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 December 31, 2007
                                           -----------------
                                   OR

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

        For the transition period from ______________ to __________________

                      Commission file number 0-27062

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

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

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

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

                                  98225
                                  -----
                                (Zip Code)

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

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

                               YES  X   NO
                                   ----    ----

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

Large accelerated file      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 February 1, 2008, 11,950,878 common shares, $1.00 par value, were
outstanding.

<PAGE>



                           HORIZON FINANCIAL CORP.

INDEX                                                                PAGE
-----                                                                ----

PART 1      FINANCIAL INFORMATION

Item 1      Financial Statements

            Consolidated Statements of Financial Position              2

            Consolidated Statements of Income                         3-4

            Consolidated Statements of Stockholders' Equity            5

            Consolidated Statements of Cash Flows                      6

            Selected Notes to Consolidated Financial Statements       7-10

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

Item 3      Quantitative and Qualitative Disclosures About
                 Market Risk                                           23

Item 4      Controls and Procedures                                    23

PART II     OTHER INFORMATION

Item 1      Legal Proceedings                                          24

Item 1A.    Risk Factors                                               24

Item 2      Unregistered Sales of Equity Securities and Use of
                 Proceeds                                              24

Item 3      Defaults Upon Senior Securities                            24

Item 4      Submission of Matters to a Vote of Security Holders        25

Item 5      Other Information                                          25

Item 6      Exhibits                                                   25

            SIGNATURES                                                 26


<PAGE>



PART I.   FINANCIAL INFORMATION
Item 1.   Financial Statements

                            HORIZON FINANCIAL CORP.
                 Consolidated Statements of Financial Position

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

Cash and cash equivalents                     $     24,807   $     40,833
Interest-bearing deposits                            2,785          5,379
Investment securities
  Available-for-sale                                47,981         52,865
  Held-to-maturity                                       -            370
Mortgage-backed securities
  Available-for-sale                                32,404         26,233
  Held-to-maturity                                      47            148
Federal Home Loan Bank stock                         7,247          7,247
Loans held for sale                                  2,561          4,493
Loans receivable, net of allowance of loan
  losses of $17,891 at December 31 and
  $15,889 at March 31                            1,190,638      1,054,870
Investment in real estate in a joint venture        17,475         17,169
Accrued interest and dividends receivable            7,881          6,626
Bank premises and equipment, net                    28,127         27,631
Deferred income tax asset                            4,351          3,733
Income tax receivable                             1,279              -
Other real estate owned                                655            725
Other assets                                        23,077         22,005
                                              ------------   ------------
TOTAL ASSETS                                  $  1,391,315   $  1,270,327
                                              ============   ============

                  LIABILITIES AND STOCKHOLDERS' EQUITY


Deposits                                      $  1,009,940   $    975,295
Accounts payable and other liabilities               6,757          9,508
Other borrowed funds                               222,555        138,715
Borrowing related to investment in real
 estate in a joint venture                          21,947         20,243
Advances by borrowers for taxes and insurance          215            454
Income tax payable                                       -            237
Deferred compensation                                1,963          2,020
                                              ------------   ------------
     Total liabilities                           1,263,377      1,146,472
                                              ------------   ------------
COMMITMENTS AND CONTINGENCIES                            -              -

STOCKHOLDERS' EQUITY
  Serial preferred stock, $1 par value,
   10,000,000 shares, authorized; none issued
   or outstanding                                        -              -
  Common stock, $1 par value, 30,000,000 shares
   authorized; 11,998,978 and 12,254,476 issued
   and outstanding, respectively                    11,999         12,254
  Additional paid-in capital                        50,839         51,489
  Retained earnings                                 62,709         56,770
  Accumulated other comprehensive income, net
    of tax                                           2,391          3,342
                                              ------------   ------------
     Total stockholders' equity                    127,938        123,855
                                              ------------   ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY    $  1,391,315   $  1,270,327
                                         ============   ============

             (See Notes to Consolidated Financial Statements)

2

<PAGE>



                         HORIZON FINANCIAL CORP.
              Consolidated Statements of Income (unaudited)

                                                     Three months ended
                                                        December 31,
(In thousands, except share data)                   2007            2006
                                              ---------     ----------
INTEREST INCOME
  Interest on loans                              $  24,917     $   23,277
  Interest on investments and mortgage-backed
   securities                                          992          1,022
                                                 ---------     ----------
      Total interest income                         25,909         24,299
                                                 ---------     ----------
INTEREST EXPENSE
  Interest on deposits                               9,573          8,715
  Interest on other borrowings                       2,536          2,162
                                                 ---------     ----------
      Total interest expense                        12,109         10,877
                                                 ---------     ----------
      Net interest income                           13,800         13,422

PROVISION FOR LOAN LOSSES                              900            450
                                                 ---------     ----------
      Net interest income after provision for
       loan losses                                  12,900         12,972
                                                 ---------     ----------
NONINTEREST INCOME
  Service fees                                         893            823
  Net gain on sales of loans - servicing released      170            162
  Net gain on sales of loans - servicing retained        1             14
  Other noninterest income                             452            420
                                                 ---------     ----------
      Total noninterest income                       1,516          1,419
                                                 ---------     ----------
NONINTEREST EXPENSE
  Compensation and employee benefits                 4,205          4,159
  Building occupancy                                 1,232          1,099
  Data processing                                      234            212
  Advertising                                          197            189
  Other expenses                                     1,554          1,395
                                                 ---------     ----------
      Total noninterest expense                      7,422          7,054
                                                 ---------     ----------
NET INCOME BEFORE PROVISION FOR INCOME TAX           6,994          7,337

PROVISION FOR INCOME TAX                             2,282          2,454
                                                 ---------     ----------
NET INCOME                                       $   4,712     $    4,883
                                                 =========     ==========
BASIC EARNINGS PER SHARE                         $    0.39     $     0.40
                                                 =========     ==========
DILUTED EARNINGS PER SHARE                       $    0.39     $     0.39
                                                 =========     ==========

             (See Notes to Consolidated Financial Statements)

3

<PAGE>

                            HORIZON FINANCIAL CORP.
                 Consolidated Statements of Income (unaudited)

                                                         Nine months ended
                                                            December 31,
(In thousands, except share data)                       2007           2006
                                                    ---------     ----------
INTEREST INCOME
  Interest on loans                                 $  73,683     $   65,428
  Investment and mortgage-backed securities             3,017          3,047
                                                    ---------     ----------
      Total interest income                            76,700         68,475
                                                    ---------     ----------
INTEREST EXPENSE
  Interest on deposits                                 28,858         23,239
  Interest on other borrowings                          6,658          5,999
                                                    ---------     ----------
      Total interest expense                           35,516         29,238
                                                    ---------     ----------
      Net interest income                              41,184         39,237

PROVISION FOR LOAN LOSSES                               2,100          1,850
                                                    ---------     ----------
      Net interest income after provision for
       loan losses                                     39,084         37,387
                                                    ---------     ----------
NONINTEREST INCOME
  Service fees                                          2,692          2,474
  Net gain on sales of loans - servicing released         657            594
  Net gain on sales of loans - servicing retained          18             22
  Net gain on sale of investment securities                 -             19
  Other noninterest income                              1,463          1,221
                                                    ---------     ----------
      Total noninterest income                          4,830          4,330
                                                    ---------     ----------
NONINTEREST EXPENSE
  Compensation and employee benefits                   12,632         12,133
  Building occupancy                                    3,493          3,068
  Data processing                                         713            642
  Advertising                                             612            539
  Other expenses                                        4,679          4,099
                                                    ---------     ----------
      Total noninterest expense                        22,129         20,481
                                                    ---------     ----------
NET INCOME BEFORE PROVISION FOR INCOME TAX             21,785         21,236

PROVISION FOR INCOME TAX                                7,144          7,121
                                                    ---------     ----------
NET INCOME                                          $  14,641     $   14,115
                                                    =========     ==========
BASIC EARNINGS PER SHARE                            $    1.21     $     1.15
                                                    =========     ==========
DILUTED EARNINGS PER SHARE                          $    1.19     $     1.14
                                                    =========     ==========

             (See Notes to Consolidated Financial Statements)


4

<PAGE>



<TABLE>

                                   HORIZON FINANCIAL CORP.
                       Consolidated Statements of Stockholders' Equity
                         Nine Months Ended December 31, 2007 and 2006
                                         (unaudited)

