                 424,454
                                 ---------               ---------
Total deposits                   $ 800,938               $ 746,849
                                 =========               =========

     Also contributing to the growth was an increase in other borrowed funds
to $122.3 million at September 30, 2005 from $119.1 million at March 31, 2005.
During the quarter the Bank borrowed additional funds from the FHLB
to help manage interest rate risk and support asset growth.

     Also included in the September 30, 2005 balance sheet is 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 the
Greenbriar Northwest LLC (GBNW), 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 $16.8 million shown on the Corporation's Consolidated
Statements of Financial Position as an asset at September 30, 2005 represents
the current level of the investment in real estate joint ventures, including
the Fairhaven Highlands joint venture.   The $17.5 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, GBNW is in the
process of meeting with the appropriate public and private entities, in its
preliminary planning efforts relating to the future development of the
property.

     Stockholders' equity at September 30, 2005 increased slightly to $108.4
million from $107.0 million at March 31, 2005.  The Corporation remains strong
in terms of its capital position, with a stockholder equity-to-assets ratio of
10.3% at September 30, 2005, compared to 10.7% at March 31, 2005.

13

<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, 2005, the Bank had liquid
assets (cash and marketable securities with maturities of one year or less)
with a book value of $57.0 million.

     As of September 30, 2005 the total book value of investments and
mortgage-backed securities was $78.1 million compared to a market value of
$82.9 million with an unrealized gain of $4.8 million.  As of March 31, 2005,
the total book value of investments and mortgage-backed securities was $86.4
million, compared to a market value of $91.6 million with an unrealized gain
of $5.2 million.   The Bank foresees no 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 flow from banking activities,
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: 1) selling additional loans in
the secondary market; 2) entering into reverse repurchase agreements; 3)
borrowing from the FHLB of Seattle; 4) accepting additional jumbo, brokered
and/or public funds deposits; or 5) accessing the discount window of the
Federal Reserve Bank of San Francisco.

     Stockholders' equity as of September 30, 2005 was $108.4 million, or
10.3% of assets, compared to $107.0, or 10.7% of assets at March 31, 2005.
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, 2005 was 13.0%, compared to
13.7% as of March 31, 2005.  These figures are well above the well-capitalized
minimum of 10% set by the FDIC.

     The Corporation has had various stock buy-back programs since August
1996.  In March 2005, the Board of Directors approved a new stock repurchase
plan that runs concurrent with the 2006 fiscal year, allowing the Corporation
to repurchase up to 10% of total shares outstanding, or approximately 1.0
million shares.  This marked the Corporation's seventh stock repurchase plan.
During the quarter ended September 30, 2005, the Corporation repurchased
46,604 shares at an average price of $21.38 and for the six-month period ended
September 30, 2005, the Corporation repurchased 173,101 shares at an average
price of $20.05.

     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 that will
be repurchased and the price that will be paid is the result of many factors,
several of which are outside of the control of 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, and
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.

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

     Net interest income for the three months ended September 30, 2005
increased 19.4% to $10.8 million from $9.0 million in the same time period of
the previous year.  Interest on loans for the quarter ended September 30, 2005
increased 33.4% to $15.8 million, from $11.8 million for the comparable
quarter a year ago. Contributing to the increase in the current year was a
higher level of average loans outstanding of $844 million for the period ended
September 30, 2005 compared to $700 million in the prior period one year ago.
Also contributing to this increase were three 25 basis point prime rate
increases during the quarter ended September 30, 2005. Interest and dividends
on investments and mortgage-backed securities for the three months ended
September 30, 2005 decreased 16.9% to $879,000, from $1.1 million for the
comparable quarter a year ago.  This decrease was a result of a lower level of
investments and mortgage backed securities outstanding during the respective
periods, as average total investments decreased 19.2% to $92.1 million at
September 30, 2005 as compared to $114.0 million at September 30, 2004 as
funds were shifted from the investment portfolio to fund loans receivable.
Total interest income

14

<PAGE>



increased 29.3% to $16.7 million at September 30, 2005 from $12.9 million in
the comparable period one year ago.  At September 30, 2005, the Bank held $7.2
million in FHLB of Seattle stock and received dividends on said investment in
the amount of $-0- during the quarter ended September 30, 2005 as compared to
$63,000 in the comparable quarter one year ago.  On May 18, 2005, the FHLB of
Seattle announced a three-year dividend suspension; therefore, the Bank's
investment income will be reduced accordingly during said period.

