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 June 30, 2006
                                               -------------
                                     OR

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

      For the transition period from ______________ to __________________

                       Commission file number 0-27062

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

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

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

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

                                    98225
                                    -----
                                 (Zip Code)

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

Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.

                                  YES   X   NO
                                       ---     ---

Indicate by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer.  See definition of "accelerated
filer and large accelerated file" in Rule 12b-2 of the Exchange Act (Check
one):

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


Indicate by check mark whether the registrant is a shell corporation (as
defined in Rule 12b-2 of the Exchange Act).

                                   YES      NO  X
                                       ---     ---
As of August 1, 2006, 9,828,615 common shares, $1.00 par value, were
outstanding.

1

<PAGE>


<PAGE>
                        HORIZON FINANCIAL CORP.

INDEX                                                                   PAGE
-----                                                                   ----

PART 1    FINANCIAL INFORMATION

Item 1    Financial Statements

          Consolidated Statements of Financial Position                   3

          Consolidated Statements of Income                               4

          Consolidated Statements of Stockholders' Equity                 5

          Consolidated Statements of Cash Flows                           6

          Selected Notes to Consolidated Financial Statements            7-10

Item 2    Management's Discussion and Analysis of Financial
            Condition and Results of Operations                         11-19

Item 3    Quantitative and Qualitative Disclosures About
            Market Risk                                                  19

Item 4    Controls and Procedures                                       19-20


PART II   OTHER INFORMATION

Item 1    Legal Proceedings                                              21

Item 1A.  Risk Factors                                                   21

Item 2    Unregistered Sales of Equity Securities and Use of Proceeds    21

Item 3    Defaults Upon Senior Securities                                21

Item 4    Submission of Matters to a Vote of Security Holders            21

Item 5    Other Information                                              21

Item 6    Exhibits                                                       22

          SIGNATURES                                                     23

2

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

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

                               ASSETS
                                                      June 30,      March 31,
(In thousands, except share data)                       2006          2006
                                                     ----------    ----------

Cash and cash equivalents                              $ 33,338      $ 24,190
Interest-bearing deposits                                 4,272         9,439
Investment securities
 Available-for-sale                                      59,680        60,137
 Held-to-maturity                                           370           370
Mortgage-backed securities
 Available-for-sale                                      26,066        23,351
 Held-to-maturity                                           390           482
Federal Home Loan Bank Stock                              7,247         7,247
Loans receivable, net of allowance of loan losses of
 $14,854 at June 30 and $14,184 at March 31             987,307       918,510
Loans held for sale, at fair value                        3,442         5,252
Investment in real estate in a joint venture             16,968        16,928
Accrued interest and dividends receivable                 5,835         5,185
Bank premises and equipment, net                         27,718        26,317
Deferred income tax receivables                           2,475         2,254
Income tax receivable                                      -              808
Other assets                                             15,672         6,258
                                                     ----------    ----------
TOTAL ASSETS                                         $1,190,780    $1,116,728
                                                     ==========    ==========
                LIABILITIES AND STOCKHOLDERS' EQUITY

Deposits                                             $  892,133    $  834,299
Accounts payable and other liabilities                    4,789         6,919
Other borrowed funds                                    157,135       141,561
Borrowing related to investment in real estate in
 a joint venture                                         18,730        18,276
Advances by borrowers for taxes and insurance               188           467
Income tax currently payable                              1,527          -
Deferred compensation                                     1,877         1,883
                                                     ----------    ----------
     Total liabilities                                1,076,379     1,003,405
                                                     ----------    ----------

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; 9,827,753 and 9,898,168 issued and
   outstanding, respectively                              9,828         9,898
 Additional paid-in capital                              53,738        54,116
 Retained earnings                                       47,900        45,991
 Accumulated other comprehensive income, net of tax       2,935         3,318
                                                     ----------    ----------
     Total stockholders' equity                         114,401       113,323
                                                     ----------    ----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY           $1,190,780    $1,116,728
                                                     ==========    ==========

             (See Notes to Consolidated Financial Statements)
3

<PAGE>



                           HORIZON FINANCIAL CORP.
                Consolidated Statements of Income (unaudited)

                                                        Three months ended
                                                              June 30,
(In thousands, except share data)                         2006         2005
                                                     ----------    ----------

INTEREST INCOME
 Interest on loans                                   $   20,170    $   14,703
Interest on investments and mortgage-backed securities    1,013           833
                                                     ----------    ----------
   Total interest income                                 21,183        15,536
                                                     ----------    ----------
INTEREST EXPENSE
 Interest on deposits                                     6,591         4,163
 Interest on other borrowings                             1,910         1,099
                                                     ----------    ----------
   Total interest expense                                 8,501         5,262
                                                     ----------    ----------
   Net interest income                                   12,682        10,274

PROVISION FOR LOAN LOSSES                                   700           725
                                                     ----------    ----------
   Net interest income after provision for loan losses   11,982         9,549
                                                     ----------    ----------
NONINTEREST INCOME
 Service fees                                               867           746
 Other                                                      372           667
 Net gain on sales of loans - servicing released            225           297
 Net gain on sales of loans - servicing retained              5            14
 Net gain on sale of investment securities                    5            42
                                                     ----------    ----------
   Total noninterest income                               1,474         1,766
                                                     ----------    ----------
NONINTEREST EXPENSE
 Compensation and employee benefits                       3,867         3,432
 Building occupancy                                         953           819
 Other expenses                                           1,338         1,448
 Data processing                                            217           218
 Advertising                                                175           170
                                                     ----------    ----------
   Total noninterest expense                              6,550         6,087
                                                     ----------    ----------

NET INCOME BEFORE PROVISION FOR INCOME TAX                6,906         5,228

PROVISION FOR INCOME TAX                                  2,324         1,516
                                                     ----------    ----------
NET INCOME                                           $    4,582    $    3,712
                                                     ==========    ==========

BASIC EARNINGS PER SHARE                                $  0.46       $  0.37

DILUTED EARNINGS PER SHARE                              $  0.46       $  0.37

                  (See Notes to Consolidated Financial Statements)
4

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<PAGE>
<TABLE>

                                HORIZON FINANCIAL CORP.
                         Consolidated Statements of Stockholders' Equity
                            Three Months Ended June 30, 2006 and 2005
                                           (unaudited)