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

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

BALANCE, March 31, 2006         9,898      $  9,898     $  54,116     $  45,991    $  3,318    $   113,323
Comprehensive income
 Net income                         -             -             -        14,115           -         14,115
 Other comprehensive income
  Change in unrealized gains
  on available-for-sale
  securities, net taxes of
  $188                              -             -             -             -         351            351
  Total other comprehensive
   income                           -             -             -             -           -              -
Comprehensive income                -             -             -             -           -              -
Cash dividends on common stock
 at $.40/sh                         -             -             -         (4,541)         -         (4,541)
5 for 4 stock split in
 the form of a 25%
 stock dividend                 2,453         2,453        (2,453)             -          -              -
Cash paid in leiu of fractional
  shares                            -             -             -            (10)         -            (10)
Stock options exercised            13            13            88              -          -            101
Stock award plan                    3             3           198              -          -            201
Tax benefit associated with
  stock options                     -             -            28              -          -             28
Treasury stock purchased and
 retired                         (100)         (100)         (565)        (1,803)         -         (2,468)
                             --------       --------     --------      ---------   --------     ----------
BALANCE, December 31, 2006     12,267     $  12,267    $   51,412     $   53,752   $  3,669     $  121,100
                             ========       ========     ========      =========   ========     ==========
BALANCE, March 31, 2007        12,254     $  12,254    $   51,489     $   56,770   $  3,342     $  123,855
Comprehensive income
 Net income                         -             -             -         14,641          -         14,641
 Other comprehensive income
  Change in unrealized gains
  on available-for-sale
  securities, net taxes
  (benefit) of $(512)               -              -            -              -       (951)          (951)
   Total other comprehensive
     income (loss)                  -              -            -              -          -              -
Comprehensive income                -              -            -              -          -              -
Cash dividends on common stock
  at $.395/sh                       -              -            -         (4,780)         -         (4,780)
Stock options exercised            16             16           85              -          -            101
Stock award plan                    9              9          465              -          -            474
Tax benefit associated with
  stock options                     -              -           43              -          -             43
Treasury stock purchased and
  retired                        (280)          (280)      (1,243)        (3,922)         -         (5,445)
                             --------       --------     --------      ---------   --------     ----------
BALANCE, December 31, 2007     11,999       $ 11,999     $ 50,839      $  62,709   $  2,391     $  127,938
                         ========       ========     ========      =========   ========     ==========


</TABLE>

<TABLE>

                                  Total
                               Comprehensive
                                 Income
                               ------------

                            <c>

BALANCE, March 31, 2006
Comprehensive income
 Net income                    $    14,115
 Other comprehensive income
  Change in unrealized gains
  on available-for-sale
  securities, net taxes of
  $188                                 351
                               -----------
  Total other comprehensive
    income                             351
                               -----------
Comprehensive income           $    14,466
                               ===========
Cash dividends on common stock
 at $.40/sh
5 for 4 stock split in
 the form of a 25%
 stock dividend
Cash paid in leiu of fractional
 shares
Stock options exercised
Stock award plan
Tax benefit associated with
 stock options
Treasury stock purchased and
 retired
BALANCE, December 31, 2006

BALANCE, March 31, 2007
Comprehensive income
 Net income                    $    14,641
 Other comprehensive income
  Change in unrealized gains
  on available-for-sale
  securities, net taxes
  (benefit) of $(512)                 (951)
                               -----------
  Total other comprehensive
   income (loss)                      (951)
                               -----------
Comprehensive income           $    13,690
                               ===========
Cash dividends on common stock
 at $.395/sh
Stock options exercised
Stock award plan
Tax benefit associated with
 options
Treasury stock purchased and
 retired
BALANCE, December 31, 2006

</TABLE>

5

<PAGE>
                           (See Notes to Consolidated Financial Statements)


                           HORIZON FINANCIAL CORP.
             Consolidated Statements of Cash Flows (unaudited)

                                                        Nine Months Ended
(In thousands, except share data)                          December 31,
                                                        2007         2006
                                             ---------     --------
CASH FLOWS FROM OPERATING ACTIVITIES
 Net income                                          $  14,641     $ 14,115
Adjustments to reconcile net income to net
cash provided by operating activities
 Depreciation and amortization                           1,819        1,382
 Stock award plan compensation                             474          198
 Provision for deferred income tax                        (106)         (59)
 Provision for loan losses                               2,100        1,850
 Provision for loss - Real Estate Owned                     70            -
 Excess tax benefits from the exercise of stock options    (43)         (28)
Changes in assets and liabilities
 Accrued interest and dividends receivable              (1,255)      (1,709)
 Interest payable                                       (1,429)       1,973
 Net change in loans held for sale                       1,932          613
 Federal income tax (receivable) payable                (1,516)         (29)
 Other assets                                           (1,029)      (5,285)
 Other liabilities                                      (1,706)        (152)
                                                     ---------     --------
   Net cash flows from operating activities             13,952       12,869
                                                     ---------     --------
CASH FLOWS FROM INVESTING ACTIVITIES
 Investment in interest-bearing deposits, net            2,594       (1,393)
 Purchases of investment securities - available-
   for-sale                                            (15,065)      (3,395)
 Proceeds from sales and maturities of
   investment securities - available-for-sale           18,155        8,189
 Purchases of mortgage-backed securities - available-
   for-sale                                            (10,176)     (10,467)
 Proceeds from the sales and maturities of
   Investment securities - held-to-maturity                370            -
 Proceeds from maturities of mortgage-backed
   securities - available-for-sale                       4,336        7,207
 Proceeds from maturities of mortgage-backed
   securities - held-to-maturity                           101          260
 Net change in loans                                  (138,118)    (126,357)
 Purchases of bank premises and equipment               (2,065)      (2,103)
 Net change in investment in joint venture                (306)        (208)
                                                     ---------     --------
   Net cash flows from investing activities           (140,174)    (128,267)
                                                     ---------     --------
CASH FLOWS FROM FINANCING ACTIVITIES
 Net change in deposits                                 34,645      118,844
 Advances from other borrowed funds                    586,340      282,443
 Repayments of other borrowed funds                   (502,500)    (275,000)
 Advances on borrowing related to investment in real
  estate in a joint venture                              1,704        1,495
 Common stock issued, net                                  101           94
 Tax benefit associated with stock options                  43           28
 Cash dividends paid                                    (4,692)      (4,443)
 Treasury stock purchased                               (5,445)      (2,468)
                                                     ---------     --------
   Net cash flows from financing activities            110,196      120,993
                                                     ---------     --------
NET CHANGE IN CASH AND CASH EQUIVALENTS                (16,026)       5,595
CASH AND CASH EQUIVALENTS, beginning of period          40,833       24,190
                                                     ---------     --------
CASH AND CASH EQUIVALENTS, end of period             $  24,807     $ 29,785
                                                     =========     ========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
 Cash paid during the period for interest            $  36,945     $ 27,264
                                                     =========     ========
 Cash paid during the period for income tax          $   8,717     $  7,173
                                                     =========     ========

              (See Notes to Consolidated Financial Statements)

6

<PAGE>



                          HORIZON FINANCIAL CORP.
           SELECTED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
              THREE AND NINE MONTHS ENDED DECEMBER 31, 2007
                              (unaudited)

NOTE 1 - Basis of Presentation and Significant Accounting Policies

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

     The condensed consolidated financial statements as of and for the three
and nine months ended December 31, 2007, include the accounts of Horizon
Financial Corp. (Horizon Financial or the Corporation), and its wholly-owned
subsidiary Horizon Bank (Horizon Bank or the Bank), and other subsidiaries of
the Bank.  Significant intercompany balances and transactions have been
eliminated in consolidation. The Corporation has engaged in no significant
activity other than holding the stock of the Bank.

