1


                         REDWOOD MORTGAGE INVESTORS VII
                       (a California Limited Partnership)
                               Index to Form 10-K

                                December 31, 2005

                                                   Part I
<TABLE>
<S>      <C>                                                                                                 <C>
                                                                                                             Page No.
                                                                                                           -----------
Item 1   - Business                                                                                           4
Item 2   - Properties                                                                                         8
Item 3   - Legal Proceedings                                                                                  8
Item 4   - Submission of Matters to a Vote of Security Holders (Partners)                                     8

                                                  Part II

Item 5   - Market for the Registrant's "Limited Partnership Units" and Related Unitholder Matters             9
Item 6   - Selected Financial Data                                                                            9
Item 7   - Management's Discussion and Analysis of Financial Condition and Results of Operations              11
Item 7a  - Quantitative and Qualitative Disclosures About Market Risk                                         17
Item 8   - Financial Statements and Supplementary Data                                                        20
Item 9   - Changes in and Disagreements with Accountants on Accounting and Financial Disclosure               44
Item 9a  - Controls and Procedures                                                                            44
Item 9b  - Other Information                                                                                  44

                                                  Part III

Item 10  - Directors and Executive Officers of the Registrant                                                 45
Item 11  - Executive Compensation                                                                             46
Item 12  - Security Ownership of Certain Beneficial Owners and Management                                     47
Item 13  - Certain Relationships and Related Transactions                                                     47
Item 14  - Principal Accountant Fees and Services                                                             47

                                                  Part IV

Item 15  - Exhibits, Financial Statements and Schedules                                                       48

Signatures                                                                                                    49

Certifications                                                                                                50
</TABLE>

                                       1
<PAGE>

                                  UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                              Washington, DC 20549


                                    FORM 10-K


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

                      For the Year Ended December 31, 2005

                                       OR

        [   ]    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: 000-19992


                         REDWOOD MORTGAGE INVESTORS VII,
                        a California Limited Partnership
             (Exact name of registrant as specified in its charter)


         California                                   94-3094928
(State or other jurisdiction of
incorporation or organization)             (I.R.S. Employer Identification)


900 Veterans Blvd., Suite 500, Redwood City, CA           94063
  (address of principal executive offices)              (zip code)


                               (650) 365-5341
              (Registrant's telephone number, including area code)


Securities registered pursuant to Section 12 (b) of the Act:      NONE

Securities registered pursuant to Section 12 (g) of the Act:    Limited
                                                            Partnership Units

                                       2
<PAGE>

     Indicate by check mark if the registrant is a well-known  seasoned  issuer,
as defined in Rule 405 of the Securities Act of 1933, as amended.

Yes                           No          XX
          --------------             -------------

     Indicate by check mark if the  registrant  is not required to file pursuant
to Section 13 or Section 15(d) of the Securities Act of 1934, as amended.

Yes                           No          XX
          --------------             -------------

     Indicate by check mark whether the  registrant (1) has filed all reports 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.

Yes            XX             No
          --------------             -------------

     Indicate by check mark whether the registrant is a large accelerated filer,
an accelerated filer, or a non-accelerated filer. See definition of "accelerated
filer and large accelerated filer" in Rule 12b-2 of the Exchange Act.


Large Accelerated Filer[   ]  Accelerated Filer[   ]  Non-Accelerated Filer[X]


     Indicate  by check mark  whether  the  registrant  is a shell  company  (as
defined in Rule 12b-2 of the Act).

Yes                           No          XX
          --------------             -------------

     As of June 30, 2005, the aggregate value of limited  partnership units held
by  non-affiliates  was  $9,180,838.  This  calculation  is based on the capital
account balance of the limited partners and excludes limited  partnership  units
held by the general partner.

     Documents incorporated by reference:

     Portions of the Prospectus  dated October 20, 1989, and Supplement #5 dated
February 14, 1992,  filed on form S-11, are  incorporated  in Parts II, III, and
IV.  Exhibits filed as part of Form S-11  Registration  Statement  #33-30427 are
incorporated in part IV.

                                       3
<PAGE>

                                     Part I


Item 1 - Business

     Redwood  Mortgage  Investors  VII, a California  Limited  Partnership  (the
"Partnership"),  was  organized  in 1989 of which  Michael R.  Burwell and Gymno
Corporation, a California corporation,  are the general partners. The address of
the  Partnership  and the general  partners is 900  Veterans  Blvd.,  Suite 500,
Redwood  City,  California  94063.  The  Partnership  is  organized to engage in
business as a mortgage  lender,  for the primary purpose of making loans secured
by deeds of trust on California real estate.  Loans are arranged and serviced by
Redwood Mortgage Corp., an affiliate of the general partners.  The Partnership's
objectives  are to make  investments,  as  referred to above,  which  will:  (i)
provide the maximum  possible cash returns  which limited  partners may elect to
(a)  receive as monthly,  quarterly  or annual  cash  distributions  or (b) have
credited to their capital  accounts and applied to Partnership  activities;  and
(ii) preserve and protect the Partnership's  capital. The Partnership's  general
business  is  more  fully  described  under  the  section  entitled  "Investment
Objectives and Criteria" pages 26-31 of the Prospectus, which is incorporated by
reference.

     Originally,  60,000 Units were offered on a "best  efforts"  basis  through
broker/dealer member firms of the National Association of Security Dealers, Inc.
In accordance with the terms of the Prospectus,  the general partners  increased
the number of Units for sale from 60,000 to 120,000 and elected to continue  the
offering until  September 30, 1992.  The offering  closed on September 30, 1992,
and the limited partners  contributed capital totaled $11,998,359 of an approved
$12,000,000  issue,  in Units of $100 each. At that date all the  applicants had
been admitted into the Partnership with none left in the applicant  status.  The
final SR report  (Report of Sales of Securities  and use of proceeds  therefrom)
was filed on September 21, 1992.

     The Partnership  began selling Units in October 1989 and began investing in
mortgages in December 1989. At December 31, 2005, the  Partnership had a balance
in its secured loan portfolio  totaling  $5,448,401  with interest rates thereon
ranging from 8.50% to 10.00%.

     Currently, loans secured by First Trust Deeds comprise 71.96% of the amount
of funds in the secured loan portfolio  followed by Second Trust Deeds of 26.67%
and third trust deeds of 1.37%.  Single  Family (1-4 unit) homes total 54.04% of
the secured loans versus 60.82% in 2004.  Commercial  loans  increased  slightly
from last  year,  now  comprising  27.29%  of the  secured  portfolio.  Loans to
apartments  totaled  10.46%.  Of the  total  secured  loans,  75.07%  are in six
counties of the San Francisco Bay Area,  and the adjacent  counties of Monterey,
San Joaquin,  Santa Cruz,  Stanislaus,  and Solano Counties collectively make up
19.76% of the  loans.  The  balance of loans  5.17% are  primarily  in  Southern
California. Loan size decreased the past year, and is now averaging $236,887 per
loan,  a decrease  of  $26,987.  Some of the  larger  loans  invested  in by the
Partnership  are  fractionalized  between  other  affiliated  partnerships  with
objectives  similar to those of the Partnership to further reduce risk.  Average
equity per loan  transaction  based on  appraised  values and senior debt at the
inception date of the loan, which is our loan plus any senior loans,  divided by
the  property's  appraised  value,   subtracted  from  100%,  stood  at  32.82%.
Generally,   the  more  equity,   the  more  protection  for  the  lender.   The
Partnership's   loan  portfolio  is  in  good  condition  with  no  property  in
foreclosure as of December 2005.

     Delinquencies  are discussed  under Item 7 -  Management's  Discussion  and
Analysis of Financial Condition and Results of Operations.

     In December  2004, the  Partnership  acquired  undeveloped  parcels of land
through a deed in lieu of foreclosure. The land is located in Stanislaus County,
California. It is comprised of three separate lots, which total approximately 14
acres.  The  parcels  are  currently  for  sale.  As of  December  31,  2005 the
Partnership's investment in this property totaled $1,756,116,  including accrued
interest and advances,  as of the date of the acquisition.  Management  believes
that the full value of this  investment will be recovered from the eventual sale
of the  property  based  upon its  current  estimate  of the  fair  value of the
property.  As such, the  Partnership  has not allocated any reserve  against the
property. This property is jointly owned by two other affiliated partnerships.

     In February,  2005, the Partnership  acquired a multi-unit property through
foreclosure.  This  property  is  located  in an  upscale  neighborhood  in  San
Francisco.  At the time the  Partnership  took  ownership of the  property,  the
Partnership's   investment  totaled  $836,701  including  accrued  interest  and
advances. This property is jointly owned by three other affiliated Partnerships.