                                 Common Stock                                                   Accumulated
                             ----------------------    Additional                  Unearned       Other
(In thousands,               Number of                  Paid-In      Retained        ESOP      Comprehensive
except share data)            Shares       At Par       Capital      Earnings       Shares     Income (Loss)
                             ---------  -----------   -----------   -----------    ---------   -------------

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

BALANCE, March 31, 2005       10,038      $ 10,038     $ 54,737      $38,939        $  (72)      $  3,382
Comprehensive income
 Net income                        -             -            -        3,712             -              -
Other comprehensive income
 Change in unrealized
  losses on available-for-
  sale securities, net
  taxes of $143                    -             -            -            -             -            277
 Total other comprehensive
  income                           -             -            -            -             -              -
 Comprehensive income              -             -            -            -             -              -
Cash dividends on common
 stock at $.14/sh                  -             -            -       (1,393)            -              -
Stock options exercised           37            37          146            -             -              -
Treasury stock purchased           -             -            -            -             -              -
Retirement of treasury stock    (126)         (126)        (721)      (1,632)            -              -
                               -----      --------     --------     --------        ------        -------
BALANCE, June 30, 2005         9,949      $  9,949     $ 54,162     $ 39,626        $  (72)       $ 3,659
                               =====      ========     ========     ========        ======        =======

BALANCE, March 31, 2006        9,898      $  9,898     $ 54,116     $ 45,991        $    -        $ 3,318
Comprehensive income
 Net income                        -             -            -        4,582             -              -
 Other comprehensive income
  Change in unrealized gains
   on available-for-sale
   securities, net taxes
   (benefit) of $(206)             -             -            -            -             -           (383)
  Total other comprehensive
   income                          -             -            -            -             -              -
 Comprehensive income              -             -            -            -             -              -
Cash dividends on common
 stock at $.15/sh                  -             -            -       (1,474)            -              -
Stock options exercised            3             3           15            -             -              -
Stock award plan                   -             -           19            -             -              -
Tax benefit associated with
 stock options                     -             -            3            -             -              -
Treasury stock purchased           -             -            -            -             -              -
Retirement of treasury stock     (73)          (73)        (415)      (1,199)            -              -
                               -----      --------     --------     --------        ------        -------
BALANCE, June 30, 2006         9,828      $  9,828     $ 53,738     $ 47,900        $    -        $ 2,935
                               =====      ========     ========     ========        ======        =======
</TABLE>

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

                            <c>               <c>                <c>

BALANCE, March 31, 2005         $     -           $107,024
Comprehensive income
 Net income                           -              3,712             $ 3,712
Other comprehensive income
 Change in unrealized
  losses on available-for-
  sale securities, net
  taxes of $143                       -                277                 277
 Total other comprehensive                                             -------
  income                              -                  -                 277
                                                                       -------
 Comprehensive income                 -                  -             $ 3,989
Cash dividends on common                                               =======
 stock at $.14/sh                     -             (1,393)
Stock options exercised               -                183
Treasury stock purchased         (2,479)            (2,479)
Retirement of treasury stock      2,479                  -
                                -------           --------
BALANCE, June 30, 2005          $     -           $107,324
                                =======           ========

BALANCE, March 31, 2006         $     -           $113,323
Comprehensive income
 Net income                           -              4,582             $ 4,582
 Other comprehensive income
  Change in unrealized gains
   on available-for-sale
   securities, net taxes
   (benefit) of $(206)                -               (383)               (383)
  Total other comprehensive                                            -------
   income                             -                  -                (383)
                                                                       -------
 Comprehensive income                 -                  -             $ 4,199
Cash dividends on common                                               =======
 stock at $.15/sh                     -             (1,474)
Stock options exercised               -                 18
Stock award plan                      -                 19
Tax benefit associated with
 stock options                        -                  3
Treasury stock purchased         (1,687)            (1,687)
Retirement of treasury stock      1,687                  -
                                -------           --------
BALANCE, June 30, 2006          $     -           $114,401
                                =======           ========

                                 (See Notes to Consolidated Financial Statements)

</TABLE>

5

<PAGE>



                           HORIZON FINANCIAL CORP.
              Consolidated Statements of Cash Flows (unaudited)
                                                        Three Months Ended
(In thousands, except share data)                              June 30,
                                                          2006        2005
                                                       --------     --------
CASH FLOWS FROM OPERATING ACTIVITIES
 Net income                                            $  4,582     $  3,712
Adjustments to reconcile net income to net
cash provided by operating activities
 Depreciation and amortization                               39          206
 Stock dividends   Federal Home Loan Bank stock            -             (29)
 Stock award plan compensation                               19         -
 Provision for deferred income tax                          (14)        -
 Provision for loan losses                                  700          725
Changes in assets and liabilities
 Accrued interest and dividends receivable                 (650)        (135)
 Interest payable                                           945          514
 Net change in loans held for sale                        1,810          (52)
 Federal income tax payable                               2,335        1,516
 Other assets                                               586          544
 Other liabilities                                       (3,399)      (1,823)
                                                       --------     --------
   Net cash flows from operating activities               6,953        5,178
                                                       --------     --------
CASH FLOWS FROM INVESTING ACTIVITIES
 Investment in interest-bearing deposits, net             5,167       (1,436)
 Purchases of investment securities - available-for-sale   -          (3,525)
 Proceeds from sales and maturities of
   investment securities - available-for-sale                28       14,023
 Purchases of mortgage-backed securities - available-
   for-sale                                              (7,335)      (1,489)
 Proceeds from maturities of mortgage-backed
   securities - available-for-sale                        4,459        2,252
 Proceeds from maturities of mortgage-backed
   securities - held-to-maturity                             92           93
 Net change in loans                                    (69,096)     (38,657)
 Purchases of bank premises and equipment                (1,841)        (462)
 Net change in investment in joint venture                  (40)         444
                                                       --------     --------
   Net cash flows from investing activities             (68,566)     (28,757)
                                                       --------     --------
CASH FLOWS FROM FINANCING ACTIVITIES
 Net change in deposits                                  57,834       25,879
 Advances from other borrowed funds                      78,574       41,420
 Repayments of other borrowed funds                     (63,000)     (37,500)
 Net change in borrowing related to inv. in real
   estate in a joint venture                                454          375
 Common stock issued, net                                    18          183
 Tax benefit associated with stock options                    3         -
 Cash dividends paid                                     (1,435)      (1,355)
 Treasury stock purchased                                (1,687)      (2,480)
                                                       --------     --------
   Net cash flows from financing activities              70,761       26,522
                                                       --------     --------
NET CHANGE IN CASH AND CASH EQUIVALENTS                   9,148        2,943
CASH AND CASH EQUIVALENTS, beginning of period           24,190       23,251
                                                       --------     --------
CASH AND CASH EQUIVALENTS, end of period               $ 33,338     $ 26,194
                                                       ========     ========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
 Cash paid during the period for interest              $  7,556     $  4,748
                                                       ========     ========
 Cash paid during the period for income tax            $   -        $   -
                                                       ========     ========

