U.S. SECURITIES AND EXCHANGE COMMISSION
                              Washington, DC 20549

                 ----------------------------------------------

                                   FORM 10-QSB

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

                  For the quarterly period ended March 31, 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 Number 0-25884

                             REDWOOD FINANCIAL, INC.
--------------------------------------------------------------------------------
             (Exact name of Registrant as specified in its Charter)

                           Minnesota                         41-1807233
-------------------------------------------------------------------------------
 (State or other jurisdiction of incorporation      (IRS Employer Identification
             or organization)                                Number)

P.O. Box 317, 301 S. Washington St., Redwood Falls, Minnesota     56283-0317
----------------------------------------------------              ----------
            (Address of principal executive offices)              (Zip Code)

Registrant's telephone number, including area code:   (507) 637-8730

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

                                                        [X]  Yes     [  ]  No

        Indicate  the  number  of  shares  outstanding  of each of the  issuer's
classes of common stock as of May 2, 1997:

              Class                                               Outstanding
              -----                                               -----------

        Common stock, par value $0.10 per share                      961,875


<PAGE>



                     REDWOOD FINANCIAL, INC. AND SUBSIDIARY

                                    CONTENTS

PART I - FINANCIAL INFORMATION

                                                                        Page

      Item 1:   Financial Statements

                Consolidated Balance Sheets at March 31, 1997 and
                June 30, 1996                                            3

                Consolidated Statements of Earnings for the Three
                and Nine months ended March 31, 1997 and 1996            4

                Consolidated Statement of Stockholders' Equity
                for the Nine months ended March 31, 1997                 5

                Consolidated Statements of Cash Flows for the
                Nine months ended March 31, 1997 and 1996                6

                Notes to Consolidated Financial Statements            7-10

      Item 2:   Management's Discussion and Analysis of
                Financial Condition and Results of Operations        11-20

PART II - OTHER INFORMATION

      Item 1:   Legal Proceedings                                       21

      Item 2:   Changes in Securities                                   21

      Item 3:   Defaults Upon Senior Securities                         21

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

      Item 5:   Other Information                                       21

      Item 6:   Exhibits and Reports on Form 8-K                        21

      Signatures                                                        22


                                        2

<PAGE>
                     REDWOOD FINANCIAL, INC., AND SUBSIDIARY
                         PART I - FINANCIAL INFORMATION
                          Item 1 - Financial Statements

                           Consolidated Balance Sheets
                                   (Unaudited)
<TABLE>
<CAPTION>
                                                        March 31,   June 30, 
                       Assets                             1997        1996
--------------------------------------------------------------------------------
<S>                                                  <C>          <C>   
Cash                                                 $     15,326      15,345
Interest-bearing deposits with banks                      360,466   2,857,818
--------------------------------------------------------------------------------
               Cash and cash equivalents                  375,792   2,873,163
--------------------------------------------------------------------------------
Securities available for sale:
     Mortgage-backed and related securities             6,171,442           0
     Investment securities                              3,946,250           0
--------------------------------------------------------------------------------
        Total securities available for sale            10,117,692           0
--------------------------------------------------------------------------------

Securities held to maturity:
     Mortgage-backed and related securities            14,478,888  15,805,305
     Investment securities                             10,995,787  15,288,913
--------------------------------------------------------------------------------
         Total securities held to maturity             25,474,675  31,094,218
--------------------------------------------------------------------------------
Loans receivable, net                                  18,878,902  16,513,727
Federal Home Loan Bank stock, at cost                     333,500     333,500
Accrued interest receivable                               431,865     553,856
Premises and equipment, net                                58,659      52,187
Other assets                                               59,753      93,992

--------------------------------------------------------------------------------
                    Total Assets                     $ 55,730,838  51,514,643
--------------------------------------------------------------------------------

        Liabilities and Stockholders' Equity

--------------------------------------------------------------------------------
Deposits                                               42,561,895  38,042,529
Federal Home Loan Bank advances                           850,318           0
Advance payments by borrowers for taxes and insurance      99,752      55,686
Accrued expenses and other liabilities                    109,131     259,392

--------------------------------------------------------------------------------
                 Total Liabilities                     43,621,096  38,357,607
--------------------------------------------------------------------------------

Common stock ($.10 par value): Authorized and issued
 1,125,000 shares; outstanding 961,875 shares
 at March 31, 1997; 1,068,750 shares at June 30, 1996     112,500     112,500
Additional paid-in capital                              8,469,782   8,457,017
Retained earnings, subject to certain restrictions      6,243,103   6,118,091
Net unrealized loss on securities available for sale      (72,671)          0
Unearned employee stock ownership plan shares            (546,064)   (595,744)
Unearned management stock bonus plan shares              (328,453)   (393,422)
Treasury stock, at cost; 163,125 shares at             (1,768,455)   (541,406)
 March 31, 1997; 56,250 shares at June 30, 1996

--------------------------------------------------------------------------------
             Total Stockholders' Equity                12,109,742  13,157,036
--------------------------------------------------------------------------------

--------------------------------------------------------------------------------
     Total Liabilities and Stockholders' Equity      $ 55,730,838  51,514,643
--------------------------------------------------------------------------------
</TABLE>

See accompanying notes to consolidated financial statements.
                                        3

                                                         
<PAGE>
                     REDWOOD FINANCIAL, INC. AND SUBSIDIARY
                       Consolidated Statements of Earnings
                                   (Unaudited)
<TABLE>
<CAPTION>
                                                   Three months          Nine months 
                                                  ended March 31,       ended March 31,
                                                  ---------------       ---------------
                                                   1997     1996        1997       1996     
-----------------------------------------------------------------------------------------
<S>                                           <C>        <C>         <C>        <C>         
Interest income:                                                                 
    Loans receivable                        $    400,449   339,724   1,141,005  1,011,652 
    Mortgage-backed and related securities       307,462   190,035     846,132    549,325
    Investment securities                        206,293   292,835     642,207    911,433
    Cash equivalents                              57,974    38,315     161,637    126,149
-----------------------------------------------------------------------------------------
      Total interest income                      972,178   860,909   2,790,981  2,598,559
                                                                                 
