SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

                                   FORM 10-KSB
(Mark One):

[X]       ANNUAL REPORT  PURSUANT TO SECTION 13 OR 15 (d) OF THE  SECURITIES
          EXCHANGE ACT OF 1934 For the fiscal year ended June 30, 1997, 
                                                         -------------

[ ]       TRANSITION  REPORT  PURSUANT TO SECTION 13 OR 15(d) OF THE  SECURITIES
          EXCHANGE ACT OF 1934 For the  transition  period from               to
                                                               ---------------
          ---------------

Commission File No. 0-25884

                             REDWOOD FINANCIAL, INC.
                 ----------------------------------------------
                 (Name of Small Business Issuer in Its Charter)

Minnesota                                                       41-1807233
---------------------------------------------               --------------------
(State or Other Jurisdiction of Incorporation               I.R.S.    Employer
or Organization)                                            Identification No.

301 South Washington Street (P.O. Box 317), Redwood Falls, Minnesota  56283-0317
--------------------------------------------------------------------  ----------
(Address of Principal Executive Offices)                              (Zip Code)

Issuer's Telephone Number, Including Area Code:              (507) 637-8730
                                                             --------------

Securities registered pursuant to Section 12(b) of the Act:                None
                                                                           ----

Securities registered pursuant to Section 12(g) of the Act:

                     Common Stock, par value $0.10 per share
                                (Title of Class)

         Check  whether  the issuer:  (1) has filed all  reports  required to be
filed by Section 13 or 15(d) of the  Securities  Exchange Act of 1934 during the
past 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 [ ].

         Check if there is no  disclosure  of  delinquent  filers in response to
Item 405 of  Regulation  S-B contained in this form,  and no disclosure  will be
contained,  to the best of the  registrant's  knowledge,  in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB. [X]

         State issuer's revenues for its most recent fiscal year. $3,923,233

         The aggregate  market value of the voting stock held by  non-affiliates
of the registrant,  based on the average bid and asked price of the registrant's
Common  Stock on September 2, 1997,  was  $7,389,291  ($11.50 per share based on
642,547 shares of Common Stock held by non-affiliates).

         As of  September  2, 1997,  there were  issued  (1,125,000  shares) and
outstanding 961,875 shares of the registrant's Common Stock.

Transition Small Business Disclosure Format (check one) YES [ ] NO [X]

                       DOCUMENTS INCORPORATED BY REFERENCE

         1.    Portions of the Annual Report to  Stockholders  for the Fiscal
               Year ended June 30, 1997. (Part II)

         2.    Portions  of the Proxy  Statement  for the  Annual  Meeting of
               Stockholders. (Part III)


<PAGE>



PART I

Item 1.  Business
-----------------

Business of the Company

         Redwood  Financial,  Inc. (the  "Company")  is a Minnesota  corporation
organized in January 1995 at the direction of Redwood Falls Federal  Savings and
Loan  Association  (the  "Association")  in  connection  with the  Association's
conversion  from the mutual to stock form (the  "Conversion").  On July 7, 1995,
the Association completed its conversion and became a wholly owned subsidiary of
the Company.  The Company is a unitary  savings and loan holding  company which,
under  existing  laws,  generally  is not  restricted  in the types of  business
activities in which it may engage provided the  Association  retains a specified
amount of its  assets in  housing-related  investments.  At June 30,  1997,  the
Company had total assets of $62.2 million,  total deposits of $46.1 million, and
stockholders' equity of $12.3 million. The primary activity of the Company is to
hold all of the  outstanding  capital  stock of the  Association,  however,  the
Company  maintains  a small  investment  and loan  portfolio  separate  from its
investment in the Association.

Business of the Association

         The  Association  is a  federally  chartered  stock  savings  and  loan
association  headquartered  in Redwood Falls,  Minnesota.  The  Association  was
founded in 1924 under the name Redwood Falls Building and Loan Association.  The
Association  changed its name to Redwood Falls Savings and Loan  Association  in
1948. The Association obtained a federal charter in 1982 and changed its name to
Redwood Falls Federal Savings and Loan  Association.  The Association is subject
to examination and comprehensive  regulation by the Office of Thrift Supervision
("OTS") and its deposits have been federally insured by the Savings  Association
Insurance  Fund  ("SAIF")  and its  predecessor,  the  Federal  Savings and Loan
Insurance Corporation ("FSLIC"), since 1958. The Association is a member of, and
owns capital stock in, the Federal Home Loan Bank ("FHLB") of Des Moines,  which
is one of the 12 regional banks in the FHLB System.

         The  Association  attracts  deposits  from the  public  and  uses  such
deposits primarily to purchase  investment  securities and  mortgage-backed  and
related  securities and to originate loans secured by mortgages on single family
residences in its market area. For this mortgage loan portfolio, the Association
originates and retains fixed and adjustable  rate loans,  and fixed rate balloon
loans. The Association also originates commercial real estate loans and consumer
loans.  The  Association   originates  a  limited  number  of  multi-family  and
residential  construction  loans. The Association  also  participates in several
commercial, commercial real estate, and agricultural loans.

         The principal sources of funds for the Association's lending activities
are  deposits  and the  amortization,  repayment,  and  maturity  of  loans  and
investment  securities.  The Association  also obtains funds from FHLB Advances.
The  Association  does not rely on brokered  deposits,  however,  a  substantial
portion of the Association's  deposits are funds from local government entities.
Principal sources of income are interest on loans,  mortgage-backed  and related
securities,  and investment securities.  The Association's  principal expense is
interest paid on deposits.

Market Area and Competition

         The  Association's  market area consists of a major portion of Renville
County and northern Redwood County, Minnesota. This area is primarily rural with
a large amount of  agri-business.  The primary lending  concentration  is in the
Association's market area, an area mainly comprised of the cities

                                        2

<PAGE>



of Redwood Falls and Olivia, both of which are county seats and have populations
of approximately 5,000 and 2,800, respectively. Historically, the economy in the
Association's  market area has been  dependent on  agriculture  and  agriculture
related  industries.  However,  one of the largest  employers  in this area is a
manufacturer  of peripheral  parts for computers.  In recent years, a casino has
had an important economic impact on the area providing  employment and promoting
tourism.  Employment  is also provided by city and county  governments,  through
their need for administrative and hospital workers.

Lending Activities

         General.  The  Company's  loan  portfolio   predominantly  consists  of
mortgage  loans  secured by single  family  residences.  The Company  also makes
commercial real estate,  consumer,  residential  construction,  and multi-family
real  estate  loans.  From  time  to  time,  the  Company  will  participate  in
agricultural real estate loans and, agricultural  operating and commercial loans
not secured by real estate.

         Most of the Company's loan portfolio is secured by first mortgage loans
on one- to four-family residences.  For its mortgage loan portfolio, the Company
originates and retains both fixed-rate and  adjustable-rate  loans.  The Company
does not sell mortgage loans into the secondary market.  The Company's  consumer
loan  portfolio  consists  primarily  of savings  account  loans and to a lesser
extent other  consumer  loans.  The Company's  commercial  real estate loans are
secured by multi-family residential apartment buildings, health care facilities,
office  buildings,  and retail  establishments.  Agricultural  loans include two
participations  with a local  area bank  secured  by real  estate and other farm
related collateral.

         Analysis of Loan Portfolio.  The following table sets forth information
concerning the composition of the Company's loan portfolio in dollar amounts and
in percentages of the loan  portfolio  (before  deductions for loans in process,
deferred loan fees and discounts, and allowance for loan losses) as of the dates
indicated.

