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, 1997

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

     For the transition period from___________________to___________________

                         Commission File Number 0-25884

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

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

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

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

         Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the  Securities  Exchange  Act of
1934  during  the  preceding  12 months  (or for such  shorter  period  that the
registrant was required to file such reports),  and (2) has been subject to such
filing requirements for the past 90 days.
                                                        [X]  Yes     [ ]  No

         Indicate  the  number of  shares  outstanding  of each of the  issuer's
classes of common stock as of January 28, 1998:

                 Class                                   Outstanding
                 -----                                   -----------
         Common stock, par value $0.10 per share            868,093


<PAGE>




                     REDWOOD FINANCIAL, INC. AND SUBSIDIARY

                                    CONTENTS

PART I - FINANCIAL INFORMATION

                                                                           Page
       Item 1:     Financial Statements

                   Consolidated Balance Sheets at December 31, 1997 and
                   June 30, 1997                                              3

                   Consolidated Statements of Earnings for the Three
                   and Six months ended December 31, 1997 and 1996            4

                   Consolidated Statement of Stockholders' Equity
                   for the Six months ended December 31, 1997                 5

                   Consolidated Statements of Cash Flows for the
                   Six months ended December 31, 1997 and 1996                6

                   Notes to Consolidated Financial Statements              7-11

       Item 2:     Management's Discussion and Analysis of
                   Financial Condition and Results of Operations          12-25

PART II - OTHER INFORMATION

       Item 1:     Legal Proceedings                                         26

       Item 2:     Changes in Securities                                     26

       Item 3:     Defaults Upon Senior Securities                           26

       Item 4:     Submission of Matters to a Vote of Security Holders       26

       Item 5:     Other Information                                         26

       Item 6:     Exhibits and Reports on Form 8-K                          26

       Signatures                                                            27


                                        2
<PAGE>
                     REDWOOD FINANCIAL, INC., AND SUBSIDIARY
                         PART I - FINANCIAL INFORMATION
                          Item 1 - Financial Statements

                           Consolidated Balance Sheets
                                   (Unaudited)
<TABLE>
<CAPTION>
                                                                                    December 31           June 30,
                                    Assets                                             1997                 1997

-------------------------------------------------------------------------------------------------------------------
<S>                                                                              <C>                <C>   
Cash                                                                              $      14,505             15,314
Interest-bearing deposits with banks                                                  1,730,913            748,478
-------------------------------------------------------------------------------------------------------------------
                             Cash and cash equivalents                                1,745,418            763,792
-------------------------------------------------------------------------------------------------------------------

Securities available for sale:
     Mortgage-backed and related securities (amortized cost                          12,571,756          8,149,752
       $12,506,596 and $8,143,694, respectively)
     Investment securities (amortized cost $6,403,149 and                             6,429,367          6,981,250
       $6,992,534, respectively)
-------------------------------------------------------------------------------------------------------------------
                     Total securities available for sale                             19,001,123         15,131,002
-------------------------------------------------------------------------------------------------------------------

Securities held to maturity:
     Mortgage-backed and related securities (market value                            12,100,866         13,873,801
       $12,265,604 and $14,082,280, respectively)
     Investment securities (market value $8,912,043 and                               8,895,140         10,395,659
       $10,399,446, respectively)
-------------------------------------------------------------------------------------------------------------------
                      Total securities held to maturity                              20,996,006         24,269,460
-------------------------------------------------------------------------------------------------------------------

Loans receivable, net                                                                23,374,423         20,766,539
Federal Home Loan Bank stock, at cost                                                   415,000            333,500
Accrued interest receivable                                                             653,366            613,357
Premises and equipment, net                                                             398,839            212,067
Real Estate, net                                                                              0             13,520
Other assets                                                                            562,863             65,679

-------------------------------------------------------------------------------------------------------------------
                                 Total Assets                                     $  67,147,038         62,168,916
-------------------------------------------------------------------------------------------------------------------

                     Liabilities and Stockholders' Equity

-------------------------------------------------------------------------------------------------------------------
Deposits                                                                             46,979,232         46,093,213
Federal Home Loan Bank advances                                                       8,016,083          3,500,000
Advance payments by borrowers for taxes and insurance                                    63,930             69,744
Accrued expenses and other liabilities                                                  286,388            163,926

-------------------------------------------------------------------------------------------------------------------
                              Total Liabilities                                      55,345,633         49,826,883
-------------------------------------------------------------------------------------------------------------------

Common stock ($.10 par value): Authorized and issued
 1,125,000 shares; outstanding 887,075 shares at
 December 31, 1997; 961,875 shares at June 30, 1997                                     112,500            112,500
Additional paid-in capital                                                            8,476,682          8,467,833
Retained earnings, subject to certain restrictions                                    6,574,634          6,369,591
Net unrealized gain (loss) on securities available for sale                              54,827             (3,135)
Unearned employee stock ownership plan shares                                          (496,384)          (529,504)
Unearned management stock bonus plan shares                                            (263,484)          (306,797)
Treasury stock, at cost; 237,925 shares at
 December 31, 1997; 163,125 shares at June 30, 1997                                  (2,657,370)        (1,768,455)

-------------------------------------------------------------------------------------------------------------------
                          Total Stockholders' Equity                                 11,801,405         12,342,033
-------------------------------------------------------------------------------------------------------------------

-------------------------------------------------------------------------------------------------------------------
                  Total Liabilities and Stockholders' Equity                      $  67,147,038         62,168,916
-------------------------------------------------------------------------------------------------------------------
</TABLE>

See accompanying notes to unaudited 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,
                                                                               ------------------           ------------------
                                                                              1997          1996           1997         1996

----------------------------------------------------------------------------------------------------------------------------------
<S>                                                                 <C>                  <C>           <C>             <C>    
Interest income:
    Loans receivable                                                $         487,619       378,600       953,735         740,556
    Securities held to maturity:
      Mortgage-backed and related securities                                  221,540       266,099       453,033         538,670
      Investment securities                                                   144,897       209,841       295,402         435,914
    Securities available for sale:
      Mortgage-backed and related securities                                  170,463             0       335,260               0
      Investment securities                                                   111,602             0       239,553               0
    Cash equivalents                                                           22,109        54,503        35,524         103,664
----------------------------------------------------------------------------------------------------------------------------------
      Total interest income                                                 1,158,230       909,043     2,312,507       1,818,804

Interest Expense:
    Deposits                                                                  634,069       502,095     1,268,372       1,009,291
    Federal Home Loan Bank advances                                           117,951             0       183,234               0
----------------------------------------------------------------------------------------------------------------------------------
      Total interest expense                                                  752,020       502,095     1,451,606       1,009,291