     Total interest paid on deposits increased 49.7% to $4.9 million at
September 30, 2005 from $3.2 million at September 30, 2004 as a result of an
increased level of deposits outstanding along with an increase in interest
rates in the current period.  Interest on borrowings increased 65.3% to $1.0
million during the quarter ended September 30, 2005, compared to $635,000 for
the comparable period one year ago.  The increased expense in the current year
was a result of a higher level of borrowings outstanding, as a portion of the
Bank's loan portfolio growth was funded with wholesale borrowings. The Bank
continues to carry wholesale borrowings in order to further leverage its
balance sheet and better manage its interest rate risk profile.

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

Quarterly average balances as of:     September 30, 2005   September 30, 2004
                                      ------------------  --------------------
                                                 (In thousands)

Loans                                    $    844,446         $    700,494
Investments                                    92,083              114,013
                                         ------------         ------------
Total interest-earning assets            $    936,529         $    814,507
                                         ------------         ------------
Deposits                                 $    784,384         $    684,238
Borrowings                                    118,048               75,682
                                         ------------         ------------
Total interest-bearing liabilities       $    902,432         $    759,920
                                         ------------         ------------

Average assets                              1,041,954              883,006
Average stockholders' equity                  107,859              107,378

Quarterly weighted average interest
 rates as of:                         September 30, 2005   September 30, 2004
                                     -------------------  --------------------

 Yield on loans                               7.48%                6.76%
 Yield on investments                         3.79%                3.68%
                                              -----                -----
 Yield on interest-earning assets             7.12%                6.33%

 Cost of deposits                             2.46%                1.88%
 Cost of borrowings                           3.48%                3.33%
                                              -----                -----
 Cost of interest-bearing liabilities         2.60%                2.03%

 Net interest spread                          4.52%                4.30%
 Net interest margin                          4.59%                4.42%

     Total interest income for the six months ended September 30, 2005
increased 28.5% to $32.2 million from $25.1 million for the comparable period
one year ago.  Total interest expense for the six-month period ended September
30, 2005 increased 46.7% to $11.2 million from $7.6 million for the six months
ended September 30, 2004. Net interest income for the six-month period ended
September 30, 2005 increased 20.5% to $21.0 million from $17.5 million for
the comparable period one year ago.



15

<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.

                                               As of September 30,
Allowance for Loan Losses                    2005               2004
                                           --------           --------
                                                  (In thousands)

 Allowance at beginning of period          $ 11,767            $ 10,122
 Provision for loan losses                    1,475                 625
 Charge offs, net of recoveries                 (81)                110
                                           --------            --------
 Allowance at end of period                $ 13,161            $ 10,857
 Allowance for loan losses as a
   percentage of net loans receivable
   at the end of the period                    1.52%              1.54%
 Net charge-offs as a percentage of
   average loans outstanding during
   the period                                 0.010%             0.016%

     The provision for loan losses was $750,000 for the quarter ended
September 30, 2005 compared to $325,000 for the quarter ended September 30,
2004.  This change resulted from management's ongoing analysis of the growth
of the loan portfolio, changes in loan portfolio composition by collateral
categories, overall credit quality of the portfolio, peer group analysis, and
current economic conditions.  The allowance for loan losses was $13.2 million,
or 1.5% of net loans receivable at September 30, 2005, compared to $10.9
million, or 1.5% of net loans receivable at September 30, 2004.  The increased
allowance level resulted from continued loan portfolio growth in the
higher-risk lending categories of commercial and multi-family
construction/permanent loans and business loans during the period, which
comprised $686.9 million, or 79.1% of the portfolio at September 30, 2005,
versus $563.9 million, or 80.0% at September 30, 2004.

     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 of September 30, 2005, there were six loans on nonaccrual status.  At
September 30, 2005 total non-performing loans were $1.3 million.  The Bank had
no real estate owned at September 30, 2005.  Total non-performing assets
represented $1.3 million, or .12% of total assets at September 30, 2005
compared to $1.1 million, or 0.13% of total assets at September 30, 2004.  The
non-performing figures for September 30, 2005 include one delinquent
residential real estate loan in the amount of $964,000.  The Bank does not
anticipate incurring a material loss from this loan.