<TABLE>
<CAPTION>
                                                                       At June 30,
                                       ---------------------------------------------------------------------
                                                     1997                                  1996
                                       --------------------------------     --------------------------------
                                            Amount       Percentage            Amount             Percentage
                                                                   (Dollars in thousands)
<S>                                       <C>             <C>                  <C>                 <C>   
Real estate loans:
  Residential (1-4 family)..........       $18,577         89.46%               $15,233             92.24%
  Residential construction..........           502          2.42                    220               1.33
  Multi-family......................           174          0.84                     --                 --
  Multi-family construction.........           980          4.72                    189               1.15
  Commercial........................           680          3.27                    520               3.15
  Agricultural......................           150          0.72                     --                 --
Consumer loans:                                                                     
  Other consumer loans..............            21          0.10                     --                 --
  Savings account...................           133          0.64                    141               0.85
Commercial..........................           715          3.44                    775               4.69
Agricultural operating..............           425          2.05                     --                 --
                                           -------        -------               -------            -------
Total...............................        22,357        107.66                 17,078             103.41
Less:                                      
  Loans in process..................        (1,361)        (6.56)                  (333)             (2.01)
  Deferred loan fees and discounts..           (16)        (0.08)                   (18)             (0.11)
  Allowance for loan losses.........          (213)        (1.02)                  (213)             (1.29)
                                           -------        -------                ------             ------
Total loans, net....................       $20,767        100.00%               $16,514             100.00%
                                            ======        =======                ======            =======

</TABLE>


                                        3

<PAGE>



         The Company  primarily  originates loans for retention in its portfolio
and has not purchased whole loans or sold loans during the past three years.

                                        4

<PAGE>



         Loan Maturity  Tables.  The following  table sets forth the maturity of
Company's  loan  portfolio  at  June  30,  1997.  The  table  does  not  include
prepayments or scheduled principal  repayments.  Adjustable-rate  mortgage loans
are shown as maturing based on contractual maturities.

<TABLE>
<CAPTION>
                 One- to Four-  Multi-    
                   Family      Family     Residential Multi-Family  Commercial Agricultural
                 Residential Real Estate Construction Construction Real Estate  Real Estate Consumer Commercial Agricultural  Total
                 ----------- ----------- ------------ ------------ -----------  ----------- -------- ---------- ------------  -----
                                                                      (In thousands)                                  
<S>                <C>         <C>          <C>          <C>          <C>        <C>         <C>       <C>          <C>     <C>
Amounts Due:                                                                                                    
  Within 1 year.   $ 3,689     $  123       $  --        $  --        $    83    $   150     $  133    $            $       $ 4,178
  1 to 5 years..    12,060         51          --           --            419         --         21                          12,551
  After 5 years.     2,833          0         502          980            178         --                  710         425     5,628
                    ------       ----        ----         ----         ------      -----      -----     -----        ----    ------
Total amount due   $18,582     $  174       $ 502        $ 980        $   680    $   150     $  154    $  710       $ 425   $22,357
                    ======       ====        ====         ====         ======      =====      =====     =====        ====   =======
                                                                                                                                    

</TABLE>



                                        5

<PAGE>



         The following table sets forth the dollar amount of all loans due after
June 30, 1998, which have pre-determined  interest rates and which have floating
or adjustable interest rates.

                                                        Floating or
                                         Fixed-rates  Adjustable Rates    Total
                                         -----------  ----------------    -----
                                                      (In thousands)
1-4 Family residential..................     $8,518         $6,375      $14,893
Multi-family real estate................         51              0           51
Residential construction................        282            220          502
Multi-family construction...............         --            980          980
Commercial real estate..................        385            212          597
Agricultural real estate................        150             --            0
Consumer................................         21             --           21
Commercial..............................        417            293          710
Agricultural............................        425             --          425
                                             ------         ------       ------
  Total.................................    $10,099         $8,080      $18,179
                                             ======          =====       ======
                                               

         One-to Four-Family Residential Loans. The Association's primary lending
activity consists of the origination of one- to four-family residential mortgage
loans secured by property located in the Association's  primary market area. The
Association generally originates one- to four-family  residential first mortgage
loans without private  mortgage  insurance in amounts up to 80% of the lesser of
the appraised value or selling price of the mortgaged property.  The Association
will not  originate  any loan which  exceeds 95% of the lesser of the  appraised
value or the  selling  price of the  property  and  typically  requires  private
mortgage  insurance on any loans in excess of 80% of the value of the  mortgaged
property.  The  Association  also  originates  home equity loans  (e.g.,  second
mortgage  loans) up to 90% of the appraised value on an aggregate basis with all
other mortgages without private mortgage insurance.

         In order to  maintain  interest-rate  risk at  acceptable  levels,  the
Association originates primarily fixed-rate, balloon mortgage loans that provide
for an amortization of up to 30 years,  but which typically  mature after 5 to 7
years.  Provided the borrower  demonstrates  acceptable  repayment ability,  the
Association will usually  refinance the balloon mortgage loan at maturity at the
then current  market rate of interest.  Among other factors,  the  Association's
refinancing of these loans is dependent  upon adequate  collateral  value.  From
time to time, the Association will originate fixed-rate loans with maturities of
up to 30 years.  The  Association  monitors the level of this type of long-term,
fixed-rate lending in order to control  interest-rate risk. Many of the existing
loans that do not reprice within 5 years were originated more than 10 years ago,
before the Association  de-emphasized  the origination of long-term,  fixed-rate
loans.

         The  Association  also  offers   adjustable-rate  loans,  although  the
majority of its recent loan production has been in fixed-rate balloon loans. The
Association's  adjustable-rate mortgage loans provide for periodic interest-rate
adjustments of 1% to 2% with a maximum  adjustment  over the life of the loan of
between 5% and 6%. Typically,  the interest rate on these loans adjusts every 1,
3, or 5 years,  and  provides  for  amortization  over a 15- to 30-year  period.
Indices used in the origination of  adjustable-rate  mortgage loans include both
U.S. Treasury securities and a national cost of funds index.

         Interest rates charged on mortgage loans are competitively priced based
on market conditions and the  Association's  cost of funds. The origination fees
for loans are  generally 1% of the loan  amount.  Generally,  the  Association's
standard  underwriting  guidelines  for  fixed-rate  mortgage  loans  conform to
Federal Home Loan Mortgage Corporation ("FHLMC")  guidelines.  It is the current
policy of the

                                        6

<PAGE>



Association  to  originate  loans  solely for its loan  portfolio.  However,  if
favorable  market  conditions  exist,  the Association may originate  long-term,
fixed-rate loans for sale in the secondary mortgage market. The Association will
continue to emphasize  short-term or  adjustable-rate  mortgage loans consistent
with its asset/liability  management strategy. At June 30, 1997, the Association
did not service loans for others.

         Consumer  Loans.  Consumer  loans are primarily  made when secured by a
savings account in the Association. These loans generally have rates that adjust
with the rate on the  underlying  account and are typically at least one percent
above the rate on the  underlying  account.  Savings  account  loans are offered
subject to a 90%  loan-to-value  ratio.  The  Association  is in the  process of
expanding its consumer loan program to include auto, unsecured,  and other forms
of consumer lending. At June 30, 1997, the Association's  balance in these other
consumer loans totaled $21,000.  Although the Association also makes home equity
loans,  these  loans  are  secured  by  liens  on  primary  residences  and  are
categorized as one- to four-family residential mortgage loans.

         Commercial  Real  Estate  Loans.  In order to serve its  community  and
enhance the yield on its assets,  the  Association  originates  loans secured by
commercial  real estate.  Loans secured by commercial  real estate are generally
originated  in  amounts  up to 80%  of  the  appraised  value  of the  property.
Commercial real estate loans are either adjustable-rate loans that reprice after
1, 3, or 5 years  or  fixed-rate  balloon  loans  due  after  1, 3, or 5  years.
Commercial real estate loans typically amortize over a 25- to 30-year period. At
June 30, 1997, the  Association's  largest  commercial  real estate loans to one
borrower consisted of two participations  totaling $148,000 that were performing
loans,  secured by a health  care  facility  in Redwood  Falls,  Minnesota.  All
commercial real estate loans require prior approval by the  Association's  Board
of  Directors.  As part  of its  underwriting,  the  Association  requires  that
borrowers  qualify  for a  commercial  real  estate  loan at the  fully  indexed
interest rate rather than at the origination interest rate.

