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 December 31, 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 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 January 15, 1999:

                 Class                                          Outstanding
                 -----                                          -----------
         Common stock, par value $0.10 per share                  653,993

         Transitional Small Business Disclosure Format: [ ]  Yes     [X]   No


<PAGE>



                     REDWOOD FINANCIAL, INC. AND SUBSIDIARY

                                    CONTENTS
<TABLE>
<CAPTION>

PART I - FINANCIAL INFORMATION

                                                                                 Page
                                                                                 ----
<S>                                                                             <C>  
       Item 1:     Financial Statements

                   Consolidated Balance Sheets at December 31, 1998 and
                   June 30, 1998                                                    3

                   Consolidated Statements of Earnings for the Three and Six
                   months ended December 31, 1998 and 1997                          4

                   Consolidated Statements of Comprehensive Income for              5
                   the Six months ended December 31, 1998 and 1997

                   Consolidated Statement of Stockholders' Equity
                   for the Six months ended December 31, 1998                       6

                   Consolidated Statements of Cash Flows for the
                   Six months ended December 31, 1998 and 1997                      7

                   Notes to Consolidated Financial Statements                    8-17

       Item 2:     Management's Discussion and Analysis of
                   Financial Condition and Results of Operations                18-29

PART II - OTHER INFORMATION
       Item 1:     Legal Proceedings                                               30

       Item 2:     Changes in Securities and Use of Proceeds                       30

       Item 3:     Defaults Upon Senior Securities                                 30

       Item 4:     Submission of Matters to a Vote of Security Holders             30

       Item 5:     Other Information                                               31

       Item 6:     Exhibits and Reports on Form 8-K                                31

       Signatures                                                                  32
</TABLE>
                                       2
<PAGE>
                     REDWOOD FINANCIAL, INC. AND SUBSIDIARY
                         PART 1 - FINANCIAL INFORMATION
                          Item 1 - Financial Statements

                           Consolidated Balance Sheets
                                   (Unaudited)
<TABLE>
<CAPTION>
                               Assets                                            December 31,                     June 30,
                                                                                      1998                          1998
----------------------------------------------------------------------------------------------------------------------------
<S>                                                                             <C>                           <C>   
Cash                                                                            $      52,179                        20,448
Interest-bearing deposits with banks                                                2,226,864                     1,988,780
----------------------------------------------------------------------------------------------------------------------------
                     Cash and cash equivalents                                      2,279,043                     2,009,228
----------------------------------------------------------------------------------------------------------------------------

Securities available for sale:
     Mortgage-backed and related securities (amortized cost                        42,230,319                    33,937,175
       $42,185,362 and $33,726,372, respectively)
     Investment securities (amortized cost $6,293,710 and                           6,298,975                     9,793,500
       $9,784,454, respectively)
----------------------------------------------------------------------------------------------------------------------------
                     Total securities available for sale                           48,529,294                    43,730,675
----------------------------------------------------------------------------------------------------------------------------

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

Loans receivable, net                                                              34,009,600                    28,994,750
Federal Home Loan Bank stock, at cost                                               1,342,100                       835,000
Accrued interest receivable                                                           572,071                       547,898
Premises and equipment, net                                                         1,550,545                       596,867
Investment in limited partnership                                                     397,885                       484,024
Other assets                                                                          148,309                        88,163
----------------------------------------------------------------------------------------------------------------------------

----------------------------------------------------------------------------------------------------------------------------
                     Total Assets                                               $  88,828,847                    77,286,605
----------------------------------------------------------------------------------------------------------------------------

                           Liabilities and Stockholders' Equity

----------------------------------------------------------------------------------------------------------------------------
Deposits                                                                           51,816,523                    48,101,806
Federal Home Loan Bank advances                                                    26,805,697                    16,200,000
Accrued interest payable                                                              649,992                       631,168
Advance payments by borrowers for taxes and insurance                                  78,577                        75,463
Accrued expenses and other liabilities                                                232,998                       340,142
----------------------------------------------------------------------------------------------------------------------------
                      Total Liabilities                                            79,583,787                    65,348,579
----------------------------------------------------------------------------------------------------------------------------

Common stock ($.10 par value):  Authorized and issued
  1,125,000 shares; outstanding 665,284 shares at
  December 31, 1998; 868,093 shares at June 30, 1998                                  112,500                       112,500
Additional paid-in capital                                                          8,502,453                     8,490,163
Retained earnings, subject to certain restrictions                                  6,921,618                     6,794,926
Accumulated other comprehensive income                                                 23,815                       131,909
Unearned employee stock ownership plan shares                                        (430,144)                     (463,264)
Unearned management stock bonus plan shares                                          (176,859)                     (220,172)
Treasury stock, at cost, 459,716 shares at
  December 31, 1998; 256,907 shares at June 30, 1998                               (5,708,323)                   (2,908,036)

----------------------------------------------------------------------------------------------------------------------------
                      Total Stockholders' Equity                                    9,245,060                    11,938,026
----------------------------------------------------------------------------------------------------------------------------

----------------------------------------------------------------------------------------------------------------------------
                      Total Liabilities and Stockholders' Equity                $  88,828,847                    77,286,605
----------------------------------------------------------------------------------------------------------------------------
</TABLE>

See accompanying notes to consolidated financial statements
                                                               
                                       3
<PAGE>
                     REDWOOD FINANCIAL, INC. AND SUBSIDIARY
                       Consolidated Statements of Earnings
                                   (Unaudited)
<TABLE>
<CAPTION>
                                                                             Three months               Six months
                                                                           ended December 31,          ended December 31,
                                                                         1998         1997          1998        1997
-----------------------------------------------------------------------------------------------------------------------
<S>                                                               <C>              <C>        <C>           <C>    
Interest Income:
   Loans receivable                                                $    673,608      487,619    1,314,939      953,735
   Securities held to maturity:
      Mortgage-backed and related securities                                  0      221,540            0      453,033
      Investment securities                                                   0      137,602            0      282,223
   Securities available for sale:
      Mortgage-backed and related securities                            594,105      170,463    1,167,331      335,260
      Investment securities                                              79,861      111,602      201,715      239,553
   Cash equivalents and other                                            47,897       29,404       84,865       48,703
-----------------------------------------------------------------------------------------------------------------------
Total interest income                                                 1,395,471    1,158,230    2,768,850    2,312,507

Interest Expense:
   Deposits                                                             661,390      634,069    1,318,802    1,268,372
   Federal Home Loan Bank advances                                      305,356      117,951      579,731      183,234
-----------------------------------------------------------------------------------------------------------------------
Total interest expense                                                  966,746      752,020    1,898,533    1,451,606

-----------------------------------------------------------------------------------------------------------------------
Net interest income                                                     428,725      406,210      870,317      860,901
-----------------------------------------------------------------------------------------------------------------------

Provision for losses on loans                                            15,000            0       24,000            0
-----------------------------------------------------------------------------------------------------------------------

-----------------------------------------------------------------------------------------------------------------------
Net interest income after provision for losses on loans                 413,725      406,210      846,317      860,901
-----------------------------------------------------------------------------------------------------------------------

Noninterest income:
   Gains on sale of securities available for sale                        16,085        7,871       37,913        7,871
   Fees and service charges                                              31,856       25,230       59,620       37,803
   Other                                                                  1,563          435        6,753        1,314
-----------------------------------------------------------------------------------------------------------------------
Total noninterest income                                                 49,504       33,536      104,286       46,988
-----------------------------------------------------------------------------------------------------------------------

Noninterest expense:
   Compensation and employee benefits                                   250,653      220,756      470,370      409,736
   Advertising                                                            7,766        7,512       15,919       13,673
   Occupancy                                                             10,114        6,905       18,738       13,048
   Federal deposit insurance premiums                                     7,198        7,552       14,752       14,538
   Professional fees                                                     33,160       27,903       56,804       58,156
   Data processing expense                                                8,876        8,282       18,197       12,687
   Loss (gain) on limited partnership                                    (1,381)           0       86,139            0
   Other                                                                 43,412       39,586       78,922       64,207
-----------------------------------------------------------------------------------------------------------------------
Total noninterest expense                                               359,798      318,496      759,841      586,045
-----------------------------------------------------------------------------------------------------------------------

Earnings before income taxes                                            103,431      121,250      190,762      321,844

Income tax expense                                                       29,645       42,097       64,070      116,801
-----------------------------------------------------------------------------------------------------------------------

