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, 1998,

[ ] 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. [ ]

         State issuer's revenues for its most recent fiscal year $4.9 million.
                                                                 ------------

         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, 1998,  was $6.6 million  ($13.0 per share based on
510,221 shares of Common Stock held by non-affiliates).

         As of  September  2, 1998,  there were issued and  outstanding  800,611
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, 1998. (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.  It
was 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.  Subsequently,  in May 1998, the Association  changed its corporate
title to HomeTown Bank (the "Bank").  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 Bank retains a
specified amount of its assets in housing-related investments. At June 30, 1998,
the Company had total assets of $77.3 million,  total deposits of $48.1 million,
and stockholders'  equity of $11.9 million.  The primary activity of the Company
is to hold all of the  outstanding  capital  stock  of the  Bank,  however,  the
Company  maintains a small loan  portfolio  separate from its  investment in the
Bank.

Business of the Bank

         The Bank  attracts  deposits  from the  public  and uses such  deposits
primarily to purchase  investment  securities  and  mortgage-backed  and related
securities and to originate  loans in its market area.  For its loan  portfolio,
the Bank originates and retains fixed and adjustable rate loans,  and fixed rate
balloon loans. The Bank is primarily a 1-4 family  residential  mortgage lender;
however,  the Bank has actively begun origination of commercial and agricultural
loans,  including  both real estate secured and operating and term loans secured
by non-real estate  collateral.  The Bank also originates various consumer loans
and a limited number of multi-family  and residential  construction  loans.  The
Bank also  participates  in several  commercial,  commercial  real  estate,  and
agricultural loans.

         The principal  sources of funds for the Bank's  lending  activities are
deposits and the amortization,  repayment,  and maturity of loans and investment
securities.  The Bank also obtains  funds from  Federal Home Loan Bank  ("FHLB")
advances.  The Bank does not rely on brokered  deposits,  however, a substantial
portion  of the  Bank'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  Bank's  principal  expenses  are
interest  expense on deposits and  noninterest  expense and, to a lesser extent,
interest expense on FHLB advances.

         The Bank 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
Bank 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.

Market Area and Competition

         The Bank'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
Bank's market area, an area mainly  comprised of the cities 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 Bank'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

                                        2

<PAGE>



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
agricultural  and commercial real estate,  consumer,  residential  construction,
multi-family real estate loans, and agricultural and commercial  non-real estate
loans.  From time to time,  the Company will  participate  in  agricultural  and
commercial 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,  office buildings, and
retail  establishments.  Agricultural  loans are secured by real  estate  and/or
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,
                                       --------------------------------------------------
                                                1998                      1997
                                       ------------------------    ----------------------
                                         Amount      Percentage    Amount      Percentage
                                         ------      ----------    ------      ----------
                                                   (Dollars in thousands)
<S>                                    <C>            <C>       <C>             <C>     
Real estate loans:
  Residential (1-4 family) .........   $ 24,261        83.67%    $ 18,577        89.46%  
  Residential construction .........        464         1.60          502         2.42
  Multi-family .....................      1,472         5.08          174         0.84
  Multi-family construction ........          0         0             980         4.72
  Commercial .......................      1,375         4.74          680         3.27
  Agricultural .....................        113         0.39          150         0.72
Consumer loans:                                                  
  Other consumer loans .............        182         0.63           21         0.10
  Loans on deposits ................        256         0.88          133         0.64
Commercial .........................      1,236         4.26          715         3.44
Agricultural operating .............      2,793         9.64          425         2.05
                                       --------       ------     --------       ------
Total ..............................     32,152       110.89       22,357       107.66
Less:                                                            
  Loans in process .................     (2,877)       (9.92)      (1,361)       (6.56)
  Deferred loan fees and discounts .        (29)       (0.10)         (16)       (0.08)
  Allowance for loan losses ........       (251)       (0.87)        (213)       (1.02)
                                       --------       ------     --------       ------
Total loans, net ...................   $ 28,995       100.00%    $ 20,767       100.00%
                                       ========       ======     ========       ======
</TABLE>
                                                              