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

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

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

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

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

Consolidation of Variable Interest Entities

     In January 2003, the Financial Accounting Standards Board ("FASB") issued
FASB Interpretation No. ("FIN") 46, Consolidation of Variable Interest
Entities.  FIN 46 explains the concept of a variable interest entity and
requires consolidation by the primary beneficiary where the variable interest
entity does not have sufficient equity at risk to finance its activities
without additional subordinated financial support from other parties.  This
interpretation applies immediately to variable interest entities in which an
enterprise holds a variable interest.  In October 2004, the Bank's
wholly-owned subsidiary, Westward Financial Services, Inc. ("Westward
Financial"), entered into a real estate development joint venture with
Greenbriar Northwest LLC ("GBNW"), an established residential land development
company headquartered in Bellingham, Washington.  The Corporation believes
that GBNW is a variable interest entity.  Under FIN 46, GBNW is consolidated
in the Corporation's consolidated balance sheet.  The Corporation also
accounts for the portion not owned by Westward Financial, as a minority
interest.  The investment in real estate is recorded as an asset and the
related debt is recorded as the Corporation's liability.  The real estate
joint venture has a carrying amount of $17.5 million, with a related borrowing
of $21.9 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 $134,000 and $139,000
for the three months ended December 31, 2007 and 2006, respectively, and
$426,000 and $393,000 for the nine months ended December 31, 2007 and 2006,
respectively.

7

<PAGE>



NOTE 2 - Stockholders' Equity

Earnings Per Share
------------------

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

                                   Three months ended     Nine months ended
                                       December 31,          December 31,
                                   2007        2006        2007       2006
                                ----------  ----------  ----------  ----------
Basic weighted average shares
  outstanding                   12,064,265  12,266,820  12,148,772  12,297,369
Incremental shares from un-
  exercised stock options
  and unvested restricted stock
  awards                            93,200     127,999     103,548     120,510
                                ----------  ----------  ----------  ----------
Diluted weighted average shares
  outstanding                   12,157,465  12,394,819  12,252,320  12,417,879
                                ==========  ==========  ==========  ==========
Ant-dilutive shares outstanding
  related to options to acquire
  the Corporation's common stock    45,998           -      16,506           -
                                ==========  ==========  ==========  ==========
Cash Dividend Declared
-----------------------

     On December 19, 2007, the Corporation announced a quarterly cash dividend
of $0.135 per share payable on February 1, 2008 to stockholders of record on
January 8, 2008.

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

     The Corporation adopted Statement of Financial Accounting Standard
("SFAS" or "Statement") No. 123R, Share-Based Payment, 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 No. 123R.  Also under this method, expense is
recognized for unvested awards that were granted prior to April 1, 2006 based
upon the fair value determined at the grant date under Statement No. 123,
Accounting for Stock-based Compensation.  For the three and nine months ended
December 31, 2007, the Corporation recognized $191,000 and $467,000,
respectively, in stock option and restricted stock award compensation expense
as a component of salaries and benefits, compared to $82,000 and $193,000 for
the three and nine months ended December 31, 2006.   As of December 31, 2007
and 2006 there was approximately $749,000 and $548,000, respectively, of total
unrecognized compensation cost related to nonvested options and restricted
stock awards which is scheduled to amortize over the next four years.


     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 nine months ended December
31, 2007 and 2006, was $4.74 and $4.18 per share, respectively.  The following
assumptions were used in arriving at the fair value of options granted during
the nine months ended December 31, 2007 and 2006:

                                   Nine Months Ended      Nine Months Ended
                                   December 31, 2007      December 31, 2006
                              -----------------      -----------------

Risk-free interest rate                  4.54%                 5.27%
Dividend yield rate                      2.56%                 2.42%
Price volatility                        29.12%                 24.77%
Expected life of options              4.09 years             3.78 years

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


8

<PAGE>



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

The Corporation may grant options and/or awards for a maximum of 937,500
shares, as adjusted, of authorized common stock to certain officers and key
employees under the 2005 Incentive Stock Plan.  Activity during the nine
months ended December 31, 2007 also included options granted under the 1995
Stock Option and Incentive Plan, which allowed for a maximum of 743,906
shares, as restated, of authorized common stock to be awarded.  Options and
awards are granted at no less than fair market value and may or may not vest
immediately upon issuance based on the terms established by the Board of
Directors.  Options and awards are generally exercisable within one to five
years from date of grant and expire after ten years.

     The following tables summarize stock option and award activity for the
nine months ended December 31, 2007 under both the 1995 and 2005 stock plans:

                                                  Weighted
                                  Weighted        average         Aggregate
                                  average        remaining        intrinsic
                   Outstanding    exercise       contractual      value (in
Stock Options      under plan   price per share  term (in years)  thousands)
-------------     ------------  ---------------  --------------   ---------

Balance, March 31,
 2007                184,475      $     10.05
 Granted              31,862            20.80
 Exercised           (16,001)            6.35
 Forfeited, expired
  or cancelled        (2,084)           19.27
                   ---------      -----------     -------------   --------
Balance, December 31,
 2007                198,252      $     11.98              5.21   $  1,248
                   =========      ===========     =============   ========
Exercisable,
 December 31, 2007   140,786      $      8.78              3.68   $  1,236
                   =========      ===========     =============   ========

The total intrinsic value, the amount by which the fair value of the
underlying stock exceeds the exercise price of an option on the exercise date,
of options exercised for the nine months ended December 31, 2007 and 2006 was
$178,000 and $279,000, respectively.
                                                               Weighted
                                              Weighted         average
                                              average         remaining
                             Outstanding      grant price    contractual
Restricted Stock Awards      under plan       per share     term (in years)
-----------------------     -----------      -----------    ---------------
Balance, March 31, 2007          31,682       $     18.91
  Granted                        30,500             21.88
  Vested                         (8,751)            18.73
  Forfeited, expired or
   cancelled                     (1,670)            20.01
                            -----------       -----------   -------------
Balance, December 31, 2007       51,761       $     20.66            1.17
                            ===========       ===========   =============

NOTE 4 - Impact of New Accounting Pronouncements

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


9

<PAGE>



NOTE 4 - Impact of New Accounting Pronouncements (continued)

     In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements
(SFAS 157). SFAS 157 defines fair value, establishes a framework for measuring
fair value in generally accepted accounting principles (GAAP), and expands
disclosures about fair value measurements. This Statement applies to other
accounting pronouncements that require or permit fair value measurements.
Accordingly, this Statement does not require any new fair value measurements.
This Statement is effective for financial statements issued for fiscal years
beginning after November 15, 2007, and interim periods within those fiscal
years.  Implementation of this Statement beginning April 1, 2008, is not
expected to have a material impact on the Corporations' consolidated financial
statements.

     In February 2007, the Financial Accounting Standards Board released
Statement No. 159, Fair Value Option for Financial Assets and Financial
Liabilities. This Statement permits entities to choose to measure many
financial instruments and certain other items at fair value. This Statement is
effective for financial statements issued for fiscal years beginning after
November 15, 2007, and interim periods within those years.  Implementation of
this Statement beginning April 1, 2008, is not expected to have a material
impact on the Corporations' consolidated financial statements.


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 and local 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, prices
for residential and commercial properties, 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 corporate title to its current name, "Horizon Bank".  Effective
August 1, 2005, the Bank converted from a state chartered savings bank to a
state chartered commercial bank.

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

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

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

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

11

<PAGE>



rate mortgages in the secondary market; (v) focusing on asset quality; (vi)
containing operating expenses; and (vii) maintaining capital in excess of
regulatory requirements combined with prudent growth.

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

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

     The primary business of the Bank is to acquire funds in the form of
deposits and wholesale funds, and to use the funds to make commercial,
consumer, and real estate loans in its primary market area.  In addition, and
to a lesser extent, the Bank invests in a variety of investment grade
securities including, but no necessarily limited to U.S. Government and
federal agency obligations, mortgage-backed securities, corporate debt, equity
securities, and municipal securities.  The Bank intends to continue to fund
its assets primarily with retail and commercial deposits, although, FHLB
advances, brokered deposits, and other wholesale borrowings, will also likely
be used as a supplemental source of funds.

