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, 2004
                                              ------------------

                                      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)

                    Chartered by the State of 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
                                   -----    -----

As of September 30, 2004,  10,168,034 common shares, $1.00 par value, were
outstanding.

<PAGE>



                             HORIZON FINANCIAL CORP.

INDEX                                                              PAGE

PART 1     FINANCIAL INFORMATION

Item 1     Financial Statements

           Consolidated Statements of Financial Position            2

           Consolidated Statements of Income                       3-4

           Consolidated Statements of Stockholders' Equity          5

           Consolidated Statements of Cash Flows                    6

           Notes to Consolidated Financial Statements              7-8

Item 2     Management's Discussion and Analysis of Financial
              Condition and Results of Operations                  9-15

Item 3     Quantitative and Qualitative Disclosures About
              Market Risk                                           15

Item 4     Controls and Procedures                                  15


PART II    OTHER INFORMATION

Item 1     Legal Proceedings                                        16

Item 2     Unregistered Sales of Equity Securities and
              Use of Proceeds                                       16

Item 3     Defaults Upon Senior Securities                          16

Item 4     Submission of Matters to a Vote of  Security Holders   16-17

Item 5     Other Information                                        17

Item 6     Exhibits                                                 17


           SIGNATURES                                               18

1

<PAGE>



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

                             HORIZON FINANCIAL CORP.
                 Consolidated Statements of Financial Position

                                    ASSETS
                                                  September 30,
                                                      2004         March 31,
                                                   (unaudited)       2004
                                                  ------------   ------------


Cash and cash equivalents                         $ 19,585,732   $ 18,431,964
Interest-bearing deposits                            9,567,904     20,767,398
Investment securities
  Available-for-sale                                81,218,045     85,183,872
  Held-to-maturity                                     369,519        369,444
Mortgage-backed securities
  Available-for-sale                                20,986,391     27,759,813
  Held-to-maturity                                   1,256,413      1,544,034
Federal Home Loan Bank Stock                         7,155,000      7,014,900
Loans receivable, net of allowance of loan
 losses of $10,856,867 at September 30 and
 $10,121,532 at March 31                           704,784,147    658,226,144
Loans held for sale, at fair value                   2,454,750      1,333,500
Accrued interest and dividends receivable            4,160,302      4,032,007
Bank premises and equipment, net                    19,505,983     17,193,671
Net deferred income tax assets                       1,321,675        831,123
Federal income tax receivable                           65,765              -
Real estate owned                                            -         63,432
Other assets                                        16,036,906     16,124,579
                                                  ------------   ------------
TOTAL ASSETS                                      $888,468,532   $858,875,881
                                                  ============   ============

                   LIABILITIES AND STOCKHOLDERS' EQUITY

Deposits                                          $685,982,695   $670,259,218
Accounts payable and other liabilities               6,998,547      8,301,761
Other borrowed funds                                86,181,569     67,468,842
Advances by borrowers for taxes and insurance          344,090        416,899
Income tax currently payable                                 -      1,375,274
Deferred compensation                                1,783,995      1,746,894
                                                  ------------   ------------
     Total liabilities                             781,290,896    749,568,888
                                                  ------------   ------------

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; 10,168,034 and 10,405,331 issued
   and outstanding, respectively                    10,168,034     10,405,331
  Additional paid-in capital                        55,605,362     56,893,824
  Retained earnings                                 37,393,667     36,925,836
  Unearned ESOP shares                                (144,205)      (144,205)
  Accumulated other comprehensive income,
   net of tax                                        4,154,778      5,226,207
                                                  ------------   ------------
     Total stockholders' equity                    107,177,636    109,306,993
                                                  ------------   ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY        $888,468,532   $858,875,881
                                                  ============   ============


                (See Notes to Consolidated Financial Statements)

2

<PAGE>



                           HORIZON FINANCIAL CORP.
                 CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)

                                                        Three months ended
                                                           September 30,
                                                         2004        2003
                                                     -----------  -----------
INTEREST INCOME
  Interest on loans                                  $11,833,129  $11,003,995
  Interest on investments and mortgage-backed
   securities                                          1,057,001    1,206,498
                                                     -----------  -----------
     Total interest income                            12,890,130   12,210,493
                                                     -----------  -----------

INTEREST EXPENSE
  Interest on deposits                                 3,246,069    3,375,101
  Interest on other borrowings                           634,754      557,164
                                                     -----------  -----------
     Total interest expense                            3,880,823    3,932,265
                                                     -----------  -----------
     Net interest income                               9,009,307    8,278,228

PROVISION FOR LOAN LOSSES                                325,000      500,000
                                                     -----------  -----------
     Net interest income after provision for
      loan losses                                      8,684,307    7,778,228
                                                     -----------  -----------

NONINTEREST INCOME
  Service fees                                           816,812      806,946
  Other                                                  555,749      498,602
  Net gain on sales of loans - servicing released        204,607    1,031,883
  Net gain on sales of loans - servicing retained         45,441       80,666
  Net gain on sale of investment securities              152,440       40,000
                                                     -----------  -----------
     Total noninterest income                          1,775,049    2,458,097
                                                     -----------  -----------