Interest Expense:                                                                
    Deposits                                     552,263   474,621   1,561,553  1,412,435
    Federal Home Loan Bank advances                  926         0         926          0
-----------------------------------------------------------------------------------------
      Total interest expense                     553,189   474,621   1,562,479  1,412,435
                                                                                 
    Net interest income                          418,989   386,288   1,228,502  1,186,124
                                                                                 
Provision for losses on loans                          0         0           0          0
-----------------------------------------------------------------------------------------
                                                                                
    Net interest income after provision                                          
      for losses on loans                        418,989   386,288   1,228,502  1,186,124
                                                                                 
Noninterest income:                                                              
    Fees and service charges                       5,678     7,796      31,861     22,967
    Gains on the sale of securities                                              
      available for sale                           2,863         0       2,863          0
    Other                                          6,382     6,885       7,844     25,149
-----------------------------------------------------------------------------------------
      Total noninterest income                    14,923    14,681      42,568     48,116
                                                                                 
Noninterest expense:                                                             
    Compensation and employee benefits           177,873   153,497     531,240    473,583
    Advertising                                    4,866     5,724      13,473     12,843
    Occupancy                                      8,134     6,586      23,496     20,316
    Federal deposit insurance premiums             6,020    19,713      45,389     60,990
    Professional fees                             14,233    29,681     178,471    101,533
    Deposit insurance fund assessment                  0         0     237,085          0
    Other                                         20,948    23,076      64,801     63,113
-----------------------------------------------------------------------------------------
      Total noninterest expense                  232,074   238,277   1,093,955    732,378
-----------------------------------------------------------------------------------------
                                                                                
      Earnings before income taxes               201,838   162,692     177,115    501,862
                                                                                 
Income tax expense                                74,986    60,328      52,103    150,904
-----------------------------------------------------------------------------------------
                                                                                
      Net earnings                            $  126,852   102,364     125,012    350,958
-----------------------------------------------------------------------------------------
                                                                                
Net earnings per common share                 $     0.13      0.10        0.13       0.34
-----------------------------------------------------------------------------------------

-----------------------------------------------------------------------------------------
Weighted average number of shares outstanding    955,926 1,019,392     976,828  1,017,322
-----------------------------------------------------------------------------------------
</TABLE>
                                                     
See accompanying notes to consolidated financial statements.                   
                                                                             
                                        4

<PAGE>
REDWOOD FINANCIAL, INC. AND SUBSIDIARY

Consolidated Statement of Stockholders' Equity
(Unaudited)
<TABLE>
<CAPTION>


                                                               Net      Unearned 
                                                            Unrealized   Employee    Unearned
                                                             Loss on      Stock     Management
                                   Additional               Securities  Ownership   Stock Bonus                   Total
                         Common      Paid-in     Retained   Available      Plan        Plan       Treasury    Stockholders'
                          Stock      Capital     Earnings    for Sale     Shares      Shares        Stock        Equity
---------------------------------------------------------------------------------------------------------------------------
<S>                   <C>            <C>         <C>           <C>        <C>          <C>        <C>            <C>       
Balance,
 June 30, 1996        $   112,500    8,457,017   6,118,091           0    (595,744)    (393,422)    (541,406)    13,157,036

 Net earnings                                      125,012                                                          125,012

 Stock repurchases                                                                                (1,227,049)    (1,227,049)

 Net unrealized 
  loss on securities
  available for sale                                           (72,671)                                             (72,671)

 Earned employee
  stock ownership
  plan shares                           12,765                              49,680                                   62,445

 Earned management 
  stock bonus plan                                                                       64,969                      64,969
  shares
---------------------------------------------------------------------------------------------------------------------------

Balance,
 March 31, 1997       $   112,500    8,469,782   6,243,103     (72,671)   (546,064)    (328,453)  (1,768,455)    12,109,742
---------------------------------------------------------------------------------------------------------------------------

</TABLE>


See accompanying notes to consolidated financial statements.
                                    5


<PAGE>
                     REDWOOD FINANCIAL, INC., AND SUBSIDIARY

                      Consolidated Statements of Cash Flows
                                   (Unaudited)
<TABLE>
<CAPTION>
                                                                                                Nine months
                                                                                               ended March 31, 
                                                                                           -----------------------
                                                                                           1997           1996
------------------------------------------------------------------------------------------------------------------
<S>                                                                                    <C>             <C>    

Operating Activities:
 Net earnings                                                                          $   125,012        350,958
 Adjustments to reconcile net earnings to net cash
  provided by operations
      Depreciation                                                                          13,193         12,602
      Amortization of premiums and discounts on investment
          securities, mortgage-backed and related securities
          and loans receivable, net                                                        (28,869)       (28,079)
      Decrease in other assets                                                              34,239         32,305
      Decrease (increase) in accrued interest receivable                                   121,991        (12,154)
      Increase in accrued interest payable                                                 417,057        251,554
      Amortization of unearned ESOP shares                                                  49,680         49,680
      Earned ESOP shares priced above original cost                                         12,765          8,194
      Earned Management Stock Bonus Plan shares                                             64,969         17,656
      Decrease in accrued expenses and other liabilities                                  (150,261)      (147,581)
      Decrease in deferred income taxes                                                     48,447         42,229
      Federal Home Loan Bank stock dividend                                                      0         (6,500)

------------------------------------------------------------------------------------------------------------------
                    Net cash provided by operating activities                              708,223        570,864

Investing Activities:
  Proceeds from maturities of investment securities held to maturity                     4,295,000      2,500,000
  Purchases of investment securities held to maturity                                            0     (2,862,720)
  Purchases of mortgage-backed and related securities held to maturity                           0     (4,127,185)
  Principal collected on mortgage-backed and related securities held to
    maturity                                                                             1,320,723      1,250,853
  Purchases of investment securities available for sale                                 (4,990,575)             0
  Proceeds from sales of investment securities available for sale                          996,513              0
  Purchases of mortgage-backed and related securities available for sale                (6,251,792)             0
  Principal collected on mortgage-backed and related securities available
    for sale                                                                                37,639              0
  Increase in loans receivable, net                                                     (2,363,081)      (628,876)
  Purchases of premises and equipment                                                      (19,665)        (1,637)