     The Corporation's profitability depends primarily on its net interest
income, which is the difference between the income it receives on the Bank's
loan and investment portfolio and the Bank's cost of funds, which consists of
interest paid on deposits and borrowings. The Bank reviews its opportunities
with respect to both assets and liabilities.  In the past few  years, for
example, the Bank chose to concentrate its commercial lending efforts on
growing its Prime based loan portfolio, at a time when many lenders were
offering fixed rate real estate loans at levels significantly below prime.  In
this regard, the Bank's loan portfolio growth was heavily concentrated in the
active real estate development and construction markets in the Puget Sound
region.  Through its excellent relationships with established real estate
developers and builders, the Bank's experienced loan officers were successful
at growing this portion of the Bank's portfolio, which is primarily Prime
based business.  This was beneficial in previous years, with the Federal
Reserve's Open Market Committee's ("FOMC") efforts to increase short term
interest rates, which in turn increased the Prime lending rate.  With the
FOMC's 50 basis point reduction on September 18, 2007, 25 basis point
reduction on October 31, 2007 and 25 basis point reduction on December 11,
2007, the Corporation is experiencing a decline in its net interest margin.
Subsequently, the FOMC reduced rates by 125 basis points in January 2008.
This rapid pace of easing monetary policy by the FOMC will contribute to
further declines in the Corporation's net interest margin.  The results of
this strategy are discussed in more detail in the section entitled "Comparison
of Operating Results for the Three Months Ended December 31, 2007 and December
31, 2006" and "Comparison of Operating Results for the Nine Months Ended
December 31, 2007 and December 31, 2006".  On the liability side of the
balance sheet, these changing rates also impact the Bank's earnings.
Management acknowledges that there is a lag effect in this regard, in both
increasing and decreasing rate environments as the
rates on the Bank's certificate of deposit liabilities do not adjust
instantly, rather the impact occurs more gradually as the
certificates of deposit mature and reprice in a changing interest rate
environment.

     Net interest income is also affected by the relative amounts of
interest-earning assets and interest-bearing liabilities.  When
interest-earning assets equal or exceed interest-bearing liabilities, any
positive interest rate spread will generate net interest income. The
Corporation's profitability is also affected by the level of the Bank's other
income and expenses.  Other noninterest income includes income associated with
the origination and sale of mortgage loans, loan servicing fees, deposit
account related fees, and net gains and losses on sales of interest-earning
assets.  This portion of the Bank's income is heavily dependent on the Bank's
success at originating and selling one-to-four family mortgage loans into the
secondary market.  In addition, the Bank's ability to generate fee income on
its deposit accounts impacts this portion of the Bank's income stream.  In
fiscal 2006, the Bank introduced an overdraft protection service, which
increased the deposit related fee income and is discussed in more detail in
the section entitled "Comparison of Operating Results for the Three Months
Ended December 31, 2007 and December 31, 2006" and "Comparison of Operating
Results for the Nine Months Ended December 31, 2007 and December 31, 2006".

     Other noninterest expenses include compensation and benefits, occupancy
and equipment expenses, deposit insurance premiums, data servicing expenses
and other operating costs.  In fiscal 2006, the Bank began a Bank-wide
efficiency initiative, soliciting input from all employees and implementing
many of the suggestions it received.  This is an ongoing process, as
management continues to look for ways to improve efficiency. To encourage
employees to participate in this initiative, the Bank has added a
profitability component to the incentive portion of the employee's pay, and
efficiency

12

<PAGE>



accounts for one-third of this profitability component.  Also during fiscal
2006, the Bank formed a Core Data Processor task team to analyze ways to best
utilize its new data processing system.  At the time of the data processing
conversion in November 2004, the focus was appropriately on converting the
data from the previous system.  Subsequently, the focus shifted to ensuring
that the Bank was taking advantage of the benefits offered by the new system,
and this is a process that will continue in future years along with the
efficiency initiative discussed above.

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

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

     Total consolidated assets for the Corporation at December 31, 2007,
increased to $1.4 billion, reflecting an increase of 9.5% from March 31, 2007.
This increase in assets was primarily a result of the growth in loans
receivable, which increased 12.9% to $1.2 billion at December 31, 2007 from
$1.0 billion at March 31, 2007.  The growth in loans receivable was primarily
attributable to a $94.4 million, or 17.1%, increase in the balance of
construction and land development and commercial business loan categories
since March 31, 2007.  The Bank continued to focus on expanding its
relationships with established residential real estate developers and
one-to-four family residential builders, which resulted in the continued
growth in this component of loans receivable during the period.  Also
contributing to this increase is a slowing pace of loan paydowns in this
category, as the sales activity has slowed compared to previous periods. This
has resulted in loan balances remaining on the Corporation's balance sheet
longer than in more active periods for real estate sales. Also increasing
during the period was the commercial loan category, as the Bank continues to
focus on increasing its commercial lines of credit balances to diversify its
loan portfolio and expand its relationships with businesses in its markets.
Commercial real estate loans, primarily consisting of loans with initial fixed
rate periods of three to five years, moderated during the period as the Bank
continued its trend away from the lower returns available in this segment in
favor of the returns available in the construction and land development
category.  One-to-four family mortgage loans, net increased 23.0% to $152.4
million at December 31, 2007 from $123.9 million at March 31, 2007.  Mortgage
loan originations were strong in the third quarter of fiscal 2008, and the
Bank chose to retain certain short term mortgage loans rather than sell them
into the secondary market.  However, even with the retention of these loans,
the Bank continued its practice of selling most of its single-family long term
fixed rate loan production into the secondary market.  The Bank sold $62.4
million of single-family real estate loans during the nine months ended
December 31, 2007, compared to $62.0 million during the nine months ended
December 31, 2006.

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

                              December 31,     %        March 31,       %
(Dollars in thousands)          2007      of Portfolio    2007    of Portfolio
                             ----------   ------------  --------  ------------
One-to-four family mortgage
 loans
   One-to-four family        $  164,933      13.6%     $  149,885      14.0%
   One-to-four family
    construction                 36,584       3.0          28,576       2.7
   Less participations sold     (49,105)     (4.0)        (54,592)     (5.1)
                             ----------     -----      ----------     ------
     Net one-to-four family
       mortgage loans           152,412      12.6         123,869      11.6
Construction and land
  development                   477,908      39.5         405,348      37.9
Multi family residential         45,415       3.8          52,727       4.9
Commercial real estate          312,669      25.9         292,212      27.3
Commercial business loans       168,120      13.9         146,265      13.7
Home equity secured              44,267       3.7          45,307       4.2
Other consumer loans              7,738        .6           5,031        .5
                             ----------     -----      ----------     ------
      Subtotal                1,056,117      87.4         946,890      88.4
                             ----------     -----      ----------     ------
Total loans receivable        1,208,529     100.0%      1,070,759     100.0%
                             ----------     -----      ----------     ------
Less:
   Allowance for loan losses    (17,891)                  (15,889)
                             ----------                ----------
   Net loans receivable      $1,190,638                $1,054,870
                             ==========                ==========
Net residential loans        $  151,151      12.7%     $  122,839      11.6%
Net commercial business loans   165,077      13.9         143,604      13.7
Net commercial real estate
 loans (1)                      823,257      69.1         738,861      70.0
Net consumer loans (2)           51,153       4.3          49,566       4.7
                            -----------     -----      ----------      -----
                            $ 1,190,638     100.0%     $1,054,870       100%
                        ===========     =====      ==========      =====

(1) Includes construction and development, multi-family and commercial real
    estate loans.
(2) Includes home equity and other consumer loans.


13

<PAGE>



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

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

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

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

                                    December 31, 2007        March 31, 2007
                                  ---------------------   -------------------
(Dollars in thousands)              Amount     Percent      Amount    Percent
                                  ----------  ---------   ----------  -------
Speculative construction one-to-
 four  family                     $   24,980     4.9%     $   13,694      3.2%
Custom construction one-to-
 four family                          11,604     2.2          14,882      3.4
                                  ----------   ------      ---------  -------
   Total one-to-four family
    construction                      36,584     7.1          28,576      6.6

Commercial speculative construction
 1-4 family                          238,179    46.3         177,602     40.9
Commercial construction multi
 family                                9,008     1.8           6,986      1.6
Commercial construction               47,477     9.2          47,490     11.0
Commercial land development          183,244    35.6         173,270     39.9
                                  ----------   ------      ---------  -------
   Total construction and land
    development                      477,908    92.9         405,348     93.4
                                  ----------   ------      ---------  -------
   Total construction loans       $  514,492   100.0%      $ 433,924    100.0%
                                  ==========   ======      =========  =======


14

<PAGE>



     The tables below display the characteristics of the available for sale
(AFS) and held-to-maturity (HTM) portfolios as of December 31, 2007:

                                                          Net       Estimated
                                          Amortized   Unrealized      Fair
(In thousands)                               Cost     Gain/(Loss)     Value
                                          ----------  -----------  ---------
AFS Securities
 State and political subdivisions and
   U.S. government agency securities      $   39,012   $     226  $   39,238
 Marketable equity securities                    623       3,271       3,894
 Mutual funds                                  5,000        (151)      4,849
 Mortage-backed securities and
   Collateralized mortgage obligations
    (CMOs)                                    32,060         344      32,404
                                          ----------   ---------  ----------
   Total available-for-sale securities        76,695       3,690      80,385
                                          ----------   ---------  ----------
HTM Securities
 Mortgage-backed securities and
   CMOs                                           46           5          51
                                          ----------   ---------  ----------
   Total held-to-maturity securities              46           5          51
                                          ----------   ---------  ----------
   Total securities                       $   76,741   $   3,695  $   80,436
                                          ==========   =========  ==========


                          Maturity Schedule of Securities at December 31, 2007
                         ----------------------------------------------------
                              Available-For-Sale        Held-To-Maturity
                          -------------------------   ------------------------
                             Amortized   Estimated   Amortized   Estimated
(In thousands)                  Cost     Fair Value     Cost     Fair Value
                          -------------- ----------  ---------  --------------
Maturities:
   Less than one year        $    12,568  $  12,549    $    15    $         15
   One to five years              12,798     12,999         18              19
   Over five to ten years         17,724     17,815          4               7
   Over ten years                 27,982     28,279          9              10
                             -----------  ---------    -------    ------------
                                  71,072     71,642         46              51
                             -----------  ---------    -------    ------------
Mutual funds and marketable
   equity securities (liquid)      5,623      8,743          -               -
                             -----------  ---------    -------    ------------
Total investment securities  $    76,695  $  80,385    $    46    $         51
                             ===========  =========    =======    ============

     Total liabilities increased 10.2% to $1.3 billion at December 31, 2007,
from $1.1 billion at March 31, 2007.  This increase in liabilities was
primarily the result of growth in other borrowed funds, which increased 60.4%
to $222.6 million at December 31, 2007 from $138.7 million at March 31, 2007.
During the three and nine months ended December 31, 2007 the Bank borrowed
$35.0 million and $69.0 million, respectively, of additional funds from the
FHLB to support asset growth and help manage interest rate risk.

     Also contributing to the growth in liabilities during the nine month
period was growth in the balance of deposits, which increased 3.6% to $1.01
billion at December 31, 2007 from $975.3 million at March 31, 2007.    The
following is an analysis of the deposit portfolio by major type of deposit at
December 31, 2007 and March 31, 2007:

(In thousands)                                 Dec 31, 2007    March 31, 2007
                                               ------------    --------------
Demand deposits
 Savings                                        $    18,880      $     21,628
 Checking                                            71,300            78,294
 Checking (noninterest-bearing)                      81,747            91,703
 Money Market                                       186,402           187,912
                                                -----------      ------------
                                                    358,329           379,537
                                                -----------      ------------
Time certificates of deposit
 Less than $100,000                                 280,276           273,022
 Greater than or equal to $100,000                  273,437           243,346
 Brokered certificates of deposit                    97,898            79,390
                                                -----------      ------------
                                                    651,611           595,758
                                                -----------      ------------
Total deposits                                  $ 1,009,940      $    975,295
                                                ===========      ============


15

<PAGE>



     The December 31, 2007 balance sheet also includes an investment in real
estate for a joint venture and the corresponding borrowing.  During the fiscal
year ended March 31, 2005, Westward Financial, as a 50% partner in GBNW
(Greenbriar Northwest LLC), purchased an 85 acre parcel of land in Bellingham
for future development.  GBNW intends to develop the property in future years
into a neighborhood community to be known as Fairhaven Highlands.   The $17.5
million reflected on the Corporation's Consolidated Statements of Financial
Position as an asset at December 31, 2007 represents the current level of the
investment in real estate joint ventures, including the Fairhaven Highlands
joint venture.   This amount also includes the remaining net investment in a
residential development joint venture that has since been completed and
closed. The $21.9 million shown in the liability section of the Consolidated
Statements of Financial Position represents the corresponding wholesale
borrowing used to fund the investment in the Fairhaven Highlands joint
venture.  At this time, the partnership is in the process of meeting with the
appropriate public and private entities in connection with its planning
efforts relating to the future development of the property.

     Stockholders' equity at December 31, 2007 increased 3.3% to $127.9
million from $123.9 million at March 31, 2007.  This increase was primarily
attributable to net income of $14.6 million for the nine months ended December
31, 2007.  This change also included the effects from the Corporation's share
repurchase program.  Repurchases of common stock totaled $5.4 million for the
nine months ended December 31, 2007 compared to $2.5 million for the nine
months ended December 31, 2006.  The Corporation's capital position remains
strong, with a stockholder equity-to-assets ratio of 9.2% at December 31,
2007, compared to 9.7% at March 31, 2007.

Asset Quality
-------------

     The Corporation manages its credit risk through diversification of its
loan portfolio and the application of prudent underwriting policies,
procedures, and monitoring practices.  Delinquent and problem loans, however,
are a part of any financial institution.  When a borrower fails to make
payments, the Corporation implements certain procedures, with an organized
practical approach, for the collection of delinquent loans.

     Allowance for Loan Losses. 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 at the time financial statements are prepared.
These factors include changes in portfolio size and composition, actual loss
experience, current economic conditions, detailed analysis of individual loans
for which full collectibility may not be assured, and determination of the
existence and realizable value of the collateral and guarantees securing the
loans.  The ultimate recovery of loans is susceptible to future market factors
beyond the Corporation's control, which may result in losses or recoveries
differing significantly from those provided for in the financial statements.

     The following table summaries the allowance for loan losses, charge-offs,
and loan recoveries:

                            For the quarter ended    For the nine months ended
                                 December 31,               December 31,
                             2007            2006       2007          2006
                        --------        ---------  --------     ----------
(Dollars in thousands)

Allowance at beginning of
 period                    $ 17,023         $ 15,511  $ 15,889     $   14,184
Provision for loan losses       900              450     2,100          1,850
Charge offs (net of
 recoveries)                    (32)               8       (98)           (65)
                           --------         --------  --------     ----------
Allowance at end of
 period                    $ 17,891         $ 15,969  $ 17,891     $   15,969
                           ========         ========  ========     ==========
Allowance for loan losses
 as a percentage of net
 loans receivable at the
 end of the period             1.50%            1.53%     1.50%          1.53%

Net charge-offs as a
 percentage of average
 loans outstanding during
 the period                   0.003%           (0.001%)  0.009%         0.006%

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

     The provision for loan losses was $900,000 for the quarter ended December
31, 2007 and $2.1 million for the nine months ended December 31, 2007 compared
to $450,000 and $1.9 million for the three and nine months ended December 31,
2006.  These provisions reflect management's ongoing analysis of changes in
loan portfolio composition by collateral


16

<PAGE>



categories, balances outstanding, overall credit quality of the portfolio,
peer group analysis, historical industry loss experience, and current economic
conditions.  The allowance for loan losses was $17.9 million, or 1.50% of net
loans receivable at December 31, 2007, compared to $16.0 million, or 1.53% of
net loans receivable at December 31, 2006.  The 12.0% increase in the
allowance to $17.9 million resulted from continued loan portfolio growth in
the higher-risk lending categories of construction and land development,
commercial real estate, and commercial business loans during the period, which
amounted to $988.3 million at December 31, 2007, versus $870.8 million at
December 31, 2006.

     Non-Performing Assets.  As of December 31, 2007, there were no loans in
the loan portfolio over 90 days delinquent and accruing and one loan on
nonaccrual status.  At December 31, 2007, total non-performing loans were
$990,000.  The Bank had one property in the real estate owned category
totaling $655,000 at December 31, 2007.  Total non-performing assets
represented $1.6 million, or 0.12% of total assets at December 31, 2007
compared to $1.1 million or 0.09% of total assets at December 31, 2006.

