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 September 30, 1997

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

            For the transition period from                  to
                                           ----------------    -----------------

                         Commission File 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 October 15, 1997:

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

    Common stock, par value $0.10 per share                           913,782


<PAGE>



                     REDWOOD FINANCIAL, INC. AND SUBSIDIARY

                                    CONTENTS

PART I - FINANCIAL INFORMATION

                                                                            Page
       Item 1:     Financial Statements

                   Consolidated Balance Sheets at September 30, 1997 and
                   June 30, 1997                                               3

                   Consolidated Statements of Earnings for the Three
                   months ended September 30, 1997 and 1996                    4

                   Consolidated Statement of Stockholders' Equity
                   for the Three months ended September 30, 1997               5

                   Consolidated Statements of Cash Flows for the
                   Three months ended September 30, 1997 and 1996              6

                   Notes to Consolidated Financial Statements               7-10

       Item 2:     Management's Discussion and Analysis of
                   Financial Condition and Results of Operations           11-18

PART II - OTHER INFORMATION
       Item 1:     Legal Proceedings                                          19
       Item 2:     Changes in Securities                                      19
       Item 3:     Defaults Upon Senior Securities                            19
       Item 4:     Submission of Matters to a Vote of Security Holders        19
       Item 5:     Other Information                                          19
       Item 6:     Exhibits and Reports on Form 8-K                           19
       Signatures                                                             20


                                        2

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

                           Consolidated Balance Sheets
                                   (Unaudited)
<TABLE>
<CAPTION>

                                                                                  September 30,                   June 30,
                                         Assets                                        1997                         1997

------------------------------------------------------------------------------------------------------------------------------
<S>                                                                          <C>                                 <C>        
Cash                                                                         $               15,404                    15,314
Interest-bearing deposits with banks                                                        581,482                   748,478
------------------------------------------------------------------------------------------------------------------------------
                                  Cash and cash equivalents                                 596,886                   763,792
------------------------------------------------------------------------------------------------------------------------------

Securities available for sale:
     Mortgage-backed and related securities (amortized cost                              10,380,915                 8,149,752
       $10,286,229 and $8,143,694, respectively)
     Investment securities (amortized cost $6,992,841 and                                 7,008,525                 6,981,250
       $6,992,534, respectively)
------------------------------------------------------------------------------------------------------------------------------
                          Total securities available for sale                            17,389,440                15,131,002
------------------------------------------------------------------------------------------------------------------------------

Securities held to maturity:
     Mortgage-backed and related securities (market value                                13,225,659                13,873,801
       $13,435,893 and $14,082,280, respectively)
     Investment securities (market value $9,919,507 and                                   9,895,403                10,395,659
       $10,399,446, respectively)
------------------------------------------------------------------------------------------------------------------------------
                           Total securities held to maturity                             23,121,062                24,269,460
------------------------------------------------------------------------------------------------------------------------------

Loans receivable, net                                                                    22,356,259                20,766,539
Federal Home Loan Bank stock, at cost                                                       333,500                   333,500
Accrued interest receivable                                                                 543,421                   613,357
Premises and equipment, net                                                                 254,488                   212,067
Real Estate, net                                                                                  0                    13,520
Other assets                                                                                 56,121                    65,679

------------------------------------------------------------------------------------------------------------------------------
                                      Total Assets                           $           64,651,177                62,168,916
------------------------------------------------------------------------------------------------------------------------------

                          Liabilities and Stockholders' Equity

------------------------------------------------------------------------------------------------------------------------------
Deposits                                                                                 45,780,689                46,093,213
Federal Home Loan Bank advances                                                           6,600,000                 3,500,000
Advance payments by borrowers for taxes and insurance                                       106,983                    69,744
Accrued expenses and other liabilities                                                      178,413                   163,926

------------------------------------------------------------------------------------------------------------------------------
                                   Total Liabilities                                     52,666,085                49,826,883
------------------------------------------------------------------------------------------------------------------------------