------------------------------------------------------------------------------------------------------------------
                    Net cash used by investing activities                               (6,975,238)    (3,869,565)

Financing Activities:
  Decrease in funds held for stock subscriptions                                                 0    (13,127,630)
  Decrease in deferred stock conversion costs                                                    0        439,015
  Increase in deposits, net                                                              4,102,627      1,294,713
  Increase in advance payments by borrowers for taxes and insurance                         44,066         33,726
  Proceeds from the sale of common stock                                                         0      8,549,361
  Increase in unearned ESOP shares                                                               0       (661,984)
  Proceeds from Federal Home Loan Bank advances                                          1,500,000              0
  Repayment of Federal Home Loan Bank advances                                            (650,000)             0
  Repurchase of common stock                                                            (1,227,049)      (965,156)

------------------------------------------------------------------------------------------------------------------
                    Net cash provided (used) by financing activities                     3,769,644     (4,437,955)

------------------------------------------------------------------------------------------------------------------
                    Decrease in cash and cash equivalents                               (2,497,371)    (7,736,656)


Cash and cash equivalents, beginning of period                                           2,873,163     14,092,665
------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents, end of period                                               $   375,792      6,356,009
------------------------------------------------------------------------------------------------------------------

Supplemental cash flow disclosures:
  Cash paid for interest                                                               $ 1,145,422      1,160,881
  Cash paid for income taxes                                                               162,920         67,980

</TABLE>

See accompanying notes to consolidated financial statements.

                                        6


<PAGE>



                     REDWOOD FINANCIAL, INC. AND SUBSIDIARY

                   Notes to Consolidated Financial Statements

                                 March 31, 1997
                                   (Unaudited)

(1)   Redwood Financial, Inc.

      Redwood  Financial,  Inc. (the Company) was incorporated under the laws of
      the State of  Minnesota  for the purpose of becoming  the savings and loan
      holding company of Redwood Falls Federal Savings and Loan Association (the
      Association)  in  connection  with  the  Association's  conversion  from a
      federally-chartered   mutual   savings   and   loan   association   to   a
      federally-chartered  stock savings and loan  association,  pursuant to its
      Plan of Conversion.

      The Company commenced a Subscription and Community  Offering of its shares
      (the Offering) in connection with the conversion of the Association on May
      22, 1995.  The Offering was closed on June 22, 1995 and the conversion was
      completed July 7, 1995 (see note 5).

(2)   Basis of Presentation

      The accompanying unaudited consolidated financial statements were prepared
      in accordance with  instructions  for Form 10-QSB and,  therefore,  do not
      include  all  disclosures  necessary  for a complete  presentation  of the
      consolidated   balance  sheets,   consolidated   statements  of  earnings,
      consolidated   statement  of   stockholders'   equity,   and  consolidated
      statements of cash flows in conformity with generally accepted  accounting
      principles. However, all adjustments,  consisting only of normal recurring
      adjustments,  which are, in the opinion of  management,  necessary for the
      fair presentation of the interim financial  statements have been included.
      The  statements  of earnings for the three and nine months ended March 31,
      1997 are not  necessarily  indicative of the results which may be expected
      for the entire year.

      The material  contained  herein is written with the  presumption  that the
      users of the interim financial  statements have read or have access to the
      most recent Annual Report on Form 10-KSB of Redwood Financial, Inc., which
      contains  the  latest  audited  financial  statements  and notes  thereto,
      together with Management's  Discussion and Analysis of Financial Condition
      and Results of Operations as of June 30, 1996 and for the year then ended.

                                                                     (Continued)

                                        7


<PAGE>



                            REDWOOD FINANCIAL, INC. AND SUBSIDIARY

(3)   Earnings Per Share

      Earnings  per share are based upon the weighted  average  number of common
      shares and common stock equivalents,  if dilutive,  outstanding during the
      period. The only common stock equivalents are stock options.  The weighted
      average  number  of  common  stock  equivalents  is  calculated  using the
      treasury stock method.

(4)   Regulatory Capital Requirements

      At March 31, 1997, the  Association  met each of the three current minimum
      regulatory  capital  requirements.  The  following  table  summarizes  the
      Association's regulatory capital position at March 31, 1997:

                                                        Amount      Percent (1)
          ---------------------------------------------------------------------
                                                         (dollars in thousands)

          Tangible Capital:

            Actual                                        $8,241        15.24%
            Required                                         811         1.50
         --------------------------------------------------------------------
            Excess                                        $7,430        13.74%
         --------------------------------------------------------------------

         Core Capital:

            Actual                                        $8,241        15.24%
            Required                                       1,623         3.00
         --------------------------------------------------------------------
            Excess                                        $6,618        12.24%
         --------------------------------------------------------------------

         Risk-Based Capital:

            Actual                                        $8,445        51.15%
            Required                                       1,321         8.00
         --------------------------------------------------------------------
            Excess                                        $7,124        43.15%
         --------------------------------------------------------------------

         (1)    Tangible  and core capital  levels are shown as a percentage  of
                total adjusted assets;  risk-based capital levels are shown as a
                percentage of risk-weighted assets.

                                                                     (Continued)

                                        8


<PAGE>



                     REDWOOD FINANCIAL, INC. AND SUBSIDIARY

(5)   Stockholders' Equity and Stock Conversion

      The Association  converted from a  federally-chartered  mutual savings and
      loan  association  to  a   federally-chartered   stock  savings  and  loan
      association  pursuant to its plan of Conversion  which was approved by the
      Association's  members on June 23, 1995.  The  conversion  was effected on
      July 7, 1995,  and resulted in the issuance of 1,125,000  shares of common
      stock  (par  value  $0.10) at $8.00 per share for a gross  sales  price of
      $9,000,000.   Costs   related  to  conversion   (primarily   underwriters'
      commission,  printing, and professional fees) aggregated $450,639 and were
      deducted  to  arrive  at the  net  proceeds  of  $8,549,361.  The  Company
      established  an employee  stock  ownership  trust which  purchased  82,748
      shares of common stock of the Company at the  issuance  price of $8.00 per
      share from funds borrowed from the holding company.