     The following table summarizes the Corporation's non-performing assets:

                                                        As of December 31,
                                                      ----------------------
                                                         2007       2006
                                                      ----------  ----------
     (Dollars in thousands)

     Accruing loans   90 days past due                 $      -    $      33
     Non-accrual loans                                      990        1,040
                                                      ----------  ----------
     Total non-performing loans                             990        1,073
     Total non-performing loans/net loans                  0.08%        0.10%
     Real estate owned                                      655            -
                                                      ----------  ----------
     Total non-performing assets                          1,645        1,073
                                             ----------  ----------
     Total non-performing assets/total assets              0.12%        0.09%


     The majority of the Corporation's loan portfolio consists of commercial
loans and single-family residential loans secured by real estate in the
Whatcom, Skagit, Snohomish, and Pierce County areas of Washington. Economic
conditions in the region remain relatively healthy (compared to national
trends), however we are seeing increasing signs of a slowing housing market,
including increasing inventories and overall slower sales activity.

     Construction and land development, commercial real estate and
multi-family real estate 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 Bank is closely watching the construction and land
development loan portfolio, and believe there is a potential for significant
additions to non-performing loans or real estate owned in the near future.
Specifically, we are currently monitoring three loans outstanding to a builder
in Pierce County secured by single family residential real estate
developments. One loan, with a balance of $5.6 million at December 31, 2007,
is secured by a project which appears to be progressing in a satisfactory
manner, and we anticipate being able to work through the remaining lots and
homes to permit repayment.  However, the other two loans are secured by
developments seeing slower sales activity, and success in these other projects
is less certain. These two loans have combined balances outstanding of $6.4
million at December 31, 2007. The possibility exists that if activity does not
improve in these developments, these loans may ultimately need to be placed on
non-accrual. If this $6.4 million had been on non-accrual at December 31,
2007, our non performing assets would have equaled 0.58% of total assets.
Based on the Bank's most recent analysis, we do not project a material loss of
principal from these credits at this time. Further, the Bank believes that the
loss potential for all non performing assets is properly reserved.

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



17

<PAGE>



Comparison of Operating Results for the Three Months Ended December 31, 2007
and December 31, 2006
----------------------------------------------------------------------------

     General.  Net income decreased 3.5% to $4.7 million for the three months
ended December 31, 2007 from $4.9 million for the three months ended December
31, 2006.  Diluted earnings per share for the three months ended December 31,
2007 was $0.39 on weighted average diluted shares outstanding of 12,157,465,
compared to diluted earnings per share of $0.39 on weighted average diluted
shares of 12,394,819 for the three months ended December 31, 2006.

     Net Interest Income.  Net interest income before provision for loan
losses for the three months ended December 31, 2007 increased 2.8% to $13.8
million from $13.4 million for the comparable period in 2006.  Interest on
loans for the quarter ended December 31, 2007 increased 7.0% to $24.9 million,
from $23.2 million for the comparable quarter a year ago.  This increase was a
result of a combination of factors, including the growth in loans receivable,
as the Bank experienced loan growth during the quarter, increasing the loan
portfolio to $1.2 billion at December 31, 2007 compared to $1.0 billion at
December 31, 2006.

     Also included in interest income for the period ended December 31, 2007
and 2006 were approximately $1.3 million of deferred fee income recognition.
Most of these fees were related to the Bank's commercial loan portfolio
primarily as a result of increases in the real estate development loan
portfolio.  These development loans typically are shorter term in nature so
the deferred fee recognition during the life of the loan is greater than what
would be recognized for a comparable loan fee on a longer amortizing loan.
The table below presents an analysis of deferred fee recognition for the three
months ended December 31, 2007 and 2006:

                                           For the quarter ended December 31,
                                                2007               2006
                                           -------------      --------------
(In thousands)
 Commercial loan deferred fees               $    1,067         $      1,090
 One-to-four real estate mortgage loan
   deferred fees                                    222                  200
                                             ----------         ------------
   Total                                     $    1,289         $      1,290
                                             ===========        ============

     Interest on investments and mortgage-backed securities for the three
months ended December 31, 2007 remained relatively unchanged at $1.0 million.
Total interest income increased 6.6% to $25.9 million at December 31, 2007
from $24.3 million in the comparable period one year ago as a result of the
factors discussed above.

     Total interest paid on deposits increased 9.8% to $9.6 million for the
quarter ended December 31, 2007 from $8.7 million for the quarter ended
December 31, 2006, as a result of increased growth in average deposits
outstanding to $987.3 million for the three months ended December 31, 2007
compared to $931.4 million for the three months ended December 31, 2006.  Also
contributing to the increase was a higher level of interest rates compared to
the previous period which resulted in an increase in interest expense,
including interest paid on the Bank's deposits.  At December 31, 2007,
approximately 65% of the Bank's deposits were in the form of certificates of
deposit, including $97.9 million in brokered certificates of deposit.  While
management continues its efforts to increase core deposits as a funding
source, the competitive marketplace for core deposit dollars has resulted in
only moderate success in this regard.

     Interest on borrowings increased 17.3% to $2.5 million during the quarter
ended December 31, 2007, compared to $2.2 million for the comparable period
one year ago, as a result of increased growth in average borrowings
outstanding to $224.6 million for the three months ended December 31, 2007
compared to $176.1 million for the three months ended December 31, 2006.  The
increased expense in the current year was also a result of a higher level of
interest rates during most of the period.  The Bank continues to carry
wholesale borrowings in order to further leverage its balance sheet as an
alternative liquidity source and to better manage its interest rate risk
profile.


18

<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 December 31,
Average balances:                               2007               2006
                                           -------------      --------------
(In thousands)
 Loans                                     $   1,165,555      $    1,050,934
 Investments                                      88,687              91,633
                                           -------------      --------------
 Total interest-earning assets                 1,254,242           1,142,567

 Deposits                                  $     987,250      $      931,357
 Borrowings                                      224,558             176,135
                                           -------------      --------------
 Total interest-bearing liabilities            1,211,808           1,107,492

 Average assets                            $   1,368,723      $    1,243,702
 Average stockholders' equity              $     128,002      $      119,475


                                           For the quarter ended December 31,
Weighted average interest rates:                2007               2006
                                           -------------      --------------
 Yield on loans                                    8.55%               8.86%
 Yield on investments                              4.47%               4.46%
                                           -------------      --------------
 Yield on interest-earning assets                  8.26%               8.51%

 Cost of deposits                                  3.88%               3.74%
 Cost of borrowings                                4.52%               4.91%
                                           -------------      --------------
 Cost of interest-bearing liabilities              4.00%               3.93%

 Net interest spread                               4.27%               4.58%
 Net interest margin                               4.40%               4.70%

     Noninterest Income.  Noninterest income for the three months ended
December 31, 2007 increased 6.8% to $1.5 million compared to $1.4 million for
the same period a year ago. Service fee income increased 8.6% to $893,000 for
the quarter ended December 31, 2007 from $823,000 for the same quarter in the
prior period.  The net gain on the sale of loans servicing released increased
4.9% to $170,000 for the quarter ended December 31, 2007 from $162,000 in the
comparable period one year ago. Mortgage loan originations were strong in the
third quarter of fiscal 2008, and the Bank continued its practice of selling
most of its single-family long term fixed rate loan production into the
secondary market.  Other noninterest income for the quarter increased 7.7% to
$452,000 for the quarter ended December 31, 2007 from $420,000 for the three
months ended December 31, 2006.  The primary reason for the increase from the
prior period was additional income related to the purchase of approximately
$5.0 million of bank owned life insurance during fiscal year 2007.

     Noninterest Expense.  Noninterest expense for the three months ended
December 31, 2007 increased 5.2% to $7.4 million from $7.1 million for the
comparable quarter one year ago.  Compensation and employee benefits increased
slightly to $4.2 million for the quarter ended December 31, 2007.  Building
occupancy for the quarter ended December 31, 2007 increased 12.0% to $1.2
million from $1.1 million for the quarter ended December 31, 2006.  Increases
in compensation and employee benefits and building and occupancy expenses
resulted from the opening of a full service retail facility and mortgage loan
center in Puyallup, Washington in June 2007.  Other noninterest expense
increased 11.4% to $1.6 million for the quarter ended December 31, 2007 from
$1.4 million in the quarter ended December 31, 2006 as a result of increased
printing and supplies expense related to the opening of the Bank's Puyallup
retail office and loan center, consulting expenses, and a valuation write-
down of the Bank's other real estate owned of $70,000.

