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

                                  FORM 10-QSB

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

                         For the quarterly period ended March 31, 1998

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

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

                        Commission File Number 0-25884

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

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

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

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

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

      Indicate the number of shares  outstanding of each of the issuer's classes
of common stock as of April 30, 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 March 31, 1998 and
             June 30, 1997                                          3

             Consolidated Statements of Earnings for the Three
             and Nine months ended March 31, 1998 and 1997          4

             Consolidated Statement of Stockholders' Equity
             for the Nine months ended March 31, 1998               5

             Consolidated Statements of Cash Flows for the
             Nine months ended March 31, 1998 and 1997              6

             Notes to Consolidated Financial Statements          7-11

     Item 2: Management's Discussion and Analysis of
             Financial Condition and Results of Operations      12-23

PART II - OTHER INFORMATION

     Item 1: Legal Proceedings                                     24

     Item 2: Changes in Securities                                 24

     Item 3: Defaults Upon Senior Securities                       24

     Item 4: Submission of Matters to a Vote of Security 
             Holders                                               24

     Item 5: Other Information                                     24

     Item 6: Exhibits and Reports on Form 8-K                      24

     Signatures                                                    25



                                        2

<PAGE>

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

                           Consolidated Balance Sheets
                                   (Unaudited)
<TABLE>
<CAPTION>
                                                                March 31,        June 30,
                                    Assets                        1998             1997

-------------------------------------------------------------------------------------------
<S>                                                            <C>             <C>   
Cash                                                           $    14,888         15,314
Interest-bearing deposits with banks                             2,432,488        748,478
-------------------------------------------------------------------------------------------
                             Cash and cash equivalents           2,447,376        763,792
-------------------------------------------------------------------------------------------

Securities available for sale:
     Mortgage-backed and related securities (amortized cost     27,022,437      8,149,752
       $26,760,931 and $8,143,694, respectively)
     Investment securities (amortized cost $11,284,813 and      11,310,315      6,981,250
       $6,992,534, respectively)
-------------------------------------------------------------------------------------------
                     Total securities available for sale        38,332,752     15,131,002
-------------------------------------------------------------------------------------------

Securities held to maturity:
     Mortgage-backed and related securities (market value                0     13,873,801
       $0 and $14,082,280, respectively)
     Investment securities (market value $0 and                          0     10,395,659
       $10,399,446, respectively)
-------------------------------------------------------------------------------------------
                      Total securities held to maturity                  0     24,269,460
-------------------------------------------------------------------------------------------

Loans receivable, net                                           26,905,925     20,766,539
Federal Home Loan Bank stock, at cost                              435,000        333,500
Accrued interest receivable                                        537,077        613,357
Premises and equipment, net                                        479,608        212,067
Real Estate, net                                                         0         13,520
Other assets                                                       549,933         65,679
-------------------------------------------------------------------------------------------
                                 Total Assets                  $69,687,671     62,168,916
-------------------------------------------------------------------------------------------

                     Liabilities and Stockholders' Equity

-------------------------------------------------------------------------------------------
Deposits                                                        48,668,957     46,093,213
Federal Home Loan Bank advances                                  8,700,000      3,500,000
Advance payments by borrowers for taxes and insurance              113,325         69,744
Accrued expenses and other liabilities                             380,970        163,926
-------------------------------------------------------------------------------------------
                              Total Liabilities                 57,863,252     49,826,883
-------------------------------------------------------------------------------------------

Common stock ($.10 par value): Authorized and issued
 1,125,000 shares; outstanding 868,093 shares at
 March 31, 1998; 961,875 shares at June 30, 1997                   112,500        112,500
Additional paid-in capital                                       8,482,892      8,467,833
Retained earnings, subject to certain restrictions               6,686,511      6,369,591
Net unrealized gain (loss) on securities available for sale        172,204         (3,135)
Unearned employee stock ownership plan shares                     (479,824)      (529,504)
Unearned management stock bonus plan shares                       (241,828)      (306,797)
Treasury stock, at cost; 256,907 shares at
 March 31, 1998; 163,125 shares at June 30, 1997                (2,908,036)    (1,768,455)

-------------------------------------------------------------------------------------------
                          Total Stockholders' Equity            11,824,419     12,342,033
-------------------------------------------------------------------------------------------

-------------------------------------------------------------------------------------------
                  Total Liabilities and Stockholders' Equity   $69,687,671     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                Nine months
                                                               ended March 31,            ended March 31,
                                                          -----------------------    -----------------------
                                                            1998            1997       1998         1997
 
------------------------------------------------------------------------------------------------------------
<S>                                                       <C>             <C>        <C>          <C>      
Interest income:
    Loans receivable                                      $  530,514      400,449    1,484,249    1,141,005
    Securities held to maturity:
      Mortgage-backed and related securities                       0      257,864      453,033      796,534
      Investment securities                                        0      164,264      295,402      600,178
    Securities available for sale:
      Mortgage-backed and related securities                 436,564       49,598      771,824       49,598
      Investment securities                                  217,146       42,029      456,698       42,029
    Cash equivalents                                          18,035       57,974       53,560      161,637
------------------------------------------------------------------------------------------------------------
      Total interest income                                1,202,259      972,178    3,514,766    2,790,981

Interest Expense:
    Deposits                                                 647,265      552,263    1,915,637    1,561,553
    Federal Home Loan Bank advances                          111,460          926      294,694          926
------------------------------------------------------------------------------------------------------------
      Total interest expense                                 758,725      553,189    2,210,331    1,562,479