(6)   Stock Repurchases

      During the three  months  ended  March 31,  1997,  the  Company  purchased
      106,875 shares of its  outstanding  common stock, or 10% of its previously
      outstanding common stock. As a result of the stock repurchase program, the
      Company has now outstanding  961,875 shares of common stock. The following
      summarizes the Company's common stock repurchases during the quarter:

          Date Purchased             Shares Purchased         Price per share
          --------------             ----------------         ---------------
          January 15, 1997                 3,000                  $10.3750
          January 28, 1997                 4,600                   10.7500
          January 30, 1997                   600                   11.0000
          January 31, 1997                10,000                   11.0000
          February 4, 1997                37,500                   11.0000
          February 19, 1997               51,175                   12.0625
                                                       
(7)   New Accounting Standard

      In  February  1997,  the  Financial   Accounting  Standards  Board  issued
      Statement of Financial  Accounting  Standards  (SFAS) No. 128 Earnings per
      Share.  SFAS No. 128  establishes  standards for computing and  presenting
      earnings per share (EPS) and applies to entities with publicly held common
      stock or potential  common stock. It replaces the  presentation of primary
      EPS with a presentation  of basic EPS. It also requires dual  presentation
      of basic  and  diluted  EPS on the face of the  income  statement  for all
      entities with complex capital  structures and requires a reconciliation of
      the  numerator and the  denominator  of the basic EPS  computation  to the
      numerator and denominator of the diluted EPS computation.

                                                                     (Continued)

                                        9


<PAGE>



                     REDWOOD FINANCIAL, INC. AND SUBSIDIARY

      This  statement is effective for financial  statements  issued for periods
      ending  after  December  15,  1997,  including  interim  periods;  earlier
      application is not permitted.  This statement requires  restatement of all
      prior-period  EPS  data  presented.  Management  of the  Company  has  not
      determined  the impact of adoption of the new  accounting  standard on the
      Company's financial statements.

                                                                     (Continued)

                                       10


<PAGE>



                     REDWOOD FINANCIAL, INC. AND SUBSIDIARY

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

General

The Company's net earnings are dependent  primarily on its net interest  income,
which is the  difference  between  interest  income earned on its investment and
loan portfolio and interest paid on interest-bearing  liabilities.  Net interest
income  is  determined  by  (1)  the   difference   between   yields  earned  on
interest-earning assets and rates paid on interest-bearing liabilities (interest
rate  spread)  and (2) the  relative  amounts  of  interest-earning  assets  and
interest-bearing  liabilities. The Company's interest rate spread is affected by
regulatory,  economic,  and competitive  factors that influence  interest rates,
loan demand,  and deposit flows. To a lesser extent,  the Company's net earnings
also are affected by the level of noninterest  income,  which primarily consists
of service charges and other fees. In addition, net earnings are affected by the
level of noninterest (general and administrative) expenses.

The  operations  of  financial  institutions,  including  the  Association,  are
significantly affected by prevailing economic conditions,  competition,  and the
monetary  and  fiscal  policies  of  the  federal  government  and  governmental
agencies.  Lending  activities  are  influenced  by the demand for and supply of
housing,  competition  among  lenders,  the  level of  interest  rates,  and the
availability  of funds.  Deposit  flows and  costs of funds  are  influenced  by
prevailing market rates of interest, primarily on competing investments, account
maturities,  and the levels of personal income and savings in the  Association's
market area.

Financial Condition

The Company's total assets increased by $4,216,000,  or 8.18%,  from $51,515,000
at June 30, 1996 to $55,731,000 at March 31, 1997. The increase in the Company's
assets reflected an increase in the level of deposits,  particularly public unit
fund  deposits and proceeds from Federal Home Loan Bank (FHLB)  advances  during
the nine months ended March 31, 1997.

Cash and cash equivalents decreased by $2,497,000, or 86.91%, from $2,873,000 at
June 30, 1996 to $376,000 at March 31, 1997.  The decrease in cash was primarily
due to the use of funds for increased loan  production  and investment  security
purchases,  including  mortgage-backed  and related  securities  during the nine
months ended March 31, 1997.

The Company's loans receivable,  net, increased  $2,365,000,  or 14.32% over the
nine  months  ended  March  31,  1997.  The  increase  in loans  was a result of
increased loan demand in the Company's market and primarily includes residential
first and second (i.e. home equity) mortgage loans.

                                                                     (Continued)

                                       11


<PAGE>



                     REDWOOD FINANCIAL, INC. AND SUBSIDIARY

The  Company's  investment  securities,  including  mortgage-backed  and related
securities,  increased  $4,498,000,  or 14.47%  from June 30,  1996 to March 31,
1997.  The increase in  investment  securities,  including  mortgage-backed  and
related securities primarily included 7-year balloon mortgage-backed  securities
and U.S.  agency debt  obligations.  All  purchases  of  investment  securities,
including  mortgage-backed  and related securities  occurred in the three months
ended March 31, 1997, and are designated  available for sale.  Proceeds from the
maturity of investment  securities and sales of investment  securities available
for sale totaled $4,295,000 and $997,000,  respectively,  during the nine months
ended  March  31,  1997.  Principal  payments  on  mortgage-backed  and  related
securities  totaled  $1,358,000  in the same period.  The  Company's  investment
securities and mortgage-backed and related securities  designated  available for
sale reflect a $72,000 net unrealized loss as a result of recent market interest
rate increases.

The  Company's  deposits,  including  accrued  interest  payable,  increased  by
$4,519,000, or 11.88%, from $38,043,000 at June 30, 1996 to $42,562,000 at March
31,  1997.  The  increase in deposits is largely a result of higher  public unit
fund deposits at March 31, 1997.  During the quarter  ended March 31, 1997,  the
Company  utilized  FHLB  advances  of  $850,000.  The  Company  had no  advances
outstanding at June 30, 1996.  The Company  intends to utilize FHLB advances for
cash management and loan and investment  funding purposes.  The advances provide
an  alternative  source  of  funds  for  the  Company,  at  costs  substantially
equivalent to its retail deposit products.