Comparison of Operating Results for the Nine Months Ended December 31, 2007
and December 31, 2006
---------------------------------------------------------------------------

     General.  Net income increased 3.7% to $14.6 million for the nine months
ended December 31, 2007 from $14.1 million for the nine months ended December
31, 2006.  Diluted earnings per share for the nine months ended December 31,
2007 was $1.19 on weighted average diluted shares outstanding of 12,252,320,
compared to diluted earnings per share of $1.14 on weighted average diluted
shares of 12,417,879 for the nine months ended December 31, 2006.

19

<PAGE>



     Net Interest Income.  Net interest income before provision for loan
losses for the nine months ended December 31, 2007 increased 5.0% to $41.2
million from $39.2 million for the comparable period in 2006.  Interest on
loans for the nine months ended December 31, 2007 increased 12.6% to $73.7
million, from $65.4 million for the comparable period a year ago.  This
increase was a result of a combination of factors, including the growth in
loans receivable, as the Bank experienced loan growth during the period,
increasing the loan portfolio to $1.2 billion at December 31, 2007 compared to
$1.0 billion at December 31, 2006.

     Also included in interest income for the period ended December 31, 2007
and 2006 were $3.9 million and $3.5 million, respectively, of deferred fee
income recognition.  Most of these fees were related to the Bank's commercial
loan portfolio for the period ended December 31, 2007 and 2006, which resulted
in large part from the success in increasing the real estate development loan
portfolio.  These development loans typically are shorter term in nature, so
the deferred fee recognition during the life of the loan is greater than what
would be recognized for a comparable loan fee on a longer amortizing loan.
The table below presents an analysis of deferred fee recognition for the nine
months ended December 31, 2007 and 2006:

                                       For the nine months ended December 31,
                                            2007                   2006
                                  -------------         ---------------
 (In thousands)
 Commercial loan deferred fees          $      3,284          $        2,986
 One-to-four real estate mortgage
   loan deferred fees                            581                     510
                                        ------------          --------------
   Total                                $      3,865          $        3,496
                                        ============          ==============

     Interest on investments and mortgage-backed securities for the nine
months ended December 31, 2007 remained relatively unchanged at $3.0 million.
Total interest income increased 12.0% to $76.7 million at December 31, 2007
from $68.5 million in the comparable period one year ago as a result of the
factors discussed above.

     Total interest paid on deposits increased 24.2% to $28.9 million for the
nine months ended December 31, 2007 from $23.2 million for the nine months
ended December 31, 2006, as a result of increased growth in average deposits
outstanding to $983.5 million at December 31, 2007 compared to $893.8 million
at December 31, 2006.  Also contributing to the increase was the higher level
of interest rates during the nine month period ended December 31, 2007
compared to the previous period, which increased interest paid on the Bank's
deposits.  At December 31, 2007, approximately 65% of the Bank's deposits were
in the form of certificates of deposit, including $97.9 million in brokered
certificates of deposit.  While management continues its efforts to increase
core deposits as a funding source, the competitive marketplace for core
deposit dollars has resulted in only moderate success in this regard.

     Interest on borrowings increased 11.0% to $6.7 million during the nine
months ended December 31, 2007, compared to $6.0 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 of $186.0 million for the
nine months ended December 31, 2007 compared to $169.4 million for the nine
months ended December 31, 2006, as well as an increasing interest rate
environment during most of the period.  The Bank continues to carry wholesale
borrowings in order to further leverage its balance sheet as an alternative
liquidity source and to better manage its interest rate risk profile.


20

<PAGE>






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

                                For the nine months ended December 31,
                       ------------------------------------------------------
                                   2007                       2006
                       --------------------------  --------------------------
                                          Average                     Average
                       Average             Yield/  Average             Yield/
(In thousands)         Balance  Interest    Cost   Balance  Interest    Cost
                       -------  --------  -------  -------  --------  -------

Interest-earning
  assets:
  Loans
   receivable       $1,118,727  $ 73,683   8.78% $1,005,299  $65,428   8.68%
  Investment
   securities           57,663     1,812   4.19      65,696    2,030   4.12
  Mortgage-backed
   securities           32,390     1,205   4.96      27,400    1,017   4.94
                     ---------  --------   ----   ---------  -------  -----
   Total interest-
    earning assets   1,208,780    76,700   8.46   1,098,395   68,475   8.31

Interest-bearing
  liabilities:
  Deposits             983,495    28,858   3.91     893,761   23,239   3.47
  Borrowings           186,038     6,658   4.77     169,421    5,999   4.72
                     ---------  --------   ----   ---------  -------  -----
   Total interest-
    bearing
    liabilities      1,169,533    35,516   4.05   1,063,182   29,238   3.67
                                --------                     -------
Net interest income             $ 41,184                     $39,237
                              ========                     =======
Interest rate spread                       4.41%                       4.64%
Net interest margin                        4.54%                       4.76%

Ratio of average
  interest-earning
  assets to average
  interest- bearing
  liabilities                            103.36%                     103.31%


     Noninterest Income.  Noninterest income for the nine months ended
December 31, 2007 increased 11.6% to $4.8 million compared to $4.3 million for
the same period a year ago.  Service fee income increased 8.8% to $2.7 million
for the nine months ended December 31, 2007 from $2.5 million for the same
nine months in the prior period.  The net gain on the sale of loans servicing
released increased 10.6% to $657,000 for the nine months ended December 31,
2007 from $594,000 in the comparable period one year ago. A moderately more
active mortgage market was the primary reason for the increased amount during
the period.  Other noninterest income increased 19.9% to $1.5 million for the
nine months ended December 31, 2007 from $1.2 million for the nine months
ended December 31, 2006.  The primary reason for the increase from the prior
period was additional income related to the purchase of approximately $5.0
million of bank owned life insurance.

     Noninterest Expense.  Noninterest expense for the nine months ended
December 31, 2007 increased 8.0% to $22.1 million from $20.5 million for the
comparable nine months one year ago.  Compensation and employee benefits
increased 4.1% for the nine months ended December 31, 2007 to $12.6 million
from $12.1 million for the comparable nine months one year ago.  Building
occupancy for the nine months ended December 31, 2007 increased 13.9% to $3.5
million from $3.1 million for the nine months ended December 31, 2006.
Increases in compensation and employee benefits and building and occupancy
expenses resulted from the opening of a full service retail facility and
mortgage loan center in Puyallup, Washington in June 2007, as well as
completion of the remodel and re-branding of the Bank's Cornwall office
located in Bellingham, Washington in June 2007.  Other noninterest expense
increased 14.1% to $4.7 million from $4.1 million in the nine months ended
December 31, 2006 as a result of real estate owned expenses incurred,
increased operating expenses related to the opening of our Puyallup retail
office and loan center, consulting expenses, increased Business & Occupation
tax as a result of the growth in the loan portfolio of taxable commercial
loans, as well as a valuation write-down of the Bank's other real estate owned
of $70,000.



21

<PAGE>



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).

                                            Nine months ended December 31,
                                                   2007 vs. 2006
                                             Increase (Decrease) Due to
                                          ----------------------------------
                                                            Rate/
(In thousands)                             Volume   Rate    Volume    Total
                                          -------   ------  ------   -------
Interest income:
 Interest and fees on loans               $ 7,382   $  784  $   88   $ 8,254
 Investment securities and other
  interest-bearing securities                 (99)      72      (2)      (29)
                                          -------   ------  ------   -------
Total interest-earning assets             $ 7,283   $  856  $   86   $ 8,225
                                          =======   ======  ======   =======
Interest expense:
 Deposit accounts                         $ 2,333   $2,986  $  300   $ 5,619
 Borrowings                                   589       64       6       659
                                          -------   ------  ------   -------
Total interest-bearing liabilities        $ 2,922   $3,050  $  306   $ 6,278
                                          =======   ======  ======   =======

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 December 31, 2007, the Bank had liquid
assets (cash and marketable securities with maturities of one year or less)
with an amortized cost of $45.5 million.

     As of December 31, 2007, the total amortized cost of investments and
mortgage-backed securities was $76.7 million compared to a market value of
$80.4 million with an unrealized gain of $3.7 million.  As of March 31, 2007,
the total amortized cost of investments and mortgage-backed securities was
$74.4 million, compared to a market value of $79.6 million with an unrealized
gain of $5.2 million. The primary reason for this change relates to declining
values in the Corporation's portfolio of equities, which are heavily
concentrated in the financial sector.   The Bank does not foresee any factors
that would impair its ability to hold debt securities to maturity.