    Net interest income                                      443,534      418,989    1,304,435    1,228,502

Provision for losses on loans                                 14,000            0       14,000            0
------------------------------------------------------------------------------------------------------------

    Net interest income after provision
      for losses on loans                                    429,534      418,989    1,290,435    1,228,502

Noninterest income:
    Fees and service charges                                  21,137        5,678       58,940       31,861
    Gains on sale of investment and mortgage-backed
      securities available for sale                            7,469        2,863       15,339        2,863
    Other                                                      6,448        6,382        7,762        7,844
------------------------------------------------------------------------------------------------------------
      Total noninterest income                                35,054       14,923       82,041       42,568

Noninterest expense:
    Compensation and employee benefits                       213,925      177,873      623,660      531,240
    Advertising                                                7,318        4,866       20,991       13,473
    Occupancy                                                  9,621        8,134       22,670       23,496
    Federal deposit insurance premiums                         7,430        6,020       21,967       45,389
    Professional fees                                         18,922       14,233       77,078      178,471
    Data processing expense                                    8,051            0       20,738            0
    Deposit insurance fund assessment                              0            0            0      237,085
    Other                                                     22,174       20,948       86,381       64,801
------------------------------------------------------------------------------------------------------------
      Total noninterest expense                              287,441      232,074      873,485    1,093,955
------------------------------------------------------------------------------------------------------------

      Earnings before income taxes                           177,147      201,838      498,991      177,115

Income tax expense                                            65,270       74,986      182,071       52,103
------------------------------------------------------------------------------------------------------------

      Net earnings                                        $  111,877      126,852      316,920      125,012
------------------------------------------------------------------------------------------------------------

------------------------------------------------------------------------------------------------------------
Net earnings per common share - Basic                     $     0.14         0.14         0.38      0.13
Net earnings per common share - Diluted                         0.13         0.13         0.37      0.13
------------------------------------------------------------------------------------------------------------

------------------------------------------------------------------------------------------------------------
Weighted average number of shares outstanding - Basic        790,772      921,424      824,558      952,912
Weighted average number of shares outstanding - Diluted      836,398      951,901      863,839      981,462
------------------------------------------------------------------------------------------------------------
</TABLE>

See accompanying notes to unaudited financial statements

                                        4

<PAGE>

<TABLE>
<CAPTION>


                     REDWOOD FINANCIAL, INC. AND SUBSIDIARY
                 Consolidated Statement of Stockholders' Equity
                                   (Unaudited)

                                                                 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                                       316,920                                                                316,920

 Stock Repurchases                                                                                       (1,139,581)    (1,139,581)

 Net unrealized gain on
  securities available 
  for sale                                                      175,339                                                    175,339

 Earned employee stock
  ownership plan shares                  15,059                                  49,680                                     64,739

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

------------------------------------------------------------------------------------------------------------------------------------
Balance,  March 31, 1998   $112,500   8,482,892   6,686,511     172,204        (479,824)    (241,828)    (2,908,036)    11,824,419
------------------------------------------------------------------------------------------------------------------------------------
</TABLE>

See accompanying notes to unaudited financial statements       
                                                  
                                        5

<PAGE>
                     REDWOOD FINANCIAL, INC., AND SUBSIDIARY

                      Consolidated Statements of Cash Flows
                                   (Unaudited)

<TABLE>
<CAPTION>
                                                                                             Nine Months
                                                                                            ended March 31, 
                                                                                        ---------------------
                                                                                        1998             1997
 
------------------------------------------------------------------------------------------------------------------
<S>                                                                                 <C>              <C>    
Operating Activities:
 Net earnings                                                                       $    316,920        125,012
 Adjustments to reconcile net earnings to net cash
  provided by operations
      Provision for loan losses                                                           14,000              0
      Depreciation                                                                        19,665         13,193
      Amortization of premiums and discounts on investment
          securities, mortgage-backed and related securities
          and loans receivable, net                                                      (22,096)       (28,869)
      Decrease (increase) in other assets                                               (484,254)        34,239
      Decrease in accrued interest receivable                                             76,280        121,991
      Increase in accrued interest payable                                               394,532        417,057
      Gain on sale of mortgage-backed securities available for sale                      (15,339)             0
      Gain on sale of investment securities available for sale                                 0         (2,863)
      Amortization of unearned ESOP shares                                                49,680         49,680
      Earned ESOP shares priced above original cost                                       15,059         12,765
      Earned Management Stock Bonus Plan shares                                           64,969         64,969
      Increase (decrease) in accrued expenses and other liabilities                      217,044       (150,261)
      Decrease (increase) in deferred income taxes                                      (116,895)        48,447

------------------------------------------------------------------------------------------------------------------
                    Net cash provided by operating activities                            529,565        705,360

Investing Activities:
  Proceeds from maturities of investment securities held to maturity                     500,000      4,295,000
  Principal collected on mortgage-backed and related securities held to maturity       2,034,858      1,320,723
  Purchases of investment securities available for sale                               (1,990,093)    (4,990,575)
  Purchases of mortgage-backed and related securities available for sale              (9,918,914)    (6,251,792)
  Principal collected on mortgage-backed and related securities available for sale     2,279,766         37,639
  Proceeds from sales of investment securities available for sale                              0        999,376
  Proceeds from sales of mortgage-backed securities available for sale                   885,305              0
  Proceeds from maturities of investment securities available for sale                 7,600,000              0
  Increase in loans receivable, net                                                   (6,133,409)    (2,363,081)
  Purchases of premises and equipment                                                   (287,206)       (19,665)
  Purchases of Federal Home Loan Bank stock                                             (101,500)             0