    Net interest income                                                       406,210       406,948       860,901         809,513

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

    Net interest income after provision
      for losses on loans                                                     406,210       406,948       860,901         809,513

Noninterest income:
    Gain on sale of mortgage-backed
     securities available for sale                                              7,871             0         7,871               0
    Fees and service charges                                                   25,230        12,209        37,803          26,183
    Other                                                                         435           503         1,314           1,462
----------------------------------------------------------------------------------------------------------------------------------
      Total noninterest income                                                 33,536        12,712        46,988          27,645

Noninterest expense:
    Compensation and employee benefits                                        220,756       186,276       409,736         353,013
    Advertising                                                                 7,512         5,511        13,673           8,607
    Occupancy                                                                   6,905         6,821        13,048          14,252
    Federal deposit insurance premiums                                          7,552        18,029        14,538          39,369
    Professional fees                                                          27,903       128,255        58,156         164,239
    Data processing expense                                                     8,282             0        12,687               0
    Deposit insurance fund assessment                                               0             0             0         237,085
    Other                                                                      39,586        21,821        64,207          45,316
----------------------------------------------------------------------------------------------------------------------------------
      Total noninterest expense                                               318,496       366,713       586,045         861,881
----------------------------------------------------------------------------------------------------------------------------------

      Earnings before income taxes                                            121,250        52,947       321,844         (24,723)

Income tax expense (benefit)                                                   42,097        17,239       116,801         (22,884)
----------------------------------------------------------------------------------------------------------------------------------

      Net earnings                                                  $          79,153        35,708       205,043          (1,839)
----------------------------------------------------------------------------------------------------------------------------------

----------------------------------------------------------------------------------------------------------------------------------
Net earnings per common share - Basic                               $            0.10          0.04          0.24            0.00
Net earnings per common share - Diluted                                          0.09          0.04          0.23            0.00
----------------------------------------------------------------------------------------------------------------------------------

----------------------------------------------------------------------------------------------------------------------------------
Weighted average number of shares outstanding - Basic                         818,324       969,352       841,084         968,313
Weighted average number of shares outstanding - Diluted                       859,507       997,510       877,262         968,313
----------------------------------------------------------------------------------------------------------------------------------
</TABLE>

See accompanying notes to unaudited financial statements

                                                4

<PAGE>

                     REDWOOD FINANCIAL, INC. AND SUBSIDIARY
                 Consolidated Statement of Stockholders' Equity
<TABLE>
<CAPTION>
                                                                      Net         Unearned 
                                                                    unrealized    Employee    Unearned
                                                                     gain on        Stock    management
                                            Additional             Securities     Ownership stock bonus                  Total
                                   Common     Paid in    Retained   available       Plan    recognition    Treasury   stockholders'
                                    Stock     Capital    Earnings   for sale       Shares   plan shares      Stock       equity
-----------------------------------------------------------------------------------------------------------------------------------
<S>                              <C>        <C>         <C>           <C>         <C>          <C>        <C>           <C>       
Balance, June 30, 1997           $ 112,500  8,467,833   6,369,591     (3,135)     (529,504)    (306,797)  (1,768,455)   12,342,033

 Net Earnings                                             205,043                                                          205,043

 Stock Repurchases                                                                                          (888,915)     (888,915)

  Net unrealized gain on
  securities available for sale                                       57,962                                                57,962

 Earned employee stock
  ownership plan shares                         8,849                               33,120                                  41,969

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

-----------------------------------------------------------------------------------------------------------------------------------
Balance,  December 31, 1997      $ 112,500  8,476,682   6,574,634     54,827      (496,384)    (263,484)  (2,657,370)   11,801,405

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

See accompanying notes to unaudited financial statements
                                        5


<PAGE>
                     REDWOOD FINANCIAL, INC., AND SUBSIDIARY
                      Consolidated Statements of Cash Flows
                                   (Unaudited)
<TABLE>
<CAPTION>
                                                                                                   Six months
                                                                                               ended December 31,
                                                                                     -------------------------------------
                                                                                          1997                    1996

--------------------------------------------------------------------------------------------------------------------------------
<S>                                                                                  <C>                    <C>    
Operating Activities:
 Net earnings (loss)                                                                 $   205,043                  (1,839)
 Adjustments to reconcile net earnings to net cash
  provided by operations
      Depreciation                                                                        11,073                   9,074
      Amortization of premiums and discounts on investment
          securities, mortgage-backed and related securities
          and loans receivable, net                                                       (9,555)                (19,519)
      Decrease (increase) in other assets                                               (497,184)                 40,472
      Decrease (increase) in accrued interest receivable                                 (40,009)                159,851
      Increase in accrued interest payable                                                31,126                  17,815
      Gain on sale of mortgage-backed securities available for sale                       (7,871)                      0
      Amortization of unearned ESOP shares                                                33,120                  33,120
      Earned ESOP shares priced above original cost                                        8,849                   6,641
      Earned Management Stock Bonus Plan shares                                           43,313                  43,313
      Increase (decrease) in accrued expenses and other liabilities                      122,462                (100,426)
      Increase in deferred income taxes                                                  (38,642)                      0
--------------------------------------------------------------------------------------------------------------------------------
                    Net cash (used) provided by operating activities                    (138,275)                188,502

Investing Activities:
  Proceeds from maturities of investment securities held to maturity                     500,000               4,030,000
  Principal collected on mortgage-backed and related securities held to maturity       2,034,858                 763,883
  Proceeds from maturities of investment securities available for sale                 2,500,000                       0
  Purchases of investment securities available for sale                                 (910,000)                      0
  Purchases of mortgage-backed and related securities available for sale              (5,514,541)                      0
  Principal collected on mortgage-backed and related securities available for sale       181,590                       0
  Proceeds from sales of mortgage-backed securities available for sale                   724,037
  Increase in loans receivable, net                                                   (2,592,946)             (1,656,387)
  Purchases of premises and equipment                                                   (197,844)                (17,406)
  Increase in Federal Home Loan Bank Stock                                               (81,500)                      0
--------------------------------------------------------------------------------------------------------------------------------
                    Net cash (used) provided by investing activities                  (3,356,346)              3,120,090