               (See Notes to Consolidated Financial Statements)
6

<PAGE>


                       HORIZON FINANCIAL CORP.
         SELECTED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                   THREE MONTHS ENDED JUNE 30, 2006
                             (unaudited)

NOTE 1 - Basis of Presentation and Significant Accounting Policies

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

     The consolidated financial statements as of and for the three months
ended June 30, 2006, include the accounts of Horizon Financial Corp. (Horizon
Financial or the Corporation), Horizon Bank (Horizon Bank or the Bank), and
other subsidiaries of the Bank.  Significant intercompany balances and
transactions have been eliminated in consolidation. The Corporation has
engaged in no significant activity other than holding the stock of the Bank.

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

     The unaudited consolidated financial statements have been prepared in
accordance with accounting principles generally accepted in the United States
of America for interim financial information and with the instructions to the
Form 10-Q and Rule 10-01 of Regulation S-X.  Accordingly, they do not include
all of the information and footnotes required by accounting principles
generally accepted in the United States of America for complete financial
statements.  In the opinion of management, all adjustments (consisting only of
normal recurring accruals) necessary for a fair presentation are reflected in
the interim financial statements.  The results of operations for the periods
ended June 30, 2006 and 2005 are not necessarily indicative of the operating
results for the full year.  For further information, refer to the consolidated
financial statements and footnotes thereto in the Horizon Financial Corp.
Annual Report on Form 10-K for the year ended March 31, 2006.

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

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

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

     In January 2003, the Financial Accounting Standards Board (FASB) issued
FASB Interpretation No. (FIN) 46, Consolidation of Variable Interest Entities.
FIN 46 explains the concept of a variable interest entity and requires
consolidation by the primary beneficiary where the variable interest entity
does not have sufficient equity at risk to finance its activities without
additional subordinated financial support from other parties.  This
interpretation applies immediately to variable interest entities in which an
enterprise holds a variable interest.  In October 2004, the Bank's wholly
owned subsidiary, Westward Financial Services, Inc (Westward Financial),
entered into a real estate development joint venture with Greenbriar Northwest
LLC (GBNW), an established residential land development company headquartered
in Bellingham, Washington.  The Corporation believes that GBNW is a variable
interest entity.  Under FIN 46 GBNW is consolidated in the Corporation's
consolidated balance sheet.  The Corporation also accounts for the portion not
owned by Westward Financial, as a minority interest.  The investment in real
estate is recorded as an asset and the related debt is recorded as the
Corporation's liability.  The real estate joint venture has a carrying amount
of approximately $17.0 million, with a related borrowing of approximately
$18.7 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 $121,000 and $66,000 for the
three months ended June 30, 2006 and 2005, respectively.

7

<PAGE>



NOTE 2    Stockholders' Equity

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

     The following table illustrates the reconciliation of weighted average
shares used for earnings per share for the noted periods:

                                                        Three months ended
                                                              June 30,
                                                       ----------------------
                                                         2006         2005
                                                       ---------   ----------

  Basic weighted average shares outstanding            9,872,117    9,997,738
  Incremental shares from unexercised stock options
    and unvested restricted stock awards                  86,780      112,588
                                                       ---------   ----------
  Diluted weighted average shares outstanding          9,958,897   10,110,326
                                                       =========   ==========

As of June 30, 2006 and 2005, there were no anti-dilutive shares outstanding
related to options to acquire the Corporation's common stock.

Cash Dividend Declared
----------------------

     On June 28, 2006, the Corporation announced a quarterly cash dividend of
15 cents per share payable on August 2, 2006 to stockholders of record on July
10, 2006.

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

Share Based Payment
-------------------

     The Corporation adopted Statement of Financial Accounting Standard (SFAS
or Statement) No. 123(R), Share-Based Payment, (SFAS 123(R)) on April 1, 2006
using the "modified prospective" method.  Under this method, awards that are
granted, modified, or settled after March 31, 2006 are measured and accounted
for in accordance with Statement 123(R).  Also under this method, expense is
recognized for unvested awards that were granted prior to April 1, 2006 based
upon the fair value determined at the grant date under Statement 123,
Accounting for Stock-based Compensation (Statement 123).  For the three months
ended June 30, 2006, the Corporation recognized $19,000 in stock option and
restricted stock award compensation expense as a component of salaries and
benefits.  As of June 30, 2006, there was approximately $723,000 of total
unrecognized compensation cost related to nonvested options and awards which
is scheduled to amortize over the next four years.

     The Corporation measures the fair value of each stock option grant at the
date of grant, using the Black Scholes option pricing model.  The weighted
average fair value of options granted during the three months ended June 30,
2006, was $5.22 per share.  The following assumptions were used in arriving at
the fair value of options granted during the three months ended June 30, 2006:

                                               2006
                                            ----------
     Risk-free interest rate                    5.270%
     Dividend yield rate                        2.417%
     Price volatility                          24.770%
     Expected life of options               3.78 years

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

8

<PAGE>



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

     The following table illustrates the effect on net income and earnings per
share had the Corporation applied the fair value recognition provisions of
Statement 123 in fiscal 2006.

     Pro forma disclosures:
     ---------------------                                    Three Months
                                                                 ended
(In thousands, except per share data)                         June 30, 2005
                                                              -------------

     Net income as reported                                     $  3,712
     Additional compensation for fair value of stock options         (11)
                                                                --------
     Pro forma net income                                       $  3,701
                                                                ========
     Earnings per share
     ------------------

     Basic
        As reported                                               $0.37
                                                                  =====
        Pro forma                                                 $0.37
                                                                  =====
     Diluted
        As reported                                               $0.37
                                                                  =====
        Pro forma                                                 $0.37
                                                                  =====
Stock Option and Award Plans
----------------------------

     The Corporation may grant options and/or awards for a maximum of 750,000
shares of authorized common stock to certain officers and key employees under
the 2005 Incentive Stock Plan.  The activity during the period ending June 30,
2005 was under the 1995 Stock Option and Incentive Plan, which allowed for a
maximum of 595,125 shares, as restated, of authorized common stock to be
awarded.  Options and awards are granted at no less than fair market value and
may or may not vest immediately upon issuance based on the terms established
by the Board of Directors.  Options and awards are generally exercisable
within one to five years from date of grant and expire after ten years.