------------------------------------------------------------------------------------------------------------------
                    Net cash used by investing activities                             (5,131,193)    (6,972,375)

Financing Activities:
  Increase in deposits, net                                                            2,181,212      4,102,627
  Increase in advance payments by borrowers for taxes and insurance                       43,581         44,066
  Proceeds from Federal Home Loan Bank advances                                       12,200,000      1,500,000
  Repayment of Federal Home Loan Bank advances                                        (7,000,000)      (650,000)
  Repurchase of common stock                                                          (1,139,581)    (1,227,049)

------------------------------------------------------------------------------------------------------------------
                    Net cash provided by financing activities                          6,285,212      3,769,644

------------------------------------------------------------------------------------------------------------------
                    Increase (decrease) in cash and cash equivalents                   1,683,584     (2,497,371)


Cash and cash equivalents, beginning of period                                           763,792      2,873,163

------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents, end of period                                            $  2,447,376        375,792

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

Supplemental cash flow disclosures:
  Cash paid for interest                                                            $  1,815,799      1,145,422
  Cash paid for income taxes                                                             163,259        162,920

Supplemental noncash disclosures:
  Transfer of real estate to loans                                                        13,520              0
  Transfer of invesment and mortgage-backed and related securities from held to
    maturity to available for sale                                                    36,531,995              0
</TABLE>
See accompanying notes to unaudited financial statements
                                        6

<PAGE>

                     REDWOOD FINANCIAL, INC. AND SUBSIDIARY

                   Notes to Consolidated Financial Statements

                                 March 31, 1998
                                   (Unaudited)


(1)  Redwood Financial, Inc.

     Redwood  Financial,  Inc. (the Company) was incorporated  under the laws of
     the State of  Minnesota  for the purpose of  becoming  the savings and loan
     holding company of 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 nine months ended March 31,
     1998 are not  necessarily  indicative  of the results which may be expected
     for the entire year.

     The  material  contained  herein is written with the  presumption  that the
     users of the interim  financial  statements have read or have access to the
     most recent Annual Report on Form 10- KSB of Redwood Financial, Inc., which
     contains  the  latest  audited  financial  statements  and  notes  thereto,
     together with Management's  Discussion and Analysis of Financial  Condition
     and Results of Operations as of June 30, 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.  The Company  adopted SFAS No. 128  effective  for the
     period ending December 31, 1997. In accordance with SFAS No. 128, all prior
     period earnings per share have been restated.

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

<TABLE>
<CAPTION>

     For the Three Months Ended:                     March 31,                           March 31, 1997
     ---------------------------                   -----------                          --------------
                                                                Per-Share                               Per Share
                                       Income        Shares      Amount       Income        Shares       Amount
                                       ------        ------      ------       ------        ------       ------
     <S>                              <C>            <C>         <C>         <C>            <C>          <C>
     Net Income:                      $111,877                               $126,852
     
     Basic EPS:
     Income available to
      common stockholders              111,877       790,772     $   0.14     126,852       921,424      $0.14
     
     Effect of Dilutive Securities:
     Options on common stock and
      unvested restricted stock awards                45,626                                 30,477
                                                     -------                                -------
     
     Diluted EPS:
     Income available to common
      stockholders plus assumed
      conversions                     $111,877       836,398     $   0.13    $126,852       951,901      $0.13
     
</TABLE>
     



                                                                  (Continued)

                                        8

<PAGE>

                     REDWOOD FINANCIAL, INC. AND SUBSIDIARY
<TABLE>
<CAPTION>

     For the Nine months Ended:                March 31, 1998                     March 31, 1997
     --------------------------                --------------                     --------------
                                                             Per-Share                             Per Share
                                         Income     Shares    Amount        Income    Shares        Amount
                                         ------     ------    ------        ------    ------        ------
<S>                                     <C>        <C>        <C>         <C>        <C>           <C>
     Net Income:                        $316,920                           $125,012
     
     Basic EPS:
     Income (loss) available to
      common stockholders                316,920    824,558     $0.38       125,012   952,912        $0.13
     
     Effect of Dilutive Securities:
     Options on common stock and
     unvested restricted stock awards               39,281                             28,550
                                                    ------                            -------

     Diluted EPS:
     Income (loss) available to
     common stockholders plus
     assumed conversions                $316,920   863,839     $0.37       $125,012   981,462        $0.13
</TABLE>

(4)  Regulatory Capital Requirements

     At March 31, 1998, the  Association  met each of the three current  minimum
     regulatory  capital  requirements.   The  following  table  summarizes  the
     Association's regulatory capital position at March 31, 1998:

<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                   $8,419
     
     Less:  AFS Market                            172
       Valuation
     
     Tangible Capital                           8,247      12.25%    $1,010      1.50%       n/a         n/a
       (to tangible assets)

     Core Capital                               8,247      12.25%     2,694      4.00%    $3,367       5.00%
       (to adjusted tangible assets)
     
     Core Capital                               8,247      33.46%       n/a        n/a     1,479       6.00%
       (to risk-weighted assets)
     
     Plus: Allowable portio                       227
       general allowance for
       loan losses
     
     Risk-based Capital                        $8,474      34.38%    $1,972      8.00%    $2,465      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 March 31, 1998, the Company  purchased 18,982
     shares of its  outstanding  common stock,  completing all stock  repurchase
     programs  announced to date.  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 three months
     ended March 31, 1998:

            Settlement Date           Shares Purchased     Price per share
            ---------------           ----------------     ---------------
                                      
            January 6, 1998                   6,500           $13.0000
            January 12, 1998                 12,482           $13.3125
            Average Price per share:                        $13.2055
                                    
(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 did not 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


     In June 1997, the FASB issued SFAS No. 131,  "Disclosures about Segments of
     an Enterprise and Related Information". SFAS No. 131 requires disclosure of
     selected information about operating segments,  as defined in SFAS No. 131,
     which include those components for which financial information is available
     and  evaluated  by  the  chief   operating   decision  maker  in  assessing
     performance and making  resource  allocation  determinations  for operating
     components  such as those which  exceed 10 percent or more of the  combined
     revenue,  income,  or assets.  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.