                                                  As of September 30,
 Non-Performing Assets                           2005             2004
                                              --------          --------
                                                     (In thousands)

 Accruing loans - 90 days past due             $     -           $ 1,114
 Non-accrual loans                               1,257                 -
 Total non-performing loans                      1,257             1,114
                                              --------          --------
 Total non-performing loans/net loans             0.15%             0.16%

 Real estate owned                                    -                -
                                               --------         --------
 Total non-performing assets                      1,257            1,114
                                               --------         --------

 Total non-performing assets/total assets          0.12%            0.13%


16

<PAGE>



Noninterest Income
------------------

     Noninterest income for the three months ended September 30, 2005
decreased 3.1% to $1.7 million compared to $1.8 million for the quarter ended
September 30, 2004.  Service fee income increased 23.4% to $1.0 million for
the quarter ended September 30, 2005 from $817,000 for the same quarter in the
prior period.  The primary reason for the increased fee income in the current
period was the implementation of our overdraft protection service, during July
2005, which resulted in increased fee income.  The net gain on the sale of
loans servicing released increased to $306,000 for the quarter ended September
30, 2005 from $205,000 in the comparable period one year ago.  The net gain on
sales of investment securities decreased to $-0- in the quarter ended
September 30, 2005 from $152,000 in the quarter ended September 30, 2004.  The
gains in the prior period were primarily attributable to the sale of selected
securities from the Bank's investment portfolio.  Other noninterest income for
the quarter decreased 33.8% to $368,000 for the quarter ended September 30,
2005 from $556,000 for the three months ended September 30, 2004.  The primary
reason for the increase in the prior period was the recognition of
approximately $200,000 in profits on a real estate development project from a
joint venture of the Bank's wholly owned subsidiary, Westward Financial Corp.

     Noninterest income for the six months ended September 30, 2005 decreased
slightly to $3.5 million for the six months ended September 30, 2005 as
compared to the same period one year ago.  Service fee income increased 5.6%
to $1.8 million during the current six month period from $1.7 million for the
comparable period one year ago, primarily as a result of the implementation of
our overdraft protection service as discussed above in the quarterly
comparison.  The net gain on the sale of loans servicing released increased
11.7% to $603,000 for the six months ended September 30, 2005 from $540,000 in
the comparable period one year ago.  The primary reason for the increase was
due to a higher amount of loans sold in the current quarter.  The net
gain/loss on sales of investment securities decreased to $42,000 during the
current six month period from $470,000 for the comparable period one year ago.
The gains in these periods were primarily attributable to the sale of selected
securities from the Bank's investment portfolio.  Other noninterest income
increased 26.5% to $1.0 million for the six months ended September 30, 2005
from $818,000 for the comparable period one year ago.  The primary reason for
the increase year to date over the prior period was the recognition of
approximately $320,000 in profits in the current period ended September 30,
2005 compared to approximately $200,000 for the six month period ended
September 30, 2004 on the real estate development project mentioned above
regarding Greenbriar Northwest LLC, a real estate joint venture.  As of
September 30, 2005 all sales have been concluded for this real estate
development project.

Noninterest Expense
-------------------

     Noninterest expense for the three months ended September 30, 2005
increased 9.8% to $6.3 million from $5.7 million for the comparable quarter
one year ago.  Increases in compensation and employee benefits and building
and occupancy expenses resulted from the opening of two full service retail
offices in Marysville and Lakewood and are the primary reasons for these
increases.  Compensation and employee benefits increased 14.4% for the quarter
ended September 30, 2005 to $3.6 million from $3.2 million for the comparable
quarter one year ago.  Building occupancy for the quarter ended September 30,
2005 increased 17.8% to $819,000 from $695,000 for the three months ended
September 30, 2004.

     Data processing expenses decreased 9.9% to $218,000 for the quarter ended
September 30, 2005 from $242,000 for the comparable quarter one year ago.
Prior period expenses included one time conversion related costs related to
the Bank's core processor conversion completed in November 2004.

     Noninterest expense for the six months ended September 30, 2005 increased
13.1% to $12.4 million from $10.9 million for the six months ended September
30, 2004.  Compensation and employee benefits increased 14.2% to $7.1 million
for the current period from $6.2 million.  Building occupancy expenses for the
current six months increased 21.9% to $1.6 million from $1.3 million for the
comparable six month period one year ago.  The reasons for these increases
relate to the growth of the Bank as discussed above in the quarterly results.
Other expenses increased 10.5% to $2.9 million for the six months ended
September 30, 2005 compared to $2.6 million for the prior period one year ago
as a result of additional expenses related to the Bank's charter conversion,
state regulatory exam, and increased Business & Occupation tax due to the
shifting loan portfolio from non-taxable mortgage loans to taxable commercial
loans.

17

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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, 2005, the
Corporation had no significant off-balance sheet derivative financial
instruments, nor did it have a trading portfolio of investments.  At September
30, 2005, 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,
2005.

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 the Corporation's disclosure controls and procedures as currently in
effect are 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 quarter ended September 30, 2005, 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 design of its
disclosure controls and procedures is effective to achieve its goal, future
events affecting its business may cause the Corporation to modify its
disclosure controls and procedures.