Financing Activities:
  Increase in deposits, net                                                              854,893               2,016,768
  Decrease in advance payments by borrowers for taxes and insurance                       (5,814)                 (3,676)
  Proceeds from Federal Home Loan Bank advances                                        7,216,083                       0
  Repayment of Federal Home Loan Bank advances                                        (2,700,000)                      0
  Repurchase of common stock                                                            (888,915)                      0
--------------------------------------------------------------------------------------------------------------------------------
                    Net cash provided by financing activities                          4,476,247               2,013,092
--------------------------------------------------------------------------------------------------------------------------------
                    Increase in cash and cash equivalents                                981,626               5,321,684


Cash and cash equivalents, beginning of period                                           763,792               2,873,163
--------------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents, end of period                                             $ 1,745,418               8,194,847
--------------------------------------------------------------------------------------------------------------------------------

Supplemental cash flow disclosures:
  Cash paid for interest                                                             $ 1,434,593                 997,476
  Cash paid for income taxes                                                             125,410                 103,700

Supplemental noncash disclosures:
  Transfer of real estate to loans                                                        13,520                       0


</TABLE>
See accompanying notes to unaudited financial statements

                                        6


<PAGE>




                     REDWOOD FINANCIAL, INC. AND SUBSIDIARY

                   Notes to Consolidated Financial Statements

                                December 31, 1997
                                   (Unaudited)


(1)    Redwood Financial, Inc.

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

       The  Company  commenced  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   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  months and six months  ended
       December 31, 1997 are not necessarily indicative of the results which may
       be expected for the entire year.

       The material  contained  herein is written with the presumption  that the
       users of the interim financial statements have read or have access to the
       most recent  Annual  Report on Form 10- KSB of Redwood  Financial,  Inc.,
       which contains the latest audited financial statements and notes thereto,
       together with Management's Discussion and Analysis of Financial Condition
       and  Results  of  Operations  as of June 30,  1997 and for the year  then
       ended.





                                                                     (Continued)

                                       7
<PAGE>

                     REDWOOD FINANCIAL, INC. AND SUBSIDIARY



(3)    Earnings Per Share

       In  February  1997,  the  Financial  Accounting  Standards  Board  issued
       Statement of Financial  Accounting  Standards (SFAS) No. 128 Earnings per
       Share.  SFAS No. 128  establishes  standards for computing and presenting
       earnings  per share  (EPS) and  applies to entities  with  publicly  held
       common stock or  potential  common  stock.  SFAS No. 128  supercedes  the
       standards  for computing EPS  previously  found in Accounting  Principles
       Board (APB) Opinion No. 15,  Earnings per Share.  In accordance with SFAS
       No. 128, the Company has presented basic and diluted  earnings per share.
       Basic EPS is computed by dividing income available to common stockholders
       by the  weighted  average  number of common  shares  outstanding  for the
       period.  Diluted EPS reflects  dilution for  potential  common stock that
       would share in the earnings of the Company. SFAS No. 128 is effective for
       financial  statements  issued for periods ending after December 15, 1997,
       including  interim  periods.  SFAS No. 128  requires  restatement  of all
       prior-period EPS data presented.

       As required by SFAS No. 128  Earnings  per Share,  the  following  tables
       illustrate the  calculation  of basic and diluted  earnings per share for
       the three and six months ended December 31, 1997 and 1996. The only stock
       securities that effect the Company's  earnings per share calculations are
       options on common stock and restricted stock awards.

<TABLE>
<CAPTION>

        For the Three Months Ended:          December 31, 1997                         December 31, 1996
        ---------------------------          -----------------                         -----------------
                                                              Per-Share                              Per Share
                                        Income     Shares      Amount           Income    Shares      Amount
                                        ------     ------      ------           ------    ------      ------
<S>     <C>                             <C>       <C>          <C>              <C>       <C>         <C>  
        Net Income:                     $79,153                                 $35,708

        Basic EPS:
        Income available to
         common stockholders             79,153   818,324      $0.10             35,708    969,352     $0.04

        Effect of Dilutive Securities:
        Options on common stock                    41,183                                   28,158
                                                 --------                                  -------

        Diluted EPS:
        Income available to common
         stockholders plus assumed
         conversions                    $79,153   859,507      $0.09            $35,708    997,510     $0.04

</TABLE>





                                                                     (Continued)

                                       8
<PAGE>

                                      REDWOOD FINANCIAL, INC. AND SUBSIDIARY

<TABLE>
<CAPTION>


        For the Six Months Ended:                 December 31, 1997                     December 31, 1996
        -------------------------                 -----------------                     -----------------
                                                              Per-Share          Income              Per Share
                                         Income    Shares      Amount             (Loss)  Shares      Amount
                                         ------    ------      ------             ------  ------      ------
<S>     <C>                             <C>        <C>         <C>             <C>       <C>           <C>  
        Net Income:                     $205,043                                ($1,839)

        Basic EPS:
        Income (loss) available to
         common stockholders             205,043   841,084     $0.24            ($1,839) 968,313       $0.00

        Effect of Dilutive Securities:
        Options on common stock                     36,178                                     0
                                                   -------                               -------

        Diluted EPS:
        Income (loss) available to
         common stockholders plus
         assumed conversions            $205,043   877,262     $0.23           ($1,839)  968,313       $0.00
</TABLE>

(4)     Regulatory Capital Requirements

        At December  31, 1997,  the  Association  met each of the three  current
        minimum regulatory capital requirements.  The following table summarizes
        the Association's regulatory capital position at December 31, 1997:
<TABLE>
<CAPTION>
                                                                                                To Be Well
                                                                                             Capitalized Under
                                                                                             Prompt Corrective
                                               Actual                  Required              Action Provisions
                                               ------                  --------              -----------------
                                        Amount       Ratio        Amount        Ratio        Amount       Ratio
                                        ------       -----        ------        -----        ------       -----
<S>    <C>                              <C>         <C>           <C>            <C>          <C>         <C>   
       Association's Net Worth          $8,676

       Less:  AFS Market                    55
         Valuation

       Tangible Capital                  8,621      13.34%        $  970         1.50%           n/a        n/a
         (to tangible assets)

       Core Capital                      8,621      13.34%         1,939         3.00%        $3,232       5.00%
         (to adjusted tangible assets)

       Core Capital                      8,621      40.51%           n/a           n/a         1,277       6.00%
         (to risk-weighted assets)

       Plus: Allowable portion of          213
         general allowance for
         loan losses

       Risk-based Capital               $8,834      41.51%        $1,702         8.00%        $2,128      10.00%
         (to risk-weighted assets)
</TABLE>

                                                                     (Continued)