Common stock ($.10 par value): Authorized and issued
 1,125,000 shares; outstanding 913,782 shares at
 September 30, 1997; 961,875 shares at June 30, 1997                                        112,500                   112,500
Additional paid-in capital                                                                8,471,610                 8,467,833
Retained earnings, subject to certain restrictions                                        6,495,481                 6,369,591
Net unrealized gain (loss) on securities available for sale                                  37,133                    (3,135)
Unearned employee stock ownership plan shares                                              (512,944)                 (529,504)
Unearned management stock bonus plan shares                                                (285,141)                 (306,797)
Treasury stock, at cost; 211,218 shares at
 September 30, 1997; 163,125 shares at June 30, 1997                                     (2,333,547)               (1,768,455)

------------------------------------------------------------------------------------------------------------------------------
                               Total Stockholders' Equity                                11,985,092                12,342,033
------------------------------------------------------------------------------------------------------------------------------
 
------------------------------------------------------------------------------------------------------------------------------
                       Total Liabilities and Stockholders' Equity            $           64,651,177                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
                                                                              ended September 30,
                                                                    -------------------------------------
                                                                               1997           1996
 ---------------------------------------------------------------------------------------------------------
<S>                                                                 <C>                          <C>    
Interest income:
    Loans receivable                                                $           466,116          363,720
    Securities held to maturity:
      Mortgage-backed and related securities                                    231,493          270,807
      Investment securities                                                     150,710          226,074
    Securities available for sale:
      Mortgage-backed and related securities                                    164,797                0
      Investment securities                                                     127,746                0
    Cash equivalents                                                             13,416           49,160
---------------------------------------------------------------------------------------------------------
      Total interest income                                                   1,154,278          909,761

Interest Expense:
    Deposits                                                                    634,303          507,196
    Federal Home Loan Bank advances                                              65,284                0
---------------------------------------------------------------------------------------------------------
      Total interest expense                                                    699,587          507,196
 
    Net interest income                                                         454,691          402,565

Provision for losses on loans                                                         0                0
---------------------------------------------------------------------------------------------------------
 
    Net interest income after provision
      for losses on loans                                                       454,691          402,565

Noninterest income:
    Fees and service charges                                                     12,573           13,974
    Other                                                                           878              959
---------------------------------------------------------------------------------------------------------
      Total noninterest income                                                   13,451           14,933

Noninterest expense:
    Compensation and employee benefits                                          188,979          166,737
    Advertising                                                                   6,162            3,096
    Occupancy                                                                     6,658            7,603
    Federal deposit insurance premiums                                            6,986           21,340
    Professional fees                                                            30,253           35,983
    Deposit insurance fund assessment                                                 0          237,085
    Other                                                                        28,510           23,324
---------------------------------------------------------------------------------------------------------
      Total noninterest expense                                                 267,548          495,168
---------------------------------------------------------------------------------------------------------

      Earnings before income taxes                                              200,594          (77,670)
 
Income tax expense (benefit)                                                     74,704          (40,123)
---------------------------------------------------------------------------------------------------------

      Net earnings                                                  $           125,890          (37,547)
---------------------------------------------------------------------------------------------------------
 
Net earnings per common share                                       $              0.14            (0.04)
---------------------------------------------------------------------------------------------------------
 
---------------------------------------------------------------------------------------------------------
Weighted average number of shares outstanding                                   881,618          995,317
---------------------------------------------------------------------------------------------------------
</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                                            125,890                                                          125,890

 Stock Repurchases                                                                                         (565,092)     (565,092)

  Net unrealized gain on
  securities available for sale                                      40,268                                                40,268

 Earned employee stock
  ownership plan shares                        3,777                             16,560                                    20,337

 Earned management
  stock bonus plan shares                                                                      21,656                      21,656

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

Balance,  September 30, 1997      112,500  8,471,610   6,495,481     37,133    (512,944)     (285,141)   (2,333,547)   11,985,092
------------------------------------------------------------------------------------------------------------------------------------