Net earnings                                                       $     73,786       79,153      126,692      205,043
-----------------------------------------------------------------------------------------------------------------------

-----------------------------------------------------------------------------------------------------------------------
Net earnings per common share - Basic                              $       0.11         0.10         0.18         0.24
Net earnings per common share - Diluted                                    0.10         0.09         0.17         0.23
-----------------------------------------------------------------------------------------------------------------------
</TABLE>


See accompanying notes to consolidated financial statements

                                                            



                                       4
<PAGE>

                     REDWOOD FINANCIAL, INC. AND SUBSIDIARY
                 Consolidated Statements of Comprehensive Income
                                   (unaudited)
<TABLE>
<CAPTION>
                                                                       Six Months Ended December 31,
                                                             1998                   1997
------------------------------------------------------------------------------------------------------------------
<S>                                                    <C>             <C>        <C>               <C>    
Net earnings                                           $                 126,692                      205,043

Other comprehensive income, net of tax :
  Unrealized gains (losses) on securities:
     Unrealized holding gains (losses) arising
       during period                                      (85,346)                 (53,239)
     Less:  reclassification adjustment for gains
       included in net income                             (22,748)                 ((4,723)
                                                       -----------------------------------------------------------
Other comprehensive income (loss)                                       (108,094)                      57,962
                                                                        --------                     -------------
Comprehensive income                                   $                  18,598                      263,005
                                                       -----------------------------------------------------------

</TABLE>


See accompanying notes to consolidated financial statements

                                                                  



                                       5

<PAGE>
                     REDWOOD FINANCIAL, INC. AND SUBSIDIARY
                 Consolidated Statement of Stockholders' Equity
                   For the Six Months Ended December 31, 1998
                                   (unaudited)
<TABLE>
<CAPTION>
                                                                                 Unearned
                                                                                 Employee   Unearned
                                                                  Accumulated    Stock     management
                                          Additional                 Other      Ownership     stock                       Total
                                Common     paid-in    Retained   Comprehensive    Plan        bonus         Treasury  stockholders'
                                 Stock      capital    Earnings      Income       Shares    plan shares       stock       equity
-----------------------------------------------------------------------------------------------------------------------------------
<S>                           <C>        <C>         <C>              <C>      <C>         <C>          <C>             <C>      
Balance, June 30, 1998         $112,500   8,490,163   6,794,926       131,909   (463,264)   (220,172)    (2,908,036)    11,938,026

  Net Earnings                                          126,692                                                            126,692

  Other comprehensive
    income (loss)                                                    (108,094)                                            (108,094)

  Earned employee stock
    ownership plan 
    shares, net                              12,290                               33,120                                    45,410

  Repurchase of common stock                                                                             (2,800,287)    (2,800,287)

  Earned management stock
    bonus plan shares                                                                         43,313                        43,313

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

Balance, December 31, 1998     $112,500   8,502,453   6,921,618        23,815   (430,144)   (176,859)    (5,708,323)     9,245,060

-----------------------------------------------------------------------------------------------------------------------------------
</TABLE>

See accompanying notes to consolidated financial statements

 

                                       6
<PAGE>
                     REDWOOD FINANCIAL, INC. AND SUBSIDIARY
                      Consolidated Statements of Cash Flows
                                   (unaudited)
<TABLE>
<CAPTION>
                                                                                                        Six months
                                                                                                    ended December 31,
---------------------------------------------------------------------------------------------------------------------------
                                                                                                   1998              1997
---------------------------------------------------------------------------------------------------------------------------
<S>                                                                                          <C>             <C>    
Operating Activities
   Net earnings                                                                              $   126,692           205,043
   Adjustments to reconcile net earnings to net
     cash provided by operating activities:
       Provision for loan losses                                                                  24,000                 0
       Depreciation                                                                               18,634            11,073
       Amortization of premiums and discounts, net                                                32,044            (9,555)
       Increase  in other assets                                                                 (60,146)         (497,184)
       Increase in accrued interest receivable                                                   (24,173)          (40,009)
       Increase in accrued interest payable                                                       18,824            31,126
       Gain on sale of securities available for sale                                             (37,913)           (7,871)
       Amortization of unearned ESOP shares                                                       33,120            33,120
       Earned ESOP shares priced above original cost                                              12,290             8,849
       Earned Management Stock Bonus Plan shares                                                  43,313            43,313
       Decrease in investment in limited partnership                                              86,139                 0
       Deferred income taxes                                                                      72,063           (38,642)
       (Decrease) increase in accrued expenses and other liabilities                            (107,144)          122,462

---------------------------------------------------------------------------------------------------------------------------
                 Net cash provided (used) by operating activities                                237,743          (138,275)
---------------------------------------------------------------------------------------------------------------------------

Investing activities:
   Proceeds from maturities of investment securities held to maturity                                  0           500,000
   Principal collected on mortgage-backed securities held to maturity                                  0         2,034,858
   Proceeds from maturities of investment securities available for sale                        6,335,000         2,500,000
   Proceeds from sales of mortgage-backed securities available for sale                        2,547,575           724,037
   Purchases of mortgage-backed securities available for sale                                 16,982,885)       (5,514,541)
   Principal collected on mortgage-backed securities available for sale                        5,256,433           181,590
   Proceeds from maturities of mortgage-backed securities available for sale                     709,187                 0
   Purchases of investment securities available for sale                                      (3,849,375)         (910,000)
   Proceeds from sales of investment securities available for sale                             1,016,085                 0
   Purchases of Federal Home Loan Bank stock                                                    (507,100)          (81,500)
   Increase in loans receivable, net                                                          (5,043,777)       (2,592,946)
   Purchases of premises and equipment                                                          (972,312)         (197,844)
---------------------------------------------------------------------------------------------------------------------------
                 Net cash used by investing activities                                        11,491,169)       (3,356,346)
---------------------------------------------------------------------------------------------------------------------------

Financing Activities:
   Increase in deposits, net                                                                   3,714,717           854,893
   Increase (decrese) in advance payments by borrowers for taxes and insurance                     3,114            (5,814)
   Proceeds from Federal Home Loan Bank advances                                              21,700,000         7,216,083
   Repayment of Federal Home Loan Bank advances                                               11,094,303)       (2,700,000)
   Repurchase of common stock                                                                 (2,800,287)         (888,915)
---------------------------------------------------------------------------------------------------------------------------
                 Net cash provided by financing activities                                    11,523,241         4,476,247
---------------------------------------------------------------------------------------------------------------------------

                 Increase in cash and cash equivalents                                           269,815           981,626

Cash and cash equivalents, beginning of period                                                 2,009,228           763,792
---------------------------------------------------------------------------------------------------------------------------

Cash and cash equivalents, end of period                                                     $ 2,279,043         1,745,418
---------------------------------------------------------------------------------------------------------------------------

Supplemental disclosures of cash flow information:
   Cash paid during the period for:
      Interest                                                                               $ 1,879,709         1,434,593
      Income taxes                                                                               135,800           125,410

Supplemental disclosures of cash flow information:
   Transfer of real estate to loans                                                                    0            13,520
</TABLE>

See accompanying notes to consolidated financial statements

                                                                         
                                       
                                       7
<PAGE>



                     REDWOOD FINANCIAL, INC. AND SUBSIDIARY

                   Notes to Consolidated Financial Statements

                                December 31, 1998
                                   (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  HomeTown  Bank (the  "Bank",  previously  known as
        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  on May 22,  1995 a  Subscription  and  Community
       Offering of its shares (the  Offering) in connection  with the conversion
       of the  Association.  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  statements of comprehensive income,  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 six months  ended  December  31, 1998 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,  1998 and for the year  then
       ended.




                                                                     (Continued)

                                        8

<PAGE>



                     REDWOOD FINANCIAL, INC. AND SUBSIDIARY


(3)    Earnings Per Share

       The following  tables  illustrate  the  calculation  of basic and diluted
       earnings per share for the three months ended December 31, 1998 and 1997.