                                       4
<PAGE>

     Occasionally,  to  assist  in  protecting  its  own  assets  and to  reduce
liability,   the  Partnership  may  transfer  properties  acquired  through  the
foreclosure process to newly formed Limited Liability companies or "LLC's". Upon
acquisition  the  Partnership  transferred  its interest  (principally  land and
building) to a limited liability company ("LLC"),  Larkin Property Company,  LLC
("Larkin"),  which is 8% owned by the Partnership,  and 92% owned by three other
affiliates.  No allowance  for loss has been  established  for this  property as
management  believes  that the fair value of the  property  exceeds the combined
Partnerships'  investment in the property.  The Partnership intends to undertake
additional improvements to the property. As of December 31, 2005 the Partnership
has  capitalized  approximately  $45,940  in  costs  related  to this  property,
aggregating a total investment of $882,641 as of December 31, 2005.

     No property was taken back in 2003.  During the year 2002, the  Partnership
acquired one piece of real estate  property  through  foreclosure.  To assist in
protecting its own assets and reduce  liability,  the  Partnership  subsequently
transferred  the  property to a newly  formed LLC,  called the  Stockton  Street
Property  Company,  LLC. The  Partnership  owned a 34% minority  interest in the
Stockton Street Property Company, LLC, and another affiliated  partnership owned
the  remaining  interest.  Assets  of this LLC  were  sold  during  2003 and the
Partnership  incurred a loss of approximately  $42,000. The LLC was dissolved in
December, 2005 when its final tax return for year 2005 was filed.

     In prior years, the Partnership took back two additional properties through
foreclosure.  One was a commercial  property which the Partnership sold in 2004.
The Partnership  realized a loss of  approximately  $613,800 on the sale of this
property.  This loss was offset against  reserves  previously set aside for real
estate  properties.  The second  property taken back in 1993 is a parcel of land
located in East Palo Alto,  CA,  which is on the  market for sale.  The  general
partners believe that this property is worth considerably more than its carrying
value,  but it may take a  considerable  amount of  additional  time to sell the
property and realize its full  potential.  The property is unique in that it may
only be utilized for commercial or industrial uses.  Until recently,  land sales
activity  has been slow.  Interest in land sales for  commercial  sites has been
improving.

     Competition and General Economic Conditions

     The Partnership's  major competitors in providing mortgage loans are banks,
savings and loan associates,  thrifts,  conduit lenders,  mortgage brokers,  and
other entities both larger and smaller than the Partnership.  The Partnership is
competitive  in large part  because the general  partners  generate all of their
loans.  The general partners have been in the business of making or investing in
mortgage  loans in Northern  California  since 1978 and have developed a quality
reputation and recognition within the field.

     Beginning in July of 2004,  the Federal  Reserve  changed its interest rate
policy from one of three years of continuously lowered interest rates, which hit
a 40 year historic  interest  rate low, to one of tempered but gradual  interest
rate  increases.  In keeping with this new policy  since July 2004,  the Federal
Reserve has  increased the Federal  Funds Rate by one quarter  percentage  point
(1/4 of one  percent) at each of its  meetings to 5.25% as of December 31, 2005.
This  deliberate  upward  change in the Federal Funds Rate has caused short term
interest rates to rise,  and to a lesser degree,  pushed longer term rates up as
well.  Nationally and more specifically in Northern California,  the location of
the  majority  of our  lending  activities,  the  economies  have  substantially
recovered from the economic downturn lasting from 2000 through 2003.  Employment
and job  creation  has  improved.  During  2004 and 2005,  the  residential  and
commercial  real  estate  markets in  Northern  California  enjoyed  solid price
appreciation.  During the latter  half of 2005,  long-term  interest  rates have
begun to inch upward.  Residential  sales  volumes have declined yet median home
sales  prices  have  remained at or near their  record  2005  highs.  While some
concern  exists as to whether  real estate  values will soften,  interest  rates
continue to remain attractive by historical standards,  unemployment remains low
and the economy is strong.  Management believes these factors will contribute to
a real estate  marketplace with lower  appreciation in 2006 compared to 2004 and
2005. With less real estate  transactions  likely to exist competition for loans
will be fierce.  Since it appears that the bottom of the interest rate cycle was
reached in 2004 we believe loan runoff to lower  interest  rates will be reduced
allowing the  Partnership  to retain its loans for longer  periods.  Excess cash
will be invested in  short-term  alternative  investments,  such as money market
funds yielding considerably less than the current loan investment portfolio.

                                       5
<PAGE>

     Secured Loan Portfolio

     A summary of the  Partnership's  secured loan  portfolio as of December 31,
2005 is set forth below.

     Loans as a Percentage of Appraised Values
<TABLE>
<S>                                                              <C>               <C>

   First Trust Deed Loans                                                          $  3,920,466
   Appraised Value of Properties at Time of Loan                                      6,632,852
            Total First Trust Deeds as a % of Appraisal                                  59.11%
                                                                                  ==============

   First Trust Deed Loans                                                             3,920,466
   Second Trust Deed Loans                                                            1,453,054
   Third Trust Deed Loans                                                                74,881
                                                                                  --------------
                                                                                      5,448,401

   Priority positions due other Lenders at Time of Loan
       First Trust Deed Loans due other Lenders                                       4,054,646
       Second Trust Deed Loans due to other Lenders                                     217,455
                                                                                  --------------

            Total Debt                                                              $ 9,720,502
                                                                                  ==============

     Appraised Property Value at Time of Loan                                       $14,470,371
            Total debt as a % of Appraisal based on appraisals and prior
               liens at date of loan                                                     67.18%
                                                                                  ==============

   Number of Secured Loans Outstanding                                                       23
                                                                                  --------------

   Average Secured Loan                                                                 236,887
   Average Secured Loan as a % of Secured Loans Outstanding                               4.35%
   Largest Secured Loan Outstanding                                                     634,479
   Largest Secured Loan as a % of Secured Loans Outstanding                              11.65%
   Largest Secured Loan as a % of Partnership Assets                                      6.78%

   Secured Loans as a Percentage of Total Secured Loans                              Percent
   -------------------------------------------------------------------------      --------------

   First Trust Deed Loans                                                                71.96%
   Second Trust Deed Loans                                                               26.67%
   Third Trust Deed Loans                                                                 1.37%
                                                                                  --------------
            Total Trust Deed Loan Percentage                                            100.00%
                                                                                  ==============

   Secured Loans by Type of Property                             Amount              Percent
   ------------------------------------------------------    ---------------     ---------------

   Single Family (1-4 units                                      $2,944,330              54.04%
   Apartments                                                       570,000              10.46%
   Commercial                                                     1,487,019              27.29%
   Land                                                             447,052               8.21%
                                                             ---------------     ---------------
            Total                                                $5,448,401             100.00%
                                                             ===============     ===============
</TABLE>

                                       6
<PAGE>

     The following is a distribution of secured loans outstanding as of December
31, 2005 by California Counties.
<TABLE>
<S>                                                            <C>                   <C>

                                                                  Total
                     California County                         Secured Loans         Percent
   ------------------------------------------------------     ---------------     ---------------

   San Francisco Bay Area Counties
   San Mateo                                                       1,219,028              22.37%
   Santa Clara                                                       979,185              17.97%
   Contra Costa                                                      797,491              14.64%
   Marin                                                             634,479              11.65%
   San Francisco                                                     400,000               7.34%
   Alameda                                                            59,906               1.10%
                                                              ---------------     ---------------
                                                                   4,090,089              75.07%

   San Francisco Bay Area Adjacent Counties
   Solano                                                            494,343               9.07%
   Monterey                                                          250,000               4.59%
   San Joaquin                                                       138,706               2.55%
   Santa Cruz                                                        129,341               2.37%
   Stanislaus                                                         64,322               1.18%
                                                              ---------------     ---------------
                                                                   1,076,712              19.76%

   Other California Counties
   Santa Barbara                                                     159,664               2.93%
                                                              ---------------     ---------------
   Tulare                                                            121,936               2.24%
                                                              ---------------     ---------------
                                                                     281,600               5.17%

            Total                                                $ 5,448,401             100.00%
                                                              ===============     ===============
</TABLE>


Number of Secured Loans in Foreclosure:     0



     Scheduled  maturity  dates of secured  loans as of December 31, 2005 are as
follows:

                Year Ending December 31,                Amount
           -----------------------------------       --------------


                          2006                         $   884,322
                          2007                             447,054
                          2008                             215,000
                          2009                           1,324,441
                          2010                           2,577,584
                                                     --------------
                         Total                         $ 5,448,401
                                                     ==============

     The  Partnership's  largest  loan  in  the  principal  amount  of  $634,479
represents 11.65% of outstanding  secured loans and 6.78% of Partnership assets.
Larger  loans  sometimes  increase  above 10% of the secured  loan  portfolio or
Partnership assets as these amounts decrease due to limited partner  withdrawals
and loan payoffs.

