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, 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 October 15, 1998:

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

         Common stock, par value $0.10 per share                781,293


<PAGE>



                     REDWOOD FINANCIAL, INC. AND SUBSIDIARY

                                    CONTENTS

PART I - FINANCIAL INFORMATION

                                                                          Page
Item 1:     Financial Statements

            Consolidated Balance Sheets at September 30, 1998 and
            June 30, 1998                                                   3

            Consolidated Statements of Earnings for the Three
            months ended September 30, 1998 and 1997                        4

            Consolidated Statements of Comprehensive Income for             5
            the Three months ended September 30, 1998 and 1997

            Consolidated Statement of Stockholders' Equity
            for the Three months ended September 30, 1998                   6

            Consolidated Statements of Cash Flows for the
            Three months ended September 30, 1998 and 1997                  7

            Notes to Consolidated Financial Statements                   8-11

Item 2:     Management's Discussion and Analysis of
            Financial Condition and Results of Operations               12-19

PART II - OTHER INFORMATION
Item 1:     Legal Proceedings                                              20
Item 2:     Changes in Securities                                          20
Item 3:     Defaults Upon Senior Securities                                20
Item 4:     Submission of Matters to a Vote of Security Holders            20
Item 5:     Other Information                                              20
Item 6:     Exhibits and Reports on Form 8-K                               20
Signatures                                                                 21

                                        2

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

                           Consolidated Balance Sheets
                                   (Unaudited)

<TABLE>
<CAPTION>
                             Assets                                           September 30,           June 30,
                                                                                  1998                  1998
---------------------------------------------------------------------------------------------------------------
<S>                                                                           <C>                <C>   
Cash                                                                          $      28,127             20,448
Interest-bearing deposits with banks                                              1,546,749          1,988,780
---------------------------------------------------------------------------------------------------------------
                                    Cash and cash equivalents                     1,574,876          2,009,228
---------------------------------------------------------------------------------------------------------------
Securities available for sale:
     Mortgage-backed and related securities (amortized cost                      36,537,896         33,937,175
       $36,362,520 and $33,726,372, respectively)
     Investment securities (amortized cost $6,859,402 and                         6,880,948          9,793,500
       $9,784,454, respectively)
---------------------------------------------------------------------------------------------------------------
                                    Total securities available for sale          43,418,844         43,730,675
---------------------------------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------------------------------
Loans receivable, net                                                            31,500,753         28,994,750
Federal Home Loan Bank stock, at cost                                             1,107,300            835,000
Accrued interest receivable                                                         549,940            547,898
Premises and equipment, net                                                         980,688            596,867
Investment in limited partnership                                                   396,504            484,024
Other assets                                                                        116,584             88,163
---------------------------------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------------------------------
                                    Total Assets                              $  79,645,489         77,286,605
---------------------------------------------------------------------------------------------------------------
                                    Liabilities and Stockholders' Equity
---------------------------------------------------------------------------------------------------------------
Deposits                                                                         47,252,895         48,101,806
Federal Home Loan Bank advances                                                  20,110,503         16,200,000
Accrued interest payable                                                            961,103            631,168
Advance payments by borrowers for taxes and insurance                               103,946             75,463
Accrued expenses and other liabilities                                              326,550            340,142
---------------------------------------------------------------------------------------------------------------
                                    Total Liabilities                            68,754,997         65,348,579
---------------------------------------------------------------------------------------------------------------
Common stock ($.10 par value):  Authorized and issued
  1,125,000 shares; outstanding 781,293 shares at
  September 30, 1998; 868,093 shares at June 30, 1998                               112,500            112,500
Additional paid-in capital                                                        8,495,726          8,490,163
Retained earnings, subject to certain restrictions                                6,847,831          6,794,926
Accumulated other comprehensive income                                              118,153            131,909
Unearned employee stock ownership plan shares                                      (446,704)          (463,264)
Unearned management stock bonus plan shares                                        (198,516)          (220,172)
Treasury stock, at cost, 343,707 shares at
  September 30, 1998; 256,907 shares at June 30, 1998                            (4,038,498)        (2,908,036)
---------------------------------------------------------------------------------------------------------------
                                    Total Stockholders' Equity                   10,890,492         11,938,026
---------------------------------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------------------------------
                              Total Liabilities and Stockholders' Equity      $  79,645,489         77,286,605
---------------------------------------------------------------------------------------------------------------
</TABLE>