<TABLE>
<CAPTION>
        For the Three Months Ended:               December 31, 1998                     December 31, 1997
        ---------------------------              ------------------                     -----------------
                                                              Per Share                              Per Share
                                          Income   Shares      Amount             Income  Shares      Amount
                                          ------   ------      ------             ------  ------      ------
<S>                                      <C>       <C>          <C>             <C>        <C>         <C>  
        Net Earnings:                     $73,786                                $79,153

        Basic EPS:
        Earnings available to
         common stockholders               73,786   679,103      $0.11            79,153   819,014      $0.10

        Effect of Dilutive Securities:
        Options on common stock                      25,153                                 19,583
        Unvested restricted stock awards             16,200                                 21,600
                                                     ------                                 ------

        Diluted EPS:
        Earnings available to common
         stockholders plus assumed
         conversions                      $73,786   720,456      $0.10           $79,153    860,197     $0.09
</TABLE>

<TABLE>
<CAPTION>
        For the Six Months Ended:                  December 31, 1998                 December 31, 1997
        -------------------------                 ------------------                 -----------------
                                                              Per Share                               Per Share
                                          Income   Shares      Amount               Income   Shares      Amount
                                          ------   ------      ------               ------   ------      ------
<S>                                      <C>        <C>          <C>               <C>       <C>          <C>  
        Net Earnings:                    $126,692                                  $205,043

        Basic EPS:
        Earnings available to
         common stockholders              126,692   719,365       $0.18             205,043  841,774      $0.24

        Effect of Dilutive Securities:
        Options on common stock                      24,810                                   14,578
        Unvested restricted stock awards             16,200                                   21,600
                                                     ------                                   ------

        Diluted EPS:
        Earnings available to common
         stockholders plus assumed
         conversions                     $126,692   760,375      $0.17             $205,043  877,952      $0.23

</TABLE>




                                                                     (Continued)

                                        9

<PAGE>



                     REDWOOD FINANCIAL, INC. AND SUBSIDIARY

(4)     Regulatory Capital Requirements

        At December 31,  1998,  the Bank met each of the three  current  minimum
        regulatory  capital  requirements.  The following  table  summarizes the
        Bank's regulatory capital position at December 31, 1998:
<TABLE>
<CAPTION>
                                                                                                To Be Well
       (In thousands of dollars)                                                            Capitalized Under
                                                                                            Prompt Corrective
                                               Actual                  Required             Action Provisions
                                               ------                  --------             -----------------
                                        Amount       Ratio        Amount        Ratio       Amount       Ratio
                                        ------       -----        ------        -----       ------       -----
<S>                                    <C>           <C>           <C>           <C>         <C>        <C>   
       Bank's Net Worth                 $7,109

       Less:  Available For Sale
                 Market Valuation           24
                                         -----
       Tangible Capital                  7,085         8.15%      $1,304         1.50%          n/a        n/a
         (to tangible assets)

       Core Capital                      7,085         8.15%       2,609         3.00%       $4,348       5.00%
         (to adjusted tangible assets)

       Core Capital                      7,085        21.51%         n/a          n/a         1,976       6.00%
         (to risk-weighted assets)

       Plus: Allowable portion of
         general allowance for
         loan losses                       275
                                         -----
       Risk-based Capital               $7,360        22.31%        $2,635        8.00%       $3,294     10.00%
         (to risk-weighted assets)
</TABLE>


(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.

                                                                     (Continued)

                                       10

<PAGE>



                     REDWOOD FINANCIAL, INC. AND SUBSIDIARY

(6)    Stock Repurchases

       During the three months ended  December 31, 1998,  the Company  announced
       two stock repurchase programs. As a result, the Company purchased 116,009
       shares of its  outstanding  common stock during the quarter.  For the six
       months ended December 31, 1998, the Company  purchased 202,809 shares, or
       23.4% of its 868,093 outstanding shares of common stock at June 30, 1998.
       As a result of the stock repurchase programs, the Company has outstanding
       665,284  shares of common  stock at  December  31,  1998.  The  following
       summarizes  the  Company's  common stock  repurchases  during the quarter
       ended December 31, 1998:

                 Settlement Date        Shares Purchased       Price per share
                 ---------------        ----------------       ---------------
                 November 18, 1998             7,000              $12.1250
                 November 24, 1998               820              $13.0000
                 November 24, 1998            25,200              $13.6250
                 November 25, 1998             7,034              $13.8750
                 November 27, 1998             5,000              $13.6250
                 November 30, 1998            10,600              $14.2500
                 December 1, 1998              8,000              $14.1875
                 December 4, 1998             14,446              $14.7500
                 December 29, 1998            37,909              $15.5000

                 Average price per share                          $14.3939

       The Company also purchased 11,291 shares in January 1999,  completing all
       stock repurchase programs announced to date.

(7)    New Accounting Standards

       In  February  1997,  the  FASB  issued  SFAS  No.  133,  "Accounting  for
       Derivative   Instruments  and  Hedging   Activities"  (SFAS  133),  which
       establishes   accounting   and   reporting   standards   for   derivative
       instruments,  including certain derivative  instruments embedded in other
       contracts  (collectively  referred  to as  derivatives),  and for hedging
       activities. SFAS 133 is effective for all fiscal quarters of fiscal years
       beginning  after June 15,  1999.  Management  is  currently  studying the
       impact of adopting SFAS 133.

                                                                     (Continued)

                                       11

<PAGE>



                     REDWOOD FINANCIAL, INC. AND SUBSIDIARY


(8)    Business Segment Performance Disclosure

SFAS  No.  131,   Disclosures   about  Segments  of  an  Operation  and  Related
Information,  requires the disclosure of financial and  descriptive  information
about the operating  segments of a public business  enterprise.  For purposes of
this disclosure,  Redwood  Financial,  Inc. has deemed its operating segments to
follow its corporate structure.  The rationale for this segmentation is a result
of the differing operational purposes of its corporate entities.

To this extent, the Company has determined that it has three operating segments.
These  include (1) the parent  holding  company,  Redwood  Financial,  Inc. (the
Holding  Company),  (2) the insured  financial  institution,  HomeTown Bank (the
Bank), and (3) a subsidiary of the Bank, Redwood Falls Service  Corporation (the
Service Corporation).

The following is a brief description of the three operating segments:

Holding Company: Redwood Financial, Inc. is a Minnesota corporation organized in
1995 at the direction of Redwood Falls Federal Savings and Loan Association (now
HomeTown Bank) in connection with the then Association's  conversion from mutual
savings  association  to a stock  savings  association.  The Parent  Company was
organized   primarily  to  acquire  and  hold  the  common  stock  of  the  then
Association.  This continues to be the Parent  Company's  primary  purpose.  The
Parent  Company  also   contributes  to  the  operational   performance  of  the
consolidated  Company  through (1) retention and servicing of 3 loans which were
not  eligible  for  investment  within  the  Bank's  operating  segment  due  to
regulatory  restrictions,  (2)  management  of  a  small  investment  portfolio,
including  an  investment  in a  limited  partnership,  and  (3)  providing  and
incurring expense as a result of employee  benefits  available to Bank personnel
for the remuneration and retention of Bank personnel.

The Bank:  HomeTown  Bank is a federal stock  savings  association  organized in
1924. The Bank provides  standard banking services to communities in Redwood and
Renville  Counties,  Minnesota  including lending and deposit products services.
The Bank is the largest of the consolidated Company's operating segments.

The  Service  Corporation:  Redwood  Falls  Service  Corporation  is a Minnesota
corporation  organized in1993 for the sole purpose of providing  insurance sales
separate from the Bank as a result of previous federal regulatory  requirements.
These  requirements  have since been lifted.  The Service  Corporation  has been
inactive since June 1996. The Service  Corporation  provided no contribution the
consolidated  Company's operating  performance for the six months ended December
31, 1998 and 1997 and as a result has not been included in any  summarization of
consolidated Company performance.


                                                                     (Continued)

                                       12

<PAGE>



                     REDWOOD FINANCIAL, INC. AND SUBSIDIARY


The following tables summarize the contribution of each segment to the operating
performance  of the  consolidated  Company  for the three and six  months  ended
December 31, 1998 and 1997.