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

                                        3

<PAGE>



         Loan Maturity  Tables.  The following  table sets forth the maturity of
Company's  loan  portfolio  at  June  30,  1998.  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    $   830     $    45       $     0       $     0     $     7     $     0     $   153   $   105     $     1 $ 1,141
  1 to 5 years .     8,150         416             0             0         560         113          88       324       2,174  11,825
  After 5 years     15,281       1,011           464             0         808           0         197       807         618  19,186
                   -------     -------       -------       -------     -------     -------     -------   -------     ------- -------
Total amount due   $24,261     $ 1,472       $   464       $     0     $ 1,375     $   113     $   438   $ 1,236     $ 2,793 $32,152
                   =======     =======       =======       =======     =======     =======     =======   =======     ======= =======
</TABLE>
                                                               




                                        4

<PAGE>



         The following table sets forth the dollar amount of all loans due after
June 30, 1999, which have pre-determined  interest rates and which have floating
or adjustable interest rates.

                                                     Floating or
                                         Fixed        Adjustable
                                         Rates          Rates             Total
                                                (In thousands)

1-4 Family residential............     $18,349            $5,082         $23,431
Multi-family real estate..........         416             1,011           1,427
Residential construction..........         464                --             464
Multi-family construction.........          --                --              --
Commercial real estate............       1,334                34           1,368
Agricultural real estate..........         113                --             113
Consumer..........................         285                --             285
Commercial........................       1,131                --           1,131
Agricultural......................       2,792                --           2,792
                                       -------           -------         -------
  Total...........................    $ 24,884          $  6,127        $ 31,011
                                       =======           =======         =======


         One-to  Four-Family  Residential  Loans.  The  Bank's  primary  lending
activity consists of the origination of one- to four-family residential mortgage
loans secured by property  located in the Bank's  primary  market area. The Bank
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 Bank generally
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 Bank 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 Bank
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 Bank will
usually  refinance  the balloon  mortgage  loan at maturity at the then  current
market rate of interest.  Among other factors,  the Bank's  refinancing of these
loans is dependent  upon  adequate  collateral  value.  The Bank will  originate
fixed-rate  loans with maturities of up to 30 years. The Bank monitors the level
of this type of long-term,  fixed-rate lending in order to control interest-rate
risk. In addition,  the Bank attempts to fund long-term,  fixed-rate  loans with
long-term deposits and FHLB advances.

         The Bank also offers  adjustable-rate  loans,  although the majority of
its recent loan  production  has been in fixed-rate  balloon  loans.  The Bank'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 Bank's cost of funds.  The  origination  fees for
loans are  generally  1% of the loan  amount.  Generally,  the  Bank's  standard
underwriting  guidelines for  fixed-rate  mortgage loans conform to Federal Home
Loan

                                        5

<PAGE>



Mortgage Corporation ("FHLMC") guidelines.  It is the current policy of the Bank
to originate  loans solely for its loan  portfolio.  However,  if certain market
conditions exist, the Bank may originate long-term, fixed-rate loans for sale in
the secondary mortgage market. The Bank will continue to emphasize short-term or
adjustable-rate  mortgage loans consistent with its  asset/liability  management
strategy;  however,  recent declines in interest rates have resulted in a higher
level of origination of long-term,  fixed-rate loans. At June 30, 1998, the Bank
did not service loans for others.

         Consumer  Loans.  Consumer  loans are primarily  made when secured by a
savings  account in the Bank.  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 Bank is in the process of expanding its consumer
loan program to include auto, unsecured, and other forms of consumer lending. At
June 30,  1998,  the  Bank's  balance  in these  other  consumer  loans  totaled
$182,000.  Although  the Bank 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 Bank 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, 1998, the
Bank's largest  commercial real estate loan to one borrower  consisted of a loan
totaling  $328,000,  secured  by several  retail  properties  in Redwood  Falls,
Minnesota. All commercial real estate loans require approval by the Bank's Board
of Directors.  As part of its  underwriting,  the Bank  requires that  borrowers
qualify for adjustable  rate  commercial  real estate loans 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 Bank,  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
Bank,  these  loans are made on terms  similar  to those of the  Bank's  one- to
four-family residential loans and may be amortized over terms of up to 30 years.

         The Bank  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

                                        6

<PAGE>



assumable by ultimate  purchasers.  In underwriting  such loans,  the Bank takes
into  consideration  the number of units that the builder  has on a  speculative
basis that remain unsold.