</TABLE>

See accompanying notes to unaudited financial statements       

                                        5

<PAGE>
                     REDWOOD FINANCIAL, INC., AND SUBSIDIARY

                      Consolidated Statements of Cash Flows
                                   (Unaudited)
<TABLE>
<CAPTION>

                                                                                                     Three months
                                                                                                  ended September 30, 
                                                                                                  ------------------- 
                                                                                                  1997         1996
---------------------------------------------------------------------------------------------------------------------------
<S>                                                                                       <C>                    <C>      
Operating Activities:
 Net earnings (loss)                                                                      $        125,890         (37,547)
 Adjustments to reconcile net earnings to net cash                                           
  provided by operations                                                                     
      Depreciation                                                                                   3,963           4,576
      Amortization of premiums and discounts on investment                                   
          securities, mortgage-backed and related securities                                 
          and loans receivable, net                                                                 (5,207)         (9,845)
      Decrease in other assets                                                                       9,558          19,092
      Decrease in accrued interest receivable                                                       69,936         149,006
      Increase in accrued interest payable                                                         410,917         320,011
      Amortization of unearned ESOP shares                                                          16,560          16,560
      Earned ESOP shares priced above original cost                                                  3,777           2,588
      Earned Management Stock Bonus Plan shares                                                     21,656          21,656
      Increase in accrued expenses and other liabilities                                            13,693         133,597
      Increase in deferred income taxes                                                            (26,052)              0
 
---------------------------------------------------------------------------------------------------------------------------
                    Net cash provided by operating activities                                      644,691         619,694
                                                                                             
Investing Activities:                                                                        
  Proceeds from maturities of investment securities held to maturity                               500,000         600,000
  Principal collected on mortgage-backed and related securities held to maturity                   902,311         421,349
  Purchases of mortgage-backed and related securities available for sale                        (2,503,927)              0
  Principal collected on mortgage-backed and related securities available for sale                  63,200               0
  Increase in loans receivable, net                                                             (1,575,503)       (715,149)
  Purchases of premises and equipment                                                              (46,384)        (14,700)
 
---------------------------------------------------------------------------------------------------------------------------
                    Net cash (used) provided by investing activities                            (2,660,303)        291,500
                                                                                             
Financing Activities:                                                                        
  Decrease in deposits, net                                                                       (723,441)       (952,119)
  Increase in advance payments by borrowers for taxes and insurance                                 37,239          38,886
  Proceeds from Federal Home Loan Bank advances                                                  4,700,000               0
  Repayment of Federal Home Loan Bank advances                                                  (1,600,000)              0
  Repurchase of common stock                                                                      (565,092)              0
 
---------------------------------------------------------------------------------------------------------------------------
                    Net cash provided (used) by financing activities                             1,848,706        (913,233)
 
---------------------------------------------------------------------------------------------------------------------------
                    Decrease in cash and cash equivalents                                         (166,906)         (2,039)

                                                                                             
Cash and cash equivalents, beginning of period                                                     763,792       2,873,163
 
---------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents, end of period                                                  $        596,886       2,871,124
 
---------------------------------------------------------------------------------------------------------------------------

Supplemental cash flow disclosures:                                                          
  Cash paid for interest                                                                  $        288,670         187,185
  Cash paid for income taxes                                                                        62,705          51,850

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

                               September 30, 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 ended  September 30, 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

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

(4)     Regulatory Capital Requirements

        At September  30, 1997,  the  Association  met each of the three current
        minimum regulatory capital requirements.  The following table summarizes
        the Association's regulatory capital position at September 30, 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>   
       Association's Net Worth          $8,555

       Less:  AFS Market                    37
         Valuation

       Tangible Capital                   8,518      13.49%       $  947         1.50%          n/a        n/a
         (to tangible assets)