                                                                     (Continued)

                                       13


<PAGE>
REDWOOD FINANCIAL, INC. AND SUBSIDIARY

<TABLE>
<CAPTION>
                                                     For the three months ended December 31, 1998
------------------------------------------------------------------------------------------------------------------------------------
                                                         Holding                  Inter-company   Reconciling              Total
                                                         Company         Bank    Reconciliations  Adjustments           Corporation
------------------------------------------------------------------------------------------------------------------------------------
<S>                                                  <C>          <C>                <C>         <C>               <C>       
Interest Income:
   Loans receivable                                      24,871       648,737                                            673,608
   Securities held to maturity:
      Mortgage-backed and related securities
      Investment securities
   Securities available for sale:
      Mortgage-backed and related securities                          594,105                                            594,105
      Investment securities                                            79,861                                             79,861
   Cash equivalents and other                             8,616        47,897          (8,616)                            47,897
---------------------------------------------------------------------------------------------------------------------------------
Total interest income                                    33,487     1,370,600          (8,616)          0              1,395,471

Interest Expense:
   Deposits                                                           670,006          (8,616)                           661,390
   Federal Home Loan Bank advances                                    305,356               0                            305,356
---------------------------------------------------------------------------------------------------------------------------------
Total interest expense                                        0       975,362          (8,616)          0                966,746

---------------------------------------------------------------------------------------------------------------------------------
Net interest income                                      33,487       395,238               0           0                428,725
---------------------------------------------------------------------------------------------------------------------------------

Provision for losses on loans                                 0        15,000               0           0                 15,000
---------------------------------------------------------------------------------------------------------------------------------

---------------------------------------------------------------------------------------------------------------------------------
Net interest income after
  provision for losses on loans                          33,487       380,238               0           0                413,725
---------------------------------------------------------------------------------------------------------------------------------

Noninterest income:
   Gains on sale of securities
     available for sale                                                16,085                                             16,085
   Fees and service charges                                            31,856                                             31,856
   Other                                                               13,563         (12,000)                             1,563
---------------------------------------------------------------------------------------------------------------------------------
Total noninterest income                                      0        61,504         (12,000)          0                 49,504
---------------------------------------------------------------------------------------------------------------------------------

Noninterest expense:
   Compensation and employee benefits                    50,651       200,002                                            250,653
   Advertising                                                          7,766                                              7,766
   Occupancy                                                           10,114                                             10,114
   Federal deposit insurance premiums                                   7,198                                              7,198
   Professional fees                                     15,330        17,830                                             33,160
   Data processing expense                                              8,876                                              8,876
   Loss (gain) on limited partnership                    (1,381)                                                          (1,381)
   Other                                                 14,203        41,209         (12,000)                            43,412
---------------------------------------------------------------------------------------------------------------------------------
Total noninterest expense                                78,803       292,995         (12,000)          0                359,798
---------------------------------------------------------------------------------------------------------------------------------

Earnings before income taxes                            (45,316)      148,747               0           0                103,431

Income tax expense                                      (29,074)       58,719                                             29,645
---------------------------------------------------------------------------------------------------------------------------------

Net earnings                                            (16,242)       90,028               0           0                 73,786
---------------------------------------------------------------------------------------------------------------------------------


---------------------------------------------------------------------------------------------------------------------------------
Segment assets                                        1,829,051    86,999,796               0           0             88,828,847
---------------------------------------------------------------------------------------------------------------------------------
</TABLE>


All of the income and  expense  amounts  presented  in the table  above are with
external customers, except as summarized below:

Included in interest income of the Holding  Company and interest  expense of the
Bank is $8,616 of  inter-segment  income and  expense for  deposits  held by the
Holding Company at the Bank.

The other  inter-segment  revenue and expense is $12,000 included in with income
at the Bank and  other  expense  at the  Holding  Company.  These  inter-segment
amounts  relate to  management  services  provided  by the Bank on behalf of the
Holding Company.

                                       14
<PAGE>
REDWOOD FINANCIAL, INC. AND SUBSIDIARY

<TABLE>
<CAPTION>
                                                     For the three months ended December 31, 1997
-----------------------------------------------------------------------------------------------------------------------------------

                                                     Holding                      Inter-company   Reconciling              Total
                                                     Company           Bank      Reconciliations  Adjustments           Corporation
-----------------------------------------------------------------------------------------------------------------------------------
<S>                                               <C>           <C>                  <C>            <C>              <C>      
Interest Income:
   Loans receivable                                   17,366         470,253                                              487,619
   Securities held to maturity:
      Mortgage-backed and related securities                         221,540                                              221,540
      Investment securities                            8,175         129,427                                              137,602
   Securities available for sale:
      Mortgage-backed and related securities                         170,463                                              170,463
      Investment securities                                          111,602                                              111,602
   Cash equivalents and other                          9,805          29,404            (9,805)                            29,404
----------------------------------------------------------------------------------------------------------------------------------
Total interest income                                 35,346       1,132,689            (9,805)          0              1,158,230

Interest Expense:
   Deposits                                                          643,874            (9,805)                           634,069
   Federal Home Loan Bank advances                                   117,951                 0                            117,951
----------------------------------------------------------------------------------------------------------------------------------
Total interest expense                                     0         761,825            (9,805)          0                752,020

----------------------------------------------------------------------------------------------------------------------------------
Net interest income                                   35,346         370,864                 0           0                406,210
----------------------------------------------------------------------------------------------------------------------------------

Provision for losses on loans                              0               0                 0           0                      0
----------------------------------------------------------------------------------------------------------------------------------

----------------------------------------------------------------------------------------------------------------------------------
Net interest income after
  provision for losses on loans                       35,346         370,864                 0           0                406,210
----------------------------------------------------------------------------------------------------------------------------------

Noninterest income:
   Gains on sale of securities
     available for sale                                                7,871                                                7,871
   Fees and service charges                                           25,230                                               25,230
   Other                                                              12,435           (12,000)                               435
----------------------------------------------------------------------------------------------------------------------------------
Total noninterest income                                   0          45,536           (12,000)          0                 33,536
----------------------------------------------------------------------------------------------------------------------------------

Noninterest expense:
   Compensation and employee benefits                 46,669         174,087                                              220,756
   Advertising                                                         7,512                                                7,512
   Occupancy                                                           6,905                                                6,905
   Federal deposit insurance premiums                                  7,552                                                7,552
   Professional fees                                  10,779          17,124                                               27,903
   Data processing expense                                             8,282                                                8,282
   Loss (gain) on limited partnership                                                                                           0
   Other                                              26,143          25,443           (12,000)                            39,586
----------------------------------------------------------------------------------------------------------------------------------
Total noninterest expense                             83,591         246,905           (12,000)          0                318,496
----------------------------------------------------------------------------------------------------------------------------------

Earnings before income taxes                         (48,245)        169,495                 0           0                121,250

Income tax expense                                   (24,158)         66,255                                               42,097
----------------------------------------------------------------------------------------------------------------------------------

Net earnings                                         (24,087)        103,240                 0           0                 79,153
----------------------------------------------------------------------------------------------------------------------------------


----------------------------------------------------------------------------------------------------------------------------------
Segment assets                                     2,413,524      64,733,514                 0           0             67,147,038
----------------------------------------------------------------------------------------------------------------------------------
</TABLE>


All of the income and  expense  amounts  presented  in the table  above are with
external customers, except as summarized below:

Included in interest income of the Holding  Company and interest  expense of the
Bank is $9,805 of  inter-segment  income and  expense for  deposits  held by the
Holding Company at the Bank.

The other  inter-segment  revenue and expense is $12,000 included in with income
at the Bank and  other  expense  at the  Holding  Company.  These  inter-segment
amounts  relate to  management  services  provided  by the Bank on behalf of the
Holding Company.


                                       15
<PAGE>
REDWOOD FINANCIAL, INC. AND SUBSIDIARY

<TABLE>
<CAPTION>

                                                  For the six months ended December 31, 1998
-------------------------------------------------------------------------------------------------------------------------------
                                                     Holding                  Inter-company   Reconciling              Total
                                                     Company        Bank     Reconciliations  Adjustments           Corporation
-------------------------------------------------------------------------------------------------------------------------------
<S>                                                <C>         <C>                 <C>            <C>              <C>       
Interest Income:
   Loans receivable                                    50,509    1,264,430                                           1,314,939
   Securities held to maturity:
      Mortgage-backed and related securities
      Investment securities
   Securities available for sale:
      Mortgage-backed and related securities                     1,167,331                                           1,167,331
      Investment securities                                        201,715                                             201,715
   Cash equivalents and other                          18,232       84,865          (18,232)                            84,865
-------------------------------------------------------------------------------------------------------------------------------
Total interest income                                  68,741    2,718,341          (18,232)          0              2,768,850

Interest Expense:
   Deposits                                                      1,337,034          (18,232)                         1,318,802
   Federal Home Loan Bank advances                                 579,731                0                            579,731
-------------------------------------------------------------------------------------------------------------------------------
Total interest expense                                      0    1,916,765          (18,232)          0              1,898,533

-------------------------------------------------------------------------------------------------------------------------------
Net interest income                                    68,741      801,576                0           0                870,317
-------------------------------------------------------------------------------------------------------------------------------