         Multi-Family  Loans. The Bank also makes fixed-rate and adjustable-rate
multi-family loans,  including loans on apartment  complexes.  At June 30, 1998,
the Company's largest  multi-family loans consisted of two loans to the economic
development  authorities  of the cities of Redwood  Falls and Olivia,  Minnesota
totaling $498,000 and $480,000,  respectively. The loans are secured by mortgage
liens on the respective multi-family properties.

         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.  During  fiscal  1998,  the Bank  began to  actively
originate  commercial loans not secured by real estate. In this period, the Bank
hired a local experienced loan officer to expand its commercial and agricultural
lending  programs.  As such, the Bank's portfolio of commercial  non-real estate
loans  increased by $695,000 to $1,236,000  from June 30, 1997 to June 30, 1998.
The  Company's  largest   commercial  loans  to  one  borrower  consist  of  two
participation  loans,  totaling  $737,000 to a local casino secured primarily by
the casino's revenues.

         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. As with the Bank's commercial lending activities,
during  fiscal 1998,  the Bank began to actively  originate  agricultural  loans
secured by real estate or by other non real estate collateral.  As a result, the
Bank's  portfolio of agricultural  loans secured by non-real  estate  collateral
increased by $2,368,000 to $2,793,000  from June 30, 1997 to June 30, 1998.  The
Bank's portfolio of agricultural  loans secured by real estate declined modestly
by  $37,000 to  $113,000  from June 30,  1997 to June 30,  1998.  The  Company's
largest  agricultural loans to one borrower consist of an agricultural term loan
totaling $537,000 secured by cooperative stock.

         Agricultural lending,  including both operating and real estate-secured
agricultural lending generally involves a greater degree of risk than the Bank'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.

         Loan  Commitments.  The Bank 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, 1998,  the Bank
had $2,198,000 of commitments to cover originations, undisbursed funds for loans
in  process,  and unused  lines of credit.  The Bank  believes  that most of the
Bank's commitments will be funded.


                                        7

<PAGE>




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.

         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 Bank had no loans modified in a
troubled debt restructuring.

<TABLE>
<CAPTION>
                                                                          June 30,
                                                                ---------------------------
                                                                  1998                1997
                                                                -------             -------
                                                                    (Dollars in thousands)
<S>                                                             <C>                 <C>   
Loans accounted for on a non-accrual basis:
Mortgage loans:
  Permanent loans secured by 1-4 family residences...........   $   --              $   --
  All other mortgage loans...................................       --                  --
Non-mortgage loans...........................................       --                  --
                                                                ------              ------
Total........................................................   $   --              $   --
                                                                 =====              ======

Accruing loans which are contractually past due 90 days or more:
Mortgage loans:
  Permanent loans secured by 1-4 family residences...........    $  75              $  120
  All other mortgage loans...................................       --                  --
Non-mortgage loans...........................................       15                  --
                                                                 -----              ------
Total........................................................    $  90              $  120
                                                                  ====              ======
Total non-accrual and accrual loans..........................    $  90              $  120
                                                                  ====              ======
Real estate..................................................    $  --                  14
                                                                 =====              ======
Other non-performing assets..................................    $  --                  --
                                                                 =====              ======
Total non-performing assets..................................    $  90              $  134
                                                                 =====              ======
Total non-accrual and accrual loans to
  net loans..................................................     0.31%               0.58%
                                                                  ====                ====
Total non-accrual and accrual loans to
  total assets...............................................     0.12%               0.19%
                                                                  ====                ====
Total non-performing assets to total assets..................     0.12%               0.22%
                                                                  ====                ====
</TABLE>



         There was no  interest  income  that would have been  recorded on loans
placed on a  non-accrual  basis under the original  terms of such loans as there
were no loans on a nonaccrual basis during the year ended June 30, 1998.


                                        8

<PAGE>



         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 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,  1998,  the  Company's  classified  assets  consisted  of
substandard loans of $37,000. At June 30, 1998, the Company also had $427,000 in
loans designated as special mention.  The Company had delinquent loans of 60 and
90 days or more of $138,000 and $90,000,  respectively,  and a general valuation
allowance of $251,000.