     The scheduled maturities for 2006 include two loans totaling  approximately
$64,322 which are past maturity at December 31, 2005. Interest payments on these
past  maturity  loans  were  current.   The  Partnership   allows  borrowers  to
occasionally  continue to make the payments on debt past maturity for periods of
time.  The  Partnership,  in most  instances,  receives  the benefit of a higher
interest rate than would  otherwise be available in the currently  existing loan
marketplace.

                                       7
<PAGE>

     The loan  portfolio  had one loan with  principal  outstanding  of $298,545
where interest  payment was overdue 90 days.  The principal  outstanding of this
loan represents 5.48% of the Partnership's  secured portfolio as of December 31,
2005.

     In the fourth quarter of 2005, the Partnership's  previously  impaired loan
with principal  outstanding of $96,716 was repaid. A loan is considered impaired
when events and/or changes in circumstances cause the management to have serious
doubts about the  collectibility of the contractual  payments and interest is no
longer accrued.


Item 2 - Properties

     In February,  2005, the Partnership  acquired a multi-unit property through
foreclosure.  This  property  is  located  in an  upscale  neighborhood  in  San
Francisco.   This   property  is  jointly   owned  by  three  other   affiliated
partnerships.   Upon  acquisition  the  Partnership   transferred  its  interest
(principally land and building) to a limited liability company,  Larkin Property
Company,  LLC. No allowance for loss has been set aside as  management  believes
that  the  fair  value  of  the  property  exceeds  the  combined  Partnerships'
investment  in the property.  The  Partnership  intends to undertake  additional
improvements to the property.  As of December 31, 2005 the  Partnership's  total
investment in this property was $882,641.

     The Partnership took back vacant land through a deed in lieu of foreclosure
in 2004. The land is located in Stanislaus County,  California.  It is comprised
of three separate lots,  which total  approximately  14 acres.  This property is
owned  together  with  two  affiliated   partnerships.   The  Partnership's  net
investment in the land at December 31, 2005 was  $1,756,116.  The property is on
the market for sale. The general  partners believe that the property will return
the Partnership's investment upon sale.

     The  Partnership  also  owns  (through  previous   foreclosure)  one  other
property:  an undeveloped  parcel of land located in East Palo Alto. The land is
owned with two other affiliated  partnerships.  The Partnership's net investment
in the land at December 31, 2005 is $62,720. The Partnership's net investment of
$62,720 is less than 1% of Partnership assets. The general partners believe that
the property is worth considerably more than its net investment, but it may take
a  considerable  amount of additional  time to sell the property and realize its
full  potential.  The  property  is unique in that it may only be  utilized  for
commercial or industrial  uses.  Until  recently,  land sales  activity has been
slow. Interest in land sales for commercial sites has been improving.

     During 2002, the  Partnership  took back the collateral  security on one of
its loans through foreclosure. This loan was originally fractionalized and owned
with another affiliated  Partnership.  In order to reduce potential  liabilities
the  Partnership  transferred  at its book value the real estate taken back to a
newly formed Limited  Liability Company called Stockton Street Property Company,
LLC. The real estate security was six condominium  units.  Management of the LLC
was through its  managing  member,  Michael  Burwell,  a general  partner of the
Partnership.  By the end of 2003 all the units were sold  resulting in a loss to
the Partnership of  approximately  $42,000.  This LLC was formally wound up when
its final tax return for 2005 was filed in December, 2005


Item 3 - Legal  Proceedings

     In the normal  course of business the  Partnership  may become  involved in
various types of legal  proceedings  such as  assignments  of rents,  bankruptcy
proceedings,   appointments   of   receivers,   unlawful   detainers,   judicial
foreclosures, etc., to enforce the provisions of the deeds of trust, collect the
debt owed under the promissory notes or to protect or recoup its investment from
the real property  secured by the deeds. As of the date hereof,  the Partnership
is not  involved  in any  legal  proceedings  other  than  those  that  would be
considered part of the normal course of business.

Item 4 - Submission of Matters to a Vote of Security Holders (Partners)

     No matters have been submitted to a vote of the Partnership.

                                       8
<PAGE>

Part II

Item 5 - Market for the Registrant's "Limited Partnership Units" and Related
Unitholder Matters

     120,000  Units  at $100  each  (minimum  20  Units)  were  offered  through
broker-dealer  member firms of the National Association of Securities Dealers on
a "best  efforts"  basis (as  indicated  in Part I item 1).  Investors  have the
option of  withdrawing  earnings  on a monthly,  quarterly,  or annual  basis or
reinvesting and compounding the earnings. Limited partners may withdraw from the
Partnership in accordance with the terms of the Partnership Agreement subject to
possible early  withdrawal  penalties.  There is no  established  public trading
market.  As of December 31, 2005, 480 limited  partners had a capital balance of
$9,270,243.

     A  description  of  the  Partnership  Units,   transfer   restrictions  and
withdrawal  provisions  is more  fully  described  under  the  section  entitled
"Description of Units" and "Summary of Limited Partnership Agreement",  pages 47
to 50 of the Prospectus, a part of the referenced Registration Statement,  which
is incorporated by reference.

Item 6 - Selected Financial Data

     Redwood Mortgage Investors VII began operations in December 1989. Financial
condition  and results of operation for the  Partnership  as of and for the five
years ended December 31, 2005 were:

                                 Balance Sheets

                                     ASSETS
<TABLE>
<S>                                         <C>              <C>              <C>              <C>              <C>

                                                                       December 31,
                                     ----------------------------------------------------------------------------------

                                            2005             2004             2003             2002             2001
                                        -------------    -------------    -------------    -------------    --------------

Cash and cash equivalents                 $1,627,384      $   346,393      $   321,114      $ 1,057,845       $   389,844

Loans
   Loans, secured by deeds of trust        5,448,401        7,388,478        8,280,826        6,423,984        10,091,195
   Loans, unsecured, net                     161,987          238,484          232,551          216,770           173,731
   Less allowance for loan losses          (700,536)        (745,476)        (680,469)        (791,882)         (887,578)

Interest and other receivables
   Accrued interest and late fees             64,304          190,105          489,995          304,936           666,189
   Advances on loans                               6            8,188            6,484           17,230            50,665

Real estate held for sale, net             1,870,027        1,782,182          633,053          683,136           872,133
Investment in limited liability              882,641                -                -        1,212,722                 -
company
                                        -------------    -------------    -------------    -------------    --------------
                                          $9,354,214      $ 9,208,354      $ 9,283,554      $ 9,124,741       $11,356,179
                                        =============    =============    =============    =============    ==============
</TABLE>
                                       9
<PAGE>

                        LIABILITIES AND PARTNERS' CAPITAL
<TABLE>
<S>                                           <C>               <C>              <C>             <C>                 <C>

                                                                            December 31,
                                         ----------------------------------------------------------------------------------

                                              2005              2004             2003            2002                2001
                                          -------------     -------------    -------------    ------------      -------------
Liabilities
  Line of credit                            $        -        $        -       $ 200,000       $        -       $   1,907,000
  Accounts payable                                   -             4,951            4,102           2,593              11,295

  Deferred interest                                  -                 -                -          37,704               2,322
  Payable to affiliate                          71,998            74,987           51,288          32,176               3,316
                                          -------------     -------------    -------------    ------------      --------------
                                                71,998            79,938          255,390          72,473           1,923,933

Partners' capital
  General partners                              11,973            11,973           11,973          11,978              11,978
  Limited partners subject
      to redemption                          9,270,243         9,116,443        9,016,191       9,040,290           9,420,268
                                          -------------     -------------    -------------    ------------      --------------
Total partners' capital                      9,282,216         9,128,416        9,028,164       9,052,268           9,432,246
                                          -------------     -------------    -------------    ------------      --------------
                                           $ 9,354,214        $9,208,354       $9,283,554      $9,124,741       $  11,356,179
                                          =============     =============    =============    ============      ==============
</TABLE>

                              STATEMENTS OF INCOME
<TABLE>
<S>                                           <C>               <C>             <C>              <C>              <C>

                                                                          December 31,
                                         --------------------------------------------------------------------------------

