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

                                 FORM 10-Q

                                (Mark One)

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

               For the quarterly period ended June 30, 2005
                                              -------------

                                    OR

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

     For the transition period from ______________ to __________________

                        Commission file number 0-27062

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

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

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

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

                                  98225
                               ---------
                               (Zip Code)

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

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

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

Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).

                               YES  X   NO
                                  -----   -----
As of August 1, 2005, 9,952,817 common shares, $1.00 par value, were
outstanding.

1

<PAGE>



                             HORIZON FINANCIAL CORP.

INDEX                                                                  PAGE
-----                                                                  -----


PART 1           FINANCIAL INFORMATION

Item 1           Financial Statements

                 Consolidated Statements of Financial Position           3

                 Consolidated Statements of Income                       4

                 Consolidated Statements of Stockholders' Equity         5

                 Consolidated Statements of Cash Flows                   6

                 Selected Notes to Consolidated Financial Statements    7-8

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

Item 3           Quantitative and Qualitative Disclosures About
                    Market Risk                                          15

Item 4           Controls and Procedures                               15-16

PART II          OTHER INFORMATION

Item 1           Legal Proceedings                                       17

Item 2           Unregistered Sales of Equity Securities and
                    Use of Proceeds                                      17

Item 3           Defaults Upon Senior Securities                         17

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

Item 5           Other Information                                       17

Item 6           Exhibits                                                18


                   SIGNATURES                                            19


2

<PAGE>




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

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

                               ASSETS
                                                   June 30,       March 31,
                                                    2005            2005
                                                 (unaudited)
                                              --------------   ------------


Cash and cash equivalents                     $   26,193,622   $ 23,250,411
Interest-bearing deposits                          5,343,481      3,907,349
Investment securities
 Available-for-sale                               61,757,444     71,824,994
 Held-to-maturity                                    369,633        369,596
Mortgage-backed securities
 Available-for-sale                               17,737,244     18,510,439
 Held-to-maturity                                    791,697        885,137
Federal Home Loan Bank Stock                       7,247,400      7,217,900
Loans receivable, net of allowance of
 loan losses of $12,448,195 at June 30
 and $11,767,029 at March 31                     843,103,870    804,980,578
Loans held for sale, at fair value                 4,120,760      4,068,859
Investment in real estate in a joint venture      16,760,055     17,204,265
Accrued interest and dividends receivable          4,633,408      4,498,756
Bank premises and equipment, net                  22,847,182     22,781,657
Deferred income tax receivables                    2,156,336      2,299,225
Income tax receivable                                      -        330,862
Other assets                                      14,896,012     15,440,447
                                              --------------   ------------
TOTAL ASSETS                                  $1,027,958,144   $997,570,475
                                              ==============   ============

               LIABILITIES AND STOCKHOLDERS' EQUITY


Deposits                                      $  772,728,110   $746,849,411
Accounts payable and other liabilities             4,584,487      5,570,071
Other borrowed funds                             122,985,775    119,066,193
Borrowing related to investment in real
 estate in a joint venture                        17,095,578     16,720,745
Advances by borrowers for taxes and insurance        214,807        518,774
Income tax currently payable                       1,185,437              -
Deferred compensation                              1,839,644      1,821,094
                                              --------------   ------------
     Total liabilities                           920,633,838    890,546,288
                                              --------------   ------------
COMMITMENTS AND CONTINGENCIES

STOCKHOLDERS' EQUITY
 Serial preferred stock, $1 par value,
   10,000,000 shares , authorized; none
   issued or outstanding                                   -              -
 Common stock, $1 par value, 30,000,000
   shares authorized; 9,948,787 and
   10,037,903 issued and outstanding,
   respectively                                    9,948,787     10,037,903
 Additional paid-in capital                       54,161,891     54,737,070
 Retained earnings                                39,626,309     38,939,268
 Unearned ESOP shares                                (72,101)       (72,101)
 Accumulated other comprehensive income,
   net of tax                                      3,659,420      3,382,047
                                              --------------   ------------
     Total stockholders' equity                  107,324,306    107,024,187
                                              --------------   ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY    $1,027,958,144   $997,570,475
                                              ==============   ============

             (See Notes to Consolidated Financial Statements)

3

<PAGE>




                           HORIZON FINANCIAL CORP.
                Consolidated Statements of Income (unaudited)

                                                    Three months ended
                                                          June 30,

                                                  2005             2004
                                               -----------      -----------
INTEREST INCOME
 Interest on loans                             $14,702,958      $11,065,554
 Interest on investments and mortgage-
  backed securities                                833,135        1,112,656
                                               -----------      -----------
   Total interest income                        15,536,093       12,178,210
                                               -----------      -----------
INTEREST EXPENSE
 Interest on deposits                            4,162,689        3,142,172
 Interest on other borrowings                    1,099,604          589,050
                                               -----------      -----------
   Total interest expense                        5,262,293        3,731,222
                                               -----------      -----------
   Net interest income                          10,273,800        8,446,988

PROVISION FOR LOAN LOSSES                          725,000          300,000
                                               -----------      -----------
   Net interest income after provision
    for loan losses                              9,548,800        8,146,988
                                               -----------      -----------
NONINTEREST INCOME
 Service fees                                      746,423          844,418
 Other                                             667,185          262,162
 Net gain on sales of loans - servicing
  released                                         296,793          335,104
 Net gain on sales of loans - servicing
  retained                                          13,686            9,983
 Net gain on sale of investment securities          42,184          317,311
                                               -----------      -----------
   Total noninterest income                      1,766,271        1,768,978
                                               -----------      -----------
NONINTEREST EXPENSE
 Compensation and employee benefits              3,431,611        3,010,924
 Building occupancy                                819,087          642,506
 Other expenses                                  1,448,028        1,178,639
 Data processing                                   217,712          192,478
 Advertising                                       169,978          189,274
                                               -----------      -----------
   Total noninterest expense                     6,086,416        5,213,821
                                               -----------      -----------
NET INCOME BEFORE PROVISION FOR INCOME TAX       5,228,655        4,702,145