         Loans secured by  commercial  real estate  generally  involve a greater
degree of risk than  residential  mortgage loans and carry larger loan balances.
This  increased  credit  risk is a result  of  several  factors,  including  the
concentration  of  principal  in a limited  number of loans and  borrowers,  the
effects of general economic conditions on income producing  properties,  and the
increased  difficulty  of  evaluating  and  monitoring  these  types  of  loans.
Furthermore,  the  repayment  of loans  secured  by  commercial  real  estate is
typically  dependent  upon the  successful  operation of the related real estate
project. If the cash flow from the project is reduced, the borrower's ability to
repay the loan may be  impaired.  For the  small  total  dollar  amount of loans
secured by church real estate that are originated by the Association,  repayment
is dependent upon the continuing financial support of the church's members.

         Residential  Construction  Loans.  Residential  construction  loans are
generally made on single-family residential property to the individuals who will
be the owners and occupants  upon  completion of  construction.  These loans are
made on a long term basis and are classified as  construction  permanent  loans,
usually with no principal  payments required during the first six months,  after
which the payments are set at an amount that will amortize over a 15- to 30-year
period. The maximum  loan-to-value ratio is 80%. For loans with private mortgage
insurance,  the  maximum  loan  to  value  ratio  is  95%.  Because  residential
construction loans are not rewritten if permanent financing is obtained from the
Association, these loans are made on terms similar to those of the Association's
one- to four-family  residential  loans and may be amortized over terms of up to
30 years.

         The  Association  originates a limited number of  speculative  loans to
builders and limits the loan to value ratio to 80% with a balloon maturity based
on an  amortization  of up to 30 years on terms that are  assumable  by ultimate
purchasers. In underwriting such loans, the Association takes into consideration
the number of units that the  builder  has on a  speculative  basis that  remain
unsold.

                                        7

<PAGE>




         Multi-Family   Loans.   The  Association   also  makes  fixed-rate  and
adjustable-rate  multi-family loans, including loans on apartment complexes.  At
June 30, 1997,  the  Association  had no  substantial  multi-family  real estate
loans.  However,  in fiscal 1997, the Company has  originated  two  multi-family
loans totaling $500,000 and $480,000,  respectively.  Both loans are obligations
of the various economic development authorities of the City of Redwood Falls and
Olivia, respectively.  The loans are originated by the Company due to regulatory
limitations on the amount of non-rated  municipal  debt that the  Association is
permitted to hold.

         Multi-family  loans  generally  provide  higher  origination  fees  and
interest  rates  than  can  be  obtained  from  single-family   mortgage  loans.
Multi-family  lending,  however,  entails significant  additional risks compared
with one- to four-family residential lending.

         Commercial   Loans.  The  Association   does  not  actively   originate
commercial loans.  However, the Association  participates in a loan on a 35-unit
housing complex designed to assist elderly and  low-to-moderate  income persons.
The  loan is an  obligation  of the City of  Redwood  Falls,  Minnesota,  and is
secured  by  the  general  taxing  authority  of  the  City.  The  Association's
participation in the loan totalled $293,000 at June 30, 1997.

         While the  Company  does not  regularly  engage in  lending  activities
outside of the lending activities of the Association,  the Company  participates
in a  commercial  loan used for the  improvement  and  operation  of a hotel and
convention center on a local gaming casino.  The Company's  participation in the
loan  totalled  $422,000  at June 30,  1997,  and is  secured  primarily  by the
revenues of the casino.

         Commercial  loans  generally  involve  a  greater  degree  of risk than
mortgage loans and carry larger loan balances.  This increased  credit risk is a
result of several factors,  including the lack of real estate as collateral, the
concentration  of  principal  in a limited  number of loans and  borrowers,  the
effects of general economic conditions on income producing  properties,  and the
increased  difficulty  of  evaluating  and  monitoring  these  types  of  loans.
Furthermore,  the repayment of commercial loans is typically  dependent upon the
successful operation of the related commercial enterprise. If the cash flow from
the  enterprise  is  reduced,  the  borrower's  ability to repay the loan may be
impaired.

         Agricultural Lending. In 1997, the Association commenced development of
a program  for  agricultural  lending.  This  program  is  intended  to  promote
increased  lending  through  agricultural  lending  opportunities  found  in the
Association's  lending area.  The program is still in  development.  At June 30,
1997, the Association  participated in a $150,000  agricultural  loan secured by
farm acreage with a local area bank.  The  Association  also  participated  in a
$425,000 loan secured by cooperative stock with the same bank. Both loans are to
the same borrower.

         Agricultural lending,  including both operating and real estate-secured
agricultural  lending  generally  involves  a  greater  degree  of risk than the
Association's  traditional  residential mortgage lending efforts. This increased
credit risk is a result of various factors,  including higher loan balances, the
concentration  of  principal  in a limited  number of loans and  borrowers,  the
effects of general and farm- specific economic  conditions,  weather conditions,
and the  increased  difficulty  in  monitoring  these types of loans.  Moreover,
repayment  is  largely  dependent  upon  the  successful  operation  of the farm
enterprise. If the cash flow from the farm enterprise is reduced, the borrower's
ability to repay the loan may be impaired.


                                        8

<PAGE>



         Loan  Commitments.   The  Association  issues  written  commitments  to
prospective  borrowers  on all real  estate  loans.  Generally,  the  commitment
requires  acceptance  within 45 days of the date of issuance.  At June 30, 1997,
the  Association  had  $862,000  of  commitments  to  cover   originations   and
undisbursed  funds for loans in process.  The Association  believes that most of
the Association's  commitments will be funded. At June 30, 1997, the Company had
$902,000 of commitments to cover  undisbursed  funds for loans in process on the
two multi-family  construction loans to the economic development  authorities of
the City of Redwood Falls and the City of Olivia.

         Loans to One  Borrower.  Savings  associations  are subject to the same
limits as those  applicable to national banks,  which under current  regulations
limit loans to one borrower in an amount equal to 15% of unimpaired  capital and
unimpaired surplus, or $500,000, whichever is greater. The Association's maximum
loan to one borrower limit was approximately $1,260,000 as of June 30, 1997.

         At June 30,  1997,  the  Association's  largest  amount of loans to one
borrower was two  agricultural  loan  participations  in the amount of $575,000,
secured by real estate and cooperative stock.

Nonperforming and Problem Assets

         Loan  Delinquencies.  Loans are  reviewed  on a  monthly  basis and are
placed  on a  non-accrual  status  when  the  loan  becomes  more  than  90 days
delinquent  and, if, in the opinion of management,  the collection of additional
interest is doubtful.  Interest  accrued and unpaid at the time a loan is placed
on non-accrual  status is charged against interest income.  Subsequent  interest
payments,  if any, are either applied to the  outstanding  principal  balance or
recorded  as  interest  income,  depending  on the  assessment  of the  ultimate
collectibility of the loan.


                                        9

<PAGE>



         Nonperforming  Assets.  The  following  table  sets  forth  information
regarding  non-accrual  loans,  real estate owned, and certain other repossessed
assets  and  loans.  As of the dates  indicated,  the  Association  had no loans
modified in a troubled debt restructuring.