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

     Stockholders' equity as of December 31, 2007 was $127.9 million, or 9.2%
of assets, compared to $123.9 million, or 9.7% of assets at March 31, 2007.
The Bank continues to exceed the 5.0% minimum tier one capital required by the
FDIC in order to be considered well-capitalized.  The Bank's total
risk-adjusted capital ratio as of December 31, 2007 was 11.0%, compared to
12.0% as of March 31, 2007.  These figures are well above the well-capitalized
minimum of 10% set by the FDIC.

     The Corporation has conducted various stock buy-back programs since
August 1996.  In March 2007, the Board of Directors approved a new stock
repurchase plan that runs concurrent with the 2008 fiscal year, allowing the
Corporation to repurchase up to 5% of total shares outstanding, or
approximately 600,000 shares.  This marked the Corporation's ninth stock
repurchase plan.  During the nine months ended December 31, 2007, the
Corporation repurchased 280,400 shares at an average price of $19.37.



22

<PAGE>



     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 December 31, 2007, the
Corporation had no significant off-balance sheet derivative financial
instruments, nor did it have a trading portfolio of investments.  At December
31, 2007, there were no material changes in the Corporation's market risk from
the information provided in the Form 10-K for the fiscal year ended March 31,
2007.

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 December 31, 2007, the Corporation's disclosure controls and
procedures were effective in ensuring that the information required to be
disclosed by the Corporation in the reports it files or submits under the Act
is (i) accumulated and communicated to the Corporation's management (including
the Chief Executive Officer and Chief Financial Officer) in a timely manner,
and (ii) recorded, processed, summarized, and reported within the time periods
specified in the SEC's rules and forms.

     In the three and nine months ended December 31, 2007, the Corporation did
not make any changes in its internal control over financial reporting (as
defined in Rule 13a-15(f) of the Exchange Act) that has materially affected,
or is reasonably likely to materially affect, the Corporation's internal
control over financial reporting.  While the Corporation believes the present
designs of its disclosure controls and procedures and internal control over
financial reporting are effective to achieve their goals, future events
affecting its business may cause the Corporation to modify its disclosure
controls and procedures and/or internal control over financial reporting.

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





23

<PAGE>



PART II.  OTHER INFORMATION


Item 1.   Legal Proceedings

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

Item 1A.  Risk Factors

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

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

     The Corporation's common stock is traded on the NASDAQ Global Securities
Market under the symbol "HRZB".  As of February 1, 2008, there were 11,950,878
shares of common stock outstanding.

Stock Repurchases

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

     The Corporation is "well-capitalized" in accordance with regulatory
standards.  The Corporation has had various stock buy-back programs since
August 1996.  In March 2007, the Board of Directors approved a new stock
repurchase plan that runs concurrent with the 2008 fiscal year, allowing the
Corporation to repurchase up to 5% of total shares outstanding, or
approximately 600,000 shares.  This marked the Corporation's ninth stock
repurchase plan.  During the quarter ended December 31, 2007, the Corporation
repurchased 133,200 shares at an average price of $17.32.

      The following table sets forth information, as adjusted, about the
Corporation's purchases of its outstanding Common Stock during the quarter
ended December 31, 2007.


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

October 1, 2007 -
 October 31, 2007       32,000          17.942       179,200       420,800
November 1, 2007 -
 November 30, 2007      83,200          17.067       262,400       337,600
December 1, 2007 -
 December 31, 2007      18,000          17.343       280,400       319,600
Total                  133,200          17.315       280,400       319,600

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

Item 3.  Defaults Upon Senior Securities
           None

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Item 4.  Submission of Matters to a Vote of Security Holders
            None

Item 5.  Other Information
           None

Item 6.  Exhibits

(a)      Exhibits
         --------
             (3.1)   Articles of Incorporation of Horizon Financial, Corp.
                     (incorporated by reference to Exhibit 3.1 to the
                     Registrant's Current Report on Form 8-K dated October 13,
                     1995)
             (3.2)   Bylaws of Horizon Financial Corp. (incorporated by
                     reference to Exhibit 3.2 to the Registrant's Current
                     Report on Form 8-K dated October 13, 1995)
            (10.1)   Amended and Restated Employment Agreement with V.
                     Lawrence Evans (incorporated by reference to the
                     Registrant's Annual Report on Form 10-K for the year
                     ended March 31, 1996)
            (10.2)   Deferred Compensation Plan (incorporated by reference to
                     the Registrant's Annual Report on Form 10-K for the year
                     ended March 31, 1996)
            (10.3)   Bank of Bellingham 1993 Employee Stock Option Plan
                     (incorporated by reference to Exhibit 99 to the
                     Registrant's Registration Statement on Form S-8 (File No.
                     33-88571)
            (10.4)   Severance Agreement with Dennis C. Joines (incorporated
                     by reference to the Registrant's Annual Report on Form
                     10-K for the year ended March 31, 2002)
            (10.5)   Severance Agreement with Richard P. Jacobson
                     (incorporated by reference to the Registrant's Quarterly
                     Report on Form 10-Q for the quarter ended June 30, 2002)
            (10.6)   Severance Agreement with Steven L. Hoekstra (incorporated
                     by reference to the Registrant's Quarterly Report on Form
                     10-Q for the quarter ended June 30, 2002)
            (10.7)   Stock Incentive Plan (incorporated by reference to
                     Exhibit 99 to the Registrant's Registration Statement on
                     Form S-8 (File No. 333-127178))
            (10.8)   Form of Incentive Stock Option Award Agreement under the
                     2005 Stock Incentive Plan (incorporated by reference to
                     Exhibit 99.1 contained in the Registrant's Current Report
                     on Form 8-K dated July 27, 2005)
            (10.9)   Form of Non-qualified Stock Option Award Agreement under
                     the 2005 Stock Incentive Plan (incorporated by reference
                     to Exhibit 99.1 contained in the Registrant's Current
                     Report on Form 8-K dated July 27, 2005)
            (10.10)  Form of Restricted Stock Award Agreement under the 2005
                     Stock Incentive Plan (incorporated by reference to
                     Exhibit 99.1 contained in the Registrant's Current Report
                     on Form 8-K dated July 27, 2005)
            (10.11)  Form of Salary Continuation Agreement between Horizon
                     Bank and Executive Officers Steven L. Hoekstra, Richard
                     P. Jacobson and Dennis C. Joines (incorporated by
                     reference to Exhibit 99.1 contained in the Registrant's
                     current Report on Form 8-K dated June 27, 2006)
            (10.12)  Amended Salary Continuation Agreement between Horizon
                     Bank and Richard P. Jacobson (incorporated by reference
                     to Exhibit 10.1 contained in the Registrant's Current
                     Report on Form 8-K dated January 23, 2008)
            (14)     Code of Ethics (incorporated by reference to the
                     Registrant's Annual Report on Form 10-K for the year
                     ended March 31, 2007)
            (31.1)   Certification of Chief Executive Officer Pursuant to
                     Section 302 of the Sarbanes-Oxley Act
            (31.2)   Certification of Chief Financial Officer Pursuant to
                     Section 302 of the Sarbanes-Oxley Act
            (32)     Certification of Chief Executive Officer and Chief
                     Financial Officer Pursuant to Section 906 of the
                     Sarbanes-Oxley Act



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                                    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/Richard P. Jacobson
                                   ------------------------------------
                                   Richard P. Jacobson
                                   President, Chief Executive Officer &
                                    Chief Financial Officer




                              Dated:    February 8, 2008




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                            Exhibit Index
                        -------------

Exhibit 31.1    Certification of Chief Executive Officer and 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





27

<PAGE>



                             Exhibit 31.1

                            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:  February 8, 2008               /s/Richard P. Jacobson
                                      ------------------------------------
                                      Richard P. Jacobson
                                      President, Chief Executive Officer &
                                        Chief Financial Officer




28

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                                 Exhibit 32



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

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

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

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


/s/Richard P. Jacobson
--------------------------------------
Richard P. Jacobson
President, Chief Executive Officer &
Chief Financial Officer


Dated February 8, 2008

29

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