                                       9
<PAGE>

                     REDWOOD FINANCIAL, INC. AND SUBSIDIARY




(5)    Stockholders' Equity and Stock Conversion

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

(6)    Stock Repurchases

       During the three months ended  December 31, 1997,  the Company  purchased
       26,707 shares of its outstanding common stock. Subsequently,  the Company
       purchased 18,982 shares in January 1998.  During fiscal 1998, the Company
       purchased  a total  of  93,782  shares,  or 9.7%  of its  961,875  shares
       outstanding  as of June 30, 1997.  As a result of these stock  repurchase
       programs, the Company has now outstanding 868,093 shares of common stock.
       The following  summarizes the Company's common stock  repurchases  during
       the four months ended January 31, 1998:

          Settlement Date                  Shares Purchased      Price per share
          ---------------                  ----------------      ---------------
          November 28, 1997                      24,707             $12.1250
          December 4, 1997                        2,000             $12.1250
          January 6, 1998                         6,500             $13.0000
          January 12, 1998                       12,482             $13.3125
          Average Price per share:                                  $12.5739
                                                            




                                                                     (Continued)

                                       10
<PAGE>


                     REDWOOD FINANCIAL, INC. AND SUBSIDIARY


(7)    New Accounting Standards

       In  February  1997,  the  FASB  issued  SFAS  No.  129,   "Disclosure  of
       Information about Capital  Structure," which codifies existing disclosure
       requirements regarding capital structure. SFAS No. 129 is not expected to
       have a significant  impact on the  Company's  current  capital  structure
       disclosures.

       In June 1997,  the FASB  issued SFAS No.  130,  "Reporting  Comprehensive
       Income,"  which  establishes  standards  for  reporting  and  display  of
       comprehensive  income and its components in a full set of general-purpose
       financial  statements.  SFAS  No.  130  is  effective  for  fiscal  years
       beginning  after December 15, 1997.  Management is currently  determining
       what effect  adoption of this statement will have on the reporting of its
       financial information.




























                                                                     (Continued)


                                       11

<PAGE>




                     REDWOOD FINANCIAL, INC. AND SUBSIDIARY

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


General

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

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

Financial Condition

The Company's total assets increased by $4,978,000,  or 8.01%,  from $62,169,000
at June 30,  1997 to  $67,147,000  at December  31,  1997.  The  increase in the
Company's assets largely reflected an increase in the level of Federal Home Loan
Bank (FHLB)  advances  during the six months  ended  December  31,  1997.  These
advances  were  used  to  fund  increased  loan   production  and  purchases  of
mortgage-backed securities.

Cash and cash equivalents  increased by $981,000,  or 128.40%,  from $764,000 at
June 30, 1997 to  $1,745,000  at December  31,  1997.  The  increase in cash was
primarily due to the maturities of investments  securities in December 1997. The
Company's  strategy is to  minimize  its level of cash and cash  equivalents  in
order to enhance  overall  yield.  As such, the higher level of cash at December
31, 1997  reflected a transition  between when cash is obtained from  investment
security maturities and loan and mortgage-backed  securities repayments and when
it is reinvested.



                                                                     (Continued)

                                       12

<PAGE>




                     REDWOOD FINANCIAL, INC. AND SUBSIDIARY


The Company's loans receivable,  net, increased $2,607,000, or 12.55% during the
six months  ended  December  31,  1997.  The  increase  in loans was a result of
increased loan demand in the Company's market and primarily  includes 1-4 family
residential  mortgage  loans and home equity  loans.  In  addition,  the Company
funded a $336,000 apartment complex purchase and a $400,000 commercial operating
loan to a local  casino  during the six months  ended  December  31,  1997.  The
continued  increase in the Company's  loan portfolio will increase the Company's
credit risk exposure.

The  Company's  investment  securities,  including  mortgage-backed  and related
securities,  designated as held to maturity decreased $3,273,000, or 13.49% from
June 30, 1997 to December  31,  1997.  The  decrease in  investment  securities,
including mortgage-backed and related securities designated held to maturity was
due to the Company's  investment  objective of designating select new investment
security   purchases,   including   purchases  of  mortgage-backed  and  related
securities as available for sale. No securities designated held to maturity were
purchased  or sold during the six months ended  December 31, 1997.  In addition,
commencing   January  1,  1998,   the  Company  has  designated  all  investment
securities,  including  mortgage-backed  and related securities as available for
sale. The purpose of this designation is to enhance the overall liquidity of the
Company's  investment  portfolio.  The  designation  is not  expected  to have a
significant effect on stockholders' equity.

The  Company's  investment  securities,   including  mortgage-backed  securities
designated  available for sale  increased  $3,870,000,  or 25.58% during the six
months ended December 31, 1997. The increase  primarily included the purchase of
7-year balloon mortgage-backed  securities and 5-year callable government agency
securities.  Purchases of mortgage-backed  securities and investment  securities
designated  available for sale totaled  approximately  $5,515,000  and $910,000,
respectively,  during this six month period. In addition,  the carrying value of
the  Company's  investment  securities,   including  mortgage-backed  securities
designated available for sale reflected a $97,000 pre-tax increase due to market
value appreciation.

The Company's premises and equipment increased $187,000, or 88.21% from $212,000
at June 30, 1997, to $399,000 at December 31, 1997.  The increase is primarily a
result of the  purchase  of a site for  possible  future  office  expansion  and
capitalized equipment owing to the Association's recent computer conversion.

The  Company's  other assets  increased by $497,000,  or 753.03% from $66,000 at
June 30, 1997 to $563,000 at December 31,  1997.  In October  1997,  the Company
invested  $500,000  in a limited  partnership  specializing  in the  buying  and
selling of equity  securities of financial  institutions.  At December 31, 1997,
the  limited  partnership  reported a net  capital  appreciation  of $47,000 not
reflected in these financial statements as of December 31, 1997.


                                                                     (Continued)

                                       13

<PAGE>




                     REDWOOD FINANCIAL, INC. AND SUBSIDIARY


The  Company's  deposits,  including  accrued  interest  payable,  increased  by
$886,000, or 1.92%, from $46,093,000 at June 30, 1997 to $46,979,000 at December
31, 1997. At December 31, 1997, the Company's FHLB advances,  including  accrued
interest payable, totaled $8,016,000, an increase of $4,516,000, or 129.03% from
$3,500,000 at June 30, 1997.  The advances were utilized to fund  increased loan
production  and  mortgage-backed  securities  purchases  during  this six  month
period.  The Company may continue to increase its use of FHLB  advances  pending
the interest  rate and other terms of future  advance  offerings.  FHLB advances
provide an alternative source of funds for the Company.