Results of Operations

Net Earnings

Net earnings  were $127,000 for the quarter ended March 31, 1997, as compared to
net earnings of $102,000 for the quarter ended March 31, 1996. This  represented
an increase of $25,000 or 24.51%.  The increase in net  earnings  was  primarily
attributable  to a  $33,000,  or 8.55%  increase  in net  interest  income.  The
increase  in net  interest  income  was  primarily  a result of the use of funds
obtained from recent deposit growth to originate  loans and purchase  investment
securities.  Net earnings were also impacted by a $6,000  decrease,  or 2.52% in
noninterest expense, and a $15,000, or 25.00% increase in income tax expense.

Net earnings were $125,000 for the nine months ended March 31, 1997, as compared
to net  earnings of  $351,000  for the nine months  ended March 31,  1996.  This
represented  a decrease of  $226,000,  or 64.39%.  The  decrease in earnings was
primarily attributable to a $237,000 one-time assessment required by the federal
deposit insurance  authorities to bring the Savings  Association  Insurance Fund
(SAIF) to parity with the Bank Insurance Fund (BIF),  and $102,000 in additional
expense  associated  with  the  unsuccessful   acquisition   attempt  of  Olivia
Bancorporation,  Inc. Net earnings were also impacted by a $43,000 increase,  or
3.63% in net interest income,  and a $99,000  decrease,  or 65.56% in income tax
expense.

                                                                     (Continued)

                                       12


<PAGE>



                     REDWOOD FINANCIAL, INC. AND SUBSIDIARY

Net Interest Income

Net  interest  income  increased  by $33,000,  or 8.55%,  from  $386,000 for the
quarter  ended March 31, 1996 to $419,000 for the quarter  ended March 31, 1997.
The  increase  in net  interest  income is  primarily  due the recent  growth in
deposits invested in higher yielding loans and investment securities,  including
mortgage-backed  and  related  securities.  In  addition,  the  increase  in net
interest  income was also  affected by an increase in the Company's net interest
spread.

Although the Company's interest-bearing  liabilities increased at a greater rate
than interest-earning assets, the spread obtained on the incremental increase in
both  interest-earning  assets  and  interest-bearing  liabilities  resulted  in
increased net interest  income.  Average  interest-earning  assets  increased by
$5,662,000,  or 11.63% from $48,672,000 for the quarter ended March 31, 1996, to
$54,334,000  for the quarter  ended  March 31,  1997.  Average  interest-bearing
liabilities increased by $6,557,000,  or 18.73% from $34,999,000 for the quarter
ended March 31, 1996 to  $41,566,000  for the quarter  ended March 31, 1997.  As
such, the Company's ratio of average interest-earning assets to interest-bearing
liabilities  declined  from  139.07% for the quarter  ended March 31,  1996,  to
130.75%  for the  quarter  ended March 31,  1997.  The  decrease in the level of
interest-earning assets relative to interest-bearing  liabilities is primarily a
result of the use of funds to purchase  outstanding common stock pursuant to the
Company's  stock  repurchase  program  during the quarter  ended March 31, 1997.
Funds used to repurchase stock totaled $1,227,000.

The  increase  in net  interest  income was also  affected by an increase in the
Company's  overall net  interest  spread.  The  Company's  net  interest  spread
increased  from  1.65% for the  quarter  ended  March 31,  1996 to 1.83% for the
quarter  ended March 31, 1997.  The  improvement  in the  Company's net interest
spread is primarily a result of the aforementioned  increased loan portfolio and
increased  investment  in  higher  yielding  investment  securities,   including
mortgage-backed securities.

Net interest income increased by $43,000, or 3.63%, from $1,186,000 for the nine
months  ended March 31, 1996 to  $1,229,000  for the nine months ended March 31,
1997.  The  increase  in net  interest  income  was  primarily  a result  of the
aforementioned  growth in deposits used to fund loan originations and investment
security  purchases during the nine months ended March 31, 1997. The increase in
net interest  income was  partially  offset by a slight  decline in net interest
spread from 1.86% for the nine months ended March 31, 1996 to 1.79% for the nine
months ended March 31, 1997.

The increased loan  portfolio,  albeit  primarily in residential  mortgage loans
will result in an increase in credit risk exposure.  The incremental increase in
interest-bearing  liabilities is primarily  repriceable within 24 months,  which
could increase the Company's interest-rate risk exposure.

                                                                     (Continued)

                                       13


<PAGE>



                     REDWOOD FINANCIAL, INC. AND SUBSIDIARY

Interest Income

Interest  income was $972,000 for the quarter  ended March 31, 1997, as compared
to $861,000 for the quarter  ended March 31, 1996,  representing  an increase of
$111,000,  or 12.89%. As previously  stated, the increase in interest income was
primarily due to a  $5,662,000,  or 11.63%,  increase in the average  balance of
interest-earning  assets in comparison of the quarters  ended March 31, 1997 and
1996,  respectively.  The  increase  in interest  income was also  affected by a
slight increase in the overall yield on interest-earning assets. For the quarter
ended March 31, 1997, the average yield on interest-earning assets was 7.16%, as
compared to 7.08% for the quarter ended March 31, 1996.  The modest  increase in
yield on interest-earning  assets was due primarily to the larger loan portfolio
in the quarter ended March 31, 1997.

Interest  income was  $2,791,000  for the nine months ended March 31,  1997,  as
compared to $2,599,000  for the nine months ended March 31, 1996, an increase of
$192,000,  or 7.39%.  The  increase in interest  income was due  primarily  to a
$4,209,000,  or 8.73%,  increase  in the  average  balance  of  interest-earning
assets. The increase in interest income was partially offset by a slight decline
in the overall yield on interest-earning assets. For the nine months ended March
31, 1997, the average yield on interest-earning assets was 7.10%, a decline from
7.19% for the nine months ended March 31, 1996.

Interest on loans receivable increased by $60,000, or 17.65%, during the quarter
ended March 31,  1997,  as compared to the quarter  ended March 31,  1996.  Such
increase was due to a $2,747,000,  or 17.44%  increase in the average balance of
loans  receivable  from  $15,750,000  for the  quarter  ended  March 31, 1996 to
$18,497,000  for the quarter  ended March 31, 1997.  The increase in interest on
loans  receivable was also affected by a slight increase in the average yield on
loans  receivable  from 8.63% for the quarter ended March 31, 1996, to 8.66% for
the quarter ended March 31, 1997.