     In February  1998,  the FASB issued SFAS No. 132,  "Employers'  Disclosures
     about  Pensions and Other  Postretirement  Benefits".  SFAS No. 132 revises
     employers'  disclosures  about  pension and other post  retirement  benefit
     plans and suggests  combined  formats for presentation of pension and other
     post retirement benefit  disclosures.  It is effective for the fiscal years
     beginning  after December 15, 1997.  Restatement of disclosures for earlier
     periods   provided  for   comparative   purposes  is  required  unless  the
     information is not readily available. This standard is not expected to have
     a material impact on the Company's consolidated financial statements.









                                                                  (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 $7,519,000,  or 12.09%, from $62,169,000
at June 30, 1997 to $69,688,000 at March 31, 1998. The increase in the Company's
assets  largely  reflected  an  increase  in the  level of loan  production  and
purchases of mortgage-backed  securities. The increase in loans and purchases of
mortgage-backed  securities  were largely funded through the use of Federal Home
Loan Bank (FHLB) advances during the nine months ended March 31, 1998.

Cash and cash equivalents increased by $1,683,000,  or 220.29%, from $764,000 at
June 30,  1997 to  $2,447,000  at  March  31,  1998.  The  increase  in cash was
primarily due to the  procurement  of $2.0 million in FHLB advances on March 31,
1998, which were  subsequently  used to repay advances  maturing in early April,
1998.  The  Company's  strategy  is to  minimize  its  level  of cash  and  cash
equivalents in order to enhance overall yield.




                                                                  (Continued)

                                       12

<PAGE>



                     REDWOOD FINANCIAL, INC. AND SUBSIDIARY


The Company's loans receivable,  net, increased $6,139,000, or 29.56% during the
nine months ended March 31, 1998.  The increase in loans was due to expansion in
the Company's  agricultural lending program as previously announced.  During the
quarter ended March 31, 1998, the Company announced the hiring of an experienced
agricultural  and commercial  loan officer to expand the Company's  agricultural
lending  program.  As a result of these efforts,  during the quarter ended March
31, 1998,  the Company  originated  $2,611,000 in  agricultural  and  commercial
loans. These loans primarily include agricultural  operating and term loans, but
also include  agricultural  real estate and also  commercial  operating and real
estate loans.  Large  concentrations  of credit include a $912,000  agricultural
operating  loan secured by  agricultural  cooperative  stock and a $580,000 loan
secured  by  real  estate  and  inventory  financing  to a local  retailer.  The
Company's  commercial  loan growth in the nine months  ended March 31, 1998 also
included the financing of a $336,000 apartment complex and a $400,000 commercial
operating loan to a local casino.  The Company has also increased its 1-4 family
residential  loan portfolio by  approximately  $2.6 million since June 30, 1997.
The  continued  increase in the  Company's  loan  portfolio  and changes in loan
portfolio mix will increase the Company's credit risk exposure.  Furthermore, in
conjunction with the increase in loans receivable, the Company is increasing its
allowance for loan losses.

Effective  January 1, 1998, the Company  designated  all investment  securities,
including   mortgage-backed  and  related  securities  as  available  for  sale.
Previously,  the Company  maintained a portfolio of  investment  securities  and
mortgage-backed and related securities  purchased before January 1997 as held to
maturity. The purpose for the designation is to enhance operational  flexibility
and liquidity.  To this extent,  $36,532,000 in investment securities previously
designated held to maturity,  including  mortgage-backed  and related securities
were  specifically  redesignated  as  available  for sale.  The Company will not
maintain any investments,  including  mortgage-backed  and related securities as
held to maturity for the foreseeable future.

Overall,  the  Company's   mortgage-backed  and  related  securities  designated
available for sale increased $18,872,000, or 231.56% from $8,150,000 at June 30,
1997 to $27,022,000 at March 31, 1998. The increase is due to the aforementioned
redesignation of $20,134,000 in  mortgage-backed  and related securities and the
purchase of $9,919,000 in mortgage-backed  securities  designated  available for
sale during the nine months  ended March 31,  1998.  The  carrying  value of the
Company's  mortgage-backed  and related securities also reflected an increase of
$262,000  due to market  appreciation.  Mortgage-backed  and related  securities
previously  designated  held to maturity  reflected net market  appreciation  of
$165,000 at redesignation to available for sale.






                                                                  (Continued)

                                       13

<PAGE>



                     REDWOOD FINANCIAL, INC. AND SUBSIDIARY


The Company's  investment  securities  designated  available for sale  increased
$4,329,000,  or 62.01% from  $6,981,000 at June 30, 1997 to $11,310,000 at March
31, 1998. The increase is also primarily due to the aforementioned redesignation
of investment securities as available for sale and the purchase of $1,990,000 in
investment securities designated available for sale during the nine months ended
March 31, 1998. The carrying value of the Company's  mortgage-backed and related
securities  also  reflected  an increase of $26,000 due to market  appreciation.
Investment  securities  previously  designated  held to maturity  reflected  net
market appreciation of $17,000 at redesignation to available for sale.