Provision for losses on loans                               0       24,000                0           0                 24,000
-------------------------------------------------------------------------------------------------------------------------------

-------------------------------------------------------------------------------------------------------------------------------
Net interest income after
  provision for losses on loans                        68,741      777,576                0           0                846,317
-------------------------------------------------------------------------------------------------------------------------------

Noninterest income:
   Gains on sale of securities
     available for sale                                             37,913                                              37,913
   Fees and service charges                                         59,620                                              59,620
   Other                                                            30,753          (24,000)                             6,753
-------------------------------------------------------------------------------------------------------------------------------
Total noninterest income                                    0      128,286          (24,000)          0                104,286
-------------------------------------------------------------------------------------------------------------------------------

Noninterest expense:
   Compensation and employee benefits                  98,139      372,231                                             470,370
   Advertising                                                      15,919                                              15,919
   Occupancy                                                        18,738                                              18,738
   Federal deposit insurance premiums                               14,752                                              14,752
   Professional fees                                   20,995       35,809                                              56,804
   Data processing expense                                          18,197                                              18,197
   Loss (gain) on limited partnership                  86,139                                                           86,139
   Other                                               28,692       74,230          (24,000)                            78,922
-------------------------------------------------------------------------------------------------------------------------------
Total noninterest expense                             233,965      549,876          (24,000)          0                759,841
-------------------------------------------------------------------------------------------------------------------------------

Earnings before income taxes                         (165,224)     355,986                0           0                190,762

Income tax expense                                    (77,088)     141,158                                              64,070
-------------------------------------------------------------------------------------------------------------------------------

Net earnings                                          (88,136)     214,828                0           0                126,692
-------------------------------------------------------------------------------------------------------------------------------


-------------------------------------------------------------------------------------------------------------------------------
Segment assets                                      1,829,051   86,999,796                0           0             88,828,847
-------------------------------------------------------------------------------------------------------------------------------
</TABLE>


All of the income and  expense  amounts  presented  in the table  above are with
external customers, except as summarized below:

Included in interest income of the Holding  Company and interest  expense of the
Bank is $18,232 of  inter-segment  income and expense for  deposits  held by the
Holding Company at the Bank.

The other  inter-segment  revenue and expense is $24,000 included in with income
at the Bank and  other  expense  at the  Holding  Company.  These  inter-segment
amounts  relate to  management  services  provided  by the Bank on behalf of the
Holding Company.


                                       16
                                      
<PAGE>

REDWOOD FINANCIAL, INC. AND SUBSIDIARY

<TABLE>
<CAPTION>
                                                              For the six months ended December 31, 1997
------------------------------------------------------------------------------------------------------------------------------------
                                                                 Holding                    Inter-company   Reconciling      Total
                                                                 Company          Bank     Reconciliations  Adjustments  Corporation
------------------------------------------------------------------------------------------------------------------------------------
<S>                                                           <C>           <C>                <C>             <C>     <C>       
Interest Income:
   Loans receivable                                               31,381        922,354                                     953,735
   Securities held to maturity:
      Mortgage-backed and related securities                                    453,033                                     453,033
      Investment securities                                       18,815        263,408                                     282,223
   Securities available for sale:
      Mortgage-backed and related securities                                    335,260                                     335,260
      Investment securities                                                     239,553                                     239,553
   Cash equivalents and other                                     27,917         48,703          (27,917)                    48,703
------------------------------------------------------------------------------------------------------------------------------------
Total interest income                                             78,113      2,262,311          (27,917)          0      2,312,507

Interest Expense:
   Deposits                                                                   1,296,289          (27,917)                 1,268,372
   Federal Home Loan Bank advances                                              183,234                0                    183,234
------------------------------------------------------------------------------------------------------------------------------------
Total interest expense                                                 0      1,479,523          (27,917)          0      1,451,606

------------------------------------------------------------------------------------------------------------------------------------
Net interest income                                               78,113        782,788                0           0        860,901
------------------------------------------------------------------------------------------------------------------------------------

Provision for losses on loans                                          0              0                0           0              0
------------------------------------------------------------------------------------------------------------------------------------

------------------------------------------------------------------------------------------------------------------------------------
Net interest income after
  provision for losses on loans                                   78,113        782,788                0           0        860,901
------------------------------------------------------------------------------------------------------------------------------------

Noninterest income:
   Gains on sale of securities
     available for sale                                                           7,871                                       7,871
   Fees and service charges                                                      37,803                                      37,803
   Other                                                                         25,314          (24,000)                     1,314
------------------------------------------------------------------------------------------------------------------------------------
Total noninterest income                                               0         70,988          (24,000)          0         46,988
------------------------------------------------------------------------------------------------------------------------------------

Noninterest expense:
   Compensation and employee benefits                             91,181        318,555                                     409,736
   Advertising                                                                   13,673                                      13,673
   Occupancy                                                                     13,048                                      13,048
   Federal deposit insurance premiums                                            14,538                                      14,538
   Professional fees                                              25,709         32,447                                      58,156
   Data processing expense                                                       12,687                                      12,687
   Other                                                          42,176         46,031          (24,000)                    64,207
------------------------------------------------------------------------------------------------------------------------------------
Total noninterest expense                                        159,066        450,979          (24,000)          0        586,045
------------------------------------------------------------------------------------------------------------------------------------

Earnings before income taxes                                     (80,953)       402,797                0           0        321,844

Income tax expense                                               (40,865)       157,666                                     116,801
------------------------------------------------------------------------------------------------------------------------------------

Net earnings                                                     (40,088)       245,131                0           0        205,043
------------------------------------------------------------------------------------------------------------------------------------


------------------------------------------------------------------------------------------------------------------------------------
Segment assets                                                 2,413,524     64,733,514                0           0     67,147,038
------------------------------------------------------------------------------------------------------------------------------------
</TABLE>


All of the income and  expense  amounts  presented  in the table  above are with
external customers, except as summarized below:

Included in interest income of the Holding  Company and interest  expense of the
Bank is $27,917 of  inter-segment  income and expense for  deposits  held by the
Holding Company at the Bank.

The other  inter-segment  revenue and expense is $24,000 included in with income
at the Bank and  other  expense  at the  Holding  Company.  These  inter-segment
amounts  relate to  management  services  provided  by the Bank on behalf of the
Holding Company.


                                       17





<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 Bank, 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 Bank's market area.

Financial Condition

The Company's total assets increased by $11,542,000, or 14.93%, from $77,287,000
at June 30,  1998 to  $88,829,000  at December  31,  1998.  The  increase in the
Company's  assets  reflected  an increase in the level of Federal Home Loan Bank
(FHLB)  advances  and deposits  during the six months  ended  December 31, 1998.
These  advances  and  deposits  were  used  primarily  to  fund  increased  loan
production  and purchases of  mortgage-backed  securities  during this six month
period.

Cash and cash equivalents  increased by $270,000,  or 13.44%, from $2,009,000 at
June 30, 1998 to  $2,279,000 at December 31, 1998.  The slight  increase in cash
was  primarily  due to the  increase  use of FHLB  advances as well as increased
deposits.  The  Company  attempts  to  maintain  lower  levels  of cash and cash
equivalents in order to enhance overall yield.




                                                                     (Continued)

                                       18

<PAGE>



                     REDWOOD FINANCIAL, INC. AND SUBSIDIARY


The Company's loans receivable,  net, increased $5,015,000, or 17.30% during the
six months  ended  December  31,  1998.  The  increase  in loans was a result of
increased  loan  demand  in  the  Company's   market  and  includes  1-4  family
residential  mortgage loans and agricultural and commercial loans. The aggregate
growth  in  the  Company's  loan   portfolio   combined  with  the  increase  in
agricultural  and  commercial  loans will  increase  the  Company's  credit risk
exposure.

The  Company's  investment  securities,   including  mortgage-backed  securities
designated  available for sale  increased  10.97% or  $4,798,000  during the six
months  ended  December 31,  1998.  The increase is primarily  due to the use of
funds provided by FHLB advances and increased deposits over the six months ended
December 31, 1998. In addition,  the carrying value of the Company's  investment
securities,  including mortgage-backed  securities designated available for sale
reflected a $50,000  before tax increase due to market value  appreciation.  The
Company  is  no  longer   designating  any  investment   securities,   including
mortgage-backed securities as held to maturity.