<TABLE>
<CAPTION>
                                                                               June 30,
                                                                   ----------------------------
                                                                     1997            1996
                                                                   --------        --------
                                                                       (Dollars in thousands)

<S>                                                                <C>             <C>     
   Loans accounted for on a non-accrual basis:
                                              
   Mortgage loans:
     Permanent loans secured by 1-4 family residences...........   $    --         $     89
     All other mortgage loans...................................        --               --
   Non-mortgage loans...........................................        --               --
                                                                    ------          -------
   Total........................................................   $    --         $     89
                                                                    ======          =======
   
   Accruing loans which are contractually past due 90 days or more:
   Mortgage loans:
     Permanent loans secured by 1-4 family residences...........   $   120         $     46
     All other mortgage loans...................................        --               --
   Non-mortgage loans...........................................        --               --
                                                                   ---------         ------
   Total........................................................   $   120         $     46
                                                                    ========         ======
   Total non-accrual and accrual loans..........................   $   120         $    135
                                                                    ========         ======
   Real estate..................................................   $    14         $     --
                                                                    ========         ======
   Other non-performing assets..................................   $    --               --
                                                                    ========         ======
   Total non-performing assets..................................   $   134         $    135
                                                                    ========         ======
   Total non-accrual and accrual loans to
     net loans..................................................       .58  %          0.82%
                                                                    ========         ======
   Total non-accrual and accrual loans to
     total assets...............................................       .19  %          0.26%
                                                                    ========         ======
   Total non-performing assets to total assets..................       .22  %          0.26%
                                                                    ========         ======

</TABLE>


         There was $296 in  interest  income  that would have been  recorded  on
loans  placed on a  non-accrual  basis  under the  original  terms of such loans
during the year ended June 30, 1997.

         Classified Assets. OTS regulations provide for a classification  system
for problem  assets of insured  institutions  which  covers all problem  assets.
Under this  classification  system,  problem assets of insured  institutions are
classified  as  "substandard,"  "doubtful,"  or "loss."  An asset is  considered
substandard if it is inadequately  protected by the current net worth and paying
capacity of the obligor or of the collateral pledged, if any. Substandard assets
include  those  characterized  by the  "distinct  possibility"  that the insured
institution  will sustain  "some loss" if the  deficiencies  are not  corrected.
Assets  classified  as  doubtful  have all of the  weaknesses  inherent in those
classified  substandard,  with the  added  characteristic  that  the  weaknesses
present  make  "collection  or  liquidation  in full,"  on the basis of  current
existing facts,  conditions,  and values,  "highly questionable and improbable."
Assets  classified  as loss are  those  considered  "uncollectible"  and of such
little value that their continuance as assets without

                                       10

<PAGE>



the  establishment  of a specific loss reserve is not  warranted.  Assets may be
designated  "special  mention"  because  of  potential  weaknesses  that  do not
currently warrant classification in one of the aforementioned categories.

         When  an  insured  institution  classifies  problem  assets  as  either
substandard or doubtful,  it may establish general allowances for loan losses in
an amount  deemed  prudent by  management.  General  allowances  represent  loss
allowances which have been established to recognize the inherent risk associated
with lending activities,  but which, unlike specific  allowances,  have not been
allocated to particular problem assets. When an insured  institution  classifies
problem assets as loss, it is required either to establish a specific  allowance
for losses equal to 100% of that portion of the asset so classified or to charge
off such amount. An institution's  determination as to the classification of its
assets and the amount of its  valuation  allowances  is subject to review by the
OTS, which may order the  establishment  of additional  general or specific loss
allowances.  A portion of general loss allowances  established to cover possible
losses  related to assets  classified as substandard or doubtful may be included
in determining an institution's  regulatory  capital,  while specific  valuation
allowances for loan losses generally do not qualify as regulatory capital.

         At  June  30,  1997,  the  Company's  classified  assets  consisted  of
substandard loans of $121,000. At June 30, 1997, the Company also had $14,000 in
loans designated as special mention.  The Company had delinquent loans of 60 and
90 days  or  more of $0 and  $121,000,  respectively,  and a  general  valuation
allowance of $213,000.

         Foreclosed Real Estate. Real estate acquired by the Company as a result
of  foreclosure  or by deed in lieu of  foreclosure is classified as real estate
owned  until it is sold.  When  property  is acquired it is recorded at the fair
value at the date of  acquisition  less  estimated  costs  of  disposition.  The
Company had no real estate owned at June 30, 1997.  The Company  does,  however,
have one loan for which  foreclosure  proceedings  have  commenced.  The loan is
considered  Real Estate in Judgment for reporting  purposes.  The balance on the
loan totals  $14,000.  No loss is anticipated  upon the eventual  disposition of
this asset.

         Allowance for Loan Losses.  Management performs an analysis to identify
the  inherent  risk of loss in its  portfolio.  A  provision  for loan losses is
charged to operations based on management's analysis, which includes a review of
all loans of which full  collectibility  of interest  and  principal  may not be
reasonably assured, considers the Company's past loan loss experience, known and
inherent  risks  in the  portfolio,  adverse  situations  that  may  affect  the
borrower's ability to repay, estimated value of any underlying  collateral,  and
current economic conditions.


                                       11

<PAGE>



         Allocation of Allowance for Loan Losses. The following table sets forth
the  allocation of the Company's  allowance for loan losses by loan category and
the percent of loans in each  category to total  loans  receivable  at the dates
indicated.  The  portion  of the loan  loss  allowance  allocated  to each  loan
category does not represent the total available for future losses that may occur
within the loan  category  because the total loan loss  allowance is a valuation
reserve applicable to the entire loan portfolio.

<TABLE>
<CAPTION>

                                                                    At June 30,
                                       ---------------------------------------------------------------    

                                                       1997                              1996
                                       ---------------------------------    --------------------------
                                                         Percent of                        Percent of
                                                          Loans in                          Loans in
                                                            each                              each
                                                        Category to                       Category to
                                      Amount            Total Loans          Amount        Total Loans
                                      ------            -----------          ------        -----------
                                                                (Dollars in thousands)
<S>                                  <C>                  <C>              <C>               <C> 
At end of period allocated to:
Real estate mortgage:
  Residential construction..........  $      1                2.2%           $   1              1.3%
  1-4 family residential............       198               83.1              202             89.3
  Multi-family .....................         2                0.8                2              1.1
  Commercial........................         3                3.0                5              3.0
  Multi-family construction.........        --                4.4               --               --
  Agricultural real estate..........         2                0.7               --               --
Consumer loans......................        --                0.7               --              0.8
Commercial..........................         3                3.2                3              4.5
Agricultural........................         4                1.9               --               --
                                         -----              -----            -----            -----
    Total allowance for                                                     
      loan losses ..................    $  213              100.0%           $ 213            100.0%
                                         =====              =====            =====            =====
                                                                          
</TABLE>


                                       12

<PAGE>



         Analysis of the  Allowance for Loan Losses.  The  following  table sets
forth information with respect to the Company's allowance for loan losses at the
dates and for the periods indicated:

                                                       At or For the Year
                                                         Ended June 30.
                                                    --------------------------
                                                         1997          1996
                                                    -----------      ---------
                                                       (Dollars in thousands)

Total loans outstanding (1).....................        $20,980      $16,727
                                                         ======       ======
Average loans outstanding.......................        $18,284      $15,755
                                                         ======       ======

Allowance balances (at beginning of
year)...........................................        $   213         $213
Charge-offs.....................................             --           --
Recoveries......................................             --           --
                                                        -------      -------
Net charge-offs.................................             --           --
Provision.......................................             --           --
                                                        -------      -------
Allowance balance (at end of year)..............        $   213      $   213
                                                         ======       ======
Allowance for loan losses as a percent
  of total loans outstanding....................          1.02%        1.27%
Net loans charged off as a percent of
  average loans outstanding.....................            --%          --%

--------------------------------
(1)      Excludes allowance for loan losses.

         Mortgage-Backed   and  Related   Securities.   To  supplement   lending
activities,  the  Company  invests in  residential  mortgage-backed  securities.
Mortgage-backed  securities can serve as collateral for borrowings and,  through
repayments, as a source of liquidity.

         At June 30, 1997, the Company's  mortgage-backed and related securities
designated  available-for-  sale had a carrying  value (and fair  value) of $8.1
million,  and an amortized cost of $8.1 million. At June 30, 1997, the Company's
mortgage-backed  and  related  securities  designated   held-to-maturity  had  a
carrying  value at  amortized  cost of $13.9  million  and a fair value of $14.1
million.