The  Company's  premises  and  equipment  increased  $268,000,  or 126.42%  from
$212,000  at June 30,  1997,  to  $480,000 at March 31,  1998.  The  increase is
primarily  a result  of the  purchase  of two lots for  possible  future  office
expansion and capitalized  equipment purchases owing to the Association's recent
electronic data processing conversion.

The  Company's  other assets  increased by $484,000,  or 733.33% from $66,000 at
June 30,  1997 to  $550,000  at March 31,  1998.  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 March 31, 1998, the
market value of the  Company's  share in this  partnership  exceeds its carrying
value by  approximately  $106,000.  This unrealized  market  appreciation is not
reflected  in these  financial  statements  as of March  31,  1998  because  the
investment in the limited partnership is recorded on the equity basis.

The  Company's  deposits,  including  accrued  interest  payable,  increased  by
$2,576,000,  or 5.59%, from $46,093,000 at June 30, 1997 to $48,669,000 at March
31, 1998. At March 31, 1998, the Company's FHLB advances totaled $8,700,000,  an
increase of  $5,200,000,  or 148.57% from  $3,500,000  at June 30,  1997.  These
advances have  maturities  from 1 to 10 years,  of which advances  totaling $3.0
million  include  various call  provisions.  The advances  were utilized to fund
increased  loan  production  and  investment  and   mortgage-backed   securities
purchases  during this nine month  period.  The Company may continue to increase
its use of FHLB  advances  pending  rate  and  other  terms  of  future  advance
offerings.




                                                                  (Continued)

                                       14

<PAGE>



                     REDWOOD FINANCIAL, INC. AND SUBSIDIARY


Results of Operations

Net Earnings

Net  earnings  were  $112,000  for the three  months  ended March 31,  1998,  as
compared to $127,000 for the three months ended March 31, 1997. This represented
a decrease of $15,000,  or 11.81%.  The  decrease in net  earnings for the three
months ended March 31, 1998 was a result of an increase in net  interest  income
offset by an  increase  in the  provision  for loan  losses and an  increase  in
compensation and employee  benefits.  For the three months ended March 31, 1998,
net interest income increased $25,000,  or 5.97% due to the Company's growth and
a change in the composition of its interest-earning assets. This increase in net
interest income was offset by a $36,000,  or 20.22% increase in compensation and
employee benefits,  and a $14,000 increase in the provision for loan losses. The
Company's  provision  for loan  losses is a result of recent  loan  growth.  The
Company  made no  provision  for loan losses in the three months ended March 31,
1997.

For the nine  months  ended March 31,  1998,  net  earnings  were  $317,000,  an
increase of $200,000 or 153.60%,  from  $125,000 for the nine months ended March
31, 1997.  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  President
Clinton on September 30, 1996,  and higher  professional  fees as a result of an
unsuccessful acquisition attempt during the nine months ended March 31, 1997. In
addition,  net  earnings  for the nine  months  ended  March 31,  1998 were also
impacted by a $75,000  increase in net interest  income,  a $39,000  increase in
noninterest income, a $23,000 decrease in federal deposit insurance premiums,  a
$93,000  increase in compensation and employee  benefits,  a $21,000 increase in
other expenses, and a $14,000 increase in the provision for loan losses.

Net Interest Income

Net interest income increased by $25,000,  or 5.97%, from $419,000 for the three
months  ended March 31, 1997 to $444,000  for the three  months  ended March 31,
1998. The increase in net interest  income was due primarily to a large increase
in the average balance of interest-earning  assets. The increase in net interest
income was partially  offset by a slight  decrease in the Company's net interest
spread.







                                                                  (Continued)

                                       15

<PAGE>



                     REDWOOD FINANCIAL, INC. AND SUBSIDIARY


For the three months ended March 31, 1998, the Company's interest-earning assets
increased  $11,450,000,  or 21.07% in comparison of the three months ended March
31, 1998 and 1997.  The  incremental  increase in interest  generated  from this
growth offset  additional  interest  expense on the  Company's  interest-bearing
liabilities  which funded this growth.  Interest-bearing  liabilities  increased
$12,939,000,  or 31.14% in  comparison  of these two periods.  As a result,  the
Company's  ratio  of  average   interest-earnings   assets  to  interest-bearing
liabilities  decreased  to 120.72% from 130.75% for the three months ended March
31,  1998 and 1997,  respectively.  The  increase  in net  interest  income  was
impacted by a slight decrease in net interest spread to 1.74% from 1.83% for the
three months ended March 31, 1998 and 1997, respectively.

For the nine months  ended March 31, 1998,  the  Company's  net interest  income
increased  $75,000,  or 6.10% to $1,304,000  from $1,229,000 for the nine months
ended March 31,  1997.  As  previously  discussed,  the increase in net interest
income  was  due  primarily  to a  large  increase  in the  average  balance  of
interest-earning  assets.  The increase in net interest income was impacted by a
slight decrease in the Company's net interest spread.