     The following table summarized stock option and award activity for the
three months ended June 30, 2006:

                              Shares of Common Stock
                              ----------------------      Weighted Average of
                              Available for    Under       Exercise Price of
                              Option/Award     Plan        Shares Under Plan
                              ------------     ----       -------------------

 Balance, March 31, 2006         724,988      151,184
   Restricted stock awards       (19,236)                      $  24.82
   Granted                       (19,236)      19,236          $  24.82
   Exercised                           -       (2,332)         $   7.51
   Lapsed                            673         (673)         $  21.17
       Expired                        (1)        -
                                --------     --------
 Balance, June 30, 2006          687,188      167,415
                                ========     ========

9

<PAGE>




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

Financial data pertaining to outstanding stock options and exercisable stock
options at June 30, 2006 follows:

                         Options Outstanding             Options Exercisable
               --------------------------------------   ---------------------
                              Weighted
                              Average        Weighted
 Range of                     Remaining      Average                 Average
 Exercise         Number     Contractual     Exercise     Number     Exercise
 Prices        Outstanding      Life          Price     Exercisable    Price
----------     -----------   -----------     ---------  -----------  --------

$ 5 to $10       91,419      3.42 years      $ 7.57       91,419      $ 7.57
$10 to $15       33,000      6.05 years      $11.66       31,000      $11.49
$15 to $20        7,500      8.67 years      $19.11        3,500      $19.19
$20 to $25       35,496      9.60 years      $22.99          500      $21.42

     At June 30, 2006, the aggregate intrinsic value of stock options
outstanding and stock options exercisable was $2.4 million and $2.2 million,
respectively.

NOTE 4 - New Accounting Pronouncements

     In March  2006,  the FASB  issued  SFAS No. 156,  Accounting  for
Servicing  of Financial  Assets  an  amendment  of FASB  Statement  No.  140,
Accounting for Transfers and Servicing of Financial Assets and Extinguishments
of Liabilities (SFAS 156).  SFAS 156 requires all separately recognized
servicing assets and liabilities to be initially measured at fair value.  In
addition, entities are permitted to choose to either subsequently measure
servicing rights at fair  value  and  report  changes  in fair  value in
earnings,  or amortize servicing rights in proportion to and over the
estimated net servicing income or loss and assess the rights for  impairment.
Beginning  with the fiscal  year in which an entity  adopts  SFAS 156,  it may
elect to  subsequently  measure a class of servicing  assets and  liabilities
at fair value.  Post adoption, an entity may make this election as of the
beginning of any fiscal year. An entity that elects to subsequently measure a
class of servicing assets and liabilities at fair value should apply that
election to all new and existing recognized servicing assets and liabilities
within that class. The effect of remeasuring an existing class of servicing
assets and liabilities at fair value is to be reported as a cumulative-effect
adjustment to retained earnings as of the beginning of the period of adoption.
SFAS 156 is effective as of the beginning of an entity's first fiscal year
that begins after September 15, 2006.  The statement also requires additional
disclosures. The Corporation is currently evaluating the impact of the
adoption of SFAS 156; however, it is not expected to have a material impact on
the Corporation's financial position or results of operations.

10

<PAGE>



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

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

Forward Looking Statements
--------------------------

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

General
-------

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

     The Bank's operations are conducted through 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.  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.  The
Bank opened a full service regional facility in June 2006, which replaced the
Bank's existing office and commercial banking center in south Everett.

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

11

<PAGE>



Business Strategy
-----------------

     The Bank's business strategy is to operate as a well-capitalized,
profitable and independent community bank, dedicated to commercial lending,
home mortgage lending, consumer lending, small business lending and providing
quality financial services to local personal and business customers.  The Bank
has sought to implement this strategy by: (i) focusing on commercial banking
opportunities;  (ii) continued efforts towards the origination of residential
mortgage loans, including one- to- four family residential construction 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.

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

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

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

     The Corporation's profitability depends primarily on its net interest
income, which is the difference between the income it receives on the Bank's
loan and investment portfolio and the Bank's cost of funds, which consists of
interest paid on deposits and borrowings. The Bank reviewed its opportunities
with respect to both assets and liabilities.  In the past two fiscal years,
for example, the Bank chose to concentrate its commercial lending efforts on
growing its Prime based loan portfolio, at a time when many lenders were
offering fixed rate real estate loans at sub-Prime rates.  In this regard, the
Bank's loan portfolio growth was heavily concentrated in the active real
estate development markets in the Puget Sound region.  Through its excellent
relationships with established real estate developers, the Bank's experienced
loan officers were successful at growing this portion of the Bank's portfolio,
which is primarily Prime based business.  This has been beneficial in the past
year, with the Federal Reserve's Open Market Committee's (FOMC) efforts to
increase short terms interest rates, which have in turn increased the Prime
lending rate on a regular basis.  The results of this strategy are discussed
in more detail in the section entitled "Comparison of Operating Results for
the Three Months Ended June 30, 2006 and June 30, 2005".  On the liability
side of the balance sheet, the impact of these increasing rates has also
impacted the Bank's earnings, however at a more moderate level to date.
Management acknowledges that there is a lag effect in this regard, as the
rates on the Bank's certificate of deposit liabilities do not adjust
instantly, rather the impact occurs more gradually as the certificates of
deposit mature and reprice in this higher rate environment.  These increases
in liability expenses will continue even after the FOMC stops its current
tightening cycle, as long as the rates being offered for new certificates of
deposit are higher than those maturing (as is the case currently).