         Mortgage-backed securities represent a participation interest in a pool
of  single-family  mortgages,  the principal and interest  payments on which are
passed  from  the  mortgage  originators,   through  intermediaries   (generally
quasi-governmental agencies) that pool and repackage the participation interests
in  the  form  of  securities,  to  investors  such  as  the  Association.  Such
quasi-governmental  agencies,  which  guarantee  the  payment of  principal  and
interest to investors,  primarily  include FHLMC,  Government  National Mortgage
Association ("GNMA"), and Federal National Mortgage Association ("FNMA").

         FHLMC is a  publicly-owned  corporation  chartered by the United States
Government.  FHLMC  issues  participation  certificates  backed  principally  by
conventional mortgage loans. FHLMC guarantees the timely payment of interest and
the ultimate return of principal  within one year. FHLMC securities are indirect
obligations  of the  United  States  Government.  FNMA is a private  corporation
chartered  by  Congress  with a mandate  to  establish  a  secondary  market for
conventional mortgage loans. FNMA guarantees the timely payment of principal and
interest,  and FNMA  securities  are indirect  obligations  of the United States
Government.  GNMA is a government  agency  within the  Department of Housing and
Urban Development  ("HUD") which is intended to help finance government assisted
housing programs.  GNMA guarantees the timely payment of principal and interest,
and GNMA securities are backed by the

                                       13

<PAGE>



full faith and credit of the United States Government.  Because FHLMC, FNMA, and
GNMA were  established to provide  support for low- and  middle-income  housing,
there are limits to the maximum size of loans that  qualify for these  programs.
To accommodate  larger-sized  loans,  and loans that, for other reasons,  do not
conform  to  the  agency  programs,   a  number  of  private  institutions  have
established their own home-loan origination and securitization programs.

         Mortgage-backed  securities  typically are issued with stated principal
amounts,  and the  securities  are backed by pools of mortgages  that have loans
with  interest  rates that are within a range and have varying  maturities.  The
underlying pool of mortgages can be composed of either  fixed-rate  mortgages or
adjustable-rate  mortgage  loans.   Mortgage-backed   securities  are  generally
referred to as mortgage participation certificates or pass-through certificates.
As a result,  the interest rate risk  characteristics  of the underlying pool of
mortgages, (i.e., fixed-rate or adjustable-rate) as well as prepayment risk, are
passed on to the certificate holder. The life of a mortgage-backed  pass-through
security  is  equal  to the life of the  underlying  mortgages.  Mortgage-backed
securities  issued  by  FHLMC,  FNMA,  and  GNMA  make  up  a  majority  of  the
pass-through certificates market.

         The collateralized  mortgage  obligations ("CMOs") (in the form of real
estate mortgage  investment  conduits) held by the Association at June 30, 1997,
had a carrying  value at amortized  cost of $59,000 and  consisted of fixed-rate
notes issued by FHLMC.  The fair value of the CMO  portfolio was $62,000 at June
30, 1997.  The portfolio of CMOs held within the  Association's  mortgage-backed
and related securities  portfolio at June 30, 1997, did not include any residual
interests in CMOs. Further, at June 30, 1997, the Company's  mortgage-backed and
related  securities  portfolio did not include any "stripped"  CMOs (i.e.,  CMOs
that pay interest only and do not repay  principal or CMOs that repay  principal
only and do not pay interest).

         Investment  Activities.  The  Association  is  required  under  federal
regulations  to maintain a minimum amount of liquid assets which may be invested
in  specified   short-term   securities  and  certain  other  investments.   See
"Regulation  - Regulation  of the  Association - Federal Home Loan Bank System."
The  Association  has  maintained a liquidity  portfolio in excess of regulatory
requirements.  Liquidity levels may be increased or decreased depending upon the
yields on  investment  alternatives  and upon  management's  judgment  as to the
attractiveness  of the yields then available in relation to other  opportunities
and its expectation of future yield levels, as well as management's  projections
as to the  short-term  demand  for  funds to be used in the  Association's  loan
origination and other activities.  The Company has also begun designating select
new investment securities as available-for-sale. At June 30, 1997, the Company's
investment  securities designated  available-for-sale  had a carrying value (and
fair value) of $7.0 million. At June 30, 1997, amortized cost also totalled $7.0
million.  At June 30,  1997,  the  Company's  investment  securities  designated
held-to-maturity  had a carrying  value at amortized cost of $10.4 million and a
fair value of $10.4  million.  The  Company's  investment  securities  consisted
primarily of U.S. Treasury securities and U.S. Government agency securities.  To
a lesser extent,  the portfolio  includes  municipal bonds and  interest-bearing
deposits as permitted by regulation.

         Investment Portfolio. The following table sets forth the carrying value
of the Company's investment securities portfolio,  short-term investments,  FHLB
stock, and mortgage-backed and related securities at the dates indicated.


                                       14

<PAGE>



                                                               At June 30,
                                                      -------------------------
                                                            1997          1996
                                                      ------------     --------
                                                             (In thousands)
Investment securities:
  U.S. Treasury notes.............................    $      5,502       $7,654
  U.S. Government agency bonds....................          10,725        6,093
  Municipal bonds.................................           1,150        1,542
                                                        ----------     --------
    Total investment securities...................          17,377       15,289
Interest-earning deposits in
  other institutions..............................             748        2,858
FHLB stock........................................             334          334
Mortgage-backed and related
  securities......................................          22,023       15,805
                                                         ---------       ------
      Total investments...........................      $   40,482      $34,286
                                                         =========       ======



         Portfolio   Maturities.   The   following   table  sets  forth  certain
information  regarding  the  carrying  values,   weighted  average  yields,  and
contractual    maturities   of   the   Company's   investment   securities   and
mortgage-backed and related securities portfolio at June 30, 1997.

<TABLE>
<CAPTION>

                                                                            As of June 30, 1997
                            --------------------------------------------------------------------------------------------------------

                                One Year or Less         One to Five Years       Five to Ten Years          More than Ten Years
                            ---------------------      --------------------   ------------------------   ------------------------
                            Carrying      Average      Carrying     Average   Carrying       Average     Carrying        Average
                              Value        Yield         Value       Yield     Value          Yield       Value           Yield
                            --------      -------      -------     --------   -------        -------     -------         ------
                                                                  (Dollars in thousands)

<S>                          <C>             <C>       <C>            <C>        <C>            <C>       <C>               <C>  
U.S. Treasury notes......    $ 1,700         5.75%     $  3,802       5.44%     $    --          --%     $   --              --%
U.S. Government
  Agency bonds...........      1,000         6.28         2,744       6.56        6,981        7.32          --              --
Municipal bonds (1)......        400         4.66           615       4.25          135        4.55          --              --
                            --------         ----       -------       ----       ------        ----     -------          ------
  Total investment
    securities...........      3,100         5.78         7,161       5.77        7,116        7.27          --              --
FHLB stock...............        N/A          N/A           N/A        N/A          N/A         N/A         N/A             N/A
Mortgage-backed and
  related securities.....        561         5.83         5,816       6.55       13,979        6.98       1,667            8.08
                              ------         ----       -------       ----       ------        ----       -----            ----
  Total investment
    portfolio(2).........    $ 3,661         5.79%      $12,977      6.12%      $21,095        7.08%     $ 1,667           8.08%
                              ======         ====        ======      ====        ======      ======       ======           ====
</TABLE>



--------------------------------
(1)  Tax  exempt  income  was not  significant  and  thus  has not  been
     presented on a tax equivalent basis.
(2)  Excludes interest-bearing deposits and FHLB stock.

Sources of Funds

         General.  Deposits  are the  major  source of the  Company's  funds for
lending  and other  investment  purposes.  The  Company  derives  funds from the
amortization  and  prepayment  of  loans  and,  to a  much  lesser  extent,  the
maturities of investment securities, mortgage-backed, and related securities and
operations.  Scheduled loan principal  repayments are a relatively stable source
of  funds,   while  deposit  inflows  and  outflows  and  loan  prepayments  are
significantly  influenced by general interest rates and market  conditions.  The
Company may also use FHLB advances as an additional source of funds.