Interest on loans receivable increased by $129,000,  or 12.75%,  during the nine
months  ended March 31,  1997,  as  compared to the nine months  ended March 31,
1996.  The increase was due to a $2,177,000,  or 14.00%  increase in the average
balance of loans receivable from $15,547,000 for the nine months ended March 31,
1996 to  $17,724,000  for the nine months ended March 31, 1997.  The increase in
interest on loans  receivable  was partially  offset by a modest  decline in the
average yield on loans receivable from 8.67% for the nine months ended March 31,
1996 to 8.58% for the nine months ended March 31, 1997.

                                                                     (Continued)

                                       14


<PAGE>



                     REDWOOD FINANCIAL, INC. AND SUBSIDIARY

Interest on  mortgage-backed  and related securities  increased by $117,000,  or
61.58%,  during the  quarter  ended March 31,  1997,  as compared to the quarter
ended March 31, 1996. Such increase was due to a $7,270,000, or 68.18%, increase
in  the  average  balance  of   mortgage-backed   and  related  securities  from
$10,663,000  for the quarter ended March 31, 1996 to $17,933,000 for the quarter
ended March 31, 1997. The aforementioned increase in mortgage-backed and related
securities  occurred primarily in the quarter ended March 31, 1997. The increase
in the average balance of mortgage-backed  and related securities is a result of
the use of funds  provided by increased  levels of deposits  and FHLB  advances,
maturing   investment   securities   and   principal   repayments   on  existing
mortgage-backed securities.

The increase in interest on mortgage-backed and related securities was partially
offset  by a  decrease  in the  average  yield on  mortgage-backed  and  related
securities  from 7.13% for the  quarter  ended  March 31,  1996 to 6.86% for the
quarter ended March 31, 1997.

Interest on  mortgage-backed  and related securities  increased by $297,000,  or
54.10%,  during the nine months  ended March 31,  1997,  as compared to the nine
months ended March 31, 1996.  The increase was due to a  $6,091,000,  or 58.70%,
increase in the average balance of  mortgage-backed  and related securities from
$10,377,000  for the nine months ended March 31, 1996,  to  $16,468,000  for the
nine  months  ended March 31,  1997.  The  increase  in the  average  balance of
mortgage-backed  and related securities is a result of the use of funds provided
by  increased  levels  of  deposits  and  FHLB  advances,   maturing  investment
securities and principal repayments on existing mortgage-backed securities.

The increase in interest on mortgage-backed and related securities was partially
offset  by a  decrease  in the  average  yield on  mortgage-backed  and  related
securities  from 7.05% for the nine months ended March 31, 1996 to 6.85% for the
nine months ended March 31, 1997.

Interest on investment  securities,  including FHLB stock, decreased by $87,000,
or 29.69%,  during the quarter  ended March 31, 1997, as compared to the quarter
ended March 31, 1996.  Such  decrease  was due  primarily  to a  $4,364,000,  or
23.89%,   decrease  in  the  average  balance  of  investment   securities  from
$18,265,000 for the quarter ended March 31, 1996, to $13,901,000 for the quarter
ended  March  31,  1997.  The  decline  in the  average  balance  of  investment
securities  was a  result  the use of cash  proceeds  from  maturing  investment
securities  primarily to fund loan originations and  mortgage-backed  securities
purchases.

Additionally,  the decrease in interest on investment securities was affected by
a decrease in the average yield on investment  securities  and FHLB stock,  from
6.42% to 5.93% for the quarters ended March 31, 1996 and 1997, respectively.

                                                                     (Continued)

                                       15


<PAGE>



                     REDWOOD FINANCIAL, INC. AND SUBSIDIARY

Interest on investment securities,  including FHLB stock, decreased by $269,000,
or 29.56%,  during the nine months ended March 31, 1997, as compared to the nine
months ended March 31, 1996. The decrease was due primarily to a $4,434,000,  or
23.44%,   decrease  in  the  average  balance  of  investment   securities  from
$18,919,000 for the nine months ended March 31, 1996 to $14,485,000 for the nine
months ended March 31, 1997.  As previously  stated,  the decline in the average
balance of  investment  securities  was a result the use of cash  proceeds  from
maturing  investment   securities   primarily  to  fund  loan  originations  and
mortgage-backed security purchases.

The  decrease in interest on  investment  securities,  including  FHLB stock was
affected by a decrease in the average yield on investment securities,  including
FHLB stock, from 6.43% for the nine months ended March 31, 1996 to 5.91% for the
nine months ended March 31, 1997.

Interest Expense

Interest expense increased by $78,000,  or 16.42%, from $475,000 for the quarter
ended March 31,  1996 to $553,000  for the  quarter  ended March 31,  1997.  The
increase in interest expense  resulted from a $6,344,000,  or 18.13% increase in
the average balance of deposits from $34,999,000 for the quarter ended March 31,
1996 to  $41,343,000  for the quarter  ended  March 31,  1997.  The  increase in
interest expense was partially offset by a slight decline in the average cost of
deposits to 5.32% during the quarter  ended March 31, 1997, as compared to 5.42%
for the quarter ended March 31, 1996. The slight decrease in the average cost of
deposits  was due to the  aforementioned  growth in the  Company's  deposit base
including an increase in lower cost money  market  savings  account  deposits as
well as overall lower  interest  costs on  certificates  of deposits  during the
quarter ended March 31, 1997.  Interest  expense on FHLB advances totaled $1,000
and $0 for the quarters ended March 31, 1997 and 1996, respectively.

Interest expense increased by $150,000,  or 10.62%, from $1,412,000 for the nine
months  ended March 31, 1996 to  $1,562,000  for the nine months ended March 31,
1997. The increase in interest expense resulted primarily from a $3,795,000,  or
10.74% increase in the average balance of deposits from $35,350,000 for the nine
months ended March 31, 1996 to  $39,145,000  for the nine months ended March 31,
1997. The increase in interest expense was also affected by a slight decrease in
the average cost of deposits,  from 5.33% during the nine months ended March 31,
1996,  to 5.31% for the nine months  ended March 31, 1997.  Interest  expense on
FHLB advances totaled $1,000 and $0 for the nine months ended March 31, 1997 and
1996, respectively.