     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.

18

<PAGE>



PART II.  OTHER INFORMATION

Item 1.     Legal Proceedings
               Horizon Financial Corporation has certain litigation and/or
               negotiations in progress resulting from activities arising from
               normal operations.  In the opinion of management, none of these
               matters are likely to have a materially adverse effect on the
               Corporation's financial position or results of operation.

Item 2.     Changes in Securities, Use of Proceeds and Issuer Repurchases of
            Equity Securities

The Company's common stock is traded on the NASDAQ National Market under the
symbol "HRZB".  As of September 30, 2005, there were 9,918,707 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 2005, the Board of Directors approved a new stock
repurchase plan that runs concurrent with the 2006 fiscal year, allowing the
Corporation to repurchase up to 10% of total shares outstanding, or
approximately 1.0 million shares.  This marked the Corporation's seventh stock
repurchase plan.  During the quarter ended September 30, 2005, the Corporation
repurchased 46,604 shares at an average price of $21.38 and for the six-month
period ended September 30, 2005, Horizon repurchased 173,101 shares at an
average price of $20.05.

     The following table sets forth information about the Corporation's
purchases of its outstanding Common Stock during the quarter ended September
30, 2005.



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

July 1, 2005 -
 July 31, 2005          2,000         $   21.47     128,497        871,503
August 1, 2005 -
 August 31, 2005       23,204         $   20.82     151,701        848,299
September 1, 2005 -
 September 30, 2005    21,400         $   21.98     173,101        826,899

Total                  46,604         $   21.38     173,101        826,899


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

Item 3.  Defaults Upon Senior Securities
           None


19

<PAGE>



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

The Corporation's 2005 Annual Meeting of Shareholders was held on July 26,
2005 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 2008 by the following vote:


                  FOR:                          WITHHELD:
                  Number of Votes   Percentage  Number of Votes   Percentage
                  ---------------   ----------  ---------------   ----------
V. Lawrence Evans    8,594,340        95.1%         446,444          4.9%
Richard R. Haggen    8,366,119        92.5%         674,665          7.5%
Robert C. Tauscher   8,587,560        95.0%         453,224          5.0%


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, James A. Strengholt, and Dennis C. Joines.

2004 Stock Option Plan:

Shareholders approved the 2005 Incentive Stock Plan, authorizing the issuance
of 750,000 shares of common stock under the Plan by the following vote:


                             Number
                            of Votes        Percentage
                          -----------------------------

FOR                        5,581,099           61.7%
AGAINST                    1,777,389           19.7%
ABSTAIN                      177,651            2.0%
BROKER NON-VOTES           1,504,645           16.6%



Item 5.       Other Information
                    None

Item 6.       Exhibits

              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)  1986 Stock Option and Incentive Plan (incorporated by
                       reference to Exhibit 99.1 to the Registrant's
                       Registration Statement on Form S-8 (File No.
                       33-99780))
               (10.4)  1995 Stock Option Plan (incorporated by reference to
                       Exhibit 99.2 to the Registrant's Registration
                       Statement on Form S-8 (File No. 33-99780))
               (10.5)  Bank of Bellingham 1993 Employee Stock Option Plan
                       (incorporated by reference to Exhibit 99 to the
                       Registrant's Registration Statement on Form S-8 (File
                       No. 33-88571))
               (10.6)  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)

20

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               (10.7)  Severance Agreement with Richard P. Jacobson
                       (incorporated by reference to the Registrant's
                       Quarterly Report on Form 10-Q for the quarter ended
                       June 30, 2002)
               (10.8)  Severance Agreement with Steven L. Hoekstra
                       (incorporated by reference to the Registrant's
                       Quarterly Report on Form 10-Q for the quarter ended
                       June 30, 2002)
               (10.9)  Stock Incentive Plan (incorporated by reference to
                       Exhibit 99 to the Registrant's Registration Statement
                       on Form S-8 (File No. 333-127178))
               (10.10) 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)
               (10.11) 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)
               (10.12) 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)
               (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

21

<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 3, 2005
                                 ----------------

22

<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 3, 2005
                                 /s/V. Lawrence Evans
                                 -------------------------------------
                                 V. Lawrence Evans
                                 Chairman, President, and Chief Executive
                                 Officer

23



<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 3, 2005
                                     /s/Richard P. Jacobson
                                     ----------------------------------
                                     Richard P. Jacobson
                                     Chief Financial Officer, EVP


24


<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

     The undersigned hereby certify, pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002 and in connection with this Quarterly Report of
Form 10-Q, 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.


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

Dated: November 3, 2005



25


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