NONINTEREST EXPENSE
  Compensation and employee benefits                   3,169,091    2,916,019
  Building occupancy                                     695,303      697,984
  Other expenses                                       1,420,189    1,279,928
  Data processing                                        241,553      158,083
  Advertising                                            187,172      210,730
                                                     -----------  -----------
     Total noninterest expense                         5,713,308    5,262,744
                                                     -----------  -----------

NET INCOME BEFORE PROVISION FOR INCOME TAX             4,746,048    4,973,581

PROVISION FOR INCOME TAX                               1,439,174    1,632,861
                                                     -----------  -----------

NET INCOME                                           $ 3,306,874  $ 3,340,720
                                                     ===========  ===========

BASIC EARNINGS PER SHARE                               $  0.32      $  0.32
                                                       =======      =======

DILUTED EARNINGS PER SHARE                             $  0.32      $  0.31
                                                       =======      =======

                 (See Notes to Consolidated Financial Statements)

3

<PAGE>

                           HORIZON FINANCIAL CORP.
                  CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)

                                                        Six months ended
                                                          September 30,
                                                       2004          2003
                                                   -----------   -----------
INTEREST INCOME
  Interest on loans                                $22,898,683   $22,058,408
  Investment and mortgage-backed securities          2,169,657     2,646,672
                                                   -----------   -----------
     Total interest income                          25,068,340    24,705,080
                                                   -----------   -----------

INTEREST EXPENSE
  Interest on deposits                               6,388,241     6,947,556
  Interest on other borrowings                       1,223,804     1,121,161
                                                   -----------   -----------
     Total interest expense                          7,612,045     8,068,717
                                                   -----------   -----------
     Net interest income                            17,456,295    16,636,363

PROVISION FOR LOAN LOSSES                              625,000     1,025,000
                                                   -----------   -----------
     Net interest income after provision for
      loan losses                                   16,831,295    15,611,363
                                                   -----------   -----------

NONINTEREST INCOME
  Service fees                                       1,661,230     1,545,135
  Other                                                817,911       990,736
  Net gain (loss) on sales of loans -
   servicing released                                  539,711     1,826,418
  Net gain (loss) on sales of loans -
   servicing retained                                   55,424        82,781
  Net gain on sale of investment securities            469,751        44,348
                                                   -----------   -----------
     Total noninterest income                        3,544,027     4,489,418
                                                   -----------   -----------

NONINTEREST EXPENSE
  Compensation and employee benefits                 6,180,015     5,695,155
  Building occupancy                                 1,344,007     1,303,556
  Other expenses                                     2,598,828     2,516,494
  Data processing                                      427,833       240,432
  Advertising                                          376,446       422,866
                                                   -----------   -----------
     Total noninterest expense                      10,927,129    10,178,503
                                                   -----------   -----------

NET INCOME BEFORE PROVISION FOR INCOME TAX           9,448,193     9,922,278

PROVISION FOR INCOME TAX                             2,866,961     3,260,218
                                                   -----------   -----------

NET INCOME                                         $ 6,581,232   $ 6,662,060
                                                   ===========   ===========

BASIC EARNINGS PER SHARE                              $  0.64       $  0.63
                                                      =======       =======

DILUTED EARNINGS PER SHARE                            $  0.63       $  0.62
                                                      =======       =======

                  (See Notes to Consolidated Financial Statements)

4

<PAGE>


<TABLE>
                                       HORIZON FINANCIAL CORP.
                         Consolidated Statements of Stockholders' Equity
                           Six Months Ended September 30, 2004 and 2003
                                             (unaudited)

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

                   <c>         <c>          <c>          <c>          <c>         <c>         <c>
BALANCE, March 31,
  2003                10,550,113  $10,550,113  $57,352,824  $32,527,963   $(216,309) $6,028,927  $        -
Comprehensive income
 Net income                    -            -            -    6,662,060           -           -           -
 Other comprehensive
  income
  Change in unrealized
   gains on available-
   for-sale securities,
   net of tax of
   $(284,830)                  -            -            -            -           -    (552,906)          -
  Total other compre-
   hensive income              -            -            -            -           -           -           -
 Comprehensive income          -            -            -            -           -           -           -
Cash dividends on
 common stock at
 $.24/sh                       -            -            -   (2,519,558)          -           -
Stock options exercised   67,266       67,266      372,241            -           -           -           -
Dividend reinvestment
 plan                     20,091       20,091      311,369            -           -           -           -
Treasury stock purchased       -            -            -            -           -           -  (2,698,585)
Retirement of treasury
 stock                  (162,400)    (162,400)    (925,842)  (1,610,343)          -           -   2,698,585
                      ----------  -----------  -----------  -----------   ---------  ----------  ----------

BALANCE, September 30,
 2003                 10,475,070  $10,475,070  $57,110,592  $35,060,122   $(216,309) $5,476,021  $        -
                      ==========  ===========  ===========  ===========   =========  ==========  ==========