     Net interest income is also affected by the relative amounts of
interest-earning assets and interest-bearing liabilities.  When
interest-earning assets equal or exceed interest-bearing liabilities, any
positive interest rate spread will generate net interest income. The
Corporation's profitability is also affected by the level of the Bank's other
income and expenses.  Other noninterest income includes income associated with
the origination and sale of mortgage loans, loan servicing fees, deposit
account related fees, and net gains and losses on sales of interest-earning
assets.  This portion of the Bank's income is heavily dependent on the Bank's
success at originating and selling one-to-four family mortgage loans into the
secondary market.  In addition, the Bank's ability to generate fee income on
its deposit accounts impacts this portion of the Bank's income stream.  In
fiscal 2006, the Bank introduced an Overdraft Protection service, which
enhanced the deposit related fee income and is discussed in more detail in the
section entitled "Comparison of Operating Results for the Three Months Ended
June 30, 2006 and June 30, 2005."

12

<PAGE>



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

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

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

     Total consolidated assets for the Corporation at June 30, 2006, were $1.2
billion, a 6.6% increase from $1.1 billion at March 31, 2006.  This increase
in assets was primarily a result of the growth in loans receivable, which
increased 7.5% to $987.3 million at June 30, 2006 from $918.5 million at March
31, 2006.  The growth in loans receivable was primarily attributable to a
$22.4 million, or 18.4%, increase in commercial loans and a $48.2 million, or
18.4%, increase in construction and land development loans since March 31,
2006.  The Bank continued its focus on expanding its relationships with
established residential real estate developers and one-to-four family
residential builders, which resulted in the continued growth in this component
of loans receivable during the period.  First mortgage loans increased
slightly during the 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 $19.9 million of real estate loans during the quarter ended June
30, 2006, compared to $29.1 million during the quarter ended June 30, 2005.

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

                                            June 30,         March 31,
 (In thousands)                              2006              2006
                                           ---------         ---------
First mortgage loans
   1-4 Family                              $ 147,173         $ 148,515
   1-4 Family construction                    23,236            20,971
   Less participations sold                  (54,889)          (56,546)
                                           ---------         ---------
     Net first mortgage loans                115,520           112,940
 Construction and land development           310,561           262,358
 Residential commercial real estate           70,823            70,080
 Non-residential commercial real estate      310,227           314,299
 Commercial loans                            145,843           123,445
 Home equity secured                          43,506            44,001
 Other consumer loans                          5,681             5,571
                                           ---------         ---------
     Subtotal                                886,641           819,754
                                           ---------         ---------
   Total loans receivable                  1,002,161           932,694
                                           ---------         ---------
Less:
   Allowance for loan losses                 (14,854)          (14,184)
                                           ---------         ---------
   Net loans receivable                    $ 987,307         $ 918,510
                                           =========         =========

 Net residential loans                     $ 114,556    12%  $ 111,967    12%
 Net commercial loans                        143,181    14%    121,117    13%
 Net commercial real estate loans            681,158    69%    636,657    70%
 Net consumer loans                           48,412     5%     48,769     5%
                                           ---------   ---   ---------   ---
                                           $ 987,307   100%  $ 918,510   100%
                                           =========   ===   =========   ===

13

<PAGE>



The tables below display the characteristics of the available for sale (AFS)
and held-to-maturity (HTM) portfolios as of June 30, 2006:

                                                             Net    Estimated
                                              Amortized  Unrealized   Fair
(In thousands)                                  Cost     Gain/(Loss)  Value
                                                ----     -----------  -----
AFS Securities
 State and political subdivisions and U.S.
   government agency securities                $ 45,902   $  (904)   $ 44,998
 Marketable equity securities                     1,824     5,995       7,819
 Mutual funds                                     5,000      (141)      4,859
 Corporate debt securities                        2,007        (3)      2,004
 Mortage-backed securities and
    Collateralized mortgage obligations (CMOs)   26,435      (369)     26,066
                                               --------   -------    --------
    Total available-for-sale securities          81,168     4,578      85,746
                                               --------   -------    --------
HTM Securities
 State and political subdivisions and U.S.
   government agency securities                     370         3         373
 Mortgage-backed securities and CMOs                390        11         401
                                               --------   -------    --------
    Total held-to-maturity securities               760        14         774
                                               --------   -------    --------
    Total securities                           $ 81,928   $ 4,592    $ 86,520
                                               ========   =======    ========

                              Maturity Schedule of Securities at June 30, 2006
                              ------------------------------------------------
                                Available-For-Sale         Held-To-Maturity
                              ----------------------   -----------------------
                              Amortized   Estimated    Amortized    Estimated
(In thousands)                   Cost     Fair Value      Cost      Fair Value
                              ---------   ----------   ---------    ----------
Maturities:
  Less than one year           $ 11,779    $ 11,742     $      -     $      -
  One to five years              30,956      30,248          724          728
  Over five to ten years         10,262      10,086            -            -
  Over ten years                 21,347      20,992           36           46
                               --------    --------     --------     --------
                                 74,344      73,068          760          774
                               --------    --------     --------     --------
Mutual funds and marketable
  equity securities (liquid)      6,824      12,678            -            -
                               --------    --------     --------     --------
Total investment securities    $ 81,168    $ 85,746     $    760     $    774
                               ========    ========     ========     ========

     Total liabilities increased 7.3% to $1.1 billion at June 30, 2006, from
$1.0 billion at March 31, 2006.  This increase in liabilities was primarily
the result of growth in deposits, which increased 6.9% to $892.1 million at
June 30, 2006 from $834.3 million at March 31, 2006.    The following is an
analysis of the deposit portfolio by major type of deposit at June 30, 2006
and March 31, 2006:

(In thousands)                             June 30, 2006     March 31, 2006
                                           -------------     --------------
Demand deposits
 Savings                                    $ 26,637            $ 30,808
 Checking                                     78,227              79,774
 Checking (noninterest-bearing)               92,117              80,778
 Money Market                                162,249             156,867
                                            --------            --------
                                             359,230             348,227
                                            --------            --------
Time certificates of deposit
 Less than $100,000                          258,243             246,136
 Greater than or equal to $100,000           274,660             239,936
                                            --------            --------
                                             532,903             486,072
                                            --------            --------
Total deposits                              $892,133            $834,299
                                            ========            ========