See accompanying notes to consolidaed financial statements


                                       3
<PAGE>
                     REDWOOD FINANCIAL, INC. AND SUBSIDIARY
                       Consolidated Statements of Earnings
                                   (Unaudited)
<TABLE>
<CAPTION>
                                                                   Three months
                                                                ended September 30,
                                                               1998            1997
---------------------------------------------------------------------------------------
<S>                                                       <C>                 <C>    
Interest Income:
   Loans receivable                                        $   641,331         466,116
   Securities held to maturity:
      Mortgage-backed and related securities                         0         231,493
      Investment securities                                          0         142,385
   Securities available for sale:
      Mortgage-backed and related securities                   573,225         164,797
      Investment securities                                    121,855         127,746
   Cash equivalents and other                                   36,968          21,741
---------------------------------------------------------------------------------------
Total interest income                                        1,373,379       1,154,278

Interest Expense:
   Federal Home Loan Bank advances                             274,375          65,284
   Deposits                                                    657,412         634,303
---------------------------------------------------------------------------------------
Total interest expense                                         931,787         699,587
---------------------------------------------------------------------------------------
Net interest income                                            441,592         454,691
---------------------------------------------------------------------------------------
Provision for losses on loans                                    9,000               0
---------------------------------------------------------------------------------------

---------------------------------------------------------------------------------------
Net interest income after provision for losses on loans        432,592         454,691
---------------------------------------------------------------------------------------
Noninterest income:
   Gains on sale of securities available for sale               21,828               0
   Fees and service charges                                     27,764          12,573
   Other                                                         5,190             878
---------------------------------------------------------------------------------------
Total noninterest income                                        54,782          13,451
---------------------------------------------------------------------------------------
Noninterest expense:
   Compensation and employee benefits                          219,717         188,979
   Advertising                                                   8,154           6,162
   Occupancy                                                     8,624           6,658
   Federal deposit insurance premiums                            7,554           6,986
   Professional fees                                            23,644          30,253
   Loss on limited partnership                                  87,520               0
   Other                                                        44,831          28,510
---------------------------------------------------------------------------------------
Total noninterest expense                                      400,044         267,548
---------------------------------------------------------------------------------------
Earnings before income taxes                                    87,330         200,594

Income tax expense                                              34,425          74,704

Net earnings                                               $    52,905         125,890
---------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------
Net earnings per common share - Basic                      $      0.07            0.15
Net earnings per common share - Diluted                           0.07            0.14
---------------------------------------------------------------------------------------
</TABLE>

See accompanying notes to consolidated financial statements

                                        4
<PAGE>
                     REDWOOD FINANCIAL, INC. AND SUBSIDIARY
                 Consolidated Statements of Comprehensive Income
                                   (unaudited)

<TABLE>
<CAPTION>
                                                                        Three Months Ended September 30,

                                                                      1998                           1997
                                                               ----------------------------------------------------------
<S>                                                             <C>               <C>             <C>        <C>    
Net earnings                                                    $                    52,905                   125,890

Other comprehensive income, net of tax :
  Unrealized gains (losses) on securities:
     Unrealized holding gains (losses) arising
       during period                                                  (659)                        40,268
     Less:  reclassification adjustment for gains
       included in net income                                      (13,097)                             0
                                                                ----------                     ----------      
Other comprehensive income (loss)                                                   (13,756)                   40,268
                                                                                 ----------                 --------- 
Comprehensive income                                            $                    39,149                   166,158
                                                                 ----------------------------------------------------

</TABLE>

See accompanying notes to consolidated financial statements

                                        5
<PAGE>
                     REDWOOD FINANCIAL, INC. AND SUBSIDIARY
                 Consolidated Statement of Stockholders' Equity
                  For the Three Months Ended September 30, 1998
                                   (unaudited)
<TABLE>
<CAPTION>
                                                                                  Unearned
                                                                                  Employee    Unearned
                                                                    Accumulated    Stock     management
                                            Additional                Other      Ownership     stock                      Total
                                  Common     paid-in     Retained  Comprehensive    Plan       bonus       Treasury   stockholders'
                                  Stock      capital     Earnings     Income       Shares    plan shares    stock         equity
-----------------------------------------------------------------------------------------------------------------------------------
<S>                              <C>       <C>          <C>            <C>       <C>           <C>         <C>         <C>       
Balance, June 30, 1998           112,500   8,490,163    6,794,926      131,909   (463,264)     (220,172)   (2,908,036)   11,938,026