                                       15

<PAGE>



         Deposits.  Deposits are attracted principally from within the Company's
primary  market  area  through  the  offering  of a broad  selection  of deposit
instruments including regular savings accounts,  money market accounts, and term
certificate accounts. The Company also offers IRA and, to a lesser extent, KEOGH
accounts.  Deposit account terms vary according to the minimum balance required,
the time period the funds must remain on deposit,  and the interest rate,  among
other factors.

         At June 30, 1997,  passbook and money market accounts  constituted $8.1
million,  or 17.75% of the  Company's  deposit  portfolio  and  certificates  of
deposit  constituted  $37.6  million  or 82.25% of the  deposit  portfolio.  The
Company had no brokered deposits at that date, however, a substantial portion of
the Association's deposits are funds from local government entities.

         The  Association  has a $1.0 million line of credit with the FHLB which
was not drawn on at June 30,  1997.  The  Association  has the  ability  to draw
additional  borrowings  of  approximately  $3,170,000,  based  upon its  current
investment in FHLB stock and investment securities pledged.

         Deposits of $100,000 or More. The following  table indicates the amount
of the  Company's  deposit  accounts of  $100,000  or more as of June 30,  1997,
including term certificate accounts separated by time remaining until maturity.


                                                                       Amount
                                                                  (In thousands)
Term certificate accounts:
  Maturity Period
-----------------
  Within three months..........................................       $ 2,182
  Three through six months.....................................         5,594
  Six through twelve months....................................         3,986
  Over twelve months...........................................         2,147
                                                                      -------
    Total......................................................        13,909
Money market accounts..........................................         3,983
                                                                      -------
    Total......................................................      $ 17,892
                                                                      =======


Borrowings

         Deposits are the primary source of funds for the Company's  lending and
investment  activities and for its general  business  purposes.  The Association
obtains  advances  from the FHLB of Des  Moines  to  supplement  its  supply  of
lendable funds.  Advances from the FHLB of Des Moines are typically secured by a
pledge of the Association's stock in the FHLB of Des Moines and a portion of the
Association's  investment  securities.  At June 30, 1997,  the  Association  had
advances outstanding of $3.5 million.  The Association,  if the need arises, may
also access the discount window of the Board of Governors of the Federal Reserve
System ("Federal  Reserve Board") to supplement its supply of lendable funds and
to meet deposit withdrawal  requirements.  At June 30, 1997, the Company and the
Association had no borrowings from the Federal Reserve Board.

Personnel

         The Company has no employees other than executive officers.  As of June
30, 1997, the Association had 9 full-time and 2 part-time employees. None of the
Association's employees are represented by a collective bargaining group.


                                       16

<PAGE>



Regulation

         Set forth below is a brief description of certain laws which related to
the  regulation of the Company and the  Association.  The  description  does not
purport  to be  complete  and is  qualified  in its  entirety  by  reference  to
applicable laws and regulations.

Regulation of the Company

         General.  The  Company is a unitary  savings and loan  holding  company
subject to regulatory  oversight by the OTS. As such, the Company is required to
register  and  file  reports  with  the OTS and is  subject  to  regulation  and
examination by the OTS. In addition,  the OTS has enforcement authority over the
Company and its non-savings association  subsidiaries,  should such subsidiaries
be formed,  which also permits the OTS to restrict or prohibit  activities  that
are determined to be a serious risk to the subsidiary savings association.  This
regulation  and  oversight  is  intended  primarily  for the  protection  of the
depositors of the  Association  and not for the benefit of  stockholders  of the
Company.

         Qualified  Thrift  Lender Test.  As a unitary  savings and loan holding
company, the Company generally is not subject to activity restrictions, provided
the  Association  satisfies  the Qualified  Thrift  Lender  ("QTL") test. If the
Company  acquires   control  of  another  savings   association  as  a  separate
subsidiary, it would become a multiple savings and loan holding company, and the
activities  of  the  Company  and  any  of  its  subsidiaries  (other  than  the
Association or any other SAIF-insured  savings association) would become subject
to  restrictions   applicable  to  bank  holding  companies  unless  such  other
associations  each also  qualify  as a QTL and were  acquired  in a  supervisory
acquisition.  See "-  Regulation of the  Association  - Qualified  Thrift Lender
Test."

Regulation of the Association

         General. As a federally  chartered,  SAIF-insured  savings association,
the  Association  is subject to extensive  regulation by the OTS and the Federal
Deposit Insurance Corporation ("FDIC"). Lending activities and other investments
must comply with various  federal  statutory and  regulatory  requirements.  The
Association is also subject to certain reserve  requirements  promulgated by the
Federal Reserve Board.

         Insurance of Deposit Accounts.  The Association's  deposit accounts are
insured by the SAIF to a maximum of $100,000 for each insured member (as defined
by law and regulation). Insurance of deposits may be terminated by the FDIC upon
a finding that the institution has engaged in unsafe or unsound practices, is in
an unsafe or unsound  condition  to  continue  operations  or has  violated  any
applicable law, regulation,  rule, order or condition imposed by the FDIC or the
institution's primary regulator.

         The FDIC  charges an annual  assessment  for the  insurance of deposits
based on the risk a particular  institution poses to its deposit insurance fund,
depending upon the institution's risk  classification.  This risk classification
is based on an institution's  capital group and supervisory subgroup assignment.
In addition,  the FDIC is authorized to increase  deposit  insurance  rates on a
semi-annual  basis if it  determines  that such action is necessary to cause the
balance  in the  SAIF  to  reach  the  designated  reserve  ratio  of  1.25%  of
SAIF-insured  deposits  within a reasonable  period of time. The FDIC may impose
special  assessments  of SAIF members to repay  amounts  borrowed  from the U.S.
Treasury  or for any  other  reason  deemed  necessary  by the  FDIC.  Prior  to
September 30, 1996, savings  associations paid within a range of .23% to .31% of
domestic  deposits and the SAIF was  substantially  underfunded.  By comparison,
prior to  September  30,  1996,  members  of the Bank  Insurance  Fund  ("BIF"),
predominantly  commercial banks,  were required to pay  substantially  lower, or
virtually no, federal deposit insurance premiums.

                                       17

<PAGE>




         Effective  September  30,  1996,  federal  law was revised to mandate a
one-time  special  assessment  on  SAIF  members  such  as  the  Association  of
approximately .657% of deposits held on March 31, 1995. The Association recorded
a $237,000 pre-tax expense for this assessment for the year ended June 30, 1997,
recognized  in the first  fiscal  quarter.  Beginning  January 1, 1997,  deposit
insurance  assessments for SAIF members were reduced to  approximately  .064% of
deposits on an annual  basis;  this rate may  continue  through the end of 1999.
During this same period,  BIF members are expected to be assessed  approximately
 .013% of deposits.  Thereafter,  assessments  for BIF and SAIF members should be
the  same  and the  SAIF  and BIF  may be  merged.  It is  expected  that  these
continuing  assessments  for  both  SAIF and BIF  members  will be used to repay
outstanding  Financing  Corporation  bond  obligations.  As a  result  of  these
changes,  beginning January 1, 1997, the rate of deposit insurance  assessed the
Association  declined  by  approximately  70%  from  rates  in  effect  prior to
September 30, 1996.

         Regulatory  Capital  Requirements.   OTS  capital  regulations  require
savings institutions to meet three capital standards: (1) tangible capital equal
to 1.5% of total adjusted  assets,  (2) a leverage ratio (core capital) equal to
at least 3% of total adjusted assets, and (3) a risk-based  capital  requirement
equal  to 8.0% of  total  risk-weighted  assets.  The  Association's  regulatory
capital exceeded all minimum regulatory capital requirements applicable to it as
of June 30, 1997.