PROVISION FOR INCOME TAX                         1,516,298        1,427,787
                                               -----------      -----------
NET INCOME                                     $ 3,712,357      $ 3,274,358
                                               ===========      ===========

BASIC EARNINGS PER SHARE                           $ .37            $ .32
                                                   =====            =====
DILUTED EARNINGS PER SHARE                         $ .37            $ .31
                                                   =====            =====
                  (See Notes to Consolidated Financial Statements)

4

<PAGE>




<TABLE>
                                     HORIZON FINANCIAL CORP.
                         Consolidated Statements of Stockholders' Equity
                            Three Months Ended June 30, 2005 and 2004
                                           (unaudited)
                                                                                        Accumu-
                                                                                        lated
                                                                                        Other
                            Common Stock                                                Compre-
                       ---------------------    Additional                Unearned      hensive   Treasury
                        Number of                 Paid-In     Retained      ESOP        Income      Stock
                         Shares       At Par      Capital     Earnings     Shares       (Loss)     at Cost
                       ---------  -----------  -----------  -----------  ---------   ----------  ----------

                   <c>         <c>          <c>          <c>          <c>         <c>         <c>
BALANCE, March 31,
 2004                10,405,331   $10,405,331 $56,893,824   $36,925,836  $(144,205)  $5,226,207  $        -
Comprehensive income
 Net income                   -             -           -     3,274,358          -            -           -
 Other comprehensive
  income
  Change in unrealized
   losses on available-
   for-sale securities,
   net taxes (benefit) of
   $(825,864)                 -             -           -             -           -  (1,603,148)          -
  Total other compre-
   hensive income             -             -           -             -           -           -
Comprehensive income          -             -           -             -           -           -           -
Cash dividends on
 common stock at
 $.13/sh                      -             -           -    (1,338,923)          -           -           -
Stock options exercised  23,079        23,079     157,151             -           -           -           -
Treasury stock purchased      -             -           -             -           -           -  (2,240,685)
Retirement of treasury
 stock                 (125,397)     (125,397)   (714,888)   (1,400,400)          -           -   2,240,685
                     ----------   ----------- -----------   -----------   ---------  ----------  ----------
BALANCE, June 30,
 2004                10,303,013   $10,303,013 $56,336,087   $37,460,871   $(144,205) $3,623,059  $        -
                     ==========   =========== ============  ===========   =========  ==========  ==========

BALANCE, March 31,
 2005                10,037,903   $10,037,903 $54,737,070   $38,939,268   $ (72,101) $3,382,047  $        -
Comprehensive income
 Net income                   -             -           -     3,712,357           -           -           -
 Other comprehensive
  income
  Change in unrealized
   gains on available-
   for-sale securities,
   net taxes of $142,889      -             -           -             -           -     277,373           -
  Total other compre-
   hensive income             -             -           -             -           -           -
Comprehensive income          -             -           -             -           -           -           -
Cash dividends on
 common stock at
 $.14/sh                      -             -           -    (1,393,397)          -           -           -
Stock options exercised  37,381        37,381     145,980             -           -           -           -
Treasury stock purchased      -             -           -             -           -           -  (2,479,575)
Retirement of treasury
 stock                 (126,497)     (126,497)   (721,159)   (1,631,919)          -           -   2,479,575
                     ----------   ----------- -----------   -----------   ---------  ----------  ----------
BALANCE, June 30,
 2005                 9,948,787   $ 9,948,787 $54,161,891   $39,626,309   $ (72,101) $3,659,420  $        -
                     ==========   =========== ===========   ===========   =========  ==========  ==========

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

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

                        <c>                  <c>
BALANCE, March 31, 2004     $109,306,993
Comprehensive income
 Net income                    3,274,358          $ 3,274,358
 Other comprehensive
  income
  Change in unrealized
   losses on available-
   for-sale securities,
   net taxes (benefit) of
   $(825,864)                 (1,603,148)          (1,603,148)
  Total other compre-                             -----------
   hensive income                      -           (1,603,148)
                                                  -----------
Comprehensive income                   -          $ 1,671,210
Cash dividends on                                 ===========
 common stock at $.13/sh      (1,338,923)
Stock options exercised          180,230
Treasury stock purchased      (2,240,685)
Retirement of treasury
 stock                                 -
                            ------------
BALANCE, June 30, 2004      $107,578,825
                            ============
BALANCE, March 31, 2005     $107,024,187
Comprehensive income
 Net income                    3,712,357          $ 3,712,357
 Other comprehensive
  income
  Change in unrealized
   gains on available-
   for-sale securities,
   net taxes of $142,889         277,373              277,373
  Total other compre-                             -----------
   hensive income                      -              277,373
                                                  -----------
Comprehensive income                   -          $ 3,989,730
Cash dividends on                                 ===========
 common stock at
 $.14/sh                      (1,393,397)
Stock options exercised          183,361
Treasury stock purchased      (2,479,575)
Retirement of treasury
 stock                                 -
                            ------------
BALANCE, June 30, 2005      $107,324,306
                            ============

                          (See Notes to Consolidated Financial Statements)