  Net Earnings                                             52,905                                                            52,905

  Other comprehensive income                                           (13,756)                                             (13,756)

  Earned employee stock
    ownership plan shares, net                 5,563                               16,560                                    22,123

  Repurchase of common stock                                                                               (1,130,462)   (1,130,462)

  Earned management stock
    bonus plan shares                                                                            21,656                      21,656
-----------------------------------------------------------------------------------------------------------------------------------
Balance, September 30, 1998      112,500   8,495,726    6,847,831      118,153   (446,704)     (198,516)   (4,038,498)   10,890,492
-----------------------------------------------------------------------------------------------------------------------------------
</TABLE>

See accompanying notes to consolidated financial statements

                                        6

<PAGE>
                     REDWOOD FINANCIAL, INC. AND SUBSIDIARY
                      Consolidated Statements of Cash Flows
                                   (unaudited)
<TABLE>
<CAPTION>
                                                                                                     Three months
                                                                                                   ended September 30,
                                                                                         -----------------------------
                                                                                                 1998          1997
----------------------------------------------------------------------------------------------------------------------
<S>                                                                                      <C>               <C>    
Operating Activities
   Net earnings                                                                          $       52,905       125,890
   Adjustments to reconcile net earnings to net
     cash provided by operating activities:
       Provision for loan losses                                                                  9,000             0
       Depreciation                                                                               8,935         3,963
       Amortization of premiums and discounts, net                                               12,252        (5,207)
       (Increase) decrease in other assets                                                      (28,421)        9,558
       (Increase) decrease in accrued interest receivable                                        (2,042)       69,936
       Increase in accrued interest payable                                                     329,935       410,917
       Gain on sale of securities available for sale                                            (21,828)            0
       Amortization of unearned ESOP shares                                                      16,560        16,560
       Earned ESOP shares priced above original cost                                              5,563         3,777
       Earned Management Stock Bonus Plan shares                                                 21,656        21,656
       Decrease in investment in limited partnership                                             87,520             0
       Deferred income taxes                                                                      9,171       (26,052)
       (Decrease) increase in accrued expenses and other liabilities                            (13,592)       13,693
----------------------------------------------------------------------------------------------------------------------
                                   Net cash provided by operating activities                    487,614       644,691
----------------------------------------------------------------------------------------------------------------------
Investing activities:
   Proceeds from maturities of investment securities held to maturity                                 0       500,000
   Principal collected on mortgage-backed and related securities held to maturity                     0       902,311
   Proceeds from maturities of investment securities available for sale                       2,925,000             0
   Proceeds from sales of mortgage-backed and related securities available for sale           2,547,575             0
   Purchases of mortgage-backed and related securities available for sale                    (7,644,295)   (2,503,927)
   Principal collected on mortgage-backed and related securities available for sale           2,467,733        63,200
   Purchases of Federal Home Loan Bank stock                                                   (272,300)            0
   Increase in loans receivable, net                                                         (2,512,536)   (1,575,503)
   Purchases of premises and equipment                                                         (392,756)      (46,384)
----------------------------------------------------------------------------------------------------------------------
                                    Net cash used by investing activities                    (2,881,579)   (2,660,303)
----------------------------------------------------------------------------------------------------------------------
Financing Activities:
   Decrease in deposits, net                                                                   (848,911)     (723,441)
   Increase in advance payments by borrowers for taxes and insurance                             28,483        37,239
   Proceeds from Federal Home Loan Bank advances                                              8,700,000     4,700,000
   Repayment of Federal Home Loan Bank advances                                              (4,789,497)   (1,600,000)
   Repurchase of common stock                                                                (1,130,462)     (565,092)
----------------------------------------------------------------------------------------------------------------------
                                   Net cash provided by financing activities                  1,959,613     1,848,706
----------------------------------------------------------------------------------------------------------------------
                                   Decrease in cash and cash equivalents                       (434,352)     (166,906)

Cash and cash equivalents, beginning of period                                                2,009,228       763,792
----------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents, end of period                                                 $    1,574,876       596,886
----------------------------------------------------------------------------------------------------------------------
Supplemental disclosures of cash flow information:
   Cash paid during the period for:
      Interest                                                                           $      609,041       288,670
      Income taxes                                                                               67,900        62,705

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

See accompanying notes to consolidated financial statements   

</TABLE>
                                       7
<PAGE>



                     REDWOOD FINANCIAL, INC. AND SUBSIDIARY

                   Notes to Consolidated Financial Statements

                               September 30, 1998
                                   (Unaudited)


(1)     Redwood Financial, Inc.