         Interest-Rate Risk (IRR). As a financial  institution  regulated by the
OTS,  the  Association  is required to measure  and monitor its  sensitivity  to
interest rate movements.  OTS-regulated  institutions meeting certain conditions
have the option of utilizing  the  OTS-established  IRR  measurement  model,  or
developing  an  in-house  model.  The  Association  has  chosen  to meet its IRR
sensitivity  modeling  requirements  through use of the OTS's Net Present  Value
(NPV) model.  This model measures how the net present value of an  institution's
assets,  liabilities and off-balance-sheet  items would change in the event of a
range of assumed changes in market interest rates. These  computations  estimate
the effect on NPV of a permanent  and  instantaneous  change in market  interest
rates of plus or minus 100, 200, 300, and 400 basis points (bps).  The Board has
established   acceptable  ranges  for  the  NPV  changes  across  these  various
scenarios.

         The following  table sets forth the  interest-rate  risk  measures,  as
calculated  by the OTS's NPV model,  for the  Association  at June 30,  1997 and
1996, given an instantaneous and permanent increase in market interest rates.

<TABLE>
<CAPTION>

                                                                            June 30,
                                                                     -------------------

                                                                      1997          1996
                                                                     ------        -----
         <S>                                                        <C>          <C>      
         Risk Measures:                       
         --------------                      
         200 Basis point rate shock
         Pre-shock NPV ratio: NPV as % of present value of assets    15.48%        21.94%
         Exposure measure: Post-shock NPV ratio:                     12.95%        20.39%
         Sensitivity measure: Change in NPV ratio:                  (253) bps    (155) bps

</TABLE>


         Calculations  of  prospective  effects of  hypothetical  interest  rate
changes are based on numerous  assumptions,  including relative levels of market
interest rates,  loan prepayments and deposit run-off,  and should not be relied
upon  as  indicative  of  actual  results.  Further,  the  calculations  do  not
contemplate  any actions the Association may undertake in response to changes in
interest rates.  Nevertheless,  the  Association's IRR sensitivity has increased
over the twelve months ended June 30, 1997,  as a result of dividends  paid from
the  Association  to the Company and increased  loan  production  and investment
purchases funded by short- and intermediate-term deposits and FHLB advances.


                                       18

<PAGE>



         Savings  associations  with a greater than  "normal"  level of interest
rate exposure may, in the future,  be subject to a deduction from capital for an
interest  rate  risk  ("IRR")   component  for  purposes  of  calculating  their
risk-based capital requirement.

         Dividend and Other Capital  Distribution  Limitations.  OTS regulations
require the  Association  to give the OTS 30 days advance notice of any proposed
declaration of dividends to the Company, and the OTS has the authority under its
supervisory powers to prohibit the payment of dividends to the Company.

         OTS regulations  impose  limitations upon all capital  distributions by
savings  institutions,  such  as  cash  dividends,  payments  to  repurchase  or
otherwise acquire its shares, payments to shareholders of another institution in
a cash-out  merger and other  distributions  charged against  capital.  The rule
establishes  three tiers of  institutions,  based primarily on an  institution's
capital  level.  An  institution  that  exceeds  all  fully  phased-in   capital
requirements  before  and  after  a  proposed  capital   distribution  ("Tier  1
institution")  and has not  been  advised  by the OTS that it is in need of more
than the normal  supervision can, after prior notice but without the approval of
the OTS, make capital  distributions during a calendar year equal to the greater
of (i) 100% of its net income to date during the  calendar  year plus the amount
that would reduce by one-half its "surplus  capital  ratio" (the excess  capital
over its fully phased-in capital  requirements) at the beginning of the calendar
year,  or (ii) 75% of its net income over the most recent four  quarter  period.
Any additional capital  distributions require prior regulatory approval. At June
30,  1997,  the  Association  was  a  Tier  1  institution.  In  the  event  the
Association's  capital  fell below its fully  phased-in  requirement  or the OTS
notified  it  that  it  was  in  need  of  more  than  normal  supervision,  the
Association's  ability to make capital  distributions  could be  restricted.  In
addition,  the  OTS  could  prohibit  a  proposed  capital  distribution  by any
institution,  which would otherwise be permitted by the  regulation,  if the OTS
determines  that  such  distribution  would  constitute  an  unsafe  or  unsound
practice.

         In addition,  the Association may not declare or pay a cash dividend on
its  capital  stock if the  effect  thereof  would be to reduce  the  regulatory
capital of the Association below the amount required for the liquidation account
to be established  pursuant to the Association's plan of conversion.  During the
year ended June 30,  1997,  the  Association  declared  and paid a $2.0  million
dividend to the Company.

         Qualified  Thrift  Lender Test.  Savings  institutions  must meet a QTL
test. If the  Association  maintains an  appropriate  level of Qualified  Thrift
Investments (primarily residential mortgages and related investments,  including
certain mortgage-related  securities) ("QTIs") and otherwise qualifies as a QTL,
it will continue to enjoy full borrowing privileges from the FHLB of Des Moines.
The  required  percentage  of QTIs is 65% of  portfolio  assets  (defined as all
assets minus intangible  assets,  property used by the institution in conducting
its business and liquid assets equal to 20% of total assets). Certain assets are
subject to a  percentage  limitation  of 20% of portfolio  assets.  In addition,
savings associations may include shares of stock of the FHLBs, FNMA and FHLMC as
qualifying QTIs. As of June 30, 1997, the Association was in compliance with its
QTL requirement with 74.50% of its assets invested in QTIs.

         Liquidity  Requirements.  All  savings  associations  are  required  to
maintain an average daily balance of liquid assets equal to a certain percentage
of the sum of its average daily balance of net withdrawable deposit accounts and
borrowings payable in one year or less. The liquidity  requirement may vary from
time to time (between 4% and 10%) depending upon economic conditions and savings
flows of all savings associations.

         Federal Home Loan Bank System.  The Association is a member of the FHLB
of Des  Moines,  which is one of 12  regional  FHLBs that  administers  the home
financing credit function of savings associations. Each FHLB serves as a reserve
or  central  bank for its  members  within  its  assigned  region.  It is funded
primarily from proceeds derived from the sale of consolidated obligations of the
FHLB

                                       19

<PAGE>



System. It makes loans to members (i.e., advances) in accordance with policies 
and procedures established by the Board of Directors of the FHLB.

         Federal  Reserve  System.   The  Federal  Reserve  Board  requires  all
depository  institutions to maintain  non-interest bearing reserves at specified
levels against their transaction  accounts (primarily  checking,  NOW, and Super
NOW checking accounts) and non-personal time deposits.  The balances  maintained
to meet the reserve  requirements  imposed by the Federal  Reserve  Board may be
used to satisfy the liquidity  requirements that are imposed by the OTS. At June
30, 1997, the Association was in compliance with these requirements.

Item 2.  Description of Property
--------------------------------

         (a) Properties.

         The  Company  owns no real  property  but  utilizes  the offices of the
Association.  The  Association  owns  its  main  office  located  at  301  South
Washington Street,  Redwood Falls,  Minnesota and one full-service branch office
located at 824 East Lincoln Street, Olivia, Minnesota. The Association also owns
a  building  adjacent  to the  branch  office  and two  lots in  Redwood  Falls,
Minnesota.  In May 1997,  the  Association  purchased two vacant lots in Redwood
Falls for possible future expansion.

         (b) Investment Policies.

         See  "Item  1.  Business"  above  for  a  general  description  of  the
Association's  investment  policies and any  regulatory  or Board of  Directors'
percentage of assets limitations regarding certain investments.

         (1)  Investments in Real Estate or Interests in Real Estate.  See "Item
1.  Business  - Lending  Activities,"  "Item 1.  Business  -  Regulation  of the
Association," and "Item 2. Description of Property. (a) Properties" above.

         (2)  Investments  in Real  Estate  Mortgages.  See "Item 1.  Business -
Lending Activities" and "Item 1. Business - Regulation of the Association."