       Core Capital                       8,518      13.49%        1,894         3.00%       $3,157       5.00%
         (to adjusted tangible assets)

       Core Capital                       8,518      41.99%          n/a          n/a         1,217       6.00%
         (to risk-weighted assets)

       Plus: Allowable portion of           213
         general allowance for
         loan losses

       Risk-based Capital                $8,731      43.04%       $1,623         8.00%       $2,029      10.00%
         (to risk-weighted assets)

</TABLE>
                                                                     (Continued)

                                        8

<PAGE>



                     REDWOOD FINANCIAL, INC. AND SUBSIDIARY


(5)  Stockholders' Equity and Stock Conversion

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

(6)  Stock Repurchases

     During the three months ended  September  30, 1997,  the Company  purchased
     48,093  shares of its  outstanding  common stock,  or 5% of its  previously
     outstanding common stock. As a result of the stock repurchase program,  the
     Company has now outstanding 913,782 shares of common stock. The Company has
     applied to the Office of Thrift Supervision for permission to repurchase an
     additional 5% of its  outstanding  stock,  or 45,689 shares.  The following
     summarizes the Company's common stock repurchases during the quarter:

           Date Purchased             Shares Purchased        Price per share
           --------------             ----------------        ---------------
           September 11, 1997             28,000                  $11.75
           September 12, 1997             20,093                  $11.75

(7)  New Accounting Standards

     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.  SFAS No. 128 is  effective  for  financial  statements
     issued for periods  ending  after  December  15,  1997,  including  interim
     periods;  earlier  application  is not  permitted.  SFAS No.  128  requires
     restatement of all prior-period EPS data presented. Management is currently
     determining  what effect SFAS No. 128 will have on the  Company's  earnings
     per share calculation.

                                                                     (Continued)

                                        9

<PAGE>



                     REDWOOD FINANCIAL, INC. AND SUBSIDIARY


       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)

                                                        10

<PAGE>



                     REDWOOD FINANCIAL, INC. AND SUBSIDIARY

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


General

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

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

Financial Condition

The Company's total assets increased by $2,482,000,  or 3.99%,  from $62,169,000
at June 30, 1997 to  $64,651,000  at  September  30,  1997.  The increase in the
Company's  assets  reflected  an increase in the level of Federal Home Loan Bank
(FHLB) advances during the three months ended September 30, 1997. These advances
were used to fund  increased loan  production  and purchases of  mortgage-backed
securities  and to offset a net  deposit  outflow  during the this  three  month
period.

Cash and cash  equivalents  decreased by $167,000,  or 21.86%,  from $764,000 at
June 30,  1997 to $597,000  at  September  30,  1997.  The  decrease in cash was
primarily  due to the use of  funds  for  the  aforementioned  increase  in loan
production,  mortgage-backed  securities  purchases,  and net  deposit  outflows
during the three  months ended  September  30,  1997.  The Company  continues to
maintain lower levels of cash and cash  equivalents in order to enhance  overall
yield.

                                                                     (Continued)

                                       11

<PAGE>



                     REDWOOD FINANCIAL, INC. AND SUBSIDIARY


The Company's loans receivable,  net, increased $1,589,000,  or 7.65% during the
three months  ended  September  30, 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  multifamily  mortgage  loans.  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 $1,148,000,  or 4.73% from
June 30, 1997 to September  30, 1997.  The  decrease in  investment  securities,
including  mortgage-backed and related securities designated held to maturity is
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 three months ended September 30, 1997. No change in
this strategy is anticipated.

The  Company's  investment  securities,   including  mortgage-backed  securities
designated  available for sale increased  14.92% or $2,258,000  during the three
months ended September 30, 1997. The increase primarily included the purchase of
7-year balloon  mortgage-backed  securities.  Purchases of these mortgage-backed
securities totaled  approximately  $2,504,000 during this three month period. In
addition, the carrying value of the Company's investment  securities,  including
mortgage-backed  securities  reflected a $40,000  increase  due to market  value
appreciation.