Results of Operations

Net Earnings

Net  earnings  were $79,000 for the three  months  ended  December 31, 1997,  as
compared  to  $36,000  for the  three  months  ended  December  31,  1996.  This
represented an increase of $43,000, or 119.44%. The increase in net earnings was
primarily  attributable to decreased professional fees which totaled $28,000 and
$128,000 for the three months  ended  December 31, 1997 and 1996,  respectively.
The higher level of  professional  fees for the three months ended  December 31,
1996 was a result of an unsuccessful  acquisition of a bank holding company.  In
addition,  net  earnings  were  affected  by a $21,000,  or 161.54%  increase in
noninterest  income.  The  increase in net earnings  was  partially  offset by a
$35,000 increase in compensation and employee  benefits,  an $18,000 increase in
other expenses, and a $25,000 increase in tax expense.

For the six months ended  December 31, 1997,  net  earnings  were  $205,000,  an
increase  of  $207,000,  from a net  loss of  $2,000  for the six  months  ended
December 31, 1996.  The increase was  primarily a result of a $237,000,  special
one-time  federal  deposit  insurance  fund  assessment  levied  against  thrift
institutions as part of an appropriations bill enacted by Congress and signed by
the  President  Clinton on September  30, 1996,  and the  aforementioned  higher
professional fees as a result of the aforementioned unsuccessful acquisition. In
addition,  net  earnings  for the six months  ended  December 31, 1997 were also
impacted by a $51,000  increase in net interest  income,  a $24,000  decrease in
federal deposit insurance premiums and a $19,000 increase in noninterest income.
The increase was  partially  offset by a $57,000  increase in  compensation  and
employee benefits and a $19,000 increase in other expenses.








                                                                     (Continued)

                                       14

<PAGE>




                     REDWOOD FINANCIAL, INC. AND SUBSIDIARY


Net Interest Income

Net interest income decreased by $1,000,  or 0.25%,  from $407,000 for the three
months ended  December 31, 1996 to $406,000 for the three months ended  December
31,  1997.  The lack of change in net  interest  income was due  primarily  to a
decrease  in the ratio of average  interest-earning  assets to  interest-bearing
liabilities  in  comparison  of the two three  months as well as decrease in the
Company's net interest spread.

For  the  three   months  ended   December  31,  1997,   the  ratio  of  average
interest-earnings assets to interest-bearing liabilities was 121.88% as compared
to 135.38% for the three months ended December 31, 1996. The decrease in earning
assets is a result of the use of funds to repurchase  the Company's  outstanding
stock and to fund the investment in the aforementioned increases in other assets
and premises and  equipment.  The  Company's net interest  spread  declined from
1.78% for the three months ended December 31, 1996 to 1.52% for the three months
ended December 31, 1997. The decline in the net interest spread is primarily due
to higher costs of the sources utilized to fund the Company's growth in 1997.

For the six months  ended  December  31, 1997,  net  interest  income  increased
$51,000,  or 6.30%,  from $810,000 for the six months ended December 31, 1996 to
$861,000 for the six months ended December 31, 1997. Although both the Company's
ratio of average interest-earning assets to interest-bearing liabilities and its
net interest spread declined in comparison of the six month periods,  the growth
of the Company  through use of advances and public  deposits (i.e.  municipal or
other  governmental  deposits)  generated an increase in net interest  income to
offset this  decline.  The Company  plans to continue to utilize  these  funding
sources which may result in a modest decrease in its net interest spread.

For  the  six  months   ended   December   31,   1997,   the  ratio  of  average
interest-earnings assets to interest-bearing liabilities was 123.39% as compared
to 135.27% for the six months ended December 31, 1996. As discussed  previously,
the decrease in earning assets is a result of the use of funds to repurchase the
Company's  outstanding  stock and to fund increases in other assets and premises
and equipment. The Company's net interest spread declined from 1.76% for the six
months ended  December  31, 1996 to 1.65% for the six months ended  December 31,
1997, as a result of utilization of higher costing sources to fund the Company's
growth in 1997.








                                                                     (Continued)

                                       15

<PAGE>




                     REDWOOD FINANCIAL, INC. AND SUBSIDIARY


Interest Income

Interest  income was $1,158,000 for the three months ended December 31, 1997, as
compared to $909,000 for the three months ended December 31, 1996,  representing
an  increase  of  $249,000,  or 27.39%.  The  increase  in  interest  income was
primarily due to the Company's growth in 1997. Average  interest-earning  assets
increased by  $12,327,000,  or 23.94% from  $51,481,000 to  $63,808,000  for the
three months ended  December  31, 1996 and 1997,  respectively.  The increase in
interest  income  was also  affected  by an  increase  in the  overall  yield on
interest-earning assets. For the three months ended December 31, 1997, the yield
on interest-earning  assets was 7.26%, as compared to 7.06% for the three months
ended  December 31, 1996. The increase in yield on  interest-earning  assets was
due primarily to a change in the  composition of the Company's  interest-earning
assets,  particularly  the  larger  loan  portfolio  in the three  months  ended
December 31, 1997.

Interest  income was  $2,313,000  for the six months ended December 31, 1997, as
compared to $1,819,000 for the six months ended December 31, 1996,  representing
an increase of $494,000,  or 27.16%.  As discussed  previously,  the increase in
interest   income  was   primarily  due  to  the   Company's   growth.   Average
interest-earning assets increased by $11,843,000, or 23.04%, from $51,395,000 to
$63,238,000  for the six months ended December 31, 1996 and 1997,  respectively.
The increase in interest  income was also affected by an increase in the overall
yield on  interest-earning  assets.  For the six months ended December 31, 1997,
the yield on interest-earning assets was 7.31%, as compared to 7.08% for the six
months ended December 31, 1996.

Interest on loans receivable  increased by $109,000,  or 28.76%, to $488,000 for
the three months ended  December 31, 1997, as compared to $379,000 for the three
months ended December 31, 1996. Such increase was due to a $5,021,000, or 28.03%
increase in the average  balance of loans  receivable  from  $17,912,000 for the
three months ended December 31, 1996 to  $22,933,000  for the three months ended
December  31,  1997.  The  increase  in interest  on loans  receivable  was also
affected by an increase in the average yield on loans  receivable from 8.45% for
the three  months ended  December 31, 1996,  to 8.51% for the three months ended
December 31, 1997.

Interest on loans receivable  increased by $213,000,  or 28.74%, to $954,000 for
the six months  ended  December  31,  1997,  as compared to $741,000 for the six
months ended December 31, 1996. This increase was due to a $4,878,000, or 28.12%
increase in the average balance of loans receivable from $17,346,000 for the six
months ended December 31, 1996 to $22,224,000  for the six months ended December
31, 1997.  The increase in interest on loans  receivable  was also affected by a
slight increase in the average yield on loans  receivable from 8.54% for the six
months ended  December 31, 1996, to 8.58% for the six months ended  December 31,
1997.