         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, 1998.

         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.

         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.


                                        9

<PAGE>

<TABLE>
<CAPTION>
                                                                         At June 30,
                                                  ------------------------------------------------------------
                                                        1998                                  1997
                                                  ---------------------------         ------------------------
                                                               Percent of                          Percent of
                                                             Loans in each                       Loans in 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:
  1-4 family residential............                  56           76.9                   68           85.3
  Multi-family .....................                   5            4.5                    1            5.2
  Commercial........................                  31            4.3                    6            3.0
  Agricultural......................                   1            0.4                    1            0.7
Consumer............................                   2            1.4                   --            0.7
Commercial..........................                   8            3.8                   --            3.2
Agricultural........................                  18            8.7                    7            1.9
Unallocated allowance for                                                           
  loans losses......................                 130            N/A                  130            N/A
                                                   -----          -----                -----          -----
    Total allowance for                                                             
      loan losses ..................               $ 251          100.0%               $ 213          100.0%
                                                   =====          =====                =====          =====
</TABLE>
                                                               


         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:

<TABLE>
<CAPTION>
                                                                 At or For the Year
                                                                    Ended June 30,
                                                             ----------------------------
                                                               1998                1997
                                                               ----                ----
                                                                (Dollars in thousands)

<S>                                                          <C>                 <C>    
Total loans outstanding (1).....................              $29,246             $20,980
                                                               ======              ======
Average loans outstanding.......................              $24,131             $18,284
                                                               ======              ======

Allowance balances (at beginning of
year)...........................................             $    213                $213
Charge-offs.....................................                   --                  --
Recoveries......................................                   --                  --
                                                             --------             -------
Net charge-offs.................................                   --                  --
Provision.......................................                   38                  --
                                                             --------             -------
Allowance balance (at end of year)..............             $    251             $   213
                                                             ========             =======
Allowance for loan losses as a percent
  of total loans outstanding....................                 0.86%               1.02%
Net loans charged off as a percent of
  average loans outstanding.....................                   --%                 --%
</TABLE>

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

                                       10

<PAGE>




         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 and/or sales, as a source of liquidity.

         At June 30, 1998, the Company's  mortgage-backed and related securities
designated  available-for-  sale had a carrying  value (and fair value) of $33.9
million,  and an amortized cost of $33.7  million.  In January 1998, the Company
redesignated  all  mortgage-backed  and related  securities  held to maturity as
available  for  sale.   As  such,   at  June  30,  1998,   the  Company  had  no
mortgage-backed and related securities designated held to maturity.  The Company
doe not intend to designate any  mortgage-backed  and related securities as held
to maturity in the foreseeable future.

         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   Bank.   Such
quasi-governmental  agencies,  which  guarantee  the  payment of  principal  and
interest to investors,  primarily  include FHLMC,  Government  National Mortgage
Bank ("GNMA"), and Federal National Mortgage Bank ("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 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.  At  June  30,  1998,  the  Company  had  no
collateralized mortgage obligations or other mortgage derivative products.

         Investment Activities. In order to maintain operational flexibility and
meet  regulatory  liquidity  requirements,  the  Bank  maintains  an  investment
securities  portfolio.  See  Regulation  of  the  Bank  Liquidity  Requirements.
Investment  securities  can serve as  collateral  for  borrowings  and,  through
maturities and/or sales, as a source of liquidity.

         At June  30,  1998,  the  Company's  investment  securities  designated
available-for-sale  had a carrying  value (and fair value) of $9.8  million.  At
June 30, 1998,  amortized cost also totalled $9.8 million.  In January 1998, the
Company redesignated all investment securities held to maturity as

                                       11

<PAGE>



available  for sale.  As such,  at June 30, 1998,  the Company had no investment
securities designated held to maturity. The Company does not intend to designate
any investment  securities as held to maturity in the  foreseeable  future.  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.

                                                      At June 30,
                                               -------------------------
                                                1998              1997
                                              -------            -------
                                                (In thousands)
  U.S. Treasury notes....................      $3,798            $ 5,502
  U.S. Government agency securities......                         10,725
                                                5,166
  Municipal bonds........................         830              1,150
                                              -------             ------
    Total investment securities..........       9,794             17,377
Interest-earning deposits in
  other institutions.....................       1,989                748
FHLB stock...............................         835                334
Mortgage-backed and related
  securities.............................      33,937             22,023
                                              -------             ------
      Total investments..................     $46,555            $40,482
                                              =======             ======



         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, 1998.