</TABLE>

5

<PAGE>




                        HORIZON FINANCIAL CORP.
          Consolidated Statements of Cash Flows (unaudited)
                                                        Three Months Ended
                                                             June 30,
                                                      2005            2004
                                                   ----------       ---------
CASH FLOWS FROM OPERATING ACTIVITIES
 Net income                                        $3,712,357      $3,274,358
Adjustments to reconcile net income to net
cash provided by operating activities
 Depreciation and amortization                        205,545          40,715
 Stock dividends - Federal Home Loan Bank stock       (29,500)        (69,700)
 Provision for loan losses                            725,000         300,000
Changes in assets and liabilities
 Accrued interest and dividends receivable           (134,652)         43,318
 Interest payable                                     514,125             990
 Net change in loans held for sale                    (51,901)     (1,944,170)
 Federal income tax (receivable) payable            1,516,299       1,027,787
 Other assets                                         544,435         437,145
 Other liabilities                                 (1,823,403)     (2,695,695)
                                                  -----------     -----------
   Net cash flows from operating activities         5,178,305         414,748
                                                  -----------     -----------
CASH FLOWS FROM INVESTING ACTIVITIES
 Investment in interest-bearing deposits, net      (1,436,132)     10,346,166
 Purchases of investment securities -
  available-for-sale                               (3,525,000)     (9,285,000)
 Proceeds from sales and maturities of
  investment securities - available-for-sale       14,022,411       8,597,946
 Purchases of mortgage-backed securities -
  available-for-sale                               (1,488,610)              -
 Proceeds from maturities of mortgage-backed
  securities - available-for-sale                   2,252,207       4,788,058
 Proceeds from maturities of mortgage-backed
   securities - held-to-maturity                       93,402         145,983
 Net change in loans                              (38,656,982)    (32,339,670)
 Purchases of bank premises and equipment            (462,383)     (1,874,755)
 Net change in investment in joint venture            444,210               -
                                                  -----------     -----------
   Net cash flows from investing activities       (28,756,877)    (19,621,272)
                                                  -----------     -----------
CASH FLOWS FROM FINANCING ACTIVITIES
 Net change in deposits                            25,878,699       9,659,706
 Advances from other borrowed funds                41,419,582      19,364,021
 Repayments of other borrowed funds               (37,500,000)     (7,000,000)
 Net change in borrowing related to
  inv. in real estate in a joint venture              374,833               -
 Common stock issued, net                             183,361         180,230
 Cash dividends paid                               (1,355,117)     (1,300,680)
 Treasury stock purchased                          (2,479,575)     (2,240,685)
                                                  -----------     -----------
   Net cash flows from financing activities        26,521,783      18,662,592
                                                  -----------     -----------
NET CHANGE IN CASH AND CASH EQUIVALENTS             2,943,211        (543,932)
CASH AND CASH EQUIVALENTS, beginning of period     23,250,411      18,431,964
                                                  -----------     -----------
CASH AND CASH EQUIVALENTS, end of period          $26,193,622     $17,888,032
                                                  ===========     ===========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION
 Cash paid during the period for interest         $ 4,748,168     $ 3,730,232
                                                  ===========     ===========
 Cash paid during the period for income tax       $         -     $   400,000
                                                  ===========     ===========

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


                       HORIZON FINANCIAL CORP.
         SELECTED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                   THREE MONTHS ENDED JUNE 30, 2005
                             (unaudited)

NOTE 1

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

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

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

     The unaudited consolidated financial statements have been prepared in
accordance with accounting principles generally accepted in the United States
of America for interim financial information and with the instructions to the
Form 10-Q and Rule 10-01 of Regulation S-X.  Accordingly, they do not include
all of the information and footnotes required by accounting principles
generally accepted in the United States of America for complete financial
statements.  In the opinion of management, all adjustments (consisting only of
normal recurring accruals) necessary for a fair presentation are reflected in
the interim financial statements.  The results of operations for the periods
ended June 30, 2005 and 2004 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, 2005.

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

     In January 2003, the Financial Accounting Standards Board (FASB) issued
FASB Interpretation No. (FIN) 46, Consolidation of Variable Interest Entities.
FIN 46 explains the concept of a variable interest entity and requires
consolidation by the primary beneficiary where the variable interest entity
does not have sufficient equity at risk to finance its activities without
additional subordinated financial support from other parties.  This
interpretation applies immediately to variable interest entities in which an
enterprise holds a variable interest.  In October 2004, the Bank's wholly
owned subsidiary, Westward Financial Services, Inc (Westward Financial),
entered into a real estate development joint venture with Greenbriar Northwest
LLC (GBNW), an established residential land development company headquartered
in Bellingham, Washington.  The Corporation believes that GBNW is a variable
interest entity.  Under FIN 46 GBNW is consolidated in the Corporation's
consolidated balance sheet.  The Corporation also accounts for the unowned
portion as a minority interest.  The investment in real estate is recorded as
an asset and the related debt is recorded as our liability.  The real estate
joint venture has a carrying amount of approximately $16.8 million, with a
related borrowing of approximately $17.1 million.

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

     Basic earnings per share (EPS) for the three months ended June 30, 2005
and 2004 are calculated on the basis of 9,997,738 and 10,360,624 weighted
average shares outstanding. Diluted EPS for the three months ended June 30,
2005 and 2004 are calculated on the basis of 10,110,326 and 10,524,783
weighted average shares outstanding, respectively.  Diluted EPS figures are
computed by determining the number of additional shares that are deemed
outstanding due to stock options and warrants under the treasury stock method.