                                                                     (Continued)

                                       16

<PAGE>




                     REDWOOD FINANCIAL, INC. AND SUBSIDIARY


Since January 1997,  management has designated all purchases of  mortgage-backed
and related  securities  as available  for sale.  As a result of this  strategy,
interest  income on  mortgage-backed  and  related  securities  held to maturity
declined  $44,000,  or 16.54% from $266,000 for the three months ended  December
31, 1996 to $222,000 for the three months ended  December 31, 1997. The decrease
in interest income on  mortgage-backed  and related  securities held to maturity
was a result of a  $2,476,000  decrease,  or 16.32% in the  average  balance  of
mortgage-backed  and related  securities  held to maturity in  comparison of the
three months ended December 31, 1997 and 1996,  respectively.  This decrease was
also  affected  by a slight  decrease  in the yield on the  mortgage-backed  and
related  securities  held to  maturity  from  7.01% for the three  months  ended
December 31, 1996, to 6.98% for the three months ended December 31, 1997.

Interest income on mortgage-backed and related securities available for sale was
$170,000 and $0 for the quarters ended December 31, 1997 and 1996, respectively.
The yield on the Company's  mortgage-backed  securities  portfolio available for
sale was 6.38% for the three months ended December 31, 1997.

As a result  of the  aforementioned  portfolio  designation  strategy,  interest
income on  mortgage-backed  and related  securities  held to  maturity  declined
$86,000,  or 15.96% from $539,000 for the six months ended  December 31, 1996 to
$453,000  for the six months ended  December 31, 1997.  The decrease in interest
income on  mortgage-backed  and related securities held to maturity was a result
of a $2,290,000  decrease,  or 14.84% in the average balance of  mortgage-backed
and related  securities  held to maturity in  comparison of the six months ended
December 31, 1997 and 1996,  respectively.  This decrease was also affected by a
decrease in the yield on mortgage-backed and related securities held to maturity
from 6.98% for the six months  ended  December  31,  1996,  to 6.90% for the six
months ended December 31, 1997.

Interest income on mortgage-backed and related securities available for sale was
$335,000  and  $0  for  the  six  months  ended  December  31,  1997  and  1996,
respectively.  The yield on the Company's  mortgage-backed  securities portfolio
available for sale was 6.66% for this period.

As  with  the  Company's   mortgage-backed  and  related  securities  purchases,
management has  designated  all purchases of investment  securities as available
for sale since January 1997. As a result of this  strategy,  interest  income on
investment  securities  held to  maturity,  declined  $65,000,  or  30.95%  from
$210,000 for the three months ended  December 31, 1996 to $145,000 for the three
months ended  December 31, 1997.  The decrease in interest  income on investment
securities  designated held to maturity is a result of a $3,322,000 decrease, or
24.83% in the  average  balance of  investment  securities  held to  maturity in
comparison of the three months ended  December 31, 1997 and 1996,  respectively.
This  decrease  was also  affected by a decrease in the yield on the  investment
securities  held to maturity from 6.27% for the three months ended  December 31,
1996, to 5.77% for the three months ended December 31, 1997.

                                                                     (Continued)

                                       17

<PAGE>




                     REDWOOD FINANCIAL, INC. AND SUBSIDIARY


Interest income on investment  securities available for sale was $112,000 and $0
for the three months ended December 31, 1997 and 1996,  respectively.  The yield
on the Company's  investment  securities portfolio designated available for sale
was 7.02% for the three months ended December 31, 1997.

As a result  of the  aforementioned  portfolio  designation  strategy,  interest
income on investment  securities held to maturity,  declined $141,000, or 32.34%
from $436,000 for the six months ended December 31, 1996 to $295,000 for the six
months  ended  December  31,  1997.  The net  decrease  in  interest  income  on
investment  securities  designated  held to maturity is a result of a $4,197,000
decrease,  or 29.14% in the average  balance of  investment  securities  held to
maturity  in  comparison  of the six months  ended  December  31, 1997 and 1996,
respectively.  This decrease was also affected by a slight decrease in the yield
on the  investment  securities  held to  maturity  from 6.03% for the six months
ended December 31, 1996, to 5.74% for the six months ended December 31, 1997.

Interest income on investment  securities available for sale was $240,000 and $0
for the six months ended December 31, 1997 and 1996, respectively.  The yield on
the Company's investment  securities portfolio designated available for sale was
7.22% for the six months ended December 31, 1997.

Interest income on cash and cash equivalents decreased by $33,000, or 60.00% for
the three months ended December 31, 1997 and 1996, respectively. The decrease is
a result  of  management's  decision  to  decrease  its cash on hand in order to
enhance overall yield.  Similarly,  interest income on cash and cash equivalents
decreased by $68,000,  or 65.38% for the six months ended  December 31, 1997 and
1996, respectively.

Interest Expense

Interest expense increased by $250,000,  or 49.80%,  from $502,000 for the three
months ended  December 31, 1996 to $752,000 for the three months ended  December
31, 1997.  The increase in interest  expense  resulted  from a  $14,327,000,  or
37.67%  increase in the average  balance of  interest-bearing  liabilities  from
$38,028,000  for the three months ended December 31, 1996 to $52,355,000 for the
three months ended December 31, 1997. The increase in interest  expense was also
impacted by an increase in the average  cost of funds to 5.75%  during the three
months ended  December 31, 1997, as compared to 5.28% for the three months ended
December 31, 1996.






                                                                     (Continued)


                                       18

<PAGE>




                     REDWOOD FINANCIAL, INC. AND SUBSIDIARY


The  increase in the  Company's  sources of funds was  primarily  affected by an
increase in funds  attracted  from public  deposits  (i.e.  municipal  and other
governmental  deposits)  and the use of FHLB  advances.  The  Company's  average
balance of deposits, including accrued interest payable increased by $6,695,000,
or 17.61% for the three months  ended  December  31, 1996 in  comparison  to the
three  months  ended  December 31, 1997.  Public  deposits  are  typically  more
volatile and more costly than traditional retail deposits.

The Company had outstanding FHLB advances, including accrued interest payable of
$8,016,000  and $0 for the  three  months  ended  December  31,  1997 and  1996,
respectively.  As such,  interest  expense on FHLB advances totaled $118,000 and
$0,  respectively  during these periods.  The Company  utilizes FHLB advances to
fund  increases  in loan  production  and  purchases of  investment  securities,
including mortgage-backed and related securities.