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 compre-
   hensive 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       -            -            -            -           -           -  (5,377,015)
Retirement of treasury
 stock                  (287,250)    (287,250)  (1,637,612)  (3,452,153)          -           -   5,377,015
                      ----------  -----------  -----------  -----------   ---------  ----------  ----------

BALANCE, September 30,
 2004                 10,168,034  $10,168,034  $55,605,362  $37,393,667   $(144,205) $4,154,778  $        -
                      ==========  ===========  ===========  ===========   =========  ==========  ==========

                            (See Notes to Consolidated Financial Statements)

</TABLE>

<TABLE>
                                                    Total
                            Stockholders'        Comprehensive
                               Equity               Income
                            ------------        --------------


                        <c>                  <c>
BALANCE, March 31,
  2003                      $106,243,518
Comprehensive income
 Net income                    6,662,060         $ 6,662,060
 Other comprehensive
  income
  Change in unrealized
   gains on available-
   for-sale securities,
   net of tax of
   $(284,830)                   (552,906)           (552,906)

                                                 -----------
  Total other compre-
   hensive income                      -            (552,906)
                                                 -----------
 Comprehensive income                  -         $ 6,109,154
                                                 ===========
Cash dividends on
 common stock at
 $.24/sh                      (2,519,558)
Stock options exercised          439,507
Dividend reinvestment
 plan                            331,460
Treasury stock purchased      (2,698,585)
Retirement of treasury
 stock                                 -
                            ------------

BALANCE, September 30,
 2003                       $107,905,496
                            ============
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 compre-
   hensive 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)
Retirement of treasury
 stock                                 -
                            ------------
BALANCE, September 30,
 2004                       $107,177,636
                            ============

                               (See Notes to Consolidated Financial Statements)

</TABLE>

5

<PAGE>



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

                                                        Six Months Ended
                                                          September 30,
                                                        2004        2003
                                                   -----------   -----------

CASH FLOWS FROM OPERATING ACTIVITIES
  Net income                                       $ 6,581,232   $ 6,662,060
Adjustments to reconcile net income to net
cash provided by operating activities
  Depreciation and amortization                        399,751     1,045,960
  Stock dividends - Federal Home Loan Bank stock      (140,100)     (198,700)
  Provision for loan losses                            625,000     1,025,000
Changes in assets and liabilities
  Accrued interest and dividends receivable           (128,295)      686,258
  Interest payable                                      51,260           574
  Net change in loans held for sale                 (1,121,250)   (1,241,435)
  Federal income tax (receivable) payable           (1,441,039)     (829,782)
  Other assets                                          87,673       606,981
  Other liabilities                                 (1,411,360)    1,885,229
                                                   -----------   -----------
     Net cash flows from operating activities        3,502,872     9,642,145
                                                   -----------   -----------

CASH FLOWS FROM INVESTING ACTIVITIES
  Investment in interest-bearing deposits, net      11,199,494    24,997,966
  Purchases of investment securities -
   available-for-sale                               (9,285,000)  (10,925,000)
  Proceeds from sales and maturities of
   investment securities - available-for-sale       11,803,678     6,827,635
  Purchases of mortgage-backed securities -
   available-for-sale                                        -   (12,829,904)
  Proceeds from maturities of mortgage-backed
   securities - available-for-sale                   6,658,592    18,106,635
  Proceeds from maturities of mortgage-backed
   securities - held-to-maturity                       287,545       839,981
  Net change in loans                              (47,003,792)  (21,036,871)
  Purchases of bank premises and equipment          (2,891,274)   (1,915,544)
  Net change in other real estate owned                 63,432     1,008,909
                                                   -----------   -----------
     Net cash flows from investing activities      (29,167,325)    5,073,807
                                                   -----------   -----------

CASH FLOWS FROM FINANCING ACTIVITIES
  Net change in deposits                            15,723,477    (5,158,452)
  Advances from other borrowed funds                46,712,727         9,594
  Repayments of other borrowed funds               (28,000,000)            -
  Common stock issued, net                             399,103       490,865
  Cash dividends paid                               (2,640,071)   (2,195,712)
  Treasury stock purchased                          (5,377,015)   (2,698,585)
                                                   -----------   -----------
     Net cash flows from financing activities       26,818,221    (9,552,290)
                                                   -----------   -----------

NET CHANGE IN CASH AND CASH EQUIVALENTS              1,153,768     5,163,662

CASH AND CASH EQUIVALENTS, beginning of period      18,431,964    15,083,505
                                                   -----------   -----------

CASH AND CASH EQUIVALENTS, end of period           $19,585,732   $20,247,167
                                                   ===========   ===========

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
  Cash paid during the period for interest         $ 7,560,785   $ 8,069,291
                                                   ===========   ===========
  Cash paid during the period for income tax       $ 4,308,000   $ 4,090,000
                                                   ===========   ===========

                (See Notes to Consolidated Financial Statements)

6

<PAGE>



                            HORIZON FINANCIAL CORP.
                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
            THREE MONTHS AND SIX MONTHS ENDED SEPTEMBER 30, 2004
                                 (unaudited)


NOTE 1-

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

     The consolidated financial statements as of and for the three months and
six months ended September 30, 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 the
Form 10-Q and Rule 10-01 of Regulation S-X.  Accordingly, they do not include
all of the information and footnotes required by accounting principles
generally accepted in the United States of America for complete financial
statements.  In the opinion of management, all adjustments (consisting only of
normal recurring accruals) necessary for a fair presentation are reflected in
the interim financial statements.  The results of operations for the periods
ended September 30, 2004 and 2003 are not necessarily indicative of the
operating results for the full year.  For further information, refer to the
consolidated financial statements and footnotes thereto in the Corporation's
Annual Report on Form 10-K for the year ended March 31, 2004.