                                              2005              2004            2003             2002             2001
                                          -------------     -------------    ------------    -------------    --------------

Gross revenue                              $   691,385       $   868,274      $  782,280      $ 1,078,186      $  1,192,381
Expenses                                       153,830           289,628         189,639          314,704           371,184
                                          -------------     -------------    ------------    -------------    --------------

Net income                                 $   537,555       $   578,646      $  592,641      $   763,482      $    821,197
                                          =============     =============    ============    =============    ==============

Net income to general partners (1%)              5,376             5,786           5,926            7,635             8,212
Net income to limited partners (99%)           532,179           572,860         586,715          755,847           812,985
                                          -------------     -------------    ------------    -------------    --------------
                                           $   537,555       $   578,646      $  592,641      $   763,482      $    821,197
                                          =============     =============    ============    =============    ==============

Net income per $1,000 invested by
 limited partners for entire period:
     - where income is compounded          $        59       $        65      $       67      $        85      $         85
                                          =============     =============    ============    =============    ==============

     - where partner receives income
         in monthly distributions          $        58       $        63      $       65      $        82      $         82
                                          =============     =============    ============    =============    ==============
</TABLE>

     Annualized yields when income is compounded or distributed  monthly for the
years 2001 through 2005 are outlined in the table below:

                                        Compounded         Distributed
                                      ---------------     ---------------


                    2001                  8.50%               8.19%
                    2002                  8.44%               8.13%
                    2003                  6.66%               6.47%
                    2004                  6.49%               6.30%
                    2005                  5.94%               5.78%

     Average  annualized  yield from inception  through  December 31, 2005, when
income is compounded  and retained,  was 7.58%.  Average  annualized  yield from
inception  through  December 31, 2005,  when income is  distributed  monthly was
7.35%.

                                       10
<PAGE>

Item 7 - Management Discussion and Analysis of Financial
         Condition and Results of Operations

     MANAGEMENT  DISCUSSION  AND ANALYSIS OF FINANCIAL  CONDITION AND RESULTS OF
OPERATIONS

Critical Accounting Policies.

     In  preparing  the  financial  statements,  management  is required to make
estimates based on the information available that affect the reported amounts of
assets and  liabilities  as of the balance  sheet dates and income and  expenses
during  the  reporting  periods.   Such  estimates  relate  principally  to  the
determination of (1) the allowance for loan losses (i.e. the amount of allowance
established  against loans  receivable as an estimate of potential  loan losses)
including   the  accrued   interest  and  advances  that  are  estimated  to  be
unrecoverable  based on estimates of amounts to be collected  plus  estimates of
the value of the  property as  collateral  and (2) the  valuation of real estate
acquired through foreclosure. At December 31, 2005, we owned five pieces of real
property.

     Loans and the related accrued interest, late fees and advances are analyzed
on a  periodic  basis  for  recoverability.  Delinquencies  are  identified  and
followed  as part of the loan  system.  A  provision  is made for loan losses to
adjust the allowance for loan losses to an amount considered by management to be
adequate,   with  due   consideration  to  collateral   value,  to  provide  for
unrecoverable  loans and  receivables,  including  impaired loans,  other loans,
accrued interest,  late fees and advances on loans and other accounts receivable
(unsecured).  The  Partnership  charges  off  uncollectible  loans  and  related
receivables  directly to the allowance  account once it is  determined  that the
full amount is not collectible.

     If the probable  ultimate  recovery of the carrying  amount of a loan, with
due  consideration  for the fair value of  collateral,  is less than amounts due
according to the  contractual  terms of the loan  agreement and the shortfall in
the amounts due are not  insignificant,  the carrying  amount of the  investment
shall be reduced to the  present  value of future cash flows  discounted  at the
loan's effective interest rate. If a loan is collateral dependent,  it is valued
at the estimated fair value of the related collateral.  If events and or changes
in  circumstances  cause  management  to have  serious  doubts about the further
collectibility  of the  contractual  payments,  a loan  may  be  categorized  as
impaired and interest is no longer accrued.  Any subsequent payments on impaired
loans are applied to reduce the  outstanding  loan  balances  including  accrued
interest and advances.

     Recent  trends in the  economy  have been taken into  consideration  in the
aforementioned  process of arriving at the  allowance  for loan  losses.  Actual
results could vary from the aforementioned provisions for losses.

Forward Looking Statements.

     Certain  statements  in this  Report on Form 10-K which are not  historical
facts may be considered forward-looking statements within the meaning of Section
27A of the Securities Act of 1933, as amended, and Section 21E of the Securities
and  Exchange  Act of 1934,  as  amended,  including  statements  regarding  the
Company's expectations,  hopes, intentions, beliefs and strategies regarding the
future.  Forward-looking statements include statements regarding future interest
rates and  economic  conditions  and their  effect  on the  Partnership  and its
assets, future sales of properties held by the Partnership and the proceeds from
such sales,  trends in the California  real estate  market,  estimates as to the
allowance for loan losses, estimates of future limited partner withdrawals, 2006
annualized  yield  estimates,  plans  to  develop  certain  properties,  beliefs
regarding the Partnership recovering the full value of its investment in certain
properties,  the expectation that borrower foreclosures will not have a material
effect on  liquidity,  and the use of excess  cash flow.  Actual  results may be
materially different from what is projected by such forward-looking  statements.
Factors  that  might  cause  such a  difference  include  unexpected  changes in
economic   conditions  and  interest  rates,   the  impact  of  competition  and
competitive  pricing  and  downturns  in the real  estate  markets  in which the
Company has made loans. All  forward-looking  statements and reasons why results
may differ  included  in this Form 10-K are made as of the date  hereof,  and we
assume no obligation to update any such forward-looking  statement or reason why
actual results may differ.

                                       11
<PAGE>

Related Parties.

     The general  partners of the Partnership are Gymno  Corporation and Michael
R. Burwell.  Most  Partnership  business is conducted  through Redwood  Mortgage
Corp.,  an affiliate of the general  partners,  which  arranges,  services,  and
maintains  the loan  portfolio  for the  benefit  of the  Partnership.  The fees
received by the  affiliate  and the general  partners  are paid  pursuant to the
partnership  agreement and are determined at the sole  discretion of the general
partners  subject to limitations  imposed by the partnership  agreement.  In the
past,  the general  partners have elected not to take the maximum  compensation.
The  following is a list of various  Partnership  activities  for which  related
parties are compensated.

     o Mortgage  Brokerage  Commissions  For fees in connection with the review,
selection,  evaluation,  negotiation and extension of loans, an affiliate of the
general  partners may collect an amount  equivalent  to 12% of the loaned amount
until 6 months after the termination date of the offering.  Thereafter, the loan
brokerage  commissions (points) will be limited to an amount not to exceed 4% of
the total Partnership  assets per year. The loan brokerage  commissions are paid
by the borrowers, and thus, are not an expense of the Partnership. For the years
ended  December  31,  2005,  2004 and 2003 loan  brokerage  commissions  paid by
borrowers were $137,913, $93,465, and $111,927, respectively.

     o Mortgage  Servicing Fees Monthly mortgage  servicing fees of up to 1/8 of
1% (1.5% on an annual basis) of the unpaid principal of the Partnership's  loans
is paid to Redwood  Mortgage  Corp.,  or such lesser amount as is reasonable and
customary in the  geographic  area where the  property  securing the mortgage is
located. Once a loan is categorized as impaired,  mortgage servicing fees are no
longer accrued thereon.  Additional servicing fees are recorded upon the receipt
of any  subsequent  payments  on  impaired  loans.  Mortgage  servicing  fees of
$68,906,  $81,442,  and $73,062 were  incurred for the years ended  December 31,
2005, 2004 and 2003, respectively.