                                                                     (Continued)

                                       16


<PAGE>



                     REDWOOD FINANCIAL, INC. AND SUBSIDIARY

Provision for Loan Losses

The  Company's  provision for loan losses was $0 and $0 for the three months and
nine  months  ended  March  31,  1997  and  1996,  respectively.  Due to lack of
substantive  problem loans (i.e. few nonaccrual  loans) during these periods and
stable real estate values in the Company's market area, management believed that
the  allowance  for loan  losses was  adequate  throughout  these  periods.  The
allowance for loan losses was maintained at $213,000 at March 31, 1997 and 1996.
The Company's net loan  charge-offs were $0 and $0 for the three and nine months
ended March 31,  1997 and 1996,  respectively.  At March 31, 1997 and 1996,  the
allowance for loan losses  represented 1.12% and 1.32%,  respectively,  of loans
receivable. Nonaccrual loans totaled $0 and $109,000 at March 31, 1997 and 1996,
respectively.

Noninterest Income

The level of noninterest  income remained nearly unchanged for the quarter ended
March 31,  1997 as  compared  to the  quarter  ended  March 31,  1996.  For both
periods,  noninterest income totaled $15,000.  Fee income declined by $2,000, or
25.00%  from  $8,000 for the quarter  ended  March 31,  1996,  to $6,000 for the
quarter  ended March 31, 1997.  The decrease in fee income was  primarily due to
lower loan  closing fees during the quarter  ended March 31, 1997.  In addition,
other income declined by $1,000,  or 14.29% for the quarter ended March 31, 1997
as compared to the quarter ended March 31, 1996.  The declines in fee income and
other  income  were  offset  by a  $3,000  gain on the  sale  of two  investment
securities available for sale in the quarter ended March 31, 1997.

Noninterest  income  decreased by $5,000,  or 10.42%,  from $48,000 for the nine
months ended March 31, 1996 to $43,000 for the nine months ended March 31, 1997.
The decrease in  noninterest  income was primarily  due to a $17,000,  or 68.00%
decrease in other noninterest  income.  The decrease in other noninterest income
was primarily due to a $12,000 gain taken on the  disposition  of various assets
in the nine months ended March 31, 1996. This decrease was partially offset by a
$9,000, or 39.13%,  increase in fees and service charges, and the aforementioned
$3,000 gain on the sale of two investment securities available for sale.

The increase in fees and service  charges during the nine months ended March 31,
1997 as compared to the nine months ended March 31, 1996, was a result of higher
loan closing fees (e.g. loan origination fees and appraisal fees) resulting from
the  aforementioned  increase  in loan  origination  volume over the nine months
ended March 31, 1997.

                                                                     (Continued)

                                       17


<PAGE>



                     REDWOOD FINANCIAL, INC. AND SUBSIDIARY

Noninterest Expense

Noninterest expense decreased by $6,000, or 2.52%, from $238,000 for the quarter
ended March 31,  1996 to $232,000  for the  quarter  ended March 31,  1997.  The
decrease in total noninterest  expense was primarily due to a $16,000, or 53.33%
decline  in  professional  fees,  and a  $14,000,  or 70.00%  decline in federal
deposit insurance  premiums.  This was partially offset by a $25,000,  or 16.34%
increase in  compensation  and employee  benefits.  The decrease in  noninterest
expense was also impacted by a $1,000 decrease in advertising  expense, a $2,000
decrease in other noninterest expense, and a $1,000 increase in occupancy costs.

The Company  incurred  higher  professional  fees in the quarter ended March 31,
1996 as a result of its then recent  stock  conversion.  The decrease in federal
deposit   insurance   premiums  was  due  to  lower  Federal  Deposit  Insurance
Corporation   deposit   insurance   assessments  as  a  result  of  the  omnibus
appropriations  bill  signed  September  30,  1996 by  President  Clinton.  This
legislation  included a provision intended to bring to parity the funds insuring
savings  associations (i.e. the SAIF) and commercial banking  institutions (i.e.
the BIF). The legislation  required the  Association to pay a one-time  $237,000
assessment  to the FDIC.  This  assessment  was  expended in the  quarter  ended
September  30, 1996.  The  increase in  compensation  and  employee  benefits is
primarily  a result of  increased  staffing,  salary  increases,  and  increased
amortization  of the management  stock bonus plan and employee  stock  ownership
plan.

Noninterest expense increased by $362,000, or 49.45%, from $732,000 for the nine
months  ended March 31, 1996 to  $1,094,000  for the nine months ended March 31,
1997.   The  increase  in   noninterest   expense  was   primarily  due  to  the
aforementioned  one-time $237,000 federal deposit insurance  assessment to bring
to parity the SAIF and BIF,  and $102,000 in  expenses,  primarily  professional
fees,  incurred as a result of the  unsuccessful  acquisition  attempt of Olivia
Bancorporation,  Inc. The increase in noninterest expense during the nine months
ended March 31, 1997 was also attributable to a $57,000, or 12.03%,  increase in
compensation and employee benefits from $474,000 for the nine months ended March
31, 1996 to $531,000 for the nine months  ended March 31, 1997.  The increase in
noninterest  income  was  partially  offset  by a  decline  in  federal  deposit
insurance  expense of $16,000,  or 26.23% as a result of lower  federal  deposit
insurance premiums  commencing in the quarter ended March 31, 1997. The increase
in noninterest expense was affected by a $3,000, or 15.00% increase in occupancy
costs, and a $2,000 increase,  or 3.17% in other noninterest expense.  Excluding
expenses   incurred   in  the   unsuccessful   acquisition   attempt  of  Olivia
Bancorporation, Inc., professional fees declined $26,000, or 25.49%.

As previously  stated,  the increase in  compensation  and employee  benefits is
primarily  a  result  of  increased  staffing,   salary  increases,  and  higher
amortization  costs  of the  management  stock  bonus  plan and  employee  stock
ownership plan.