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

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

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

     Basic earnings per share (EPS) for the three months ended September 30,
2004 and 2003 are calculated on the basis of 10,251,020 and 10,504,871
weighted average shares outstanding, respectively. Diluted EPS for the three
months ended September 30, 2004 and 2003 are calculated on the basis of
10,403,892 and 10,714,723 weighted average shares outstanding, respectively.
Basic earnings per share for the six months ended September 30, 2004 and 2003
are calculated on the basis of 10,305,522 and 10,528,093 weighted average
shares outstanding, respectively. Diluted earnings per share for the six
months ended September 30, 2004 and 2003 are calculated on the basis of
10,464,462 and 10,742,826 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 and warrants under the
treasury stock method.

7

<PAGE>

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

     The Corporation recognizes the financial effects of stock options under
the intrinsic value method in accordance with Accounting Principles Board
Opinion No. 25 Accounting for Stock Issued to Employees (APB 25). Generally,
stock options are issued at a price equal to the fair value of the
Corporation's stock as of the grant date.

     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 of Financial Accounting Standard
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,
                            2004          2003         2004           2003
                         ----------    ----------   ----------    ----------

Net income as reported   $3,306,874    $3,340,720   $6,581,232    $6,662,060
Additional compensation
 for fair value of
 stock options               (1,150)      (15,460)     (13,082)      (42,784)
                         ----------    ----------   ----------    ----------
Pro forma net income     $3,305,724    $3,325,260   $6,568,150    $6,619,276
                         ==========    ==========   ==========    ==========

Earnings per share

Basic

  As reported              $ 0.32        $ 0.32       $ 0.64         $ 0.63
                           ======        ======       ======         ======

  Pro forma                $ 0.32        $ 0.32       $ 0.64         $ 0.63
                           ======        ======       ======         ======

Diluted

  As reported              $ 0.32        $ 0.31       $ 0.63         $ 0.63
                           ======        ======       ======         ======

  Pro forma                $ 0.32        $ 0.31       $ 0.63         $ 0.62
                           ======        ======       ======         ======

8

<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 Corporation was formed under Washington law on May 22, 1995, and
became the holding company for the Bank, effective October 13, 1995.
Effective June 19, 1999, the Corporation completed the acquisition of
Bellingham Bancorporation, whose wholly-owned subsidiary, Bank of Bellingham,
was merged with and into the Bank.  At September 30, 2004, the Corporation had
total assets of $888,468,532, total deposits of $685,982,695, and total equity
of $107,177,636.  The Corporation's business activities generally are limited
to passive investment activities and oversight of its investment in the Bank.
Accordingly, the information set forth herein, including the consolidated
financial statements and related data, relates primarily to the Bank and its
subsidiary.

     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."

     The Bank's operations are conducted through 16 full-service office
facilities, located in Whatcom, Skagit and Snohomish counties in Northwest
Washington.  The acquisition of Bellingham Bancorporation increased the
Corporation's and the Bank's presence in Whatcom County.  In fiscal 2002, the
Bank acquired a bank site in Lynnwood, Washington, which was remodeled and
opened for business in March 2003.  The Bank opened commercial banking/loan
centers in Bellingham, Snohomish and Everett and expanded its operations in
Burlington during the first quarter of fiscal 2004.  In June 2004, the Bank
purchased a building that was formerly occupied by another bank in the city of
Lakewood, located in Pierce County, just south of Tacoma.  The Lakewood office
is scheduled to open during the first quarter of  2005.  Future plans for the
Bank include the opening of a full service office in Marysville in November
2004 and a full service office in Everett during fiscal 2006, which will
replace the Bank's existing Everett office.

     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.

9

<PAGE>



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

     The Corporation does not presently engage in any activities outside of
serving as a shell parent company for the Bank.  The operating strategy of the
Corporation has been to expand and diversify the consolidated operations of
the Corporation across a variety of companies and/or operating units that are
engaged in complementary, but different, businesses and/or operating
strategies.  This diversification strategy is expected to continue as
opportunities arise, although there are no specific acquisitions or new
business formations planned at this time.

     The 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, although FHLB advances and other wholesale
borrowings may be used as a supplemental source of funds.

     The Corporation's profitability depends primarily on its net interest
income, which is the difference between the income it receives on the Bank's
loan and investment portfolio and the Bank's cost of funds, which consists of
interest paid on deposits and borrowings.