     These  servicing  fees  were  charged  at 1%, on an  annual  basis,  of the
outstanding  principal balances.  If the maximum mortgage servicing fee of 1.5%,
on an annual basis, had been charged to the  Partnership,  then net income would
have been reduced by approximately  $34,453,  $46,733, and $36,531 for the years
ended  December  31, 2005,  2004,  and 2003,  respectively.  Reducing net income
reduces the  annualized  yields.  An increase or decrease in this fee within the
limits  set by the  partnership  agreement  directly  impacts  the  yield to the
limited partners.

     o Asset  Management  Fees The general  partners  receive  monthly  fees for
managing the Partnership's portfolio and operations up to 1/32 of 1% of the `net
asset  value'  (3/8 of 1% on an annual  basis).  Management  fees to the general
partners of $34,512,  $34,073,  and $34,011 were incurred by the Partnership for
the years ended December 31, 2005, 2004 and 2003, respectively.

     o Other Fees The Partnership  agreement  provides that the general partners
may receive other fees such as  reconveyance,  mortgage  assumption and mortgage
extension  fees.  Such fees are  incurred by the  borrowers  and are paid to the
general partners.

     o Income and Losses  All  income  and  losses  are  credited  or charged to
partners in relation to their respective Partnership  interests.  The allocation
to the general partners (combined) shall not exceed 1%.

     o Operating  Expenses An affiliate  of the  Partnership,  Redwood  Mortgage
Corp.,  is reimbursed by the  Partnership  for all operating  expenses  actually
incurred  by it on  behalf of the  Partnership,  including  without  limitation,
out-of-pocket general and administration expenses of the Partnership, accounting
and audit fees,  legal fees and expenses,  postage and preparation of reports to
limited partners.

     o  Contributed   Capital  The  general   partners   jointly  and  severally
contributed  cash  equal  to  1/10  of 1% of the  total  capital  raised  by the
Partnership.  The general  partners  contributed  this cash as proceeds from the
offerings were received from the limited  partners.  As of December 31, 2005 and
2004, a general partner,  Gymno Corporation,  had contributed $11,973 as capital
in accordance with Section 4.02(a) of the partnership agreement.

                                       12
<PAGE>

Results of Operations - For the three years ended December 31, 2005, 2004 and
2003

Changes in the Partnership's operating results for the years ended December 31,
2005 and December 31, 2004 are discussed below:
<TABLE>
<S>                                                          <C>                  <C>

                                                        Changes for the years ended December 31,
                                                       --------------------------------------------

                                                             2005                 2004
                                                         --------------       -------------

Net income increase/(decrease)                             $  (41,091)          $ (13,995)
                                                         ==============       =============

Revenue
    Interest on loans                                        (145,403)              69,902
    Late charges                                               (8,919)             (4,231)
    Other income                                              (22,567)              20,323
                                                         --------------       -------------
                                                           $ (176,889)          $   85,994
                                                         --------------       -------------
Expenses
    Mortgage servicing fees                                   (12,536)               8,380
    Interest expense                                          (10,111)               1,832
    Clerical costs from Redwood Mortgage Corp.                 (4,163)             (5,188)
    Asset management fees                                          439                  62
    Provisions for losses on loans and real estate           (114,752)              83,306
    Professional services                                          877               5,591
    Other                                                        4,448               6,006
                                                         --------------       -------------
                                                           $ (135,798)          $   99,989
                                                         --------------       -------------

          Net income increase/(decrease)                   $  (41,091)          $ (13,995)
                                                         ==============       =============
</TABLE>

     The  decrease in interest  income of $145,403  (17.76%)  for the year ended
December 31, 2005 versus 2004 is mainly due to a lower  average  loan  portfolio
balance of $6,394,464 in 2005 as compared to the average loan portfolio  balance
of  $7,834,652  in 2004.  This  decline in interest  income in 2005 was somewhat
offset by the  Partnership  gaining  interest  income of  $42,996  in 2005 on an
impaired  loan that was repaid in 2005.  Prior to 2005,  no  interest  was being
accrued against this impaired loan. The increase in interest on loans of $69,902
(9.34%) for the year ended  December 31, 2004, was primarily  attributable  to a
higher  average loan  portfolio  balance of  $7,834,652  in 2004  compared to an
average  balance of  $7,352,405 in 2003.  The increase is also  attributed to an
interest  rate  increase  of 1.5% on  notes  totaling  $1,089,820  during  2004.
Additionally, the average portfolio interest rate has been declining, from 9.45%
in 2003 to 9.36% in 2004 and to 9.25% in 2005.  This has the effect of  reducing
interest  income or moderating  interest  income growth during  periods when the
portfolio increased and exacerbating  interest income declines during periods of
portfolio decreases.

     The decline in late charge  revenue by $8,919 (45%) and by $4,231 (18%) for
the years ended  December  31, 2005 and December  31,  2004,  respectively,  was
primarily due to improved loan collections and reduced delinquencies.

     The decrease in other income of $22,567  (75.41%) in 2005  compared to 2004
and the increase of $20,323  (211.65%) is due largely to the sale of real estate
owned in 2004 which had been  generating  fee  income.  Upon sale in 2004,  this
income  ceased.  The fee income in 2004 totaled  $23,143.  The decrease in other
income is also due to a decline in early withdrawal  penalties to $2,014 in 2005
compared to $2,741 in 2004,  offset by an increase  in  miscellaneous  income of
$273 in 2005.

     The decrease in mortgage  servicing fees of $12,536 (15.39%) in 2005 and an
increase of $8,380 (11.47%) in 2004 is largely attributable to the Partnership's
fluctuating  average portfolio  balances of $6,394,464 in 2005 and $7,834,652 in
2004.  The decrease in mortgage  servicing fees in 2005 was offset by collection
of interest, and hence the mortgage servicing fees $8,870, from an impaired loan
which paid off in 2005. The  Partnership  does not accrue  servicing fees due or
payable to  Redwood  Mortgage  on  impaired  loans.  Rather,  servicing  fees on
impaired loans are incurred as borrower payments are received.

                                       13
<PAGE>

     Interest expense decreased $10,111 (93.59%) for the year ended December 31,
2005 as compared to 2004. The weighted  average line of credit borrowing for the
year ended  December  31,  2005 was  $12,500 as  compared  to  weighted  average
borrowing of $382,265 for December 31, 2004. The weighted  average interest rate
for 2005 was 5.55%,  whereas the weighted  average interest rate during 2004 was
4.93%. The line of credit borrowing in 2005 was substantially low because of the
decline in average  loan  portfolio  of  $6,394,464  as  compared  to an average
portfolio  balance of $7,834,652 in 2004. This lower average balance in 2005 was
due to more loan  pay-offs  than the  Partnership's  ability to fund  additional
loans.  Hence,  loan  pay-off  proceeds  were mainly used to fund loans  without
resorting to the line of credit facility.

     The decrease in clerical costs of $4,163  (23.35%) and $5,188  (22.54%) for
the years ended December 31, 2005 and 2004,  respectively,  was primarily due to
lower clerical costs servicing the Partnership.

     Loan loss  provisions/(recoveries)  were $(49,745),  $65,007, and $(18,299)
for the years  ended  December  31,  2005,  2004,  and 2003,  respectively.  The
increase in provision for 2004 was  precautionary  due to the  foreclosure  that
existed at December  31,  2004.  A negative  provision of $49,745 and $18,299 in
2005 and 2003 was due to management's  assessment of the  appropriate  loan loss
allowance  at such  dates  the  lower  existing  delinquencies  and  lower  loan
balances.  The general  partners  believe that the  allowance for loan losses of
$700,536 at December 31, 2005 was adequate to offset potential losses on loans.

     Increases in professional  fees of $877 (1.78%) and $5,591 (12.78%) for the
years ended  December 31, 2005 and 2004,  respectively,  were  primarily  due to
general  accounting  cost  increases  in 2005 and 2004 in  relation to its legal
services, audit and tax return processing.

     Increases in other expenses of $4,448  (14.29%) and $6,006 (23.90%) for the
years  ended   December  31,  2005  and  2004,   respectively,   were  primarily
attributable  to the upkeep  costs of the real estate held for sale  properties.
The  Partnership  expensed  $26,242 and $20,567 for the years ended December 31,
2005 and 2004, respectively, on the properties.

Allowance for Losses.