The  Company's  deposits,  including  accrued  interest  payable,  decreased  by
$312,000,  or  0.68%,  from  $46,093,000  at June  30,  1997 to  $45,781,000  at
September 30, 1997. At September 30, 1997, the Company's  FHLB advances  totaled
$6,600,000,  an increase of  $3,100,000,  or 88.57% from  $3,500,000 at June 30,
1997.  The  advances  were  utilized  to  fund  increased  loan  production  and
mortgage-backed securities purchases during this three 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, at costs substantially  equivalent to, or lower
than its retail deposit products.

In order 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,  to fund loan growth and investment
purchases.

                                                                     (Continued)

                                       12

<PAGE>



                     REDWOOD FINANCIAL, INC. AND SUBSIDIARY


Results of Operations

Net Earnings

Net earnings were $126,000 for the quarter ended September 30, 1997, as compared
to a net  loss of  $38,000  for the  quarter  ended  September  30,  1996.  This
represented an increase of $164,000.  The increase in net earnings was primarily
attributable to the $237,000, pre-tax special assessment required by the Federal
Deposit  Insurance  Corporation  levied  on thrift  institutions  as part of the
omnibus  appropriations bill of September 30, 1996. The increase in net earnings
was also attributable to a $52,000  increase,  or 12.90% in net interest income.
The increase in net interest  income was  primarily a result of the use of funds
obtained  from  recent  advances  to  fund  loan  originations  and to  purchase
investment securities,  including mortgage-backed  securities. Net earnings were
also impacted by a $10,000 increase, or 3.88% in noninterest expense,  excluding
the $237,000 special assessment,  and a $115,000,  or 287.50% increase in income
tax expense.

Net Interest Income

Net interest  income  increased  by $52,000,  or 12.90%,  from  $403,000 for the
quarter ended September 30, 1996 to $455,000 for the quarter ended September 30,
1997.  The increase in net interest  income is due to growth of the Company over
the  last  twelve  months  and a  change  in the mix of the  Company's  interest
earning-assets into higher yielding loans and investment securities.

The Company's average interest earning assets increased  $11,474,000,  or 22.35%
from  $51,330,000  at September 30, 1996, to  $62,804,000 at September 30, 1997.
Similarly,   the  Company's  average   interest-bearing   liabilities  increased
$12,488,000,  or 32.89% from $37,967,000 at September 30, 1996 to $50,455,000 at
September 30, 1997. The Company's  interest-bearing  liabilities  increased at a
faster rate than its  interest-earning  assets due primarily to the financing of
stock repurchases over the previous 12 months.

The increase in net interest  income was also affected by a change in the mix of
the Company's interest earning assets. As a result, net interest income was also
impacted  by an  increase  in the net  interest  spread from 1.75% for the three
months ended  September  30, 1996 to 1.81% for the three months ended  September
30, 1997.


                                                                     (Continued)


                                       13

<PAGE>



                     REDWOOD FINANCIAL, INC. AND SUBSIDIARY


Interest Income

Interest  income was  $1,154,000  for the quarter  ended  September 30, 1997, as
compared to $910,000 for the quarter ended  September 30, 1996,  representing an
increase of $244,000,  or 26.81%.  The increase in interest income was primarily
due to the aforementioned  increase in interest-earning  assets. The increase in
interest  income  was also  affected  by an  increase  in the  overall  yield on
interest-earning  assets. For the quarter ended September 30, 1997, the yield on
interest-earning  assets was 7.35%,  as compared to 7.09% for the quarter  ended
September  30, 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 quarter ended  September
30, 1997.

Interest on loans receivable  increased by $102,000,  or 28.02%, to $466,000 for
the quarter  ended  September  30, 1997, as compared to $364,000 for the quarter
ended  September  30, 1996.  Such  increase was due to a  $4,626,000,  or 27.34%
increase in the average  balance of loans  receivable  from  $16,922,000 for the
quarter ended  September 30, 1996 to $21,548,000 for the quarter ended September
30, 1997.  The increase in interest on loans  receivable was also affected by an
increase in the  average  yield on loans  receivable  from 8.60% for the quarter
ended September 30, 1996, to 8.65% for the quarter ended September 30, 1997.