14

<PAGE>



     Also contributing to the growth during the current quarter was an
increase of 11.0% in other borrowed funds to $157.1 million at June 30, 2006
from $141.6 million at March 31, 2006.  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 June 30, 2006 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 GBNW
(Greenbriar Northwest LLC), purchased an 85 acre parcel of land in Bellingham
for future development.  GBNW intends to develop the property in future years,
into a neighborhood community to be known as Fairhaven Highlands.   The $17.0
million reflected on the Corporation's Consolidated Statements of Financial
Position as an asset at June 30, 2006 represents the current level of the
investment in real estate joint ventures, including the Fairhaven Highlands
joint venture.   This amount also includes the remaining net investment in a
residential development joint venture that has since been completed and
closed. The $18.7 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, which includes costs that have been incurred and capitalized since
the acquisition of the property.  At this time, the partnership 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 June 30, 2006 increased slightly to $114.4
million from $113.3 million at March 31, 2006.  This increase was primarily
attributable to the increase in net income to $4.6 million for the quarter
ended June 30, 2006 from $4.2 million for the quarter end March 31, 2006.
This change also included the effects from the Corporation's share repurchase
program, with repurchases totaled $1.7 million for the quarter ended June 30,
2006 compared to $250,000 for the quarter ended March 31, 2006.  The
Corporation remains strong in terms of its capital position, with a
stockholder equity-to-assets ratio of 9.6% at June 30, 2006, compared to 10.2%
at March 31, 2006.

Comparison of Operating Results for the Three Months Ended June 30, 2006 and
June 30, 2005
----------------------------------------------------------------------------

     General.  Net income increased 23.4% to $4.6 million for the three months
ended June 30, 2006 from $3.7 million for the three months ended June 30,
2005.  Basic earnings per share for the three months ended June 30, 2006 was
$0.46 on weighted average shares outstanding of 9,872,117, compared to basic
earnings per share of $0.37 on weighted average shares of 9,997,738 for the
three months ended June 30, 2005.

     Net Interest Income.  Net interest income before provision for loan
losses for the three months ended June 30, 2006 increased 23.4% to $12.7
million from $10.3 million for the comparable period in 2005.  Interest on
loans for the quarter ended June 30, 2006 increased 37.2% to $20.2 million,
from $14.7 million for the comparable quarter a year ago.  This increase was a
result of a combination of factors, including: 1) the growth in loans
receivable, as the Bank experienced significant loan growth during the
quarter, increasing the loan portfolio to $987.3 million at June 30, 2006
compared to $843.1 million at June 30, 2005; and 2) an increasing Prime
lending rate.  Interest and dividends on investments and mortgage-backed
securities for the three months ended June 30, 2006 increased 21.6% to $1.0
million, from $833,000 for the comparable quarter a year ago.  This increase
was a result of a higher level of investments and mortgage-backed securities
outstanding during the respective periods, as average total investments
increased 4.6% to $94.6 million at June 30, 2006 as compared to $90.4 million
at June 30, 2005. Also contributing to the increase was the restructuring of
approximately $13.0 million of the investment securities portfolio during the
quarter ended March 31, 2006. The proceeds from those lower-yielding
securities have been reinvested in highly rated, higher-yielding investments.
Total interest income increased 36.3% to $21.2 million at June 30, 2006 from
$15.5 million in the comparable period one year ago.

     Total interest paid on deposits increased 58.3% to $6.6 million for the
quarter ended June 30, 2006 from $4.2 million for the quarter ended June 30,
2005, as a result of significant growth in average deposits outstanding to
$843.7 million at June 30, 2006 compared to $750.8 million at June 30, 2005.
Also contributing to the increase was the increasing level of interest rates
during the year which resulted in an increase in interest expense, including
interest paid on the Bank's deposits.  Interest on borrowings increased 73.8%
to $1.9 million during the quarter ended June 30, 2006, compared to $1.1
million for the comparable period one year ago.  The increased expense in the
current year was a result of a higher level of average borrowings outstanding
during the quarter ended June 30, 2006 of $170.7 million compared to $126.0
million during the quarter ended June 30, 2005, along with the increasing rate
environment.  The Bank continues to carry wholesale borrowings in order to
further leverage its balance sheet and better manage its interest rate risk
profile.

15

<PAGE>




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

                                           For the quarter ended June 30,
Average balances:                              2006               2005
                                           ----------         ----------

 (In thousands)
 Loans                                     $  956,861         $  827,113
 Investments                                   94,554             90,422
                                           ----------         ----------
 Total interest-earning assets              1,051,415            917,535

 Deposits                                  $  843,697         $  750,833
 Borrowings                                   170,663            126,043
                                           ----------         ----------
 Total interest-bearing liabilities         1,014,360            876,876

 Average assets                             1,153,754          1,012,764
 Average stockholders' equity                 113,862            107,174


                                           For the quarter ended June 30,
Weighted average interest rates:              2006               2005
                                           ----------         ----------

 Yield on loans                                  8.43%              7.11%
 Yield on investments                            4.30%              3.70%
                                           ----------         ----------
 Yield on interest-earning assets                8.06%              6.77%

 Cost of deposits                                3.13%              2.22%
 Cost of borrowings                              4.43%              3.45%
                                           ----------         ----------
 Cost of interest-bearing liabilities            3.36%              2.41%

 Net interest spread                             4.70%              4.37%
   Net interest margin                           4.82%              4.48%

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

                                           For the quarter ended June 30,
 Allowance for Loan Losses                    2006               2005
                                           ----------         ----------
 (In thousands)

 Allowance at beginning of period          $   14,184         $   11,767
 Provision for loan losses                        700                725
 Charge offs (net of recoveries)                  (30)               (44)
                                           ----------         ----------
 Allowance at  end of period               $   14,854         $   12,448
 Allowance for loan losses as a
   percentage of net loans receivable
   at the end of the period                      1.50%              1.48%

 Net charge-offs as a percentage of average
   loans outstanding during the period          0.003%             0.005%

     The provision for loan losses was $700,000 for the quarter ended June 30,
2006 compared to $725,000 for the quarter ended June 30, 2005.  These
provisions reflect management's ongoing analysis of changes in loan portfolio
composition by collateral categories, overall credit quality of the portfolio,
peer group analysis, historical industry loss experience, and current economic
conditions.  The allowance for loan losses was $14.9 million, or 1.50% of net
loans receivable at June 30, 2006, compared to $12.4 million, or 1.48% of net
loans receivable at June 30, 2005.  The increased allowance level resulted
from continued loan portfolio growth in the higher-risk lending categories of
construction and land development, commercial real estate commercial business
loans during the period, which comprised $824.3 million, or 83.5% of the
portfolio at June 30, 2006, versus $682.7 million, or 80.9% at June 30, 2005.