     The general  partners  regularly  review the loan portfolio,  examining the
status of delinquencies,  the underlying  collateral  securing these properties,
the real estate held for sale expenses and sales  activities,  borrowers payment
records, etc. Data on the local real estate market and on the national and local
economy are studied.  Based upon this  information and other data, loss reserves
are increased or  decreased.  The  Partnership  is not a credit based lender and
hence  while it reviews  the credit  history  and  income of  borrowers,  and if
applicable,  the income from income producing  properties,  the general partners
expect that we will on occasion take back real estate security.  During 2004 and
2005 the local and national economies have been strong.  Borrower  foreclosures,
as set forth under Results of  Operations,  are a normal  aspect of  Partnership
operations  and the  general  partners  anticipate  that  they  will  not have a
material  effect on liquidity.  As of December 31, 2005, the Partnership had two
loans  with  outstanding  principal  totaling  $64,322  90 days  past  maturity.
Interest  payments on these two past maturity loans were not delinquent  over 90
days. In addition, the loan portfolio had one loan with principal outstanding of
$298,545  where  interest  payments  were  overdue 90 days.  There were no loans
against which the  Partnership had notice of default filed at December 31, 2005.
At December 31, 2005, total 90 days past maturity loans, and loans with interest
payments 90 days overdue, totaled $362,867 representing 3 loans which were 6.66%
of the secured loan portfolio.  The Partnership  enters into workout  agreements
with  borrowers who are past  maturity or delinquent in their regular  payments.
The Partnership had no workout agreements as of December 31, 2005. Typically,  a
workout agreement allows the borrower to extend the maturity date of the balloon
payment,  allows the borrower to make current  monthly  payments while deferring
for periods of time, past due payments,  or allows time to pay the loan in full.
These  workout  agreements  and  foreclosures  generally  exist  within our loan
portfolio to greater or lesser degrees, depending primarily on the health of the
economy.  The number of  foreclosures  and workout  agreements  will rise during
difficult times and conversely  fall during good economic times.  These workouts
have been considered when management  arrived at appropriate  loan loss reserves
and based on our  experience,  are reflective of our loan  marketplace  segment.
Because of the number of  variables  involved,  the  magnitude  of the  possible
swings and the general  partners'  inability to control  many of these  factors,
actual results may and do sometimes differ  significantly from estimates made by
the general partners. Management provided for ($49,745), $65,007, and ($18,299),
as  provisions  (recoveries)  for losses on loans and real  estate for the years
ended  December  31, 2005,  2004 and 2003,  respectively.  The general  partners
believe  that  current  reserves  for losses are  adequate  to handle  potential
losses.  If conditions  change,  the Partnership may increase its provisions for
loan losses and real estate held for sale.

                                       14
<PAGE>

     The  Partnership  may  restructure  loans.  This is done either through the
modification  of  an  existing  loan  or  by  rewriting  a  whole  new  loan.  A
modification  could involve,  among other  conditions,  an extension in maturity
date, a reduction in repayment amount, a change in interest rate, or granting of
additional loan funds.

     The Partnership  did not restructure any loan in 2005 or 2004.  During 2003
the  Partnership  restructured  two loans  into one  existing  loan with a lower
interest rate. This resulted in an increase to loans  receivable of $107,198 and
a decrease  to  accrued  interest  and late fees and  advances  of  $88,685  and
$18,513, respectively.

Borrower Liquidity and Capital Resources.

     The Partnership  relies upon loan payoffs,  borrowers'  mortgage  payments,
and, to a lesser  degree,  its line of credit for the source of funds for loans.
Over the past several years,  mortgage  interest  rates have decreased  somewhat
from those available at the inception of the Partnership. If interest rates were
to  increase  substantially,  the yield of the  Partnership's  loans may provide
lower yields than other comparable debt-related investments. Additionally, since
the  Partnership  has made primarily fixed rate loans, if interest rates were to
rise, the likely result would be a slower  prepayment rate for the  Partnership.
This  could  cause a lower  degree of  liquidity  as well as a  slowdown  in the
ability  of the  Partnership  to  invest in loans at the then  current  interest
rates. Conversely,  in the event interest rates were to decline, the Partnership
could see significant borrower  prepayments,  which, if the Partnership can only
obtain the then  existing  lower rates of interest,  may cause a dilution of the
Partnership's yield on loans,  thereby lowering the Partnership's  overall yield
to the limited partners. The Partnership to a lesser degree relies upon its line
of credit to fund  loans.  Generally,  the  Partnership's  loans are fixed rate,
whereas the credit line is a variable  rate loan.  In the event of a significant
increase in overall  interest  rates,  the credit  line rate of  interest  could
increase to a rate above the average portfolio rate of interest.  Should such an
event occur,  the general  partners  would desire to pay off the line of credit.
Retirement  of the line of credit  would  reduce the  overall  liquidity  of the
Partnership.  Cash is  constantly  being  generated  from  borrower  payments of
interest,  principal  and loan  payoffs.  Currently,  cash flow greatly  exceeds
Partnership expenses and earnings distribution requirements. Excess cash flow is
invested in new loan  opportunities,  when available,  and is used to reduce the
Partnership credit line or for other Partnership business.

     At the time of subscription to the  Partnership,  limited  partners made an
irrevocable decision to either take distributions of earnings monthly, quarterly
or annually or to compound  earnings  in their  capital  account.  For the years
ended  December  31,  2005,  2004  and  2003,  the  Partnership  made  following
allocations  of earnings  both to the limited  partners  who elected to compound
their earnings, and those that chose to distribute:

                           2005              2004              2003
                       --------------    -------------     -------------

Compounding                $ 348,748        $ 374,066         $ 375,105
Distributing               $ 183,432        $ 198,794         $ 211,610


     As of  December  31 2005,  2004 and  2003,  limited  partners  electing  to
withdraw earnings represented 36%, 35% and 34% of the limited partners' capital.

     The  Partnership  agreement  also allows the  limited  partners to withdraw
their  capital  account  subject to  certain  limitations.  For the years  ended
December 31, 2005, 2004 and 2003, $30,727,  $34,267, and $22,690 were liquidated
subject to the 10% penalty for early  withdrawal.  These  withdrawals are within
the normally  anticipated  range that the general partners would expect in their
experience in this and other  partnerships.  The general  partners expect that a
small  percentage  of limited  partners  will elect to liquidate  their  capital
accounts  over one year  with a 10%  early  withdrawal  penalty.  In  originally
conceiving  the  Partnership,  the general  partners  wanted to provide  limited
partners  needing  their  capital  returned  a degree of  liquidity.  Generally,
limited  partners  electing to withdraw  over one year need to  liquidate  their
investment  to  raise  cash.  The  trend  the  Partnership  is  experiencing  in
withdrawals  by  limited  partners  electing  a  one  year  liquidation  program
represents  a small  percentage  of limited  partner  capital as of December 31,
2005, 2004, and 2003, respectively.

                                       15
<PAGE>

     Additionally,  for the years  ended  December  31,  2005,  2004,  and 2003,
$164,220,  $239,547,  and  $376,514,  respectively,  were  liquidated by limited
partners who have elected a  liquidation  program over a period of five years or
longer.  This ability to withdraw  after five years by limited  partners has the
effect of providing  limited partner  liquidity.  The general  partners expect a
portion of the limited  partners to take advantage of this  provision.  This has
the  anticipated   effect  of  the  Partnership   growing,   primarily   through
reinvestment of earnings in years one through five. The general  partners expect
to see increasing  numbers of limited partner  withdrawals in years five through
eleven,  after  which time the bulk of those  limited  partners  who have sought
withdrawal  have been  liquidated.  After  year  eleven,  liquidation  generally
subsides.

Earnings and capital liquidations, including early withdrawals, during the three
years ended December 31, 2005 were:

                            Years ended December 31,

                   Earnings            Capital
                  Liquidation        Liquidation          Total
                 --------------     --------------    ---------------

2005                 $ 183,432      *$    194,947          $ 378,379

2004                 $ 198,794      *$    273,814          $ 472,608

2003                 $ 211,610      *$    399,204          $ 610,814


* These are gross amounts, which are not net of early withdrawal penalties.

     In some  cases in order to  satisfy  Broker  Dealers  and  other  reporting
requirements, the general partners have valued the limited partners' interest in
the  Partnership  on a basis which  utilizes a per Unit  system of  calculation,
rather than based upon the investors' capital account. This information has been
reported  in this manner in order to allow the  Partnership  to  integrate  with
certain  software used by the Broker Dealers and other  reporting  entities.  In
those cases, the Partnership will report to Broker Dealers,  Trust Companies and
others a  "reporting"  number of Units based upon a $1.00 per Unit  calculation.
The number of reporting Units provided will be calculated based upon the limited
partner's  capital  account  value  divided by $1.00.  Each  investor's  capital
account balance is set forth  periodically on the Partnership  account statement
provided  to  investors.  The  reporting  Units are solely  for  Broker  Dealers
requiring such information for their software programs and do not reflect actual
Units owned by a limited  partner or the limited  partners' right or interest in
cash flow or any other  economic  benefit in the  Partnership.  Each  investor's
capital  account balance is set forth  periodically  on the Partnership  account
statement  provided  to  investors.  The  amount of  Partnership  earnings  each
investor is entitled to receive is determined by the ratio that each  investor's
capital account bears to the total amount of all investor  capital accounts then
outstanding.  The capital account balance of each investor should be included on
any NASD member client account statement in providing a per Unit estimated value
of the client's investment in the Partnership in accordance with NASD Rule 2340.