Off-Balance Sheet Arrangements
------------------------------

     In the normal course of business, the Corporation makes off-balance sheet
arrangements, including credit commitments to its customers to meet their
financial needs.  These arrangements involve, to varying degrees, elements of

7

<PAGE>



credit and interest rate risk not recognized in the consolidated statement of
financial condition.  The Bank makes personal, commercial, and real estate
lines of credit available to customers as well as stand by letters of credit
or financial guarantees.  Commitments to extend credit to customers are
subject to the Bank's normal credit policies and are essentially the same as
those involved in extending loans to customers.  At June 30, 2005, there were
no material changes in the Corporation's off-balance sheet arrangements from
the information provided in the Form 10-K for the fiscal year ended March 31,
2005.

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

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

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

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

Pro forma disclosures:

                                            For the quarter ended June 30,
                                               2005                2004
                                            ----------           ----------
Net income as reported                      $3,712,357           $3,274,358
Additional compensation for fair
 value of stock options                        (16,589)             (11,932)
                                            ----------           ----------
Pro forma net income                        $3,695,768           $3,262,426
                                            ==========           ==========
Earnings per share
Basic
  As reported                                   $ .37                $.32
                                                =====                ====
  Pro forma                                     $ .37                $.31
                                                =====                ====

Diluted
 As reported                                    $ .37                $.31
                                                =====                ====
 Pro forma                                      $ .37                $.31
                                                =====                ====

8

<PAGE>



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


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

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

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

General
-------

     Horizon Financial was formed under Washington law on May 22, 1995, and
became the holding company for Horizon Bank effective October 13, 1995.
Effective June 19, 1999, the Corporation completed the acquisition of
Bellingham Bancorporation, whose wholly-owned subsidiary, Bank of Bellingham,
was merged with and into Horizon Bank.  At June 30, 2005, the Corporation had
total assets of $1.0 billion, total deposits of $772.7 million and total
stockholders' equity of $107.3 million.  The Corporation's business activities
generally are limited to passive investment activities and oversight of its
investment in the Bank.  Accordingly, the information set forth herein,
including the consolidated financial statements and related data, relates
primarily to the Bank and its subsidiary, Westward Financial.

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

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

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

9

<PAGE>



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

      The Corporation does not presently engage in any activities outside of
serving as a shell parent company for the Bank.  The primary business of the
Bank is to acquire funds in the form of deposits and wholesale funds, and to
use the funds to make commercial, consumer, and real estate loans in its
primary market area.  In addition, the Bank invests in a variety of investment
grade securities including, but not necessarily limited to U.S. Government and
federal agency obligations, mortgage-backed securities, corporate debt, equity
securities, and municipal securities.  The Bank intends to continue to fund
its assets primarily with retail and commercial deposits, although brokered
deposits, FHLB advances, and other wholesale borrowings, may be used as a
supplemental source of funds.

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

     Net interest income is also affected by the relative amounts of
interest-earning assets and interest-bearing liabilities.  When
interest-earning assets equal or exceed interest-bearing liabilities, any
positive interest rate spread will generate net interest income. The
Corporation's profitability is also affected by the level of the Bank's other
income and expenses.  Other noninterest income includes income associated with
the origination and sale of mortgage loans, loan servicing fees and net gains
and losses on sales of interest-earning assets.  Other noninterest expenses
include compensation and benefits, occupancy and equipment expenses, deposit
insurance premiums, data servicing expenses and other operating costs.  The
Corporation's results of operations are also significantly affected by general
economic and competitive conditions, particularly changes in market interest
rates, government legislation, regulation, and monetary and fiscal policies.

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

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

     Total consolidated assets for the Corporation as of June 30, 2005, were
$1.0 billion, a 3.1% increase from the March 31, 2005 level of $997.6 million.
This increase in assets was primarily a result of the growth in loans
receivable, which increased 4.7% to $843.1 million at June 30, 2005 from
$805.0 million at March 31, 2005.  This growth was primarily attributable to
the growth in commercial loans during this period, as the Bank continued its
practice of selling most of its single-family fixed rate loan production into
the secondary market.  The Bank sold $28.1 million of real estate loans during
the quarter ended June 30, 2005, compared to $30.8 million during the quarter
ended June 30, 2004.


<PAGE>
     The following is an analysis of the loan portfolio by major type of
loans:
                                          June 30,          March 31,
                                            2005              2005
                                         ---------         -----------
                                               (In thousands)

First mortgage loans
 1-4 Family                               $174,995           $174,457
 1-4 Family construction                    18,120             16,464
 Less participations sold                  (61,893)           (65,125)
                                          --------           --------
   Net first mortgage loans                131,222            125,796
Construction and land development          183,212            161,006
Residential commercial real estate          70,201             73,397
Non-residential commercial real estate     328,481            323,464
Commercial loans                            98,476             91,210
Home equity secured                         37,914             35,913
Other consumer loans                         6,046              5,962
                                          --------           --------
   Subtotal                                724,330            690,952
                                          --------           --------
10

<PAGE>


   Total Loans receivable                  855,552            816,748
                                         ---------           --------
Less:
  Allowance for loan losses                (12,448)           (11,767)
                                         ---------           --------
  Net Loans receivable                   $ 843,104           $804,981
                                         =========           ========

 Net residential loans                   $ 130,116  15%      $124,745  16%
 Net commercial loans                       96,661  12%        89,542  11%
 Net commercial real estate loans          573,069  68%       549,506  68%
 Net consumer loans                         43,258   5%        41,188   5%
                                         --------- ---       -------- ---
                                         $ 843,104 100%      $804,981 100%
                                         ========= ===       ======== ===

Also contributing to the change in assets was the decline in available for
sale (AFS) investment and mortgage-backed securities, which, combined,
decreased 12.0% to $79.5 million at June 30, 2005 from $90.3 million at March
31, 2005.