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

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

(2)     Basis of Presentation

       The  accompanying   unaudited   consolidated  financial  statements  were
       prepared in accordance with instructions for Form 10-QSB and,  therefore,
       do not include all disclosures  necessary for a complete  presentation of
       the  consolidated  balance sheets,  consolidated  statements of earnings,
       consolidated  statements of comprehensive income,  consolidated statement
       of stockholders'  equity,  and  consolidated  statements of cash flows in
       conformity with generally accepted accounting  principles.  However,  all
       adjustments,  consisting only of normal recurring adjustments, which are,
       in the opinion of management,  necessary for the fair presentation of the
       interim  financial  statements  have been  included.  The  statements  of
       earnings  for  the  three  months  ended   September  30,  1998  are  not
       necessarily  indicative  of the  results  which may be  expected  for the
       entire year.

       The material  contained  herein is written with the presumption  that the
       users of the interim financial statements have read or have access to the
       most recent  Annual  Report on Form 10- KSB of Redwood  Financial,  Inc.,
       which contains the latest audited financial statements and notes thereto,
       together with Management's Discussion and Analysis of Financial Condition
       and  Results  of  Operations  as of June 30,  1998 and for the year  then
       ended.


                                                                     (Continued)

                                        8

<PAGE>



                     REDWOOD FINANCIAL, INC. AND SUBSIDIARY


(3)    Earnings Per Share

       The following  tables  illustrate  the  calculation  of basic and diluted
       earnings  per share for the three  months  ended  September  30, 1998 and
       1997.

<TABLE>
<CAPTION>
        For the Three Months Ended:           September 30, 1998               September 30, 1997
        ---------------------------           -------------------               ------------------
                                                              Per Share                         Per Share
                                          Income   Shares      Amount       Income    Shares      Amount
                                          ------   ------      ------       ------    ------      ------
        <S>                              <C>      <C>          <C>        <C>        <C>          <C>
        Net Earnings:                    $52,905                          $125,890

        Basic EPS:
        Earnings available to
         common stockholders              52,905   759,627      $0.07      125,890    864,533      $0.15

        Effect of Dilutive Securities:
        Options on common stock                     24,467                              9,694
        Unvested restricted stock awards            16,200                             21,600
                                                    ------                             ------

        Diluted EPS:
        Earnings available to common
         stockholders plus assumed
         conversions                      $52,905  800,294      $0.07     $125,890    895,827      $0.14

</TABLE>



(4)     Regulatory Capital Requirements

        At September 30, 1998,  the Bank met each of the three  current  minimum
        regulatory  capital  requirements.  The following  table  summarizes the
        Bank's regulatory capital position at September 30, 1998:












                                                                     (Continued)

                                        9

<PAGE>



                     REDWOOD FINANCIAL, INC. AND SUBSIDIARY
<TABLE>
<CAPTION>
                                                                                                 To Be Well
       (In thousands of dollars)                                                              Capitalized Under
                                                                                              Prompt Corrective
                                                      Actual                 Required         Action Provisions
                                                      ------                 --------         -----------------
                                         Amount       Ratio        Amount      Ratio         Amount       Ratio
                                         ------       -----        ------      -----         ------       -----
<S>                                       <C>        <C>          <C>            <C>        <C>          <C>             
       Bank's Net Worth                  $8,613

       Less:  Available For Sale
                 Market Valuation           118
                                        -------
       Tangible Capital                   8,495      10.94%       $1,165         1.50%          n/a        n/a
         (to tangible assets)

       Core Capital                       8,495      10.94%        2,329         3.00%       $3,882       5.00%
         (to adjusted tangible assets)

       Core Capital                       8,495      28.45%          n/a          n/a         1,792       6.00%
         (to risk-weighted assets)

       Plus: Allowable portion of
         general allowance for
         loan losses                        260
                                        -------
       Risk-based Capital                $8,755      29.32%       $2,389         8.00%       $2,986      10.00%
         (to risk-weighted assets)

</TABLE>

(5)    Stockholders' Equity and Stock Conversion

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





                                                                     (Continued)