     While the general  partners have set an estimated value for the Partnership
Units,  such  determination  may not be  representative  of the  ultimate  price
realized  by an  investor  for such Units upon sale.  No public  trading  market
exists for the Partnership's Units and none is likely to develop. Thus, there is
no certainty  that the Units can be sold at a price equal to the stated value of
the capital account. Furthermore, the ability of an investor to liquidate his or
her investment is limited subject to certain  liquidation rights provided by the
Partnership, which may include early withdrawal penalties.

Current Economic Conditions.

     During 2005, the United States  economy as a whole  performed  well.  Gross
Domestic Product estimates for 2005 of 3.5% show a slight slowdown from the 4.2%
Gross Domestic  Product of 2004.  The United States average annual  unemployment
rate for 2005 was 4.9% and has trended downward throughout 2005. Regionally, the
San Francisco Bay Area  demonstrated  a very similar  unemployment  rate with an
average annual  unemployment rate of 5.1% for 2005 down 0.9% from 2004. The rate
of inflation concerns many with energy costs having risen significantly over the
last year. The consumer price index rose 3.4% in 2005 compared to 3.3% for 2004.
These  statistics  indicate an economy that is continuing to grow, which is good
for both mortgage  lenders and the real estate industry as a whole.  The 10 year
treasury rate is hovering around 4.5% at year end but is expected to increase in
the future.  Should this occur,  real estate  markets may slow due to the higher
costs of money.

                                       16
<PAGE>

     The Partnership makes loans primarily in Northern  California.  As such the
regional  real estate  market is of primary  concern to the  Partnership.  As of
December 31, 2005, approximately 71.78%, ($153,632,000) of the loans held by the
Partnership  were in six San Francisco Bay Area  Counties.  The remainder of the
loans held was secured  primarily by Northern  California real estate outside of
the San Francisco Bay Area.

     In general,  California  residential real estate continued to appreciate in
value during 2005.  In  California  the median price of a single  family home in
December,  2005 was $548,430  which was 15.6% higher than in December,  2004. In
the nine county San Francisco Bay Area, the median price of a single-family home
in  December,   2005  was  $633,000  14.3%  above  the  December,   2004  median
single-family home sales price of $554,000.  The total sales volumes, the number
of homes sold,  has  recently  been  declining.  This slow down in the number of
homes sold has not significantly  impacted  residential  sales prices.  Mortgage
interest  rates for both  fixed and  adjustable  rate  loans  have been  rising,
decreasing  housing  affordability.  Rising interest rates and decreasing  sales
volumes will likely slow down the rate of housing appreciation we have seen over
the last two years.  Nonetheless,  a strong  residential real estate marketplace
exists and as such  increases  lending  opportunities  and assists in  providing
adequate equity to help repay mortgage debt should borrowers  become  delinquent
in their payments.

     Commercial real estate in the San Francisco Bay Area continued its rebound.
Occupancy rates and rents increased  during 2005 in most markets  throughout the
San Francisco  Bay Area.  CB Richard  Ellis  reports that San Francisco  Class A
office rents averaged $34.54,  up from $32.52 in 2004 and that vacancy decreased
from  15.4% in 2004 to  approximately  12% in 2005.  The San  Francisco  leasing
market  absorbed an estimated 1.5 million  square feet net during 2005 according
to Grubb and Ellis. Sales of San Francisco commercial office buildings are brisk
with record per square foot prices being attained and 2005 being a record volume
sales year (Grubb & Ellis Research  Fourth  Quarter 2005). A healthy  commercial
real estate  market  increases  lending  opportunities  and assists in providing
adequate  equity to repay mortgage debt should  borrowers  become  delinquent in
their payments.

     For Partnership  loans  outstanding as of December 31 2005, the Partnership
had an average loan-to-value ratio of 67.18%, computed based on appraised values
and  senior  liens as of the date the loan was made.  This  percentage  does not
account for any  increases or  decreases  in property  values since the date the
loan was  made,  nor does it  include  any  reductions  in  principal  on senior
indebtedness   through  amortization  of  payments  after  the  loan  was  made.
Management  expects this low loan-to-value  ratio will assist the Partnership in
weathering loan delinquencies and foreclosures should they eventuate.


Contractual Obligations Table.  None

Item 7a - Quantitative and Qualitative Disclosures About Market Risk

     The  following  table  contains  information  about  the cash held in money
market accounts,  secured loans held in the  Partnership's  portfolio and on our
line of credit as of December 31, 2005. The  presentation,  for each category of
information,  aggregates the assets and  liabilities by their maturity dates for
maturities  occurring  in each of the years  2006  through  2010 and  separately
aggregates the information  for all maturities  arising after 2010. The carrying
values of these assets and liabilities  approximate  their fair market values as
of December 31, 2005:
<TABLE>
<S>                              <C>          <C>           <C>          <C>          <C>       <C>             <C>

                                 2006         2007          2008         2009         2010      Thereafter      Total
                             ------------- ------------ ------------- ------------ ------------ ------------ -------------
Interest earning assets:
Money market accounts          $1,601,273                                                                      $1,601,273
Average interest rate               0.60%                                                                           0.60%
Loans secured by deeds
   of trust                       884,322      447,054       215,000    1,324,441    2,577,584            -     5,448,401
Average interest rate               9.25%        9.50%         8.50%        9.15%        9.27%            -         9.23%
Interest bearing
   liabilities:
Line of credit                          -                                                                               -
Average interest rate               7.50%                                                                          7.50%-
</TABLE>

                                       17
<PAGE>

Market Risk.

     The Partnership's line of credit bears interest at a variable rate, tied to
the prime rate. As a result, the Partnership's primary market risk exposure with
respect to its  obligations is to changes in interest  rates,  which will affect
the interest cost of outstanding  amounts on the line of credit. The Partnership
may also suffer market risk tied to general trends  affecting real estate values
that may impact the Partnership's security for its loans.

     The Partnership's  primary market risk in terms of its profitability is the
exposure to  fluctuations  in earnings  resulting from  fluctuations  in general
interest rates. The majority of the  Partnership's  mortgage loans earn interest
at fixed  rates.  Changes  in  interest  rates may also  affect the value of the
Partnership's   investment  in  mortgage  loans  and  the  rates  at  which  the
Partnership  reinvests  funds  obtained  from loan  repayments  and new  capital
contributions  from limited partners.  If interest rates increase,  the interest
rates the Partnership obtains from reinvested funds will generally increase, but
the value of the Partnership's existing loans at fixed rates will generally tend
to decrease.  The risk is mitigated  by the fact that the  Partnership  does not
intend to sell its loan  portfolio,  rather  such  loans are held until they are
paid off. If interest  rates  decrease,  the amounts  becoming  available to the
Partnership  for  investment  due  to  repayment  of  Partnership  loans  may be
reinvested at lower rates than the  Partnership had been able to obtain in prior
investments,  or than the rates on the repaid loans. In addition,  interest rate
decreases may encourage  borrowers to refinance their loans with the Partnership
at a time where the  Partnership  is unable to reinvest  in loans of  comparable
value.

     The  Partnership  does not hedge or otherwise seek to manage  interest rate
risk. The Partnership does not enter into risk sensitive instruments for trading
purposes.

PORTFOLIO REVIEW - For the years ended December 31, 2005, 2004 and 2003

Loan Portfolio

     The Partnership's  loan portfolio  consists primarily of short-term (one to
five years),  fixed rate loans secured by real estate.  As of December 31, 2005,
2004 and 2003 the Partnership's loans secured by real property collateral in six
of the San Francisco Bay Area counties (San Francisco,  San Mateo,  Santa Clara,
Marin,  Alameda and Contra Costa) represented  $4,090,089  (75.07%),  $4,902,146
(66.34%), and $5,982,000 (72.24%), respectively, of the outstanding secured loan
portfolio.  The  remainder of the  portfolio  represented  loans secured by real
estate located primarily in Northern California.

     The  following  table  sets  forth the  distribution  of loans  held by the
Partnership  by property  type for the years ended  December 31, 2005,  2004 and
2003:
<TABLE>
<S>                                   <C>                 <C>          <C>                <C>        <C>                 <C>

                                                2005                            2004                           2003
                                     ----------------------------     --------------------------    ----------------------------

Single Family (1-4 units)             $ 2,944,330         54.04%       $ 4,493,519        60.82%     $  2,442,961        29.50%
Apartments (over 4 units)                 570,000         10.46%           971,864        13.15%        1,367,327         1.51%
Commercial                              1,487,019         27.29%         1,923,095        26.03%        2,410,861        29.11%
Land                                      447,052          8.21%                 -             -        2,059,677        24.88%
                                     -------------    -----------     ------------    -----------    -------------   ------------

          Total                       $ 5,448,401        100.00%       $ 7,388,478       100.00%     $  8,280,826       100.00%
                                     =============    ===========     ============    ===========    =============   ============
</TABLE>

     As of December 31, 2005, the Partnership  held 23 loans secured by deeds of
trust. The following table sets forth the priorities,  asset  concentrations and
maturities of the secured loans held by the Partnership as of December 31, 2005.