The Company's  deposits  increased by $3,715,000,  or 7.72%, from $48,102,000 at
June 30, 1998 to  $51,817,000  at December 31, 1998.  At December 31, 1998,  the
Company's FHLB advances  totaled  $26,806,000,  an increase of  $10,606,000,  or
65.47% from  $16,200,000 at June 30, 1998. The advances were primarily  utilized
to fund increased loan production and purchase investment securities,  including
mortgage-backed  securities.  In  order  to  fund  loan  growth  and  investment
purchases  and to  leverage  its  capital,  the  Company  may  continue  to seek
additional  deposits  through  traditional  deposit  products  and  new  deposit
products, as well as increase utilization of FHLB advances.

Stockholder's  equity declined by $2,693,000 or 22.56% from  $11,938,000 at June
30, 1998 to $9,245,060  December 31, 1998.  The decrease is primarily due to the
Company's stock repurchase  programs,  described  elsewhere in this 10-QSB. As a
result Treasury stock increased  $2,800,000,  or 96.29%, from $2,908,000 at June
30, 1998 to $5,708,000 at December 31, 1998.  The use of interest  earning funds
to repurchase stock will decrease interest income in future periods.


Results of Operations

Net Earnings

Net  earnings  were $74,000 for the three  months  ended  December 31, 1998,  as
compared  to  $79,000  for the  three  months  ended  December  31,  1997.  This
represented  a decrease of $5,000,  or 6.33%.  The  decrease in net earnings was
primarily  attributable to a $43,000,  or 13.52%  increase in other  noninterest
expense,  most  notably  compensation  and  employee  benefits  as a  result  of
increased  staff.  The  decrease  was also  affected  by a $15,000  increase  in
provision for loan losses.


                                                                     (Continued)

                                       19

<PAGE>



                     REDWOOD FINANCIAL, INC. AND SUBSIDIARY

The decrease in net income was partially offset by a $23,000,  or 5.67% increase
in net interest  income,  a $17,000,  or 51.73%  increase in noninterest  income
including $16,000 in gains on the sale of securities,  and a $12,000,  or 28.57%
decrease in income tax expense.

Net  earnings  were  $127,000 for the six months  ended  December  31, 1998,  as
compared  to  $205,000  for  the  six  months  ended  December  31,  1997.  This
represented a decrease of $78,000,  or 38.05%.  The decrease in net earnings was
primarily  attributable to a $86,139 decrease in the carrying value of a limited
partnership.  This limited partnership invests in equity securities of financial
institutions.  The  value of the  securities  held by this  limited  partnership
decreased  as a result of equity  market  depreciation  in the six months  ended
December 31, 1998.

The decrease was also affected by an $88,000,  or 15.02% increase in noninterest
expense,  excluding the decline in the value of the limited  partnership,  and a
$24,000  increase in provision  for loan losses.  The decrease in net income was
partially  offset by a  $57,000,  or  121.28%  increase  in  noninterest  income
including  gains  on the sale of  securities  of  $38,000,  a  $9,000,  or 1.05%
increase in net interest income, and a $53,000, or 45.30% decrease in income tax
expense.

Net Interest Income

Net interest income increased by $23,000,  or 5.67%, from $406,000 for the three
months ended  December 31, 1997 to $429,000 for the three months ended  December
31, 1998.  The increase in net interest  income was  primarily due growth of the
Company,  specifically,  its increased use of deposits and FHLB advances to fund
loan   production   and   purchases   of   investment   securities,    including
mortgage-backed securities. Th increase was slightly offset by a decrease in the
Company's net interest spread, from 1.52% for the three months ended to December
31, 1997, to 1.51% for the three months ended December 31, 1998.

Net interest  income  increased by $9,000,  or 1.05%,  from $861,000 for the six
months ended December 31, 1997 to $870,000 for the six months ended December 31,
1998. As previously noted, the increase in net interest income was primarily due
to growth of the  Company,  specifically,  its increase use of deposits and FHLB
advances  to fund  loan  production  and  purchases  of  investment  securities,
including mortgage-backed  securities.  The increase was offset by a decrease in
the  Company's  net  interest  spread,  from 1.65% for the six  months  ended to
December 31, 1997, to 1.50% for the six months ended December 31, 1998.

                                                                     (Continued)


                                       20

<PAGE>



                     REDWOOD FINANCIAL, INC. AND SUBSIDIARY


Interest Income

Interest  income was $1,395,000 for the three months ended December 31, 1998, as
compared  to  $1,158,000   for  the  three  months  ended   December  31,  1997,
representing an increase of $237,000, or 20.47%. The increase in interest income
was primarily due to an increase in  interest-earning  assets as a result of the
Company's growth.  Average  interest-earning  assets increased  $16,341,000,  or
25.61% from  $63,808,000  for the three  months  ended  December  31,  1997,  to
$80,149,000  for the three  months  ended  December  31,  1998.  The increase in
interest  income was  partially  offset by a decrease  in the  overall  yield on
interest-earning assets. For the three months ended December 31, 1998, the yield
on interest-earning  assets was 6.96%, as compared to 7.26% for the three months
ended  December 31, 1997. The decrease in yield on  interest-earning  assets was
due primarily to lower yields on the Company's loan and securities portfolios.

Interest  income was  $2,769,000  for the six months ended December 31, 1998, as
compared to $2,313,000 for the six months ended December 31, 1997,  representing
an  increase  of  $456,000,  or 19.71%.  The  increase  in  interest  income was
primarily   due   to   an   increase   in   interest-earning   assets.   Average
interest-earning  assets increased  $15,346,000,  or 24.27% from $63,238,000 for
the six months  ended  December 31, 1997,  to  $78,584,000  for the three months
ended  December  31,  1998.  The  increase  in  interest  income was offset by a
decrease in the overall  yield on  interest-earning  assets.  For the six months
ended  December 31, 1998,  the yield on  interest-earning  assets was 7.05%,  as
compared to 7.31% for the six months ended  December  31, 1997.  The decrease in
yield on  interest-earning  assets also was due primarily to lower yields on the
Company's loan and securities portfolios.

Interest on loans receivable  increased by $186,000,  or 38.11%, to $674,000 for
the three months ended  December 31, 1998, as compared to $488,000 for the three
months ended December 31, 1997. Such increase was due to a $9,649,000, or 42.07%
increase in the average  balance of loans  receivable  from  $22,933,000 for the
three months ended December 31, 1997 to  $32,582,000  for the three months ended
December 31, 1998. The increase in interest on loans  receivable was offset by a
decrease  in the  average  yield on loans  receivable  from  8.51% for the three
months ended December 31, 1997, to 8.27% for the three months ended December 31,
1998.

Interest on loans receivable increased by $361,000, or 37.84%, to $1,315,000 for
the six months  ended  December  31,  1998,  as compared to $954,000 for the six
months ended December 31, 1997. Such increase was due to a $9,401,000, or 42.30%
increase in the average balance of loans receivable from $22,224,000 for the six
months ended December 31, 1997 to $31,625,000  for the six months ended December
31, 1998. The increase in interest on loans  receivable was offset by a decrease
in the average  yield on loans  receivable  from 8.58% for the six months  ended
December 31, 1997, to 8.32% for the six months ended December 31, 1998.


                                                                     (Continued)

                                       21

<PAGE>



                     REDWOOD FINANCIAL, INC. AND SUBSIDIARY

Interest income on mortgage-backed and related securities available for sale was
$594,000 and  $170,000  for the three  months ended  December 31, 1998 and 1997,
respectively.  The yield on the Company's  mortgage-backed  securities portfolio
available  for sale was 6.17% and 6.38% for the three months ended  December 31,
1998 and 1997,  respectively.  A  decrease  in the yield on the  mortgage-backed
securities  portfolio  has  occurred as a result of recent  declines in mortgage
rates. In January 1998, the Company redesignated all mortgage-backed and related
securities  as available  for sale.  As such,  the Company  reported no interest
income on mortgage-backed  and related securities held to maturity for the three
or six months ended December 31, 1998.

Interest income on mortgage-backed and related securities available for sale was
$1,167,000  and $335,000  for the six months  ended  December 31, 1998 and 1997,
respectively.  The yield on the Company's  mortgage-backed  securities portfolio
available  for sale was 6.26% and 6.66% for the six months  ended  December  31,
1998 and 1997,  respectively.  A  decrease  in the yield on the  mortgage-backed
securities  portfolio  has  occurred as a result of recent  declines in mortgage
rates.