Interest expense increased by $443,000,  or 43.90%,  from $1,009,000 for the six
months ended  December 31, 1996 to $1,452,000  for the six months ended December
31, 1997.  The increase in interest  expense  resulted  from a  $13,257,000,  or
34.89%  increase in the average  balance of  interest-bearing  liabilities  from
$37,993,000  for the six months ended December 31, 1996 to  $51,250,000  for the
six months ended  December 31, 1997.  The increase in interest  expense was also
impacted by an increase in the average cost of funds to 5.66% for the six months
ended  December 31, 1997, as compared to 5.31% for the six months ended December
31, 1996.

The increase in the  Company's  sources of funds in  comparison of the six month
periods was primarily  affected by an increase in public deposits and the use of
FHLB  advances.   The  Company's  average  balance  of  deposits   increased  by
$7,300,000,  or 19.21% from the six months ended December 31, 1996 in comparison
to the six months ended  December 31, 1997.  Interest  expense on FHLB  advances
totaled $183,000 and $0,  respectively  during the six months ended December 31,
1997 and 1996, respectively.

Provision for Loan Losses

The  Company's  provision for loan losses was $0 and $0 for the three months and
six  months  ended  December  31,  1997 and 1996,  respectively.  Due to lack of
substantive  problem loans (i.e. few nonaccrual  loans) during these periods and
stable real estate values in the Company's market area, management believes that
the  allowance  for loan  losses was  adequate  throughout  these  periods.  The
allowance  for loan losses was  maintained  at $213,000 at December 31, 1997 and
1996.  The  Company's net loan  charge-offs  were $0 and $0 for the three months
ended December 31, 1997 and 1996,  respectively.  At December 31, 1997 and 1996,
the  allowance for loan losses  represented  0.90% and 1.16%,  respectively,  of
loans  receivable.  Nonaccrual loans totaled $0 and $57,000 at December 31, 1997
and 1996, respectively.


                                                                     (Continued)

                                       19

<PAGE>




                     REDWOOD FINANCIAL, INC. AND SUBSIDIARY


Noninterest Income

Noninterest income increased $21,000, or 161.54% from $13,000 to $34,000 for the
three months ended December 31, 1996 and 1997, respectively. The increase is due
to a $20,000,  one-time  prepayment  penalty on a commercial  loan and an $8,000
gain recognized on the sale of a mortgage-backed security.

For the six  months  ended  December  31,  1997,  noninterest  income  increased
$19,000, or 67.86% to $47,000 from $28,000 for the six months ended December 31,
1996. The increase is due to the  aforementioned  prepayment penalty and gain on
the sale of a mortgage-backed security.

Noninterest Expense

Noninterest expense decreased by $49,000, or 13.35%, from $367,000 for the three
months ended  December 31, 1996 to $318,000 for the three months ended  December
31,  1997.  The  decrease  in  noninterest  expense was  primarily  due to lower
professional  fees for the three months ended  December 31, 1997.  As previously
discussed,  the Company  incurred higher  professional  fees in the three months
ended December 31, 1996 as a result of an unsuccessful acquisition attempt. This
decrease was also impacted by a $10,000,  or 55.56%  decrease in federal deposit
insurance premiums.  The decrease in noninterest expense was partially offset by
a $35,000 increase in compensation  and employee  benefits,  and an $18,000,  or
81.82%  increase in other expenses.  The increase in  compensation  and employee
benefits  was  primarily  due to  increased  staff and  higher  compensation  of
existing employees. The increase in other expenses was primarily due to expenses
associated with the Company's investment in a limited partnership.

In addition, as a result of the Company's recent conversion to an automated data
processing system from a manual data processing  system, the Company now reports
data processing expense separately.  In previous periods, manual data processing
costs were not material  (i.e.  less than $1,000 per quarter).  Data  processing
expense totaled $8,000 for the three months ended December 31, 1997.











                                                                     (Continued)

                                       20

<PAGE>




                     REDWOOD FINANCIAL, INC. AND SUBSIDIARY


Noninterest expense decreased by $276,000,  or 32.02%, from $862,000 for the six
months ended December 31, 1996 to $586,000 for the six months ended December 31,
1997.  The  decrease  in total  noninterest  expense  was  primarily  due to the
aforementioned  $237,000,  special  one  time  special  deposit  insurance  fund
assessment during the six months ended December 31, 1996 and lower  professional
fees for the six months ended  December 31, 1997. As previously  discussed,  the
Company incurred higher  professional  fees in the six months ended December 31,
1996 as a result of an unsuccessful  acquisition attempt. This decrease was also
impacted by a $24,000, or 61.54% decrease in federal deposit insurance premiums.
The decrease in noninterest expense was partially offset by a $57,000, or 16.15%
increase  in  compensation  and  employee  benefits,  and a  $19,000,  or 42.22%
increase  in  other  expenses.   As  previously   discussed,   the  increase  in
compensation  and  employee  benefits is primarily  due to  increased  staff and
higher  compensation  of existing  employees.  The increase in other expenses is
primarily due to expenses associated with the Company's  investment in a limited
partnership.  For the six  months  ended  December  31,  1997,  data  processing
expenses totaled $13,000.

Income Taxes

The Company's income tax expense  increased by $25,000,  or 147.06% from $17,000
for the three  months ended  December 31, 1996,  to $42,000 for the three months
ended  December  31, 1997.  The change in income  taxes was due  primarily to an
increase in pre-tax earnings of $68,000, from $53,000 for the three months ended
December 31, 1996 to $121,000 for the three months ended December 31, 1997.

The Company's  income tax expense  increased by $140,000,  from a tax benefit of
$23,000 for the six months ended December 31, 1996, to a tax expense of $117,000
for the six months ended  December 31, 1997.  The change in income taxes was due
primarily to an increase in pre-tax earnings of $347,000, from a pre-tax loss of
$25,000  for the six months  ended  December  31,  1996 to pre-tax  earnings  of
$322,000 for the six months ended December 31, 1997.













                                                                     (Continued)

                                       21

<PAGE>




                     REDWOOD FINANCIAL, INC. AND SUBSIDIARY


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; 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.

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, 1997 and 1996,  the Company's loan  portfolio,
net, increased $2,593,000 and $1,656,000, respectively. During the same periods,
the Company  purchased  investment  securities and  mortgage-backed  and related
securities  in the  amounts of  $6,425,000,  and $0,  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
Association has the ability to obtain additional  advances from the Federal Home
Loan Bank of Des Moines.  During the quarters  ended December 31, 1997 and 1996,
the  Association  utilized  advances  of  $7,216,000  and $0,  respectively.  In
addition,   commencing  in  January  1998,  the  Company's  designation  of  all
investments as available for sale is intended to increase  liquidity and overall
operational flexibility.