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

                                                                 Estimated
                                         Amortized      Net        Fair
                                           Cost     Gain/(Loss)    Value
                                       -----------  ----------   ------------
                                                  (In thousands)
AFS Securities
 State and political subdivisions
  and U.S. government agency
  securities                            $ 47,449      $(279)      $47,170
 Marketable equity securities              1,824      5,801         7,625
 Mutual funds                              5,000        (91)        4,909
 Corporate debt securities                 2,026         28         2,054
 Mortage-backed securities and
  Collateralized mortgage obligations
   (CMOs)                                 17,590        147        17,737
                                        --------   --------      --------
  Total available-for-sale securities     73,889      5,606        79,495
                                        --------   --------      --------
HTM Securities
 State and political subdivisions
  and U.S. government agency
  securities                                 370         13           383
 Mortgage-backed securities and
   CMOs                                      792         38           830
                                        --------   --------      --------
   Total held-to-maturity securities       1,162         51         1,213
                                        --------   --------      --------
   Total securities                     $ 75,051     $5,657       $80,708
                                        ========   ========      ========

                          Maturity Schedule of Securities at June 30, 3005
                      --------------------------------------------------------
                          Available-For-Sale             Held-To-Maturity
                      ---------------------------     ------------------------
                       Amortized      Estimated       Amortized     Estimated
                          Cost        Fair Value         Cost       Fair Value
                      ------------   ------------     ----------   -----------
Maturities:
 Less than one year    $  7,127       $  7,153        $     -       $     -
 One to five years       37,772         37,539          1,053         1,087
 Over five to ten years   5,059          5,042             10            10
 Over ten years          17,107         17,227             99           116
                       --------       --------        -------       -------
                         67,065         66,961          1,162         1,213
                       --------       --------        -------       -------
Mutual funds and
 marketable equity
 securities (liquid)      6,824         12,534              -             -
                       --------       --------        -------       -------
Total investment
 securities            $ 73,889       $ 79,495        $ 1,162       $ 1,213
                       ========       ========        =======       =======

     Total liabilities also increased 3.4% to $920.6 million at June 30, 2005,
from $890.5 million at March 31, 2005.    This increase in liabilities was the
result, in large part, of growth in deposits, which increased 3.5% to $772.7
million at June

11

<PAGE>



30, 2005 from $746.8 million at March 31, 2005.    The following is an
analysis of the deposit portfolio by major type of deposit at June 30, 2005
and March 31, 2005:
                                       June 30, 2005       March 31, 2005
                                       -------------      ---------------
                                                 (In thousands)
Demand deposits
 Savings                                  $ 37,184            $40,863
 Checking                                   79,242             83,268
 Checking (noninterest-bearing)             72,276             63,503
 Money Market                              130,723            134,761
                                        ----------         ----------
                                           319,425            322,395
                                        ----------         ----------
Time certificates of deposit
 Less than $100,000                        243,227            240,178
 Greater than or equal to $100,000         210,076            184,276
                                        ----------          ---------
                                           453,303            424,454
                                        ----------          ---------
Total deposits                          $  772,728          $ 746,849
                                        ==========          =========

     Also contributing to the growth was an increase in other borrowed funds
to $123.0 million at June 30, 2005 from $119.1 million at March 31, 2005.
During the quarter the Bank borrowed additional funds from the FHLB to help
manage interest rate risk and support asset growth.

     Also included in the June 30, 2005 balance sheet is an investment in real
estate for a joint venture and the corresponding borrowing.  During the year
ended March 31, 2005, Westward Financial as a 50% partner in the Greenbriar
Northwest LLC (GBNW), purchased an 85 acre parcel of land in Bellingham for
future development.  GBNW intends to develop the property in future years,
into a neighborhood community to be known as Fairhaven Highlands.   The $16.8
million shown on the Corporation's Consolidated Statements of Financial
Position as an asset at June 30, 2005 represents the current level of the
investment in real estate joint ventures, including the Fairhaven Highlands
joint venture.   The $17.1 million shown in the liability section of the
Consolidated Statements of Financial Position represents the corresponding
wholesale borrowing used to fund the investment in the Fairhaven Highlands
joint venture.  At this time, GBNW is in the process of meeting with the
appropriate public and private entities, in its preliminary planning efforts
relating to the future development of the property.

     Stockholders' equity at June 30, 2005 increased slightly to $107.3
million from $107.0 million at March 31, 2005.  This increase was primarily
attributable to the increase in accumulated other comprehensive income to $3.6
million at June 30, 2005 from $3.4 million at March 31, 2005.  The Corporation
remains strong in terms of its capital position, with a stockholder equity-
to-assets ratio of 10.4% at June 30, 2005, compared to 10.7% at March 31,
2005.

Liquidity and Capital Resources
-------------------------------

     The Bank maintains liquid assets in the form of cash and short-term
investments to provide a source to fund loans, savings withdrawals, and other
short-term cash requirements.  At June 30, 2005, the Bank had liquid assets
(cash and marketable securities with maturities of one year or less) with a
book value of $51.2 million.