                                       10

<PAGE>



                     REDWOOD FINANCIAL, INC. AND SUBSIDIARY

(6)    Stock Repurchases

       During the three months ended  September 30, 1998, the Company  purchased
       86,800  shares of its  outstanding  common  stock,  or 10% of its 868,093
       outstanding  shares of common stock at June 30, 1998.  As a result of the
       stock repurchase program,  the Company has now outstanding 781,293 shares
       of common stock.  The  following  summarizes  the Company's  common stock
       repurchases during the quarter:

         Settlement Date            Shares Purchased      Price per share
         ---------------            ----------------      ---------------
         August 14, 1998                 11,250              $13.0000
         August 17, 1998                 43,400              $13.0000
         August 24, 1998                 10,832              $13.1250
         August 28, 1998                  2,000              $12.7500
         September 18, 1998              19,318              $13.0625

         Average price per share                             $13.0238


(7)    New Accounting Standards

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
















                                                                     (Continued)

                                       11

<PAGE>



                     REDWOOD FINANCIAL, INC. AND SUBSIDIARY

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


General

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

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

Financial Condition

The Company's total assets increased by $2,358,000,  or 3.05%,  from $77,287,000
at June 30, 1998 to  $79,645,000  at  September  30,  1998.  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, 1998. These advances
were  used  primarily  to fund  increased  loan  production  and to offset a net
deposit outflow during this three month period.

Cash and cash equivalents  decreased by $434,000,  or 21.60%, from $2,009,000 at
June 30, 1998 to  $1,575,000  at September  30,  1998.  The decrease in cash was
primarily  due to the use of  funds  for  the  aforementioned  increase  in loan
production and net deposit  outflows during the three months ended September 30,
1998. The Company attempts to maintain lower levels 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 $2,506,000,  or 8.64% during the
three months  ended  September  30, 1998.  The increase in loans was a result of
increased  loan  demand  in  the  Company's   market  and  includes  1-4  family
residential  mortgage loans and agricultural and commercial loans. The continued
increase in the Company's loan portfolio will increase the Company's credit risk
exposure.

The  Company's  investment  securities,   including  mortgage-backed  securities
designated  available  for sale  decreased  0.71% or  $312,000  during the three
months ended  September 30, 1998.  The Company has  maintained  the size of this
portfolio  due to recent  purchases,  which have  offset  maturities,  sales and
increased  prepayments  of  mortgage-backed  securities  as a result  of  recent
decreases in mortgage rates. Purchases of investment securities,  which included
only  mortgage-backed  securities totaled  approximately  $7,644,000 during this
three month period. In addition,  the carrying value of the Company's investment
securities,  including mortgage-backed securities reflected a $23,000 before tax
decrease due to market value depreciation.  The Company is no longer designating
any  investment  securities,  including  mortgage-backed  securities  as held to
maturity.

The Company's deposits decreased by $849,000, or 1.76%, from $48,102,000 at June
30, 1998 to  $47,253,000  at September  30, 1998.  At  September  30, 1998,  the
Company's  FHLB advances  totaled  $20,111,000,  an increase of  $3,911,000,  or
24.14% from  $16,200,000 at June 30, 1998. The advances were primarily  utilized
to fund increased loan  production and offset an outflow of deposits 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 fund loan  growth  and  investment  purchases  and to  leverage  its
capital,   the  Company  may  continue  to  seek  additional   deposits  through
traditional  deposit  products  and new  deposit  products,  as well as increase
utilization of FHLB advances.












                                                                     (Continued)

                                       13

<PAGE>



                     REDWOOD FINANCIAL, INC. AND SUBSIDIARY

Results of Operations

Net Earnings

Net earnings were $53,000 for the quarter ended  September 30, 1998, as compared
to $126,000  for the quarter  ended  September  30,  1997.  This  represented  a
decrease of $73,000,  or 57.94%.  The  decrease in net  earnings  was  primarily
attributable to a $94,000,  or 324.14% increase in other expense.  This increase
in other  expense is  primarily  attributable  to a decrease  in the value of an
investment  by the Company in a limited  partnership.  This limited  partnership
invests in equity securities of financial institutions.  The value of the equity
securities  held by this  limited  partnership  decreased  as a result of recent
depreciation  of equity  securities.  As a result,  the  Company  decreased  the
carrying  value of this  investment  by $88,000,  or 18.18% in the three  months
ended September 30, 1998 to recognize both realized and unrealized losses in its
share of the limited partnership.