     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, 2004,
were $888,468,532, a 3.5% increase from the March 31, 2004, level of
$858,875,881.  This increase in assets was primarily attributable to the
growth in loans receivable, which increased 7.1% to $704,784,147 at September
30, 2004 from $658,226,144 at March 31, 2004.  The following is an analysis of
the loan portfolio by major type of loans:

                                          September 30,       March 31,
                                              2004              2004
                                          ------------       -----------
First mortgage loans
   1-4 family                             $166,072,020       $183,622,770
   1-4 family construction                  85,594,914         75,941,688
   Less participations                     (67,025,656)       (74,278,637)
                                          ------------       ------------
     Net first mortgage loans              184,641,278        185,285,821
Construction and land development           89,365,811         78,273,205
Residential commercial real estate          66,724,776         53,135,324
Non-residential commercial real estate     276,135,169        257,074,876
Commercial loans                            83,183,406         77,960,168
Home equity secured                         31,757,475         26,296,475
Other consumer loans                         6,496,944          6,330,294
                                          ------------       ------------
     Subtotal                              553,663,581        499,070,342
                                          ------------       ------------

10

<PAGE>



     Subtotal                              738,304,859        684,356,163
                                          ------------       ------------
Less:
   Undisbursed loan proceeds               (18,438,917)       (11,962,770)
   Deferred loan fees                       (4,224,928)        (4,045,717)
   Allowance for loan losses               (10,856,867)       (10,121,532)
                                          ------------       ------------
                                          $704,784,147       $658,226,144
                                          ============       ============

Net residential loans                     $168,929,110  24%  $174,345,886  26%
Net commercial loans                        81,555,251  12%    76,415,588  12%
Net commercial real estate loans           416,743,691  59%   375,440,228  57%
Net consumer loans                          37,556,095   5%    32,024,442   5%
                                          ------------ ---   ------------ ---
                                          $704,784,147 100%  $658,226,144 100%
                                          ============ ===   ============ ===

Also contributing to the change in assets was the decline in available for
sale (AFS) investment and mortgage-backed securities, which, combined,
decreased to $102,204,435 at September 30, 2004 from $112,943,685 at March 31,
2004.

The tables below display the characteristics of the AFS and held to maturity
(HTM) portfolios as of September 30, 2004:

                                                                 Estimated
                                         Amortized      Net        Fair
                                           Cost     Gain/(Loss)    Value
                                       -----------  ----------   ------------

AFS Securities
 State and political subdivisions and
  U.S. government agency securities    $57,709,547  $  458,884   $ 58,168,431
 Marketable equity securities            1,824,224   5,463,194      7,287,418
 Mutual funds                            5,000,000     (50,352)     4,949,648
 Corporate debt securities              10,609,827     202,721     10,812,548
 Mortage-backed securities and CMOs     20,704,322     282,069     20,986,391
                                       -----------  ----------   ------------
   Total available-for-sale securities  95,847,920   6,356,516    102,204,436
                                       -----------  ----------   ------------

HTM Securities
 State and political subdivisions and
  U.S. government agency securities        369,519      24,101        393,620
 Mortgage-backed securities and CMOs     1,256,413      99,722      1,356,135
                                       -----------  ----------   ------------
   Total held-to-maturity securities     1,625,932     123,823      1,749,755
                                       -----------  ----------   ------------
   Total securities                    $97,473,852  $6,480,339   $103,954,191
                                       ===========  ==========   ============

                                     Maturity Schedule of Securities
                      --------------------------------------------------------
                          Available-For-Sale             Held-To-Maturity
                      ---------------------------     ------------------------
                       Amortized      Estimated       Amortized     Estimated
                          Cost        Fair Value         Cost       Fair Value
                      ------------   ------------     ----------   -----------
Maturities:
 One year             $16,042,975   $ 16,252,422      $      126   $      129
 Two to five years     47,689,936     48,199,815       1,382,332    1,462,517
 Five to ten years      6,793,778      6,907,183          12,927       14,469
 Over ten years        18,497,007     18,607,950         230,547      272,640
                      -----------   ------------      ----------   ----------
                       89,023,696     89,967,370       1,625,932    1,749,755
                      -----------   ------------      ----------   ----------

Mutual funds and
 marketable equity
 securities (liquid)    6,824,224     12,237,066               -            -
                      -----------   ------------      ----------   ----------
Total investment
 securities           $95,847,920   $102,204,436      $1,625,932   $1,749,755
                      ===========   ============      ==========   ==========

     Total liabilities increased 4.23% to $781,290,896 at September 30, 2004,
from $749,568,888 at March 31, 2004.  This increase in liabilities was in
large part a result of the growth in other borrowed funds, which increased
27.7% to $86,181,569 from $67,468,842 at March 31, 2004.  The Bank borrowed
additional funds from the FHLB to help fund the growth in net loans receivable
to $704,784,147.  Also contributing to the net change in total liabilities was
the increase in

11

<PAGE>



deposits of 2.4%, to $685,982,695 at September 30, 2004 from $670,259,218 at
March 31, 2004.  The following is an analysis of the deposit portfolio by
major type of deposit at September 30, 2004 and March 31, 2004:

                                              September 30         March 31
                                              ------------       ------------
Demand deposits
  Savings                                     $ 39,729,901       $ 40,526,619
  Checking                                      82,757,973         78,697,106
  Checking (noninterest-bearing)                43,853,542         44,773,672
  Money market                                 137,610,154        131,310,670
                                              ------------       ------------
                                               303,951,570        295,308,067
                                              ------------       ------------
Time certificates of deposit
  Less than $100,000                           241,424,991        245,608,118
  Greater than or equal to $100,000            140,606,134        129,343,033
                                              ------------       ------------
                                               382,031,125        374,951,151
                                              ------------       ------------
Total deposits                                $685,982,695       $670,259,218
                                              ============       ============

     Stockholders' equity at September 30, 2004 decreased 1.9% to $107,177,636
from $109,306,993 at March 31, 2004.  This decrease was primarily attributable
to the decrease in accumulated other comprehensive income to $4,154,778 at
September 30, 2004 from $5,226,207 at March 31, 2004.  The primary reason for
the decline was the decrease in fair market value of various securities in the
Bank's portfolio as a result of rising interest rates.  The Corporation
remains strong in terms of its capital position, with a stockholder
equity-to-assets ratio of 12.1% at September 30, 2004, compared to 12.7% at
March 31, 2004.


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, 2004, the Bank had liquid
assets (cash and marketable securities with maturities of one year or less)
with a book value of $74,168,603.

     As of September 30, 2004, the total book value of investments and
mortgage-backed securities was $97,473,852 compared to a market value of
$103,954,190 with an unrealized gain of $6,480,338.  As of March 31, 2004, the
total book value of investments and mortgage-backed securities was
$106,938,668, compared to a market value of $114,997,574 with an unrealized
gain of $8,058,906.   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 operations, which
consist primarily of mortgage loan repayments, deposit increases, loan sales,
borrowings and cash received from the maturity or sale of investment
securities.  The Bank'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 Bank'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 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, 2004 was $107,177,636, or 12.06%
of assets, compared to $109,306,993, or 12.73% of assets at March 31, 2004.
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, 2004 was 15.52%, compared to
16.6% as of March 31, 2004.  These figures are well above the well-capitalized
minimum of 10% set by the FDIC.

     The Corporation has been in various stock buy-back programs since August
1996.  In March 2004, the Board of Directors approved a new stock repurchase
plan that runs concurrent with the 2005 fiscal year, allowing the Corporation
to repurchase up to 10% of total shares outstanding, or approximately 1.04
million shares.  This marked the Corporation's sixth stock repurchase plan.
During the quarter ended September 30, 2004, the Corporation repurchased
161,853 shares at an average price of $19.33.  In total, the Corporation has
repurchased 287,250 shares at an average price of $18.67 under this plan.

     Management intends to continue its stock buy-back programs from time to
time as long as repurchasing the stock contributes to the overall growth of
shareholder value.   The number of shares of stock that will be repurchased
and the price

12

<PAGE>



that will be paid is the result of many factors, several of which are outside
of the Corporation's control.  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 Bank's 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 Bank's capital or liquidity position.

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

     Net interest income for the three months ended September 30, 2004
increased 8.8% to $9,009,307 from $8,278,228 in the same time period of the
previous year.  Interest on loans for the quarter ended September 30, 2004
increased 7.5% to $11,833,129, from $11,003,995 for the comparable quarter a
year ago.  Included in these numbers are $182,469 and $621,613, respectively,
of deferred fee income recognition as a result of loan paydowns, payoffs, and
loans sold from the available for sale mortgage portfolio.  Interest and
dividends on investments and mortgage-backed securities for the three months
ended September 30, 2004 decreased 12.4% to $1,057,001, from $1,206,498 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 total investments decreased to $120,553,272 at
September 30, 2004 as compared to $154,555,944 at September 30, 2003.  Total
interest income increased 5.6% to $12,890,130 from $12,210,493 in the
comparable period one year ago.

     Total interest paid on deposits decreased 3.8% to $3,246,069 at September
30, 2004 from $3,375,101 at September 30, 2003.  This decrease in interest
expense is in large part attributable to an improvement in the Bank's deposit
mix, with a decreased reliance on certificates of deposit as a percentage of
total deposits.  Interest on borrowings increased 13.9% to $634,754 during the
quarter ended September 30, 2004, compared to $557,164 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.

     Total interest income for the six months ended September 30, 2004
increased 1.5% to $25,068,340 from $24,705,080.  Total interest expense for
the six-month period ended September 30, 2004 decreased 5.7% to $7,612,045
from $8,068,717 for the six months ended September 30, 2003. Net interest
income for the six-month period ended September 30, 2004 increased 4.9% to
$17,456,295 from $16,636,363 for the comparable period one year ago which
increase was attributable to increases on interest on loans, and decreases in
interest and dividends on investments and mortgage-backed securities.

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.