     As of June 30, 2005 the total book value of investments and
mortgage-backed securities was $75.1 million compared to a market value of
$80.7 million with an unrealized gain of $5.7 million.  As of March 31, 2005,
the total book value of investments and mortgage-backed securities was $86.4
million, compared to a market value of $91.6 million with an unrealized gain
of $5.2 million.   The Bank foresees no factors that would impair its ability
to hold debt securities to maturity.
     As indicated on the Corporation's Consolidated Statement of Cash Flows,
the Bank's primary sources of funds are cash flow from 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: 1) selling additional loans in
the secondary market; 2) entering into reverse repurchase agreements; 3)
borrowing from the FHLB of Seattle; 4) accepting additional jumbo, brokered
and/or public funds deposits; or 5) accessing the discount window of the
Federal Reserve Bank of San Francisco.

     Stockholders' equity as of June 30, 2005 was $107.3 million, or 10.4% of
assets, compared to $107.0, or 10.7% of assets at March 31, 2005.  The Bank
continues to exceed the 5.0% minimum tier one capital required by the FDIC in
order to

12

<PAGE>




be considered well capitalized.  The Bank's total risk-adjusted capital ratio
as of June 30, 2005 was 13.2%, compared to 13.7% as of March 31, 2005.  These
figures are well above the well-capitalized minimum of 10% set by the FDIC.

     The Corporation has had various stock buy-back programs since August
1996.  In March 2005, the Board of Directors approved a new stock repurchase
plan that runs concurrent with the 2006 fiscal year, allowing the Corporation
to repurchase up to 10% of total shares outstanding, or approximately 1.0
million shares.  This marked the Corporation's seventh stock repurchase plan.
During the quarter ended June 30, 2005, the Corporation repurchased 126,497
shares at an average price of $19.55.

     Management intends to continue its stock buy-back programs from time to
time as long as repurchasing the stock is perceived to contribute to the
overall growth of shareholder value.   The number of shares of stock that will
be repurchased and the price that will be paid is the result of many factors,
several of which are outside of the control of 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, and
the Corporation's liquidity and capital needs and regulatory requirements.
Presently, it is management's belief that purchases made under the current
Board approved plan will not materially affect the Corporation's capital or
liquidity position.

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

     Net interest income for the three months ended June 30, 2005 increased
21.6% to $10.3 million from $8.4 million in the same time period of the
previous year.  Interest on loans for the quarter ended June 30, 2005
increased 32.9% to $14.7 million, from $11.1 million for the comparable
quarter a year ago.  Interest and dividends on investments and mortgage-backed
securities for the three months ended June 30, 2005 decreased 25.1% to
$833,000, from $1.1 million for the comparable quarter a year ago.  This
decrease was a result of a lower level of investments and mortgage backed
securities outstanding during the respective periods, as average total
investments decreased 28.0% to $90.4 million at June 30, 2005 as compared to
$125.6 million at June 30, 2004.  Total interest income decreased 27.6% to
$15.5 million at June 30, 2005 from $12.2 million in the comparable period one
year ago.  At June 30, 2005, the Bank held $7.2 million in FHLB of Seattle
stock and received dividends in the amount of $29,500 during the quarter ended
June 30, 2005 as compared to $70,000 in the comparable quarter one year ago.
On May 18, 2005, the FHLB of Seattle announced a three-year dividend
suspension; therefore, the Bank's investment income will be reduced
accordingly during said period.

     Total interest paid on deposits increased 32.5% to $4.2 million at June
30, 2005 from $3.1 million at June 30, 2004 as a result of an increased level
of deposits outstanding along with a moderate increase in interest rates in
the current period.  Interest on borrowings increased 86.7% to $1.1 million
during the quarter ended June 30, 2005, compared to $589,000 for the
comparable period one year ago.  The increased expense in the current year was
a result of a higher level of borrowings outstanding, as a portion of the
Bank's loan portfolio growth was funded with wholesale borrowings. The Bank
continues to carry wholesale borrowings in order to further leverage its
balance sheet and better manage its interest rate risk profile.

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

Average balances as of:          June 30, 2005          June 30, 2004
                                --------------         ---------------
                                           (In thousands)

 Loans                            $ 827,113                 $ 675,607
 Investments                         90,422                   125,556
                                  ---------                 ---------
 Total interest-earning assets      917,535                   801,163

 Deposits                         $ 750,833                 $ 674,058
 Borrowings                         126,043                    68,162
                                  ---------                 ---------
 Total interest-bearing
  liabilities                       876,876                   742,220

 Average assets                   1,012,764                   868,081
 Average stockholders' equity       107,174                   108,443

13

<PAGE>



Weighted average interest rates as of:     June 30, 2005    June 30, 2004
                                           -------------    -------------


 Yield on loans                                 7.11%           6.55%
 Yield on investments                           3.70%           3.55%
                                            --------         -------
 Yield on interest-earning assets               6.77%           6.08%

 Cost of deposits                               2.22%           1.87%
 Cost of borrowings                             3.45%           3.47%
                                            --------         -------
 Cost of interest-bearing liabilities           2.41%           2.02%

 Net interest spread                            4.37%           4.06%
 Net interest margin                            4.48%           4.22%

Provision for losses on loans
-----------------------------

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

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

 Allowance at  beginning of period           $ 11,767       $ 10,122
 Provision for loan losses                        725            300
 Charge offs (net of recoveries)                  (44)           112
                                             --------       --------
 Allowance at  end of period                 $ 12,448       $ 10,534
 Allowance for loan losses as a
   percentage of net loans receivable
   at the end of the period                     1.48%          1.53%

 Net charge-offs as a percentage of average
   Loans outstanding during the period          0.007%         0.017%


     The provision for loan losses was $725,000 for the quarter ended June 30,
2005 compared to $300,000 for the quarter ended June 30, 2004.  This change
resulted from management's ongoing analysis of the growth of the loan
portfolio, changes in loan portfolio composition by collateral categories,
overall credit quality of the portfolio, peer group analysis, and current
economic conditions.  The allowance for loan losses was $12.4 million, or 1.5%
of net loans receivable at June 30, 2005, compared to $10.5 million, or 1.5%
of net loans receivable at June 30, 2004.  The increased allowance level
resulted from continued loan portfolio growth in the higher-risk lending
categories of commercial and multi-family construction/permanent loans and
business loans during the period, which comprised $669.7 million, or 79.5% of
the portfolio at June 30, 2005, versus $546.9 million, or 79.2% at June 30,
2004.