The decrease in net income was also affected by a $31,000, or 16.40% increase in
compensation expense, a $13,000, or 2.86% decrease in net interest income, and a
$9,000 increase in loan loss provisions.  The decrease was partially offset by a
$41,000,  or 54.67% decrease in income tax expense,  a $22,000 increase in gains
on the sale of securities available for sale, and a $15,000, or 115.38% increase
in fees and other service charges.

Net Interest Income

Net  interest  income  decreased  by $13,000,  or 2.86%,  from  $455,000 for the
quarter ended September 30, 1997 to $442,000 for the quarter ended September 30,
1998.  The decrease in net interest  income was  primarily  due to a decrease in
interest-earning assets relative to interest-bearing  liabilities and a decrease
in net interest spread.

While  there  has  been  an  increase  in  both   interest-earning   assets  and
interest-bearing  liabilities due to growth of the Company,  the Company's ratio
of  average  interest-earning  assets to  average  interest-bearing  liabilities
decreased  from 124.47% at September  30, 1997 to 116.50% at September 30, 1998.
This  decrease  is the result of the use of  $1,705,000  in  available  funds to
repurchase  the  Company's  outstanding  shares since  September  30,  1997.  In
addition,  the Company's non-interest earning assets have increased by $992,000,
or 114.29%, from September 30, 1997 to September 30, 1998, primarily as a result
of funds used to  construct  the Bank's new office  building  in Redwood  Falls,
Minnesota and to invest in the aforementioned limited partnership.  Net interest
income was also impacted by a decrease in the net interest spread from 1.81% for
the three  months ended  September  30, 1997 to 1.49% for the three months ended
September  30,  1998.  The  decrease  was a  result  of both a  decrease  in the
Company's yield on assets and a slight increase in its cost of funds.


                                                                     (Continued)

                                       14

<PAGE>



                     REDWOOD FINANCIAL, INC. AND SUBSIDIARY


Interest Income

Interest  income was  $1,373,000  for the quarter  ended  September 30, 1998, as
compared to $1,154,000 for the quarter ended September 30, 1997, representing an
increase of $219,000,  or 18.98%.  The increase in interest income was primarily
due to an increase in interest-earning  assets. Average  interest-earning assets
increased  $14,216,000,  or 22.64% from  $62,804,000  for the three months ended
September  30, 1997,  to  $77,020,000  for the three months ended  September 30,
1998.  The  increase in interest  income was offset by a decrease in the overall
yield on interest-earning  assets. For the quarter ended September 30, 1998, the
yield on interest-earning assets was 7.13%, as compared to 7.35% for the quarter
ended September 30, 1997. The decrease in yield on  interest-earning  assets was
due primarily to lower yields on the Company's loan and securities portfolios.

Interest on loans receivable  increased by $175,000,  or 37.55%, to $641,000 for
the quarter  ended  September  30, 1998, as compared to $466,000 for the quarter
ended  September  30, 1997.  Such  increase was due to a  $9,119,000,  or 42.32%
increase in the average  balance of loans  receivable  from  $21,548,000 for the
quarter ended  September 30, 1997 to $30,667,000 for the quarter ended September
30, 1998. The increase in interest on loans  receivable was offset by a decrease
in the  average  yield on loans  receivable  from  8.65% for the  quarter  ended
September 30, 1997, to 8.37% for the quarter ended September 30, 1998.

Interest income on mortgage-backed and related securities available for sale was
$573,000  and  $165,000  for the  quarters  ended  September  30, 1998 and 1997,
respectively.  The yield on the Company's  mortgage-backed  securities portfolio
available for sale was 6.36% and 6.93% for the three months ended  September 30,
1998 and 1997,  respectively.  A  decrease  in the yield on the  mortgage-backed
securities  portfolio  has  occurred as a result of recent  declines in mortgage
rates. In January 1998, the Company redesignated all mortgage-backed and related
securities  as available  for sale.  As such,  the Company  reported no interest
income on mortgage-backed  and related securities held to maturity for the three
months ended September 30, 1998.