     The provision for loan losses was $325,000 for the quarter ended
September 30, 2004 compared to $500,000 for the quarter ended September 30,
2003.  This decrease resulted from management's ongoing analysis of changes in
loan portfolio composition by collateral categories, overall credit quality of
the portfolio, peer group analysis and current economic conditions.  The
reserve for loan losses was $10,856,867, or 1.54% of net loans receivable at
September 30, 2004, compared to $9,275,378, or 1.54% of net loans receivable
at September 30, 2003.  The increased reserve level at September 30, 2004
compared to the September quarter one year ago was attributable to the
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 $498,298,942, or 70.7% of the loan
portfolio at September 30, 2004, versus $433,913,085, or 72.1% of the loan
portfolio at September 30, 2003.

     As of September 30, 2004, there were seven loans in the Bank's portfolio
over 90 days delinquent and no loans on nonaccrual status.  At September 30,
2004 total non-performing loans were $1,113,990 and the Bank had no real
estate owned at September 30, 2004.  Total non-performing assets represented
0.13% of total assets at September 30, 2004 compared to $897,600 or 0.11% of
total assets at September 30, 2003.

13

<PAGE>



                                                 As of September 30,
Non-Performing Assets                           2004           2003
                                             ----------      --------

 Accruing loans - 90 days past due           $1,113,990      $833,919
 Non-accrual loans                                    -           249
                                             ----------      --------
 Total non-performing loans                   1,113,990       834,168
 Total non-performing loans/net loans              0.16%         0.14%
 Real estate owned                                    -        63,432
                                             ----------      --------
 Total non-performing assets                  1,113,990       897,600
                                             ----------      --------
 Total non-performing assets/total assets          0.13%         0.11%



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

     Noninterest income for the three months ended September 30, 2004
decreased 27.8% to $1,775,049 from $2,458,097 for the same time period a year
ago.  Service fee income was generally unchanged for the quarter at $816,812
from $806,946 for the comparable quarter one year ago.  However, the prior
year quarter included a higher level of mortgage related fees, including
escrow fees, in a more active refinance market.  The current quarter was
positively impacted by revisions made to the Bank's fee schedule earlier in
the year. The net gain on the sale of loans servicing released decreased 80.2%
to $204,607 during the current quarter from $1,031,883 in the comparable
period one year ago. The low interest rate environment in 2003 was the primary
reason for the significantly higher level of mortgage activity in the prior
period.  The net gain on sales of investment securities increased to $152,440
in the quarter ended September 30, 2004 from $40,000 in the quarter ended
September 30, 2003.  The gains in both periods were primarily a result of the
sale of selected common stocks from the Bank's investment portfolio.  Other
non interest income for the quarter increased 11.5% to $555,749 from $498,602
from the three months ended September 30, 2003.  The primary reason for the
increase is a result of increased profits recognized on a real estate
development project from a joint venture of the Bank's wholly owned
subsidiary, Westward Financial Services Corporation.

     Non interest income for the six months ended September 30, 2004 decreased
21.1% to $3,544,027 from $4,489,418 for the six months ended September 30,
2003.  Service fee income increased 7.5% to $1,661,230 during the current six
month period from $1,545,135 for the comparable period one year ago, primarily
as a result of the revised fee schedule discussed above in the quarterly
comparison.  The net gain/loss on the sale of loans servicing released
declined 70.4% to $539,711 for the six months ended September 30, 2004 from
$1,826,418 in the comparable period one year ago.  The net gain/loss on sales
of investment securities increased to $469,751 during the current six month
period from $44,348 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 decreased 17.4% to
$817,911 for the six months ended September 30, 2004 from $990,736 for the
comparable period one year ago.  This variance is primarily a result of the
recognition of approximately $150,000 in gains from the sale of real estate
owned in the prior year period, versus no such gains in the current year
period.

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

     Noninterest expense for the three months ended September 30, 2004
increased 8.6% to $5,713,308 from $5,262,744 for the comparable quarter one
year ago.  Compensation and employee benefits increased 8.7% for the quarter
ended September 30, 2004 to $3,169,091 from $2,916,019 for the comparable
quarter one year ago.  The increase in compensation and employee benefits was
primarily a result of the overall growth in employment at the Bank, including
key additions to staff as the Bank continues its efforts to enhance its
commercial banking expertise.  Building occupancy for the quarter ended
September 30, 2004 was essentially unchanged at $695,303 from $697,984 for the
three months ended September 30, 2003.  Other noninterest expenses increased
11.0% to $1,420,189 for the current quarter from $1,279,928 for the comparable
quarter one year ago.  The primary reasons for the increase in the current
period relates to expenses related to increased accounting services expenses
for Sarbanes-Oxley 404 compliance work, and the recognition of expenses
relating to a loss on the sale of real estate owned during the quarter.   Data
processing expenses increased 52.8% to $241,553 for the three months ended
September 30, 2004 from $158,083 for the comparable quarter one year ago,
primarily as a result of increased expenses in the current period related to
the Bank's core processor conversion, scheduled to occur in November 2004.
Advertising and marketing expenses for the quarter ended September 30, 2004
decreased 11.2% to $187,172 from $210,730 from the comparable quarter one year
ago.