16

<PAGE>



     In addition, commercial and multi-family loans have larger individual
loan amounts, which have a greater single impact on the total portfolio
quality in the event of delinquency or default.  The Corporation considers the
allowance level to be appropriate, as a result of the changing portfolio mix
and the current economic environment.

     As of June 30, 2006, there were 16 loans on nonaccrual status.  At June
30, 2006 total non-performing loans were $1.4 million.  The Bank had no real
estate owned at June 30, 2006.  Total non-performing assets represented $1.4
million, or 0.12% of total assets at June 30, 2006 compared to $1.3 million or
0.13% of total assets at June 30, 2005.

                                                        As of June 30,
                                                 ----------------------------
 Non-Performing Assets                              2006              2005
                                                 ----------        ----------
 (In thousands)

 Accruing loans   90 days past due               $        -        $        -
 Non-accrual loans                                    1,417             1,287
                                                 ----------        ----------
 Total non-performing loans                           1,417             1,287
 Total non-performing loans/net loans                  0.14%
 0.15%
  Real estate owned                                       -                 -
                                                 ----------        ----------
Total non-performing assets                           1,417             1,287
                                                 ----------        ----------
Total non-performing assets/total assets               0.12%             0.13%

     Noninterest Income.  Noninterest income for the three months ended June
30, 2006 decreased 16.5% to $1.5 million as compared to $1.8 million for the
same period a year ago.  Service fee income increased 16.2% to $867,000 for
the quarter ended June 30, 2006 from $746,000 for the same quarter in the
prior period.  The primary reason for the increase was the implementation of
an overdraft protection service during July 2005, which, together with the
increase in deposits, resulted in increased fee income.  The net gain on the
sale of loans servicing released decreased to $225,000 for the quarter ended
June 30, 2006 from $297,000 in the comparable period one year ago. A
moderately more active mortgage market was the primary reason for the
increased amount in the prior year.  Other noninterest income for the quarter
decreased 44.3% to $372,000 for the quarter ended June 30, 2006 from $667,000
for the three months ended June 30, 2005.  The primary reason for the decrease
from the prior period was the recognition in the prior year period of
approximately $320,000 in profits on the real estate development project from
a joint venture of the Bank's wholly owned subsidiary, Westward Financial
Corp.  All lot sales have been concluded for this real estate joint venture
and, as a result of the current status of the development of future lots, no
sales activity is currently anticipated for fiscal 2007 from the Bank's real
estate joint venture activities.

     Noninterest Expense.  Noninterest expense for the three months ended June
30, 2006 increased 7.6% to $6.6 million from $6.1 million for the comparable
quarter one year ago.  Compensation and employee benefits increased 12.7% for
the quarter ended June 30, 2006 to $3.9 million from $3.4 million for the
comparable quarter one year ago.  Building occupancy for the quarter ended
June 30, 2006 increased 16.4% to $953,000 from $819,000 for the three months
ended June 30, 2005.  Increases in compensation and employee benefits and
building and occupancy expenses resulted from the opening a full service
retail office in Lakewood in fiscal 2006 and a full service regional facility
in Everett, Washington in June 2006.  Other noninterest expense decreased 7.6%
to $1.3 million from $1.4 million in the quarter ended June 30, 2005. The
increased expenses in the prior period were the result of additional expenses
related to the Bank's charter conversion and state regulatory exam.

17

<PAGE>

<PAGE>
<TABLE>

Average Balances, Interest and Average Yields/Costs
---------------------------------------------------

     The following table presents at the date and for the periods indicated, the total dollar amount of
interest income and interest expense, as well as the resulting yields earned and rates paid.

                                                         For the quarter ended June 30,
                                 ---------------------------------------------------------------------------
                                                 2006                                   2005
                                 ----------------------------------      -----------------------------------
                                                            Average                                 Average
                                    Average                 Yield/       Average                    Yield/
(In thousands)                      Balance    Interest      Cost        Balance       Interest      Cost
                                    -------    --------      ----        -------       --------      ----

                                <c>         <c>           <c>         <c>           <c>           <c>
Interest-earning assets:
  Loans receivable               $  956,861    $ 20,170      8.43%       $827,113      $ 14,703      7.11%
  Investment securities              67,328         681      4.04          71,647           623      3.48
  Mortgage-backed securities         27,226         332      4.87          18,775           210      4.47
                                 ----------    --------    ------        --------      --------    ------
    Total interest-earning
      assets                      1,051,415      21,183      8.06         917,535        15,536      6.77

Interest-bearing liabilities:
  Deposits                          843,697       6,591      3.13         750,833         4,162      2.22
  Borrowings                        170,663       1,910      4.43         131,962         1,100      3.45
                                 ----------    --------    ------        --------      --------    ------
    Total interest-bearing
      liabilities                 1,014,360       8,501      3.36         882,795         5,262      2.41
                                               --------                                --------
Net interest income                            $ 12,682                                $ 10,274
                                               ========                                ========
Interest rate spread                                         4.70%                                   4.37%
Net interest margin                                          4.82%                                   4.48%

Ratio of average interest-earning
  assets to average interest-
  bearing liabilities                                      103.65%                                 103.94%

</TABLE>



Rate/Volume Analysis
--------------------

     The table below sets forth certain information regarding changes in
interest income and interest expense for the Corporation for the periods
indicated.  For each category of interest-earning asset and interest-bearing
liability, information is provided on changes attributable to (1) changes in
volume (change in volume multiplied by old rate); (2) changes in rates (change
in rate multiplied by old volume); (3) changes to rate-volume (changes in rate
multiplied by the change in volume); and (4) the total changes (the sum of the
prior columns).
                                                 Quarter Ended June 30,
                                         ------------------------------------
                                                     2006 vs. 2005
                                         ------------------------------------
                                              Increase (Decrease) Due to
                                         ------------------------------------
                                                             Rate/
(In thousands)                            Volume    Rate    Volume    Total
                                         -------  --------  -------  --------
Interest income:
 Interest and fees on loans              $ 9,226  $ 10,929  $ 1,714  $ 21,869
 Investment securities and other
  interest-bearing securitites               152       543       25       720
                                         -------  --------  -------  --------
Total interest-earning assets            $ 9,378  $ 11,472  $ 1,739  $ 22,589
                                         =======  ========  =======  ========
Interest expense:
 Deposit accounts                        $ 2,065  $  6,832  $   845  $  9,742
 Borrowings                                1,540     1,229      435     3,204
                                         -------  --------  -------  --------
Total interest-bearing liabilities       $ 3,605  $  8,061  $ 1,280  $ 12,946
                                         =======  ========  =======  ========


18

<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 June 30, 2006, the Bank had liquid assets
(cash and marketable securities with maturities of one year or less) with a
book value of $60.2 million.