Interest  income on  investment  securities  available for sale was $122,000 and
$128,000 for the quarters ended September 30, 1998 and 1997,  respectively.  The
yield on the Company's  investment  securities  portfolio available for sale was
6.06%  and  6.96%  for the  three  months  ended  September  30,  1998 and 1997,
respectively. A decrease in the yield on the investment securities portfolio has
occurred as a result of recent  declines in interest rates. In January 1998, the
Company  redesignated all investment  securities as available for sale. As such,
the  Company  reported  no  interest  income on  investment  securities  held to
maturity for the three months ended September 30, 1998.



                                                                     (Continued)

                                       15

<PAGE>



                     REDWOOD FINANCIAL, INC. AND SUBSIDIARY


Interest income on cash and cash equivalents  increased by $15,000, or 68.18% in
comparison of the three months ended  September 30, 1998 and 1997.  The increase
is a result of more cash on hand in the three months ended September 30, 1998.

Interest Expense

Interest expense increased by $232,000, or 33.14%, from $700,000 for the quarter
ended  September 30, 1997 to $932,000 for the quarter ended  September 30, 1998.
The increase in interest expense resulted from a $7,813,000,  or 20.58% increase
in the average  balance of FHLB advances from  $4,675,000  for the quarter ended
September 30, 1997 to $19,022,000  for the quarter ended September 30, 1998. The
increase  in  interest  expense  was also  impacted  by a  $1,293,000,  or 2.82%
increase in the average  balance of deposits in  comparison  of the three months
ended  September  30, 1998, to the three months ended  September  30, 1997.  The
increase in interest  expense was also impacted by a slight increase in the cost
of funds from 5.55% to 5.64% for the three months ended  September  30, 1997 and
1998, respectively.

Provision for Loan Losses

The  Company's  provision for loan losses was $9,000 and $0 for the three months
September 30, 1998 and 1997, respectively. As noted, the Company has experienced
growth in its loan  portfolio.  The  provision was increased in response to loan
growth,  a change in the  composition  of the loan portfolio  through  increased
agricultural and commercial loan  originations,  and inherent losses in the loan
portfolio.  As such, the Company  intends to regularly  provide for losses.  The
level of this  provision is dependent  on loan growth,  delinquencies,  economic
conditions,  and other various  factors used by management in the  assessment of
its loan portfolio and overall level of loan loss reserves.

At September 30, 1998 and 1997, the allowance for loan losses  totaled  $260,000
and $213,000,  respectively.  The Company's net loan  charge-offs were $0 and $0
for the  three  months  ended  September  30,  1998 and 1997,  respectively.  At
September 30, 1998 and 1997, the allowance for loan losses represented 0.82% and
0.94% of loans receivable,  respectively.  Nonaccrual loans totaled $0 and $0 at
September  30,  1998 and 1997,  respectively.  At  September  30, 1998 and 1997,
classified assets totaled $0 and $47,000, respectively.

Noninterest Income

Noninterest income increased by $42,000,  or 323.08% from $13,000 to $55,000 for
the three months ended  September 30, 1998 as compared to the three months ended
September  30, 1997.  The  increase  was due to gains on the sale of  securities
available  for sale of $22,000 and an  increase  in fees and service  charges of
$15,000, or 115.38%.

                                                                     (Continued)

                                       16

<PAGE>



                     REDWOOD FINANCIAL, INC. AND SUBSIDIARY

Noninterest Expense

Noninterest  expense  increased by $132,000,  or 49.25%,  from  $268,000 for the
quarter ended September 30, 1997 to $400,000 for the quarter ended September 30,
1998.  The increase  was due  primarily  to the  aforementioned  decrease in the
carrying  value of an  investment  in a limited  partnership.  In addition,  the
increase was also impacted by a $31,000,  or 16.40% increase in compensation and
employee  benefits  expense due  primarily to increased  staff.  There were also
minor  increases in expenses on  advertising,  occupancy,  other  expenses,  and
federal  deposit  insurance  premiums.  The increase in noninterest  expense was
partially offset by a $6,000, or 20.00% decrease in professional fees.