<TABLE>
<CAPTION>

                                                                          As of June 30, 1998
                            --------------------------------------------------------------------------------------------------------

                                  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......      $3,798        5.44%        $    --         --%       $    --         --%         $   --          --%
U.S. Government
  Agency bonds...........       1,753        6.48           1,913       6.64          1,500        6.48             --          --
Municipal bonds (1)......         430        4.19             250       4.35            150        4.57             --          --
                               ------       -----          ------      -----         ------        ----         ------       -----

 Total investment
    securities...........       5,981        5.65           2,163       6.38          1,650        6.31             --          --

Mortgage-backed and
  related securities.....       1,965        6.34           9,811       6.55         20,173        6.50          1,988        7.19
                                -----       -----          ------      -----        -------        ----          -----       -----
  Total investment
    portfolio(2).........      $7,946        5.82%        $11,974       6.52%       $21,823        6.49%        $1,988        7.19%
                                =====       =====          ======      =====         ======       =====          =====       =====

</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.


                                       12

<PAGE>



Sources of Funds

         General.  Deposits and, to a lesser extent, FHLB advances 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.

         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, 1998,  passbook and money market accounts  constituted $7.6
million,  or 15.80% of the  Company's  deposit  portfolio  and  certificates  of
deposit  constituted  $40.5  million  or 84.20% of the  deposit  portfolio.  The
Company had no brokered deposits at that date, however, a substantial portion of
the Bank's deposits are funds from local government entities.

         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,  1998,
including term certificate accounts separated by time remaining until maturity.

                                                            Amount
                                                            ------
                                                        (In thousands)
Term certificate accounts:
  Maturity Period
  Within three months.....................                 $ 2,660
  Three through six months................                   4,254
  Six through twelve months...............
                                                             3,878
  Over twelve months......................                   4,976
                                                           -------
    Total.................................                  15,768
Money market accounts.....................                   3,531
                                                           -------
    Total.................................                 $19,299
                                                            ======


Borrowings

         Deposits are the primary source of funds for the Company's  lending and
investment  activities and for its general business  purposes.  The Bank 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 blanket  pledge
of its 1-4 family mortgage loan  portfolio,  a pledge of the Bank's stock in the
FHLB of Des Moines, and a portion of the Bank's investment  securities.  At June
30, 1998, the Bank had advances  outstanding of $16.2 million. The Bank also has
a $1.0  million  line of credit with the FHLB which was not drawn on at June 30,
1998.  The Bank's  advances  include $5.0 million in advances  with various call
features.  If called, the FHLB has pledged to provide alternative funding albeit
at then current market terms. The Bank, 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, 1998, the Company and the Bank had
no borrowings from the Federal Reserve Board.

                                       13

<PAGE>




Personnel

         The Company has no employees other than executive officers.  As of June
30,  1998,  the Bank had 12  full-time  and 2 part-time  employees.  None of the
Bank's employees are represented by a collective bargaining group.

Regulation

         Set forth below is a brief description of certain laws which related to
the regulation of the Company and the Bank. 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 Bank 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 Bank  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  Bank 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 Bank-Qualified Thrift Lender Test."

Regulation of the Bank

         General. As a federally  chartered,  SAIF-insured  savings association,
the Bank 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 Bank is
also subject to certain reserve requirements  promulgated by the Federal Reserve
Board.

         Insurance of Deposit Accounts.  The Bank'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

                                       14

<PAGE>



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.

         Effective  September  30,  1996,  federal  law was revised to mandate a
one-time  special  assessment on SAIF members such as the Bank of  approximately
 .657% of deposits held on March 31, 1995.  The Bank 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 Bank 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  Bank's  regulatory  capital
exceeded all minimum regulatory capital requirements applicable to it as of June
30, 1998.

         Interest-Rate Risk (IRR). As a financial  institution  regulated by the
OTS,  the Bank 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  Bank 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 Bank at June 30, 1998 and 1997, given
an instantaneous and permanent increase in market interest rates.