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

     As of June 30, 2005, there were nine loans on nonaccrual status.  At June
30, 2005 total non-performing loans were $1.3 million.  The Bank had no real
estate owned at June 30, 2005.  Total non-performing assets represented $1.3
million, or .13% of total assets at June 30, 2005 compared to $196,000, or
0.02% of total assets at June 30, 2004.  The non-performing figures for June
30, 2005 include one delinquent residential real estate loan in the amount of
$964,000.  The Bank does not anticipate incurring a material loss from this
loan.

14

<PAGE>




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

 Accruing loans - 90 days past due    $      -          $     133
 Non-accrual loans                       1,287                  -
                                      --------           --------
 Total non-performing loans              1,287                133
 Total non-performing loans/net loans     0.15%              0.02%
 Real estate owned                           -                 63
                                      --------           --------
 Total non-performing assets             1,287                196
                                      --------           --------
 Total non-performing assets/
  total assets                            0.13%              0.02%

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

     Noninterest income for the three months ended June 30, 2005 was
essentially unchanged at $1.8 million as compared to same period a year ago.
Service fee income decreased 11.6% to $746,000 for the quarter ended June 30,
2005 from $844,000 for the same quarter in the prior period.  The primary
reason for the increased income in the prior year was recognition of
prepayment penalties on two commercial loans.  The net gain on the sale of
loans servicing released decreased to $297,000 for the quarter ended June 30,
2005 from $335,000 in the comparable period one year ago. A more active
mortgage market was the primary reason for the increased amount in the prior
year.  The net gain on sales of investment securities decreased to $42,000 in
the quarter ended June 30, 2005 from $317,000 in the quarter ended June 30,
2004.  The gains in the prior period were primarily attributable to the sale
of selected securities from the Bank's investment portfolio.  Other
noninterest income for the quarter increased 154.5% to $667,000 for the
quarter ended June 30, 2005 from $262,000 for the three months ended June 30,
2004.  The primary reason for the increase in the current period was the
recognition of approximately $320,000 in profits on a real estate development
project from a joint venture of the Bank's wholly owned subsidiary, Westward
Financial.

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

     Noninterest expense for the three months ended June 30, 2005 increased
16.7% to $6.1 million from $5.2 million for the comparable quarter one year
ago.  Compensation and employee benefits increased 14.0% for the quarter ended
June 30, 2005 to $3.4 million from $3.0 million for the comparable quarter one
year ago.  The increase in compensation and employee benefits was primarily a
result of the overall growth in employment at the Bank, including staffing for
the Bank's recently opened Marysville and Lakewood offices.

     Building occupancy for the quarter ended June 30, 2005 increased 26.3% to
$819,000 from $649,000 for the three months ended June 30, 2004.  The primary
reason for the increase in the current period was the opening of two full
service retail offices located in Marysville and Lakewood.  Data processing
expenses increased 13.1% to $218,000 for the quarter ended June 30, 2005 from
$192,000 for the comparable quarter one year ago, primarily as a result of
increased core processing costs in the current period subsequent to the Bank's
core processor conversion in November 2004.  Advertising and marketing
expenses for the quarter ended June 30, 2005 decreased 10.2% to $170,000 from
$189,000 in the comparable quarter one year ago.  Other noninterest expense
increased 22.9% to $1.4 million from $1.2 million in the quarter ended June
30, 2004 as a result of additional expenses related to the Bank's charter
conversion, state regulatory exam, and increased Business & Occupation tax due
to the shifting loan portfolio from non-taxable mortgage loans to taxable
commercial loans.

Item 3.   Quantitative and Qualitative Disclosures About Market Risk

     The Corporation continues to be exposed to interest rate risk.
Currently, the Corporation's assets and liabilities are not materially exposed
to foreign currency or commodity price risk.  At June 30, 2005, the
Corporation had no off-balance sheet derivative financial instruments, nor did
it have a trading portfolio of investments.  At June 30, 2005, there were no
material changes in the Corporation's market risk from the information
provided in the Form 10-K for the fiscal year ended March 31, 2005.

Item 4.   Controls and Procedures

(a) Evaluation of Disclosure Controls and Procedures
----------------------------------------------------

     An evaluation of the Corporation's disclosure controls and procedures (as
defined in Section 13(a)-15(e) or 15(d)-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

15

<PAGE>




management as of the end of the period preceding the filing date of this
quarterly report.  The Corporation's Chief Executive Officer and Chief
Financial Officer concluded that the Corporation's disclosure controls and
procedures as currently in effect are effective in ensuring that the
information required to be disclosed by the Corporation in the reports it
files or submits under the Act is (i) accumulated and communicated to the
Corporation's management (including the Chief Executive Officer and Chief
Financial Officer) in a timely manner, and (ii) recorded, processed,
summarized, and reported within the time periods specified in the SEC's rules
and forms.

(b) Changes in Internal Controls
--------------------------------

     In the quarter ended June 30, 2005, the Corporation did not make any
significant changes in, nor take any corrective actions regarding, its
internal controls or other factors that could significantly affect these
controls.  While the Corporation believes the present design of its disclosure
controls and procedures is effective to achieve its goal, future events
affecting its business may cause the Corporation to modify its disclosure
controls and procedures.