     As of June 30, 2006 the total book value of investments and
mortgage-backed securities was $81.9 million compared to a market value of
$86.5 million with an unrealized gain of $4.6 million.  As of March 31, 2006,
the total book value of investments and mortgage-backed securities was $79.2
million, compared to a market value of $84.4 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 operations, which
consist primarily of mortgage loan repayments, deposit increases, loan sales,
borrowings and cash received from the maturity or sale of investment
securities.  The Corporation's liquidity fluctuates with the supply of funds
and management believes that the current level of liquidity is adequate at
this time.  If additional liquidity is needed, the Corporation's options
include, but are not necessarily limited to: (i) selling additional loans in
the secondary market; (ii) entering into reverse repurchase agreements; (iii)
borrowing from the FHLB of Seattle; (iv) accepting additional jumbo, brokered
and/or public funds deposits; or (v) accessing the discount window of the
Federal Reserve Bank of San Francisco.

     Stockholders' equity as of June 30, 2006 was $114.4 million, or 9.6% of
assets, compared to $113.3, or 10.2% of assets at March 31, 2006.  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 June 30, 2006 was 12.0%, compared to 12.6% as of March 31,
2006.  These figures are well above the well-capitalized minimum of 10% set by
the FDIC.

     The Corporation has conducted various stock buy-back programs since
August 1996.  In March 2006, the Board of Directors approved a new stock
repurchase plan that continues through the 2007 fiscal year, allowing the
Corporation to repurchase up to 5% of total shares outstanding, or
approximately 500,000 shares.  This marked the Corporation's seventh stock
repurchase plan.  During the quarter ended June 30, 2006, the Corporation
repurchased 72,747 shares at an average price of $23.13.

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

Item 3.  Quantitative and Qualitative Disclosures About Market Risk

     The Corporation continues to be exposed to interest rate risk.
Currently, the Corporation's assets and liabilities are not materially exposed
to foreign currency or commodity price risk.  At June 30, 2006, the
Corporation had no significant off-balance sheet derivative financial
instruments, nor did it have a trading portfolio of investments.  At June 30,
2006, 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,
2006.

Item 4.  Controls and Procedures

     An evaluation of the Corporation's disclosure controls and procedures (as
defined in Rule 13(a)-15(e) of the Securities Exchange Act of 1934 (the
"Act")) was carried out under the supervision and with the participation of
the Corporation's Chief Executive Officer, Chief Financial Officer, and
several other members of the Corporation's senior management as of the end of
the period preceding the filing date of this quarterly report.  The
Corporation's Chief Executive Officer and Chief Financial Officer concluded
that, as of June 30, 2006, the Corporation's disclosure controls and
procedures were effective in ensuring that the information required to be
disclosed by the Corporation in the reports it files or submits under the Act
is (i) accumulated and communicated to the Corporation's management (including
the Chief Executive Officer and Chief Financial Officer) in a timely manner,
and (ii) recorded, processed, summarized, and reported within the time periods
specified in the SEC's rules and forms.

19

<PAGE>



     In the quarter ended June 30, 2006, the Corporation did not make any
changes in its internal control over financial reporting (as defined in Rule
13a-15(f) of the Exchange Act) that has materially affected, or is reasonably
likely to materially affect, the Corporation's internal control over financial
reporting.  While the Corporation believes the present designs of its
disclosure controls and procedures and internal control over financial
reporting are effective to achieve their goals, future events affecting its
business may cause the Corporation to modify its disclosure controls and
procedures and/or internal control over financial reporting.

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

20

<PAGE>



PART II.  OTHER INFORMATION

Item 1. Legal Proceedings

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

Item 1A. Risk Factors

     There have been no material changes in the risk factors previously
disclosed in the Corporation's Annual Report on Form 10-K for the year ended
March 31, 2006.

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

     The Corporation's common stock is traded on the NASDAQ Global Securities
Market under the symbol "HRZB".  As of August 1, 2006, there were 9,828,615
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 2006, the Board of Directors approved a new stock
repurchase plan that runs concurrent with the 2007 fiscal year, allowing the
Corporation to repurchase up to 5% of total shares outstanding, or
approximately 500,000 shares.  This marked the Corporation's seventh stock
repurchase plan.  During the quarter ended June 30, 2006, the Corporation
repurchased 72,747 shares at an average price of $23.133.

     The following table sets forth information about the Corporation's
purchases of its outstanding Common Stock during the quarter ended June 30,
2006.

                                                                (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
------------------    ----------     -----------   ----------   --------------

April 1, 2006 -
  April 30, 2006              -               -            -        500,000
May 1, 2006 -
  May 31, 2006           58,868          22.733       58,868        441,132
June 1, 2006 -
  June 30, 2006          13,879          24.832       72,747        427,253

Total                    72,747          23.133       72,747        427,253


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

Item 3.  Defaults Upon Senior Securities

     None

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

     None

Item 5.  Other Information

     None

21

<PAGE>



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)
        (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)
        (14)       Code of Ethics (incorporated by reference to the
                     Registrant's Annual Report on Form 10-K for the year
                     ended March 31, 2004)
        (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

22

<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:   August 9, 2006
                                     -------------------


23

<PAGE>



                                  Exhibit Index

Exhibit 31.1   Certification of Chief Executive Officer Pursuant to Section
               302 of the Sarbanes-Oxley Act

Exhibit 31.2   Certification of Chief Financial Officer Pursuant to Section
               302 of the Sarbanes-Oxley Act

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

24

<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: August 9, 2006
                                      /s/V. Lawrence Evans
                                      -------------------------------------
                                      V. Lawrence Evans
                                      Chief Executive Officer and President

25

<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: August 9, 2006
                                        /s/Richard P. Jacobson
                                        -----------------------------
                                        Richard P. Jacobson
                                        Chief Financial Officer

26

<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 on
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
Chief Executive Officer                 Chief Financial Officer


Dated: August 9, 2006


27

<PAGE>