Income Taxes

The Company's income taxes decreased by $41,000, or 54.67%, from $75,000 for the
quarter ended September 30, 1997, to $34,000 for the quarter ended September 30,
1998.  The change in income  taxes was due  primarily  to a decrease  in pre-tax
earnings of $114,000,  from a $201,000 for the quarter ended  September 30, 1997
to $87,000 for the quarter ended September 30, 1998. The Company's effective tax
rate was 39.42% and 37.24% for the three  months  ended  September  30, 1998 and
1997,  respectively.  The  increase  was a result of a lower level of tax exempt
investments over the three months ended September 30, 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 portfolios; shifts in interest rates which may result in shrinking interest
margins; deposits outflows; interest rates on competing investments;  demand for
financial  services  and  loan  products;  increases  generally  in  competitive
pressure in the banking and financial services  industry;  changes in accounting
policies  or  guidelines,  or  monetary  and  fiscal  policies  of  the  federal
government;  changes in the quality or  composition  of the  Company's  loan and
investment  portfolios;  potential  operational  disruptions  due to  Year  2000
considerations; or other significant uncertainties.






                                                                     (Continued)

                                       17

<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  three  months  ended  September  30,  1998 and  1997,  the  Company's  loan
portfolio,  net, increased $2,513,000 and $1,576,000,  respectively.  During the
same periods,  the Company purchased  mortgage-backed  and related securities in
the amounts of $7,644,000 and $2,504,000,  respectively.  The primary  financing
activity of the Company is the attraction of savings deposits and utilization of
FHLB advances.

The Company has other  sources of  liquidity  if there is a need for funds.  The
Bank has the ability to obtain  additional  advances  from the Federal Home Loan
Bank of Des Moines.  During the quarters ended  September 30, 1998 and 1997, the
Bank utilized advances of $8,700,000 and $4,700,000,  respectively. In addition,
the Company's  designation of all investments and mortgage-backed  securities as
available  for sale is intended to increase  liquidity  and overall  operational
flexibility.

The Bank is required to maintain  minimum  levels of liquid assets as defined by
OTS regulations. This requirement,  which may be changed at the direction of the
OTS  depending  upon  economic  conditions  and deposit  flows,  is based upon a
percentage of deposits and short-term borrowings.
The required minimum ratio is currently 4.0%.

The Company's most liquid assets are cash and cash equivalents. In addition, the
Company  maintains  a portfolio  of readily  marketable  investment  securities,
including  mortgage-backed and related securities which are designated available
for  sale.   The   levels   of  cash  and   investment   securities,   including
mortgage-backed  and  related   securities,   are  dependent  on  the  Company's
operating,  financing,  and investing  activities  during any given  period.  At
September 30, 1998 and 1997, cash and cash  equivalents  totaled  $1,575,000 and
$597,000,  respectively.  Investment securities,  including  mortgage-backed and
related  securities  designated  available  for  sale  totaled  $43,419,000  and
$17,389,000 at September 30, 1998 and 1997, respectively.





                                                                     (Continued)

                                       18

<PAGE>



                     REDWOOD FINANCIAL, INC. AND SUBSIDIARY


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

Year 2000 Consideration

The Company's primary exposure is its automated data processing system which had
been  determined to be Year 2000  noncompliant.  On August 4, 1998,  the Company
received its Year 2000 compliant release from its software vendor. Management is
continuing  to test the release to ensure that the software  properly  addresses
risks identified by the Federal Financial  Institutions  Examination Council and
its  data   processing   vendor.   The  Company  expects  to  have  its  testing
substantially completed by December 31, 1998. The Company also has several other
operational  areas with Year 2000  sensitivity  and is currently  testing  these
systems.

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

At this time,  the Company  expects that its Year 2000  compliance  efforts will
have no material  financial  effect.  However,  a substantial  amount of current
staff time is being  expended on Year 2000  assessment  and testing.  Should the
Company fail to correct its Year 2000  deficiencies  by December  31, 1999,  the
Company  could  expect  a  substantial  disruption  to  daily  operations.  Such
disruption could have a material effect on the Company's  financial position and
future  earnings.   To  this  extent,  the  Company's  contingency  plan  is  to
re-commence  manual data  processing  operations.  As the Company only  recently
converted from manual to automated data  processing in October 1997, the Company
still retains the equipment  and trained  staff  necessary to recommence  manual
data processing operations.  The Company plans to re-assess its contingency plan
pending the results of on-going testing.


Recent Development

Completion of Stock Repurchase Program

On August 7, 1997, the Company  announced its intention to repurchase 10% of its
outstanding  shares,  or 86,800 shares.  The Company completed the repurchase as
detailed previously in this 10-QSB.


                                                                     (Continued)

                                       19

<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.

                  Form  8-K (Item 7)  dated  August  7, 1998 and filed  with the
                  Securities and Exchange Commission August 17, 1998.













                                       20

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

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








                                       21