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  $40,000,  or 14.76% from $271,000 for the three months ended September
30, 1996 to $231,000 for the three months ended September 30, 1997. The decrease
in interest income on mortgage-backed and related securities held to maturity is
a  result  of a  $2,018,000  decrease,  or  12.92%  in the  average  balance  of
mortgage-backed  and related  securities  held to maturity in  comparison of the
quarters ended September 30, 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 6.93% for the quarter ended September 30, 1996,
to 6.81% for the quarter ended September 30, 1997.

Interest income on mortgage-backed and related securities available for sale was
$165,000  and  $0  for  the  quarters   ended   September  30,  1997  and  1996,
respectively.  The yield on the Company's  mortgage-backed  securities portfolio
available for sale was 6.93% for the quarter ended September 30, 1997.

                                                                     (Continued)

                                       14

<PAGE>



                     REDWOOD FINANCIAL, INC. AND SUBSIDIARY


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  $75,000,  or  33.19%  from
$226,000 for the three months ended September 30, 1996 to $151,000 for the three
months  ended  September  30,  1997.  The net  decrease  in  interest  income on
investment  securities  designated  held to maturity is a result of a $4,812,000
decrease,  or 32.43% in the average  balance of  investment  securities  held to
maturity  in  comparison  of the  quarters  ended  September  30, 1997 and 1996,
respectively.  This decrease was also affected by a slight decrease in the yield
on the investment  securities  held to maturity from 5.93% for the quarter ended
September 30, 1996, to 5.78% for the quarter ended September 30, 1997.

Interest income on investment  securities available for sale was $128,000 and $0
for the quarters ended September 30, 1997 and 1996,  respectively.  The yield on
the Company's investment  securities portfolio designated available for sale was
7.29% for the quarter ended September 30, 1997.

Interest income on cash and cash equivalents decreased by $36,000, or 73.47% for
the quarters ended September 30, 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.

Interest Expense

Interest expense increased by $193,000, or 38.07%, from $507,000 for the quarter
ended  September  30,1996 to $700,000 for the quarter ended  September 30, 1997.
The increase in interest expense resulted from a $7,813,000,  or 20.58% increase
in the  average  balance of deposits  from  $37,967,000  for the  quarter  ended
September 30, 1996 to $45,780,000  for the quarter ended September 30, 1997. The
increase in  interest  expense  was also  impacted  by a slight  increase in the
average cost of deposits to 5.54% during the quarter  ended  September 30, 1997,
as compared to 5.34% for the quarter ended  September 30, 1996.  The increase in
the  Company's  deposit  base was  primarily  affected  by an  increase in funds
attracted from local municipal entities. These funds are typically more volatile
and more costly than traditional retail deposits.

The increase in interest  expense also was affected by interest  expense on FHLB
advances.  During the  quarters  ended  September  30,  1997 and 1996,  interest
expense on FHLB  advances  totaled  $65,000  and $0,  respectively.  The Company
utilizes FHLB  advances to fund  increases in loan  production  and purchases of
investment securities, including mortgage-backed and related securities.

                                                                     (Continued)


                                       15

<PAGE>



                     REDWOOD FINANCIAL, INC. AND SUBSIDIARY


Provision for Loan Losses

The Company's provision for loan losses was $0 and $0 for the three months ended
September 30, 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 September  30, 1997 and 1996.  The Company's net
loan  charge-offs  were $0 and $0 for the three months ended  September 30, 1997
and 1996,  respectively.  At September 30, 1997 and 1996, the allowance for loan
losses  represented  0.94%  and  1.02%,   respectively,   of  loans  receivable.
Nonaccrual  loans  totaled  $0 and  $29,000  at  September  30,  1997 and  1996,
respectively.