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

16

<PAGE>




PART II.  OTHER INFORMATION

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

Item 2.   Unregistered Sales of Securities and Use of Proceeds

The Corporation's common stock is traded on the NASDAQ National Market under
the symbol "HRZB".  As of August 1, 2005, there were 9,952,817 shares of
common stock outstanding.

Stock Repurchases

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

     The Corporation is "well-capitalized" in accordance with regulatory
standards.  The Corporation has had various stock buy-back programs since
August 1996.  In March 2005, the Board of Directors approved a new stock
repurchase plan that runs concurrent with the 2006 fiscal year, allowing the
Corporation to repurchase up to 10% of total shares outstanding, or
approximately 1.0 million shares.  This marked the Corporation's seventh stock
repurchase plan.  During the quarter ended June 30, 2005, the Corporation
repurchased 126,497 shares at an average price of $19.552.

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


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


April 1, 2005 -
 April 30, 2005             -              -            -         1,000,000

May 1, 2005 -
 May 31, 2005          88,408         19.135        88,408          911,592

June 1, 2005 -
 June 30, 2005         38,089         20.520       126,497          873,503

Total                 126,497         19.552       126,497          873,503

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

Item 3.  Defaults Upon Senior Securities
            None

Item 4.  Submission of Matters to a Vote of Security Holders
            None
Item 5.  Other Information
            None


17

<PAGE>



Item 6.  Exhibits

(a)      Exhibits
         --------
         (3.1)    Articles of Incorporation of Horizon Financial, Corp.
                 (incorporated by reference to Exhibit 3.1 to the
                  Registrant's Current Report on Form 8-K dated October 13,
                  1995)
         (3.2)    Bylaws of Horizon Financial Corp. (incorporated by reference
                  to Exhibit 3.2 to the Registrant's Current Report on Form
                  8-K dated October 13, 1995)
        (10.1)    Amended and Restated Employment Agreement with V. Lawrence
                  Evans (incorporated by reference to the Registrant's Annual
                  Report on Form 10-K for the year ended March 31, 1996)
        (10.2)    Deferred Compensation Plan (incorporated by reference to the
                  Registrant's Annual Report on Form 10-K for the year ended
                  March 31, 1996)
        (10.3)    1986 Stock Option and Incentive Plan (incorporated by
                  reference to Exhibit 99.1 to the Registrant's Registration
                  Statement on Form S-8 (File No. 33-99780))
        (10.4)    1995 Stock Option Plan (incorporated by reference to Exhibit
                  99.2 to the Registrant's Registration Statement on Form S-8
                  (File No. 33-99780))
        (10.5)    Bank of Bellingham 1993 Employee Stock Option Plan
                  (incorporated by reference to Exhibit 99 to the Registrant's
                  Registration Statement on Form S-8 (File No. 33-88571))
        (10.6)    Severance Agreement with Dennis C. Joines (incorporated by
                  reference to the Registrant's Annual Report on Form 10-K for
                  the year ended March 31, 2004)
        (10.7)    Severance Agreement with Richard P. Jacobson (incorporated
                  by reference to the Registrant's Quarterly Report on Form
                  10-Q for the quarter ended June 30, 2002)
        (10.8)    Severance Agreement with Steven L. Hoekstra (incorporated by
                  reference to the Registrant's Quarterly Report on Form 10-Q
                  for the quarter ended June 30, 2002)
        (10.9)    2005 Incentive Stock Plan (incorporated by reference to
                  Exhibit 99 to the Registrant's Registration Statement on
                  Form S-8 (File No. 333-127178))
        (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

18

<PAGE>


                                    SIGNATURES

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



                         HORIZON FINANCIAL CORP.



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


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



                         Dated:  August 4, 2005
                                 --------------

19

<PAGE>




                             Exhibit 31.1

                            Certification


I, V. Lawrence Evans, certify that:

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

   2.   Based on my knowledge, this report does not contain any untrue
        statement of a material fact or omit to state a material fact
        necessary to make the statements made, in light of the circumstances
        under which such statements were made, not misleading with respect to
        the period covered by this report;

   3.   Based on my knowledge, the financial statements, and other financial
        information included in this report, fairly present in all material
        respects the financial condition, results of operations and cash flows
        of the registrant as of, and for, the periods presented in this
        report;

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

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

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

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

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

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

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

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

Date:  August 4, 2005
                                 /s/V. Lawrence Evans
                                 -------------------------------------
                                 V. Lawrence Evans
                                 Chairman, President, and Chief Executive
                                 Officer

20

<PAGE>



                             Exhibit 31.2

                            Certification

I, Richard P. Jacobson, certify that:

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

   2.   Based on my knowledge, this report does not contain any untrue
        statement of a material fact or omit to state a material fact
        necessary to make the statements made, in light of the circumstances
        under which such statements were made, not misleading with respect to
        the period covered by this report;

   3.   Based on my knowledge, the financial statements, and other financial
        information included in this report, fairly present in all material
        respects the financial condition, results of operations and cash flows
        of the registrant as of, and for, the periods presented in this
        report;

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

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

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

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

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

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

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

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



Date: August 4, 2005
                                     /s/Richard P. Jacobson
                                     ----------------------------------
                                     Richard P. Jacobson
                                     Chief Financial Officer, EVP

21

<PAGE>



                            Exhibit 32



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

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

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

      2.  the information contained in the report fairly presents, in all
          material respects, the company's financial condition and results of
          operations.


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

Dated:  August 4, 2005


22

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