     Non interest expense for the six months ended September 30, 2004
increased 7.4% to $10,927,129 from $10,178,503 for the six months ended
September 30, 2003.  Compensation and employee benefits increased 8.5% to
$6,180,015 for the current quarter from $5,695,155 for similar reasons
discussed above in the quarterly comparison. Building occupancy

14

<PAGE>



expenses for the current six months increased 3.1% to $1,344,007 from
$1,303,556 for the comparable six month period one year ago.  Other expenses
increased 3.3% to $2,598,828 for the six months ended September 30, 2004
compared to $2,516,494 for the prior period one year ago.  Data processing
expenses increased 77.9% to $427,833 for the six months ended September 30,
2004 from $240,432 in the prior year period.  The current year period increase
is primarily attributable to expenses related to the core data processor
conversion, as shown above in the discussion on the quarterly results.  The
other significant contributing factor to this difference relates to an
abnormally low level of expenses in the prior year period, as a result of a
renegotiation of the Bank's contract with its core data processor at that
time, which included substantial concessions in the first quarter of fiscal
2004, and a reduced monthly expense thereafter. Advertising and marketing
expenses decreased 11.0% to $376,446 for the current six month period from
$422,866 for the six months ended September 30, 2003.



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, 2004, the
Corporation had no off-balance sheet derivative financial instruments, nor did
it have a trading portfolio of investments.  At September 30, 2004, 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, 2004.

Item 4.   Controls and Procedures

Evaluation of Disclosure Controls and Procedures
------------------------------------------------

     An evaluation of the Corporation's disclosure controls and procedures (as
defined in Section 13(a)-14(c) 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.

Changes in Internal Controls
----------------------------

     In the quarter ended September 30, 2004, the Corporation did not make any
significant changes in, nor take any corrective actions regarding, its
internal controls or other factors that could significantly affect these
controls.

15

<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.   Unregistered Sales of Equity Securities and Use of Proceeds

The Company's common stock is traded on the NASDAQ National Market under the
symbol "HRZB".  As of September 30, 2004, there were 10,168,034 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 been in various stock buy-back programs since
August 1996.  In March 2004, the Board of Directors approved a new stock
repurchase plan that runs concurrent with the 2005 fiscal year, allowing the
Corporation to repurchase up to 10% of total shares outstanding, or
approximately 1.04 million shares.  This marked the Corporation's sixth stock
repurchase plan.  During the quarter ended September 30, 2004, the Corporation
repurchased 161,853 shares at an average price of $19.33.  In total, the
Corporation has repurchased 287,250 shares at an average price of $18.67 under
this plan.

     The following table sets forth information about the Corporation's
purchases of its outstanding Common Stock during the quarter ended September
30, 2004.

                                                                (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 (2)
------------------    ----------     -----------   ----------   --------------

July 1, 2004 -
 July 31, 2004          18,900          $19.31       144,297        895,703
August 1, 2004 -
 August 31, 2004       112,123          $19.25       256,420        783,580
September 1, 2004 -
 September 30, 2004     30,830          $19.61       287,250        752,750
Total                  161,853          $19.33       287,250        752,750

----------
(1) Of these shares, no shares were purchased other than through a publicly
    announced program.
(2) In March 2004, the Board of Directors approved a new stock repurchase plan
    that runs concurrent with the 2005 fiscal year, allowing the Corporation
    to repurchase up to 10% of total shares outstanding, or approximately 1.04
    million shares.  This program expires when all shares under the plan have
    been repurchased.

Item 3.  Defaults Upon Senior Securities
           None

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

The Corporation's 2004 Annual Meeting of Shareholders was held on July 27,
2004 at the Fox Hall located at 1661 W. Bakerview Road, Bellingham,
Washington.  The results of the vote on the item 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 2007 by the following vote:

16

<PAGE>



                 FOR:                           AGAINST:
                 Number of Votes   Percentage   Number of Votes   Percentage
                 ---------------   ----------   ---------------   ----------
Dennis C.
 Joines             8,466,886         99.6%         34,264           0.4%
James A.
 Strengholt         8,417,821         99.0%         83,329           1.0%


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

Item 5.  Other Information
           None

Item 6.  Exhibits

(a)      Exhibits
         (3.1)   Articles of Incorporation of Horizon Financial, Corp.
                 (incorporated by reference to Exhibit 3.1 to the Registrant's
                 Current Report on Form 8-K dated October 13, 1995)
         (3.2)   Bylaws of Horizon Financial Corp. (incorporated by reference
                 to Exhibit 3.2 to the Registrant's Current Report on Form 8-K
                 dated October 13, 1995)
         (10.1)  Amended and Restated Employment Agreement with V. Lawrence
                 Evans (incorporated by reference to the Registrant's Annual
                 Report on Form 10-K for the year ended March 31, 1996)
         (10.2)  Deferred Compensation Plan (incorporated by reference to the
                 Registrant's Annual Report on Form 10-K for the year ended
                 March 31, 1996)
         (10.3)  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)
         (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)
         (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


17

<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 4, 2004
                                       --------------------

18

<PAGE>



                                 Exhibit 31

                               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)) 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)  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

    (c)  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 4, 2004

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

19

<PAGE>



                                  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)) 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)  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

    (c)  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 4, 2004

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

20

<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 Financial Officer
Chief Executive Officer

21

<PAGE>

Dated:  November 4, 2004