For the nine months ended March 31, 1998, the Company's average interest-earning
assets increased  $11,592,000,  or 22.12% in comparison of the nine months ended
March 31, 1998 and 1997.  The  incremental  increase in interest  generated from
this growth offset additional interest expense on the Company's interest bearing
liabilities  which funded this growth.  Interest-bearing  liabilities  increased
$12,994,000,  or 33.12% in  comparison  of these two periods.  As a result,  the
Company's  ratio  of  average   interest-earnings   assets  to  interest-bearing
liabilities  decreased  to 122.55%  from 133.60% for the nine months ended March
31,  1998 and 1997,  respectively.  The  increase  in net  interest  income  was
impacted by a slight decrease in net interest spread to 1.68% from 1.79% for the
nine months ended March 31, 1998 and 1997, respectively.

Interest Income

Interest  income was  $1,202,000  for the three months ended March 31, 1998,  as
compared to $972,000 for the three months ended March 31, 1997,  representing an
increase of $230,000,  or 23.66%.  The increase in interest income was primarily
due to the Company's  aforementioned  growth for the nine months ended March 31,
1998.  The increase in interest  income was also  affected by an increase in the
overall yield on  interest-earning  assets. For the three months ended March 31,
1998, the yield on  interest-earning  assets was 7.31%, as compared to 7.16% for
the three months ended March 31, 1997. The increase in yield on interest-earning
assets  was due  primarily  to a  change  in the  composition  of the  Company's
interest-earning assets in the three months ended March 31, 1998.




                                                                  (Continued)

                                       16

<PAGE>



                     REDWOOD FINANCIAL, INC. AND SUBSIDIARY


Interest  income was  $3,515,000  for the nine months ended March 31,  1998,  as
compared to $2,791,000 for the nine months ended March 31, 1997, representing an
increase of  $724,000,  or 25.94%.  As  discussed  previously,  the  increase in
interest income was primarily due to the Company's  growth in 1997. The increase
in interest  income was also  affected  by an  increase in the overall  yield on
interest-earning  assets. For the nine months ended March 31, 1998, the yield on
interest-earning  assets was 7.32%,  as  compared  to 7.10% for the nine  months
ended March 31, 1997. The increase in yield on  interest-earning  assets was due
primarily  to a change  in the  composition  of the  Company's  interest-earning
assets in the nine months ended March 31, 1998.

Interest on loans receivable  increased by $131,000,  or 32.75%, to $531,000 for
the three  months  ended March 31,  1998,  as compared to $400,000 for the three
months ended March 31, 1997.  Such increase was due to a  $6,333,000,  or 34.24%
increase in the average  balance of loans  receivable  from  $18,497,000 for the
three  months  ended March 31, 1997 to  $24,830,000  for the three  months ended
March 31,  1998.  The  increase in interest on loans  receivable  was  partially
offset by a slight decrease in the average yield on loans  receivable from 8.66%
for the three months  ended March 31, 1997,  to 8.55% for the three months ended
March 31, 1998.

Interest on loans receivable increased by $343,000, or 30.06%, to $1,484,000 for
the nine months ended March 31,  1998,  as compared to  $1,141,000  for the nine
months ended March 31, 1997.  This increase was due to a  $5,282,000,  or 29.80%
increase in the average  balance of loans  receivable  from  $17,724,000 for the
nine months ended March 31, 1997 to $23,006,000  for the nine months ended March
31, 1998.  The increase in interest on loans  receivable  was also affected by a
slight increase in the average yield on loans receivable from 8.58% for the nine
months ended March 31, 1997, to 8.60% for the nine months ended March 31, 1998.

In January 1997, the Company began designating all new mortgage-backed  security
purchases as available for sale.  Mortgage-backed  securities purchased prior to
this date  remained as held to  maturity.  Subsequently,  in January  1998,  the
Company  determined that it no longer had the intent to hold these securities to
maturity  and  redesignated  all   mortgage-backed  and  related  securities  as
available for sale. As a result of this  redesignation,  the Company reported no
interest income on  mortgage-backed  and related  securities held to maturity in
the three months ended March 31, 1998.

Interest income on mortgage-backed and related securities available for sale was
$437,000  and  $50,000  for the three  months  ended  March  31,  1998 and 1997,
respectively.  The yield on the Company's  mortgage-backed  securities portfolio
available for sale was 6.66% for the three months ended March 31, 1998. Interest
income on mortgage-backed and related securities available for sale was $772,000
and $50,000 for the nine months ended March 31, 1998 and 1997, respectively. The
yield on the Company's  mortgage-backed  securities portfolio available for sale
was 6.90% for the nine months ended March 31, 1998.


                                                                  (Continued)

                                       17

<PAGE>



                     REDWOOD FINANCIAL, INC. AND SUBSIDIARY


As with the  Company's  mortgage-backed  and related  securities  portfolio,  in
January  1997,  the  Company  began  designating  all  new  investment  security
purchases as available for sale.  Investment  securities purchased prior to this
date remained as held to maturity. In January 1998, the Company redesignated all
investment  securities as available for sale. As a result of this redesignation,
the  Company  reported  no  interest  income on  investment  securities  held to
maturity in the three months ended March 31, 1998.

Interest  income on investment  securities  available for sale,  including  FHLB
stock was  $217,000  and $42,000 for the three  months  ended March 31, 1998 and
1997,  respectively.  The yield on the Company's investment securities portfolio
available for sale was 6.48% for the three months ended March 31, 1998. Interest
income on  investment  securities  available for sale  including  FHLB stock was
$457,000  and  $42,029  for the nine  months  ended  March  31,  1998 and  1997,
respectively.  The  yield  on  the  Company's  investment  securities  portfolio
available for sale was 6.82% for the nine months ended March 31, 1998.