Noninterest Income

The level of noninterest  income remained nearly unchanged for the quarter ended
September 30, 1997 as compared to the quarter ended  September 30, 1996. For the
quarters ended September 30, 1997 and 1996,  noninterest  income totaled $13,000
and $15,000, respectively.

Noninterest Expense

Noninterest  expense  decreased by $227,000,  or 45.86%,  from  $495,000 for the
quarter ended September 30, 1996 to $268,000 for the quarter ended September 30,
1997.  The  decrease  in total  noninterest  expense  was  primarily  due to the
aforementioned   pre-tax  $237,000  one  time  special  deposit  insurance  fund
assessment  in the quarter  ended  September  30, 1996.  This  decrease was also
impacted by a $22,000,  or 13.17% increase in compensation and employee benefits
expense, a $14,000, or 66.67% decrease in federal deposit insurance premiums,  a
$6,000,  or 16.67%  decrease  in  professional  fees,  and a  $6,000,  or 26.09%
increase in other expenses.  The increase in compensation and employee  benefits
is  primarily  due to an increase  in staff.  The  decrease  in federal  deposit
insurance  premiums is due to lower  deposit  insurance  fund  assessments  as a
result of federal legislation enacted in 1996.

Income Taxes

The Company's income taxes increased by $115,000,  from a tax benefit of $40,000
for the quarter  ended  September  30, 1996, to a tax expense of $75,000 for the
quarter ended  September 30, 1997.  The change in income taxes was due primarily
to an increase in pre-tax  earnings of $279,000,  from a pre-tax loss of $78,000
for the quarter ended September 30, 1996 to pre-tax earnings of $201,000 for the
quarter ended September 30, 1997.

                                                                     (Continued)

                                       16

<PAGE>



                     REDWOOD FINANCIAL, INC. AND SUBSIDIARY

Comparison  of Operating  Results for the Three Months ended  September 30, 1997
and 1996

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  three  months  ended  September  30,  1997 and  1996,  the  Company's  loan
portfolio, net, increased $1,576,000 and $715,000, respectively. During the same
periods,  the Company purchased  mortgage-backed  and related  securities in the
amounts of $2,504,000,  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 September 30, 1997 and 1996,
the  Association  utilized  advances  of  $4,700,000  and $0,  respectively.  In
addition, the Company's designation of selected new investments as available for
sale is intended to increase liquidity and overall operational flexibility.

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

                                                                     (Continued)

                                      17

<PAGE>



                     REDWOOD FINANCIAL, INC. AND SUBSIDIARY


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
September  30, 1997 and 1996,  cash and cash  equivalents  totaled  $597,000 and
$2,871,000,  respectively.  Investment securities, including mortgage-backed and
related  securities  designated  available for sale total  $17,389,000 and $0 at
September 30, 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.

Recent Developments

Completion  of  Stock   Repurchase   Program  and   Application  for  Additional
Repurchases

On September  3, 1997,  the Company  announced  it had  received  the  necessary
regulatory  approval  to  repurchase  5% of its  outstanding  shares,  or 48,093
shares.  The Company  completed the  repurchase  as detailed  previously in this
10-QSB.  On September 26, 1997, the Company announced that it had applied to the
Office of Thrift  Supervision  for  permission to  repurchase  another 5% of its
outstanding shares, or 45,689 shares. Regulatory approval is pending.


                                                                     (Continued)

                                       18

<PAGE>



                     REDWOOD FINANCIAL, INC. AND SUBSIDIARY

                           PART II - OTHER INFORMATION


ITEM 1:           Legal Proceedings.

                  None.

ITEM 2:           Changes in Securities.

                  Not Applicable.

ITEM 3:           Defaults Upon Senior Securities.

                  Not Applicable.

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

                  None

ITEM 5:           Other Information.

                  None.

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

                  None


                                       19

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

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



                                       20