         (3)  Investments  in  Securities  of or Interests in Persons  Primarily
Engaged in Real Estate Activities.  See "Item 1. Business - Lending  Activities"
and "Item 1. Business - Regulation of the Association."

         (c)  Description of Real Estate and Operating Data.

         Not Applicable.

Item 3.  Legal Proceedings
--------------------------

         The  Company  and the  Association,  from time to time,  are parties to
ordinary routine litigation, which arises in the normal course of business, such
as claims to enforce liens,  condemnation proceedings on properties in which the
Association holds security interests,  claims involving the making and servicing
of real property loans, and other issues incident to the business of the Company
and the  Association.  No claims or lawsuits  were pending or threatened at June
30, 1997.

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

         No matters  were  submitted  to a vote of security  holders  during the
fourth quarter of the fiscal year ended June 30, 1997.

                                       20

<PAGE>





                                     PART II


Item 5.  Market for the Registrant's Common Equity and Related Stockholder 
--------------------------------------------------------------------------
         Matters
         -------

         The  information  contained under the section  captioned  "Stock Market
Information" in the Company's  Annual Report to Stockholders for the fiscal year
ended June 30, 1997 (the "Annual Report"), is incorporated herein by reference.


Item 6.  Management's Discussion and Analysis of Financial Condition and Results
--------------------------------------------------------------------------------
         of Operations
         -------------

         The  information  contained  in  the  section  captioned  "Management's
Discussion and Analysis of Financial Condition and Results of Operations" in the
Annual Report is incorporated herein by reference.

Item 7.  Financial Statements
-----------------------------

         The  Association's   consolidated  financial  statements  required  are
contained in the Annual Report and are incorporated herein by reference.

Item 8.  Changes in and Disagreements With Accountants on Accounting and 
------------------------------------------------------------------------
         Financial Disclosure
         --------------------

         Not Applicable.


                                    PART III

Item 9.  Directors,  Executive Officers,  Promoters and Control Persons;
------------------------------------------------------------------------
         Compliance with Section 16(a) of the Exchange Act
         -------------------------------------------------

         The information contained under the section captioned "I -- Information
with Respect to Nominees  for  Director,  Directors  Continuing  in Office,  and
Executive   Officers"  in  the  proxy   statement  for  the  Annual  Meeting  of
Stockholders of the Company to be held October 30, 1997, (the "Proxy Statement")
is incorporated herein by reference.

Item 10. Executive Compensation
-------------------------------

         The  information  contained under the section  captioned  "Director and
Executive Officer Compensation - Executive  Compensation" in the Proxy Statement
is incorporated herein by reference.

Item 11. Security Ownership of Certain Beneficial Owners and Management
-----------------------------------------------------------------------

         (a)      Security Ownership of Certain Beneficial Owners

                  Information  required by this item is  incorporated  herein by
                  reference  to the section  captioned  "Voting  Securities  and
                  Principal Holders Thereof" in the Proxy Statement.

         (b)      Security Ownership of Management


                                       21

<PAGE>



                  Information  required by this item is  incorporated  herein by
                  reference  to the section  captioned  "I --  Information  with
                  Respect to Nominees  for  Director,  Directors  Continuing  in
                  Office, and Executive Officers" in the Proxy Statement.

         (c)      Management of the Company knows of no arrangements,  including
                  any pledge by any person of  securities  of the  Company,  the
                  operation of which may at a subsequent date result in a change
                  in control of the Company.

Item 12.  Certain Relationships and Related Transactions
--------------------------------------------------------

         The  information  required  by this  item  is  incorporated  herein  by
reference  to  the  sections  captioned   "Certain   Relationships  and  Related
Transactions" and "Voting Securities and Principal Holders Thereof" in the Proxy
Statement.

Item 13.  Exhibits, List and Reports on Form 8-K
------------------------------------------------

         (a)      The following documents are filed as a part of this report:

                  1.  The  following  financial  statements  and the  report  of
independent  accountants  of the  Company  included  in  the  Annual  Report  to
Stockholders  of the  Company for the fiscal  year  ending  June 30,  1997,  are
incorporated herein by reference.

         Report of Independent Auditors

         Consolidated  Statements of Financial Condition as of June 30, 1997 and
         1996

         Consolidated  Statements of Earnings for the Years Ended June 30, 1997,
         1996, and 1995

         Consolidated  Statements  of  Stockholders'  Equity for the Years Ended
         June 30, 1997, 1996, and 1995

         Consolidated  Statements  of Cash  Flows for the Years  Ended  June 30,
         1997, 1996, and 1995

         Notes to Consolidated Financial Statements.

                  2. Financial  Statement  Schedules for which provision is made
in  the  applicable  accounting  regulations  of  the  Securities  and  Exchange
Commission  ("SEC")  are not  required  under the  related  instructions  or are
inapplicable and therefore have been omitted.

                  3. The  following  exhibits  are  included  in this  Report or
incorporated herein by reference:

                  (a)      List of Exhibits:

                  3.1      Articles of Incorporation of Redwood Financial, Inc.*

                  3.2      Bylaws of Redwood Financial, Inc.*

                  10.1     Employment contract with Paul W. Pryor

                  10.2     1995 Stock Option Plan**


                                       22

<PAGE>



                  10.3     Management Stock Bonus Plan**

                  10.4     1997 Directors Stock Option Plan

                  13       Annual  Report to  Stockholders  for the fiscal  year
                           ended June 30, 1997.

                  21       Subsidiaries of the Registrant***

                  23       Consent of KPMG Peat Marwick LLP

                  27       Financial Data Schedule

(b)               Reports on Form 8-K.

                  None.

-------------------
*        Incorporated by reference to the Registrant's Registration Statement on
         Form S-1  (33-90560)  declared  effective by the  Commission on May 15,
         1995.

**       Incorporated  by reference to the proxy  statement  for the special
         meeting of  stockholders  held on January  17,  1996,  and filed with 
         the SEC on December 5, 1995 (File No. 0-25884).

***      Incorporated  by reference to the Annual Report on Form 10-KSB for
         the fiscal year ended June 30, 1995 (File No. 0-25884).



                                       23

<PAGE>
                                   SIGNATURES

         In  accordance  with  Section  13 or 15(d)  of the  Exchange  Act,  the
registrant  caused  this  report to be signed on its behalf by the  undersigned,
thereunto duly authorized.

                                          REDWOOD FINANCIAL, INC.


Dated: September 9, 1997                  By:  /s/ Paul W. Pryor
                                               ------------------
                                              Paul W. Pryor
                                              President, Chief Executive
                                              Officer and Director
                                              (Duly Authorized Representative)

         In accordance  with the Exchange Act, this report has been signed below
by the following  persons on behalf of the  registrant and in the capacities and
on the dates indicated.


By:     /s/ Paul W. Pryor                       By:  /s/ James P. Tersteeg
       ------------------                            ---------------------
       Paul W. Pryor                                 James P. Tersteeg
       President, Chief Executive Officer            Chairman of the Board
       and Director                             
       (Principal Executive Officer)            
                                                
Date:  September 9, 1997                        Date:  September 9, 1997
                                              

By:    /s/ J. Scott Nelson                      By:    /s/ Blaine C. Farnberg
       -------------------                             ----------------------
       J. Scott Nelson                                 Blaine C. Farnberg
       Vice Chairman of the Board                      Director

Date:  September 9, 1997                        Date:  September 9, 1997


By:    /s/ Thomas W. Stotesbery                 By:  /s/ Donald C. Orth
       ------------------------                      ------------------
       Thomas W. Stotesbery                          Donald C. Orth
       Director                                      Vice President and Director


Date:  September 9, 1997                        Date: September 9, 1997


By:    /s/ Anthony H. Acker
       --------------------
       Anthony H. Acker
       Chief Financial Officer
       (Principal Accounting and Financial Officer)

Date:  September 9, 1997