                                                                     (Continued)


                                       22

<PAGE>




                     REDWOOD FINANCIAL, INC. AND SUBSIDIARY


The  Association  is  required to maintain  minimum  levels of liquid  assets as
defined  by OTS  regulations.  This  requirement,  which may be  changed  at the
direction of the OTS depending upon economic  conditions  and deposit flows,  is
based upon a percentage  of deposits  and  short-term  borrowings.  The required
minimum ratio is currently 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,  1997 and  June  30,  1997,  cash  and  cash  equivalents  totaled
$1,745,000  and  $764,000,   respectively.   Investment  securities,   including
mortgage-backed  and  related  securities  designated  available  for sale total
$19,001,000 and $0 at December 31, 1997 and 1996, respectively.

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 of 8.0% of
"risk-adjusted"  assets.  The  Association  currently  meets all  three  capital
requirements.

Market Risk

Market risk is the risk of loss from adverse changes in market prices and rates.
The Company's  market risk arises  primarily from interest rate risk inherent in
its lending and deposit solicitation activities. Like many savings institutions,
the  Association  uses  shorter  term  deposits  to fund  longer  term loans and
investments.  As such,  future  earnings of the  Association  may be affected by
increases or decreases in interest rates  including  non-parallel  shifts in the
yield curve. To this extent,  the Company  regularly  reviews its sensitivity to
changes in interest rates through various monitoring methods.

The following table shows the Company's financial instruments that are sensitive
to changes in interest  rates,  categorized  by expected  maturity.  Market risk
sensitive  instruments  are  generally  defined  as on-  and  off-balance  sheet
derivatives and other financial instruments.










                                                                     (Continued)


                                       23

<PAGE>

 REDWOOD FINANCIAL, INC. AND SUBSIDIARY

 





                                              Scheduled Maturity (1)
                                                    December 31,
                                              (Dollars in thousands)
<TABLE>
<CAPTION>
                                    Average
                                    Interest                                          2002 and
                                      Rate       1998      1999      2000      2001    Beyond     Total
<S>                                  <C>     <C>        <C>      <C>       <C>       <C>       <C>      
Interest-Sensitive Assets (2):                
Loans receivable:                             
  1-4 family mortgage                 8.39%   $   839   $   732   $ 1,165   $ 2,794   $14,593   $20,123           
  Commercial real estate              7.91%       198         7         0         0     1,673     1,878
  Commercial non-mortgage            10.09%         0       425         0         0       789     1,214
  Consumer                            8.20%         0         0         0         0       390       390
Mortgage-backed Securities:           6.84%       993       960     2,025     1,319    19,348    24,645
Investment Securities                 6.33%     6,525     2,055        60        60     6,610    15,310
FHLB Stock                            7.00%       415         0         0         0         0       415
                                              
Interest Sensitive Liabilities:               
Deposits:                                     
  Money Market Accounts               3.76%   $ 5,635   $     0   $     0   $     0   $     0   $ 5,635
  Passbook Accounts                   2.65%       900         0         0         0         0       900
  Certificate Accounts                5.90%    28,258     8,652     1,638       473       986    40,007
FHLB Advances                         5.96%     7,000         0     1,000         0         0     8,000
                                              
Interest-Sensitive                            
  Off-balance Sheet Items:                    
Commitments to extend                         
  credit                              7.64%   $     0    $    0   $     0   $     5   $   979   $   984
</TABLE>                                      
                                           

(1)    Expected maturities are contractual maturities. Loans and mortgage-backed
       and related  securities are not adjusted for scheduled loan repayments or
       prepayments.

(2)    Deferred  premiums,  discounts,  loan fees and loans in  process  are not
       included in the reported balances of loans,  mortgage-backed  and related
       securities and investment securities.


Recent Developments

1.     Completion of Stock Repurchase Program

       On November 18, 1997, the Company announced it had received the necessary
       regulatory approval to repurchase 5% of its outstanding shares, or 45,689
       shares.  This  repurchase  represented  the second 5% repurchase  program
       announced  in fiscal  1998.  The  Company  has  completed  the  second 5%
       repurchase  program  and  no  other  repurchase  programs  are  currently
       outstanding.

                                                                     (Continued)

                                       24

<PAGE>




                     REDWOOD FINANCIAL, INC. AND SUBSIDIARY


2.     Year 2000

       The Company has  completed  its  analysis  of its  exposure to  potential
       operating problems associated with the inability of various  computerized
       systems to  adequately  read and  interpret  data fields for years ending
       after 1999. The Company believes its exposure is limited to the automated
       data  processing  system to which the Company  recently  converted.  This
       system covers loans, deposits and general ledger applications. In its due
       diligence  prior  to  conversion,  the  Company  sought  and  obtained  a
       commitment  from  the  vendor  that the data  processing  system  will be
       reprogrammed  by Fall 1998 to correct this  deficiency  at no  additional
       expense to the Company.  The Company  believes  that its data  processing
       vendor  will  accomplish  this  reprogramming  effort  by this  time.  In
       addition,  due to the residential mortgage lending emphasis,  the Company
       does not believe that its exposure to default by borrowers as a result of
       this problem is significant.  As such, the Company expects no significant
       financial effect from the Year 2000 problem at this time.



























                                                                     (Continued)

                                       25

<PAGE>




                     REDWOOD FINANCIAL, INC. AND SUBSIDIARY

                           PART II - OTHER INFORMATION


ITEM 1:           Legal Proceedings.

                  None.

ITEM 2:           Changes in Securities.

                  Not Applicable.

ITEM 3:           Defaults Upon Senior Securities.

                  Not Applicable.

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

                  On October 30, 1997, 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:
                            Paul W. Pryor                               756,080        10,300           N/A
                            Blaine C. Farnberg                          757,080         9,300           N/A

                  2.     Appointment of KPMG Peat Marwick               757,080         8,300          1,000
                          LLP as auditors for 1998 fiscal year
</TABLE>

ITEM 5:           Other Information.

                  None.

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

                  None

                                       26

<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 30, 1997        /s/ Paul W. Pryor
      ----------------        -----------------
                              Paul W. Pryor, President and Chief Executive
                              Officer (Duly Authorized Officer)

Date: January 30, 1997        /s/ Anthony H. Acker
      ----------------        --------------------
                              Anthony H. Acker, Chief Financial Officer
                              (Principal Accounting Officer)




















                                       27