Interest  income on  investment  securities  available  for sale was $80,000 and
$112,000 for the three months  ended  December 31, 1998 and 1997,  respectively.
The yield on the Company's  investment  securities  portfolio available for sale
was  5.59% and 7.02% for the three  months  ended  December  31,  1998 and 1997,
respectively. A decrease in the yield on the investment securities portfolio has
occurred as a result of recent  declines in interest rates. In January 1998, the
Company  redesignated all investment  securities as available for sale. As such,
the  Company  reported  no  interest  income on  investment  securities  held to
maturity for the three or six months ended December 31, 1998.

Interest  income on  investment  securities  available for sale was $202,000 and
$240,000 for the six months ended December 31, 1998 and 1997, respectively.  The
yield on the Company's  investment  securities  portfolio available for sale was
5.87%  and  7.22%  for the  three  months  ended  December  31,  1998 and  1997,
respectively. A decrease in the yield on the investment securities portfolio has
occurred as a result of recent declines in interest rates.

Interest income on cash equivalents and other increased by $19,000, or 65.52% in
comparison  of the three  months ended  December 31, 1998 and 1997.  For the six
months ended December 31, 1998,  interest  income on cash  equivalents and other
increased by $36,000,  or 73.47% in comparison to the six months ended  December
31, 1997. Cash and other includes  dividends on FHLB stock. The increase in both
periods reflects increased investment in FHLB stock.







                                                                     (Continued)

                                       22

<PAGE>



                     REDWOOD FINANCIAL, INC. AND SUBSIDIARY

Interest Expense

Interest expense increased by $215,000,  or 28.59%,  from $752,000 for the three
months ended  December 31, 1997 to $967,000 for the three months ended  December
31, 1998.  The increase in interest  expense  resulted  from a  $14,906,000,  or
195.31% increase in the average balance of FHLB advances from $7,632,000 for the
three months ended December 31, 1997 to  $22,538,000  for the three months ended
December  31,  1998.  The  increase in interest  expense was also  impacted by a
$3,572,000,  or 7.99% increase in the average  balance of deposits in comparison
of the three months ended  December 31, 1998, to the three months ended December
31, 1997. The increase in interest  expense was also partially offset a decrease
in the cost of funds from 5.75% to 5.55% for the three months ended December 31,
1997 and 1998, respectively.

Interest expense increased by $447,000,  or 30.79%,  from $1,452,000 for the six
months ended  December 31, 1997 to $1,899,000  for the six months ended December
31, 1998.  The increase in interest  expense  resulted  from a  $14,823,000,  or
248.83% increase in the average balance of FHLB advances from $5,957,000 for the
six months  ended  December  31, 1997 to  $20,780,000  for the six months  ended
December  31,  1998.  The  increase in interest  expense was also  impacted by a
$2,399,000,  or 5.30% increase in the average  balance of deposits in comparison
of the six months ended  December 31, 1998, to the six months ended December 31,
1997. The increase in interest  expense was also partially  offset a decrease in
the cost of funds from 5.66% to 5.55% for the six months ended December 31, 1997
and 1998, respectively.

Provision for Loan Losses

The Company's  provision for loan losses was $15,000 and $0 for the three months
December 31, 1998 and 1997, respectively.  For the six months ended December 31,
1998 and 1997,  the  Company's  provision  for loan losses were  $24,000 and $0,
respectively.  As  noted,  the  Company  has  experienced  growth  in  its  loan
portfolio.  The provision was increased in response to loan growth,  a change in
the  composition  of the  loan  portfolio  through  increased  agricultural  and
commercial loan  originations,  and inherent  losses in the loan  portfolio.  As
such, the Company provided for losses.  The level of this provision is dependent
on loan growth,  delinquencies,  economic conditions,  and other various factors
used by management in the  assessment of its loan portfolio and overall level of
loan loss reserves.

At December 31, 1998 and June 30, 1998,  the allowance  for loan losses  totaled
$275,000 and $251,000,  respectively. The Company's net loan charge-offs were $0
and $0 for the six months ended  December 31, 1998 and twelve  months ended June
30, 1998,  respectively.  At December 31, 1998 and June 30, 1998,  the allowance
for loan losses  represented 0.80% and 0.86% of loans receivable,  respectively.
Nonaccrual  loans  totaled $0 and $0 at  December  31,  1998 and June 30,  1998,
respectively.  At December 31, 1998 and June 30, 1998, classified assets totaled
$406,000 and $37,000, respectively.

                                                                     (Continued)

                                       23

<PAGE>



                     REDWOOD FINANCIAL, INC. AND SUBSIDIARY

Noninterest Income

Noninterest  income increased by $17,000,  or 51.73% from $34,000 to $51,000 for
the three months  ended  December 31, 1998 as compared to the three months ended
December 31,  1997.  The increase was due to an increase in gains on the sale of
securities  available for sale of $8,000, or 100.00% and an increase in fees and
service charges of $7,000, or 28.00%.

Noninterest income increased by $57,000, or 121.28% from $47,000 to $104,000 for
the six months  ended  December  31, 1998 as  compared  to the six months  ended
December 31,  1997.  The increase was due to an increase of gains on the sale of
securities available for sale of $30,000, or 375.00% and an increase in fees and
service charges of $22,000, or 57.89%.

Noninterest Expense

Noninterest expense increased by $43,000, or 13.41%, from $318,000 for the three
months ended  December 31, 1997 to $361,000 for the three months ended  December
31, 1998.  The increase was due  primarily to a $30,000,  or 13.57%  increase in
compensation and employee benefits expense due primarily to increased staff. The
Company has increased  staff in late 1998 as a result of staffing the Bank's new
main office in Redwood Falls, Minnesota.  The increase is also attributable to a
$5,000, or 17.86%,  increase in professional  fees, a $3,000, or 42.86% increase
in  occupancy  costs,  and a  $3,000,  or 7.50%  increase  in other  noninterest
expenses.

Noninterest expense increased by $174,000,  or 29.69%, from $586,000 for the six
months ended December 31, 1997 to $760,000 for the six months ended December 31,
1998. The increase was due primarily to the  aforementioned  $86,000 decrease in
the carrying value of an investment in a limited partnership.  In addition,  the
increase was also impacted by a $60,000,  or 14.63% increase in compensation and
employee  benefits  expense due  primarily to  increased  staff,  a $15,000,  or
23.44%,  increase in other noninterest  expense, a $6,000, or 46.15% increase in
occupancy costs, and a $5,000,  or 38.46% increase in data processing costs. The
increase  was also  affected by a minor  increase in  advertising  expense and a
minor decrease in professional fees.

Income Taxes

The Company's income taxes decreased by $12,000, or 28.57%, from $42,000 for the
three  months ended  December  31,  1997,  to $30,000 for the three months ended
December 31, 1998. The change in income taxes was due primarily to a decrease in
pre-tax earnings of $18,000,  or 14.88% from $121,000 for the three months ended
December 31, 1997 to $103,000 for the three months ended  December 31, 1998. The
Company's  effective  tax rate was 28.66% and 34.72% for the three  months ended
December 31, 1998 and 1997, respectively.  The decrease was a result of a higher
level of tax exempt investments over the three months ended December 31, 1997.


                                                                     (Continued)

                                       24

<PAGE>



                     REDWOOD FINANCIAL, INC. AND SUBSIDIARY

The Company's  income taxes decreased by $53,000,  or 45.30%,  from $117,000 for
the six months  ended  December  31,  1997,  to $64,000 for the six months ended
December 31, 1998. The change in income taxes was due primarily to a decrease in
pre-tax  earnings of $131,000,  or 40.68% from $322,000 for the six months ended
December 31, 1997 to $191,000 for the six months  ended  December 31, 1998.  The
Company's  effective  tax rate was 33.59%  and  36.29% for the six months  ended
December 31, 1998 and 1997, respectively.  The decrease was a result of a higher
level of tax exempt investments over the six months ended December 31, 1997.


Forward Looking Information

In recent years,  significant new federal  legislation has imposed  numerous new
legal and regulatory requirements on financial institutions.  In addition to the
uncertainties  posed by  possible  legislative  change,  there  are  many  other
uncertainties that may make the Company's  historical  performance an unreliable
indicator of its future performance, and forward-looking information,  including
projections  of future  performance,  is subject to  numerous  possible  adverse
developments,  including but not limited to the possibility of adverse  economic
developments  which may increase default and delinquency  risks in the Company's
loan portfolios; shifts in interest rates which may result in shrinking interest
margins; deposits outflows; interest rates on competing investments;  demand for
financial  services  and  loan  products;  increases  generally  in  competitive
pressure in the banking and financial services  industry;  changes in accounting
policies  or  guidelines,  or  monetary  and  fiscal  policies  of  the  federal
government;  changes in the quality or  composition  of the  Company's  loan and
investment  portfolios;  potential  operational  disruptions  due to  Year  2000
considerations; or other significant uncertainties.