<TABLE>
<CAPTION>
         Risk Measures:                                                      At June 30,            At June 30,
                                                                                1998                    1997
                                                                             -----------            -----------
         <S>                                                                 <C>                    <C>
         200 Basis point rate shock
         Pre-shock NPV ratio: NPV as % of present value of assets               13.14%                 15.48%
         Exposure measure: Post-shock NPV ratio:                                11.29%                 12.95%
         Sensitivity measure: Change in NPV ratio:                            (185) bps              (253) 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 Bank may  undertake  in  response  to  changes in
interest  rates.  Nevertheless,  the  Bank's  interest-rate  risk  exposure  has
decreased  over the 12 months ended June 30, 1998,  primarily as a result of the
Company's  use of  long-term,  fixed-rate  FHLB  advances.  These  advances were
obtained as part

                                       15

<PAGE>



of  management's  strategy  to  fund a  substantial  portion  of its  long-term,
fixed-rate loan portfolio with long-term,  fixed-rate  sources of funds in order
to minimize interest-rate risk.

         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  Bank  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, 1998,  the Bank was a Tier 1  institution.  In the event the Bank'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  Bank'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 Bank 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 Bank below the amount required for the liquidation account to be established
pursuant to the Bank's plan of conversion.  During the year ended June 30, 1998,
the Bank declared and paid a $500,000 dividend to the Company.

         Loans to One  Borrower.  Savings  institutions  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 Bank's maximum loan
to one borrower limit was approximately $1,275,000 as of June 30, 1998.

         At June 30, 1998, the Bank's largest loan amount to one borrower was an
agricultural term loan in the amount of $537,000, secured by co-operative stock.

         Qualified  Thrift  Lender Test.  Savings  institutions  must meet a QTL
test. If the Bank 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, 1998,  the Bank was in compliance  with its QTL
requirement with 84.71% of its assets invested in QTIs.


                                       16

<PAGE>



         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 Bank 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
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, 1998, the Bank 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 Bank.
The Bank 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 Bank also owns a building adjacent to the branch
office and two lots in Redwood Falls, Minnesota. In May 1997, the Bank purchased
two vacant lots in Redwood Falls for possible future expansion. Subsequently, in
April 1998, the Bank announced that it was proceeding with construction of a new
main office  building  for the Bank on the east side of Redwood  Falls.  The new
facility will be completed in early 1999 with occupancy shortly thereafter.  The
Bank intends to continue operating its downtown Redwood Falls office as a branch
office.

         In December  1997, the Bank also purchased a lot in Olivia for possible
future  expansion of its Olivia branch office.  The Bank has made no decision if
or when to construct a branch office building on this lot.

         (b) Investment Policies.

         See "Item 1.  Business"  above for a general  description of the Bank'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 Bank,"
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 Bank."


                                       17

<PAGE>



         (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 Bank."

         (c)  Description of Real Estate and Operating Data.

         Not Applicable.

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

         The  Company and the Bank,  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
Bank 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
Bank. No claims or lawsuits were pending or threatened at June 30, 1998.

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, 1998.


                                     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, 1998 (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
-----------------------------

         Consolidated  financial  statements  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.




                                       18

<PAGE>



                                    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 29, 1998, (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

                  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,  1998,  are
incorporated herein by reference.

         Report of Independent Auditors

         Consolidated Statements of Financial Condition as of June 30, 1998  and
1997

         Consolidated Statements of Earnings for the Years Ended June 30,  1998,
1997, and 1996


                                       19

<PAGE>



         Consolidated Statements of Stockholders' Equity  for  the  Years  Ended
June 30, 1998, 1997, and 1996

        Consolidated Statements of Cash Flows for the Years Ended June 30, 1998,
1997, and 1996

         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***

                  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, 1998.

                  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  Annual  Report on Form  10-KSB for the
     fiscal year ended June 30, 1997 (File No. 0-25884).
***  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).

                                       20

<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 16, 1998                   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 16, 1998                      Date: September 16, 1998


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

Date:    September 16, 1998                      Date: September 16, 1998


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


Date:    September 16, 1998                      Date:  September 16, 1998


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

Date:    September 16, 1998