Interest income on cash and cash equivalents decreased by $40,000, or 68.97% for
the three  months  ended March 31,  1998,  as compared to the three months ended
March 31, 1997.  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  $108,000,  or 66.67%  for the nine
months  ended March 31,  1998,  as  compared to the nine months  ended March 31,
1997.

Interest Expense

Interest expense increased by $206,000,  or 37.25%,  from $553,000 for the three
months  ended March 31, 1997 to $759,000  for the three  months  ended March 31,
1998.  The increase in interest  expense  resulted from  $12,939,000,  or 31.14%
increase in the average balance of interest-bearing liabilities from $41,556,000
for the three  months ended March 31, 1997 to  $54,495,000  for the three months
ended March 31, 1998.  The increase in interest  expense was also impacted by an
increase in the average  cost of funds to 5.57%  during the three  months  ended
March 31, 1998, as compared to 5.32% for the three months ended March 31, 1997.

The  increase in the  Company's  sources of funds,  and its  resulting  interest
expense was primarily  affected by an increase in the use of FHLB advances.  The
Company had average outstanding FHLB advances of $7,404,000 and $212,500 for the
three  months  ended March 31, 1998 and 1997,  respectively.  As such,  interest
expense on FHLB advances totaled $111,000 and $1,000, respectively, during these
periods. The Company utilized FHLB advances to fund increases in loan production
and purchases of investment securities and mortgage-backed securities.



                                                                  (Continued)

                                       18

<PAGE>



                    REDWOOD FINANCIAL, INC.  AND SUBSIDIARY


The Company's  average balance of deposits,  including  accrued interest payable
increased by $5,748,000,  or 13.90% for the three months ended March 31, 1998 in
comparison to the three months ended March 31, 1997. The increase in deposits is
primarily due to increased public (i.e. governmental) deposits.  Public deposits
are typically more volatile and more costly than traditional retail deposits.

Interest expense increased by $648,000,  or 41.49%, from $1,562,000 for the nine
months  ended March 31, 1997 to  $2,210,000  for the nine months ended March 31,
1998. The increase in interest  expense  resulted from a $12,994,000,  or 33.12%
increase in the average balance of interest-bearing liabilities from $39,230,000
for the nine  months  ended March 31,  1997 to  $52,224,000  for the nine months
ended March 31, 1998.  The increase in interest  expense was also impacted by an
increase in the average  cost of funds to 5.64% for the nine months  ended March
31, 1998, as compared to 5.31% for the nine months ended March 31, 1997.

As  previously  discussed,  the  increase in the  Company's  sources of funds in
comparison of the nine 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 $6,687,000,  or 17.08% for the nine months ended March 31,
1998 in  comparison  to the nine  months  ended  March  31,  1997.  As a result,
interest expense on deposits increased $354,000,  or 22.66% in comparison of the
two periods.

Interest  expense on FHLB advances  totaled  $295,000 and $1,000 during the nine
months ended March 31, 1998 and 1997,  respectively.  The  Company's use of FHLB
advances during the nine months ended March 31, 1997 was negligible.

Provision for Loan Losses

The  Company's  provision  for loan losses was $14,000 and $14,000 for the three
months and nine months  ended March 31,  1998.  During the three and nine months
ended March 31, 1997, no loan loss reserves were provided. As noted, the Company
has experienced large growth in its loan portfolio  primarily as a result of its
agricultural  and  commercial  lending  program.  However,  the Company has also
increased loan production of 1-4 family  residential  mortgage loans,  including
home equity  loans.  The  provision  was increased in response to loan growth in
anticipation  that losses could occur. As such, the Company intends to regularly
provide for known and unanticipated  loan losses. The level of this provision is
dependent on loan growth, delinquencies,  economic conditions, and other various
factors used by management in the  assessment of its loan  portfolio and overall
level of loan loss reserves.  The Company is committed to  maintaining  adequate
allowances for loan losses, regardless of the impact on reported earnings.



                                                                  (Continued)

                                       19

<PAGE>



                    REDWOOD FINANCIAL, INC.  AND SUBSIDIARY


At March 31, 1998 and 1997, the allowance for loan losses  totaled  $227,000 and
$213,000,  respectively.  The Company's net loan  charge-offs were $0 and $0 for
the three and nine months ended March 31, 1998 and 1997, respectively.  At March
31, 1998 and 1997, the allowance for loan losses  represented 0.84% and 1.12% of
loans receivable, respectively.  Nonaccrual loans totaled $0 and $0 at March 31,
1998 and 1997,  respectively.  At March 31,  1998 and  1997,  classified  assets
totaled $741,000 and $252,000,  respectively. The increase was the result of two
agricultural participation loans which were past due at March 31, 1998, but have
subsequently been brought current.

Noninterest Income

Noninterest income increased $20,000, or 133.33% from $15,000 to $35,000 for the
three months ended March 31, 1998 and 1997, respectively. The increase is due to
an  increase in fees and service  charges  and a $7,000 gain  recognized  on the
sales of mortgage-backed securities.

For the nine months ended March 31, 1998,  noninterest income increased $39,000,
or 90.70% to $82,000 from $43,000 for the nine months ended March 31, 1997.  The
increase is due to a $20,000  one-time  prepayment  penalty on a commercial loan
participation and $15,000 in gains on the sales of mortgage-backed securities.