Liquidity and Capital Resources

The Company's primary sources of funds are deposits,  FHLB advances 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. A substantial portion of the Company's deposits
are funds from local government  entities.  At December 31, 1998, these deposits
totaled  $16,350,000.  Government  deposits are typically in larger amounts than
traditional  retail  deposits and are bid more frequently and at higher interest
rates than retail deposits..  The Company has utilized  government  deposits for
several years and has procedures for addressing these  operational and liquidity
concerns.




                                                                     (Continued)

                                       25

<PAGE>



                     REDWOOD FINANCIAL, INC. AND SUBSIDIARY

The primary investing activities of the Company are the origination of loans and
the purchase of investment and mortgage-backed  and related  securities.  During
the six months ended December 31, 1998 and 1997,  the Company's loan  portfolio,
net, increased $5,044,000 and $2,593,000, respectively. During the same periods,
the Company purchased  investment and  mortgage-backed and related securities in
the amounts of $20,832,000 and $6,425,000,  respectively.  The primary financing
activity of the Company is the attraction of savings deposits and utilization of
FHLB advances.

The Company has other  sources of  liquidity  if there is a need for funds.  The
Bank has the ability to obtain  additional  advances  from the Federal Home Loan
Bank of Des Moines.  During the six months ended December 31, 1998 and 1997, the
Bank utilized advances of $21,700,000 and $7,216,000, respectively. In addition,
the Company's  designation of all investments and mortgage-backed  securities as
available  for sale is intended to increase  liquidity  and overall  operational
flexibility.

The Bank 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 4.0%.

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.   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
December  31,  1998 and  June  30,  1998,  cash  and  cash  equivalents  totaled
$2,279,000  and  $2,009,000,  respectively.   Investment  securities,  including
mortgage-backed  and related  securities  designated  available for sale totaled
$48,529,000   and   $43,731,000   at  December  31,  1998  and  June  30,  1998,
respectively.

Since the  conversion  of the  Association  and the  formation of the Company in
1995, the Company has regularly  repurchased  shares of its common stock through
open market  transactions in publically  announced  repurchase  programs.  These
repurchase programs are intended to promote higher earnings per share and return
on equity in future periods by reducing the level of capital.  These repurchases
have been  completed with liquid  resources,  sales and maturities of investment
securities  available  for sale,  loan  repayments,  increases in deposits,  and
advances procured from the FHLB.  Management  believes the Company is adequately
capitalized.  As such, the Company  believes that these  repurchases have not in
the past, nor should not in the future present substantial  liquidity or capital
concerns based upon current and anticipated  economic  considerations.  Previous
common stock repurchase programs should not be construed as indicative of future
repurchase programs by the Company.

                                                                     (Continued)


                                       26

<PAGE>



                     REDWOOD FINANCIAL, INC. AND SUBSIDIARY

Federal savings institutions are required to satisfy three capital requirements:
(i) a  requirement  that  "tangible  capital"  equal or excess  1.5% of tangible
assets,  (ii) a requirement that "core capital" equal or excess 3.0% of adjusted
tangible assets,  and (iii) a risk-based capital  requirement  currently 8.0% of
"risk-adjusted" assets. The Bank currently meets all three capital requirements.













                                                                     (Continued)


                                       27

<PAGE>



                     REDWOOD FINANCIAL, INC. AND SUBSIDIARY


Year 2000 Consideration

The Company's primary exposure is its automated data processing system which had
been  determined to be Year 2000  noncompliant.  On August 4, 1998,  the Company
received its Year 2000 compliant release from its software vendor. Management is
continuing  to test the release to ensure that the software  properly  addresses
risks identified by the Federal Financial  Institutions  Examination Council and
its data processing vendor. The Company has substantially completed its testing,
although the Company  expects to continue  testing  this and other  applications
during 1999.

The Company  anticipates  its exposure to Year 2000 issues is reduced due to its
1-4 family residential lending emphasis.  However, the Company is broadening its
lending  activities  to  include  commercial  lending.  As  part  of its  credit
underwriting,  the  Company  is  assessing  the  Year  2000  sensitivity  of all
commercial loan applicants.

At this time, the Company expects to expend approximately  $10,000 to $15,000 on
its Year 2000 compliance efforts.  In addition,  a substantial amount of current
staff time is being  expended on Year 2000  assessment  and testing.  Should the
Company fail to correct its Year 2000  deficiencies  by December  31, 1999,  the
Company  could  expect  a  substantial  disruption  to  daily  operations.  Such
disruption could have a material effect on the Company's  financial position and
future  earnings.   To  this  extent,  the  Company's  contingency  plan  is  to
re-commence  manual data  processing  operations.  As the Company only  recently
converted from manual to automated data  processing in October 1997, the Company
still retains the equipment and trained staff  necessary to  re-commence  manual
data processing operations.  The Company plans to re-assess its contingency plan
pending the results of on-going testing.


Recent Developments

1.     Completion of Stock Repurchase Program

       On November 10, 1998 and December 18, 1998, the Company  announced  stock
       repurchase  programs of 10%, or 78,100  shares and 7%, or 49,200  shares,
       respectively. The Company completed the repurchase as detailed previously
       in this 10-QSB.







                                                                     (Continued)

                                       28

<PAGE>



                     REDWOOD FINANCIAL, INC. AND SUBSIDIARY


2.     Commencement of New Facility Operations

       On January 25, 1999, the Company's  subsidiary,  HomeTown Bank, relocated
       its main  office to a new  facility  in  Redwood  Falls,  Minnesota.  The
       Company had  previously  announced the  construction  of this facility on
       behalf of the Bank on April 28, 1998.  In its  announcement,  the Company
       stated  that the new  building  will  have a  material  impact  on future
       earnings  and provided  estimates at that time.  The Company is currently
       finalizing the financial effect the new building.  The Company intends to
       maintain its current office in downtown Redwood Falls as a branch office.





















                                                                     (Continued)

                                       29

<PAGE>



                     REDWOOD FINANCIAL, INC. AND SUBSIDIARY

                           PART II - OTHER INFORMATION


ITEM 1:           Legal Proceedings.

                  None.

ITEM 2:           Changes in Securities and Use of Proceeds.

                  Not Applicable.

ITEM 3:           Defaults Upon Senior Securities.

                  Not Applicable.

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

                  On October 29, 1998, the Annual Meeting of the shareholders of
                  the   Company   was  held  to  obtain  the   approval  of  the
                  shareholders  of record as of  October  6, 1997 in  connection
                  with the matters  indicated  below.  The  following is a brief
                  description  of the matters  voted on at the meeting,  and the
                  number of votes cast for, against, or withheld, as well as the
                  number of abstentions, as to such matters:
<TABLE>
<CAPTION>
                                                                                      Vote
                                                                         ----------------------------------
                                                                                    Against or
                                         Matter                          For         withheld      Abstain
                  -----------------------------------------------------------------------------------------

                <S>     <C>                                            <C>           <C>            <C>               
                  1.     Election of directors:
                            Donald C. Orth                              742,808       11,200           N/A
                            Thomas W. Stotesbery                        737,003       17,005           N/A

                  2.     Ratification of Redwood Financial,
                         Inc. 1995 Stock Option Plan:*                  605,097       58,225           1,025

                  3.     Ratification of Redwood Financial,
                         Inc. Management Stock Bonus Plan:*             604,097       58,425           1,425

                  4.     Appointment of KPMG Peat Marwick
                          LLP as auditors for 1999 fiscal year:         752,433        1,375             200
</TABLE>

*    Totals do include 89,661 in broker non-votes.

                                                                     (Continued)

                                       30

<PAGE>



                     REDWOOD FINANCIAL, INC. AND SUBSIDIARY

                           PART II - OTHER INFORMATION


ITEM 5:           Other Information.

                  None.

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

                  None













                                       31
<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: January 29, 1999            /s/ Paul W. Pryor
      ----------------            -----------------
                                  Paul W. Pryor, President and Chief Executive
                                  Officer (Duly Authorized Officer)


Date: January 29, 1999            /s/ Anthony H. Acker
      ----------------            --------------------
                                  Anthony H. Acker, Chief Financial Officer
                                  (Principal Financial and Accounting Officer)





                                       32