                                                                     (Continued)

                                       18


<PAGE>



                     REDWOOD FINANCIAL, INC. AND SUBSIDIARY

Income Taxes

The Company's income taxes increased by $15,000, or 25.00%, from $60,000 for the
quarter  ended March 31, 1996,  to $75,000 for the quarter ended March 31, 1997.
The change in income taxes was due primarily to an increase in pre-tax  earnings
of $39,000,  or 23.93%,  from pre-tax earnings of $163,000 for the quarter ended
March 31, 1996 to $202,000 for the quarter ended March 31, 1997.

The Company's  income taxes decreased by $99,000,  or 65.56%,  from $151,000 for
the nine months ended March 31, 1996, to $52,000 for the nine months ended March
31, 1997.  The change in income taxes was due primarily to a $325,000  decrease,
or 64.74% in pre-tax  earnings from $502,000 for the nine months ended March 31,
1996 to $177,000 for the nine months ended March 31, 1997. As previously stated,
the Company's lower pre-tax  earnings are due to the one-time  $237,000  federal
deposit  insurance  assessment  and  $102,000  in expenses  associated  with the
unsuccessful acquisition attempt of Olivia Bancorporation, Inc.

Liquidity and Capital Resources

The Company's  primary  sources of funds are deposits and proceeds from maturing
investment   securities  and  principal  and  interest  payments  on  loans  and
mortgage-backed   and  related   securities.   While  maturities  and  scheduled
amortization  of  mortgage-backed   and  related  securities  and  loans  are  a
predictable  source  of  funds,  deposit  flows  and  mortgage  prepayments  are
generally   influenced  by  general   interest   rates,   economic   conditions,
competition, and other factors.

The primary investing  activity of the Company is the purchase of investment and
mortgage-backed and related  securities.  During the nine months ended March 31,
1997 and 1996, the Company purchased  investment and mortgage-backed and related
securities in the amounts of $11,242,000,  and $6,990,000,  respectively.  Other
investing activities include originations of loans and investment in FHLB of Des
Moines stock. The primary financing activity of the Company is the attraction of
savings deposits.

The Company has other  sources of  liquidity  if there is a need for funds.  The
Association has the ability to obtain additional  advances from the Federal Home
Loan Bank of Des Moines. In addition,  the Company's designation of selected new
investments as available for sale is intended to increase  liquidity and overall
operational flexibility.

                                                                     (Continued)

                                       19


<PAGE>



                     REDWOOD FINANCIAL, INC. AND SUBSIDIARY

The  Association  is  required to maintain  minimum  levels of liquid  assets as
defined  by OTS  regulations.  This  requirement,  which may be  changed  at the
direction of the OTS depending upon economic  conditions  and deposit flows,  is
based upon a percentage  of deposits  and  short-term  borrowings.  The required
minimum ratio is currently 5.0%.

The Company's most liquid assets are cash and cash equivalents. In addition, the
Company  maintains  a portfolio  of readily  marketable  investment  securities,
including  mortgage-backed and related securities which are designated available
for sale.  If necessary,  these  investment  securities  may be sold to increase
cash;  however,  the disposition of such may result in the recognition of a gain
or loss. The levels of cash and investment securities, including mortgage-backed
and related securities, are dependent on the Company's operating, financing, and
investing  activities  during any given period. At March 31, 1997 and 1996, cash
and cash equivalents totaled $376,000 and $6,356,000,  respectively.  Investment
securities,   including   mortgage-backed  and  related  securities   designated
available  for sale  total  $10,118,000  and $0 at  March  31,  1997  and  1996,
respectively.

Recent Developments

(1)   Completion of Stock Repurchase Program

      On March 13, 1997, the Company  announced that it had repurchased  101,875
      shares,  or 10% of its  previously  outstanding  common stock  pursuant to
      regulatory approval received September 3, 1996. Concurrently,  the Company
      announced its intention to seek regulatory  approval to repurchase another
      10% of its outstanding  stock, or 96,187 shares.  The Company was informed
      on March 17, 1997 by its regulator,  the Office of Thrift Supervision that
      such  request  would not be  approved  as a result  of a recent  change in
      regulatory  policy.  The  Company  subsequently  withdrew  its  repurchase
      application.

(2)   Commencement of Agricultural Lending Program

      During the quarter  ended March 31,  1997,  the Board of  Directors of the
      Association  adopted a policy for the origination and/or  participation in
      agricultural  (i.e.  farm)  loans.  The  purpose  of the new  policy is to
      enhance loan volume through  opportunities  presented in the Association's
      market area.  Both farm real estate loans and farm operating loans will be
      considered.  The  Association  has not originated or  participated  in any
      agricultural  loans in the past,  although future activity in this area is
      expected.  Agricultural lending,  which by nature involves increased risk,
      is not intended to replace the Association's  residential mortgage lending
      emphasis.  The  Association  will utilize  existing  staff,  which is well
      experienced  in this lending  area,  in the  maintenance  of a prudent and
      sound agricultural program.

                                                                     (Continued)

                                       20


<PAGE>



                     REDWOOD FINANCIAL, INC. AND SUBSIDIARY

                           PART II - OTHER INFORMATION

ITEM 1:        Legal Proceedings.

               None.

ITEM 2:        Changes in Securities.

               Not Applicable.

ITEM 3:        Defaults upon Senior Securities.

               Not Applicable.

ITEM 4:        Submission of Matters to a Vote of Security Holders.

               None

ITEM 5:        Other Information.

               None.

ITEM 6:        Exhibits and Reports on Form 8-K.

               None

                                       21


<PAGE>


                                   SIGNATURES

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

                                   REDWOOD FINANCIAL, INC.
                                   Registrant

Date: May 5, 1997                  /s/ Paul W. Pryor
      -----------                  -----------------
                                   Paul W. Pryor, President and Chief Executive
                                   Officer (Duly Authorized Officer)

Date: May 5, 1997                  /s/ Anthony H. Acker
      -----------                  --------------------
                                   Anthony H. Acker, Chief Financial Officer
                                   (Principal Accounting Officer)

                                       22