Noninterest Expense

Noninterest expense increased by $55,000, or 23.71%, from $232,000 for the three
months  ended March 31, 1997 to $287,000  for the three  months  ended March 31,
1998.  The  increase  in  noninterest   expense  was  primarily  due  to  higher
compensation and employee benefits  expenses.  These expenses increased $36,000,
or  20.22%  and are a result  of  increased  staff and  higher  compensation  to
existing employees.

In  addition,  as a  result  of the  Company's  October  1997  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.  Data processing expense totaled
$8,000 for the three months ended March 31, 1998.

Noninterest  expense decreased by $221,000,  or 20.20%,  from $1,094,000 for the
nine months ended March 31, 1997 to $873,000 for the nine months ended March 31,
1998. The decrease in total noninterest expense was primarily due to a $237,000,
one time special deposit  insurance fund assessment during the nine months ended
March 31, 1997 and lower  professional  fees of  approximately  $101,000 for the
nine months ended March 31, 1998. The Company had incurred  higher  professional
fees in the nine  months  ended  March 31,  1997 as a result of an  unsuccessful
acquisition  attempt. The decrease in noninterest expense was also impacted by a
$23,000, or 51.11% decrease in federal deposit insurance premiums.
                                                                  (Continued)

                                       20

<PAGE>



                     REDWOOD FINANCIAL, INC. AND SUBSIDIARY


The decrease in noninterest expense was partially offset by a $93,000, or 17.51%
increase  in  compensation  and  employee  benefits,  and a  $21,000,  or 32.31%
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 and directors.  The increase in other
expenses is primarily  due to  management  fees  associated  with the  Company's
investment  in a limited  partnership.  In  addition,  for the nine months ended
March 31, 1998, data processing expenses totaled $21,000.

Income Taxes

The Company's  income tax expense  decreased by $10,000,  or 13.33% from $75,000
for the three months ended March 31, 1997, to $65,000 for the three months ended
March 31, 1998.  The change in income  taxes was due  primarily to a decrease in
pre-tax earnings of $25,000,  or 12.38% from $202,000 for the three months ended
March 31, 1997 to $177,000 for the three months ended March 31, 1998.

The Company's income tax expense increased by $130,000,  or 250.00% from $52,000
for the nine months ended March 31, 1997,  to $182,000 for the nine months ended
March 31, 1998.  The change in income taxes was due  primarily to an increase in
pre-tax earnings of $322,000, or 181.92% from $177,000 for the nine months ended
March 31, 1997 to $499,000 for the nine months ended March 31, 1998.

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 portfolio;  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.





                                                                   (Continued)

                                       21

<PAGE>



                     REDWOOD FINANCIAL, INC. AND SUBSIDIARY


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 nine months ended March 31, 1998 and 1997,  the  Company's  loan  portfolio,
net, increased $6,133,000 and $2,363,000, respectively. During the same periods,
the Company  purchased  investment  securities and  mortgage-backed  and related
securities in the amounts of  $11,909,000  and  $11,242,000,  respectively.  The
primary financing  activity of the Company is the attraction of savings deposits
and utilization of FHLB advances.

The Company has other  sources of  liquidity  if there is a need for funds.  The
Association has the ability to obtain additional  advances from the Federal Home
Loan Bank of Des Moines.  During the nine months  ended March 31, 1998 and 1997,
the Association  utilized advances of $12,200,000 and $1,500,000,  respectively.
The Company's advances include $3,000,000 which include call provisions.  In the
event that these  advances  are called,  the FHLB has  committed to providing an
alternative  funding,   albeit  at  different  rates  and  terms.  In  addition,
commencing  in January  1998,  the  Company's  redesignation  of all  investment
securities,  including  mortgage-backed  and related securities 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 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 March
31, 1998 and June 30, 1997,  cash and cash  equivalents  totaled  $2,447,000 and
$764,000,  respectively.  Investment securities,  including  mortgage-backed and
related  securities   designated   available  for  sale  total  $38,333,000  and
$15,131,000 at March 31, 1998 and June 30, 1997, respectively.

                                                                  (Continued)

                                       22

<PAGE>



                     REDWOOD FINANCIAL, INC. AND SUBSIDIARY


Federal savings institutions are required to satisfy three capital requirements:
(i) a  requirement  that  "tangible  capital"  equal or excess  1.5% of tangible
assets,  (ii) a requirement that "core capital" equal or excess 4.0% 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

Proposed Bank Building

In April, 1998, the Company announced that it has approved the construction of a
new bank  building for the  Association  on the east side of the City of Redwood
Falls, Minnesota.  Construction is to commence shortly with completion scheduled
near December  1998.  The Company is  constructing  the new building in order to
modernize its facilities and to offer  additional  banking  services in the near
future.  The Company  believes that its current  facilities  are not adequate to
effectively promote additional banking services nor generate increased revenues.

The use of funds to construct this facility and the resulting  higher  occupancy
costs will  result in a decrease  in the  Company's  net  earnings.  The Company
estimates that this decrease in net earnings will be approximately  $120,000 per
year. The Company's  estimate does not reflect any additional  staffing or other
indirect costs which may be incurred,  nor any additional  revenues which may be
generated.  The Company  expects to continue  utilizing  its  existing  downtown
Redwood Falls location.


                                                              (Continued)

                                       23

<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










                                       24

<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: April 30, 1998            /s/ Paul W. Pryor
      --------------            -----------------
                                Paul W. Pryor, President and Chief Executive
                                Officer (Duly Authorized Officer)

Date: April 30, 1998            /s/ Anthony H. Acker
      --------------            --------------------
                                Anthony H. Acker, Chief Financial Officer
                                (Principal Accounting Officer)



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