                                       18
<PAGE>

        PRIORITIES, ASSET CONCENTRATIONS AND MATURITIES OF SECURED LOANS
                             As of December 31, 2005
<TABLE>
<S>                                                 <C>                <C>              <C>

                                                    # of Loans         Amount           Percent
                                                   -------------    --------------    ------------

1st Mortgages                                                14       $ 3,920,466          71.96%
2nd Mortgages                                                 8         1,453,054          26.67%
3rd Mortgages                                                 1            74,881           1.37%
                                                   =============    ==============    ============
      Total                                                  23       $ 5,448,401         100.00%

Maturing in 2006                                              4         $ 884,322          16.23%
Maturing in 2007                                              1           447,054           8.20%
Maturing in 2008                                              1           215,000           3.95%
Maturing after 12/31/08                                      17         3,902,025          71.62%
                                                   =============    ==============    ============
      Total                                                  23       $ 5,448,401         100.00%

Average Secured Loan                                                    $ 236,887           4.35%
Largest Secured Loan                                                      634,479          11.65%
Smallest Secured Loan                                                      11,260           0.21%
Average Loan-to-Value based upon appraisals
  and prior liens at time of loan                                                          67.18%
</TABLE>

     The Partnership's  largest secured loan in the principal amount of $634,479
represents 11.65% of outstanding  secured loans and 6.78% of Partnership assets.
Larger  loans  sometimes  increase  above 10% of the secured  loan  portfolio or
Partnership assets as these amounts decrease due to limited partner  withdrawals
and loan payoffs.

ASSET QUALITY

     A consequence  of lending  activities is that  occasionally  losses will be
experienced  and that the  amount  of such  losses  will vary from time to time,
depending  upon the risk  characteristics  of the loan  portfolio as affected by
economic  conditions and the financial  experiences of borrowers.  Many of these
factors  are beyond the  control of the  general  partners.  There is no precise
method of predicting  specific  losses or amounts that ultimately may be charged
off on  particular  segments of the loan  portfolio,  especially in light of the
current economic environment.

     The conclusion that a loan may become  uncollectible,  in whole or in part,
is  a  matter  of  judgment.  Although  institutional  lenders  are  subject  to
requirements and regulations  that, among other things,  require them to perform
ongoing analyses of their portfolios,  loan-to-value ratios, reserves, etc., and
to obtain and maintain  current  information  regarding  their borrowers and the
securing properties, the Partnership is not subject to these regulations and has
not adopted certain of these practices.

     Instead,  the general partners,  in connection with the periodic closing of
the accounting  records of the  Partnership and the preparation of the financial
statements, determine whether the allowance for loan losses is adequate to cover
potential  loan losses of the  Partnership.  As of December 31, 2005 the general
partners have  determined  that the allowance for loan losses of $700,536 (7.55%
of net  assets)  is  adequate  in amount.  Because  of the  number of  variables
involved,  the  magnitude  of the  swings  possible  and the  general  partners'
inability to control many of these factors,  actual results may and do sometimes
differ significantly from estimates made by the general partners. As of December
31, 2005,  three loans were  delinquent 90 days and/or matured with  outstanding
principal of $362,867.

     The Partnership also makes loans requiring periodic disbursements of funds.
As of December 31, 2005 there were no such loans.  These loans include ground up
construction of buildings and loans for  rehabilitation of existing  structures.
Interest  on such loans is computed  at simple  interest  method and only on the
amounts disbursed on a daily basis.

                                       19
<PAGE>

Item 8 - Financial Statements and Supplementary Data

A - Financial Statements

     The following  financial  statements of Redwood Mortgage  Investors VII are
included in Item 8:

o  Report of Independent Registered Public Accounting Firm
o  Balance Sheets - December 31, 2005, and December 31, 2004
o  Statements of Income for the years ended December 31, 2005, 2004 and 2003
o  Statements of Changes in Partners' Capital for the years ended
   December 31, 2005, 2004 and 2003
o  Statements of Cash Flows for the years ended December 31, 2005, 2004 and 2003
o  Notes to Financial Statements


B - Financial Statement Schedules

     The following  financial  statement schedules of Redwood Mortgage Inventors
VII are included in Item 8.

o  Schedule II  - Valuation and Qualifying Accounts
o  Schedule IV - Mortgage Loans on Real Estate

     All  other  schedules  for  which  provision  is  made  in  the  applicable
accounting  regulations  of the  Securities  and  Exchange  Commission  are  not
required under the related instructions or are inapplicable,  and therefore have
been omitted.

                                       20
<PAGE>








                         REDWOOD MORTGAGE INVESTORS VII
                       (A CALIFORNIA LIMITED PARTNERSHIP)
                              FINANCIAL STATEMENTS
                          AND SUPPLEMENTAL INFORMATION
                           DECEMBER 31, 2005 AND 2004
                         AND FOR EACH OF THE THREE YEARS
                      IN THE PERIOD ENDED DECEMBER 31, 2005













                                       21
<PAGE>

                                TABLE OF CONTENTS
<TABLE>
<S>                                                                                                  <C>

                                                                                                     Page No.
                                                                                                  ---------------
         Report of Independent Registered Public Accounting Firm                                        23

         Balance Sheets                                                                                 24

         Statements of Income                                                                           25

         Statements of Changes in Partners' Capital                                                     26

         Statements of Cash Flows                                                                       27

         Notes to Financial Statements                                                                  28

         Supplemental Schedules

            Schedule II -  Valuation and Qualifying Accounts                                            42

            Schedule IV - Mortgage Loans on Real Estate                                                 43
                Rule 12-29 Loans on Real Estate
</TABLE>






                                       22
<PAGE>

                              ARMANINO McKENNA LLP
                          CERTIFIED PUBLIC ACCOUNTANTS
                         12667 Alcosta Blvd., Suite 500
                               San Ramon, CA 94583
                                 (925) 790-2600

             REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM


To the Partners
Redwood Mortgage Investors VII
Redwood City, California

     We have  audited  the  accompanying  balance  sheets  of  Redwood  Mortgage
Investors VII (a  California  limited  partnership)  as of December 31, 2005 and
2004 and the related statements of income, changes in partners' capital and cash
flows for each of the three years in the period ended  December 31, 2005.  These
financial  statements are the responsibility of Redwood Mortgage Investors VII's
management.  Our  responsibility  is to express  an  opinion on these  financial
statements based on our audits.

     We  conducted  our audits in  accordance  with the  standards of the Public
Company Accounting Oversight Board (United States). Those standards require that
we plan and perform the audit to obtain  reasonable  assurance about whether the
financial  statements  are  free  of  material  misstatement.  Redwood  Mortgage
Investors VII is not required to have, nor were we engaged to perform,  an audit
of  its  internal  control  over  financial   reporting.   Our  audits  included
consideration  of  internal  control  over  financial  reporting  as a basis for
designing audit  procedures that are appropriate in the  circumstances,  but not
for the  purpose  of  expressing  an  opinion  on the  effectiveness  of Redwood
Mortgage Investors VII's internal control over financial reporting. Accordingly,
we express no such opinion. An audit also includes  examining,  on a test basis,
evidence  supporting the amounts and  disclosures  in the financial  statements,
assessing the  accounting  principles  used and  significant  estimates  made by
management,  and evaluating the overall  financial  statement  presentation.  We
believe that our audits provide a reasonable basis for our opinion.

     In our opinion,  the financial statements referred to above present fairly,
in all material  respects,  the financial position of Redwood Mortgage Investors
VII as of December 31, 2005 and 2004 and the results of its  operations  and its
cash flows for each of the three years in the period ended  December 31, 2005 in
conformity with accounting principles generally accepted in the United States of
America.

     Our  audits  were  conducted  for the  purpose of forming an opinion on the
basic financial  statements taken as a whole.  Schedules II and IV are presented
for purposes of  additional  analysis  and are not a required  part of the basic
financial  statements.  Such  information  has been  subjected  to the  auditing
procedures  applied in the audits of the basic financial  statements and, in our
opinion,  is fairly  stated in all  material  respects  in relation to the basic
financial statements taken as a whole.



                                            ARMANINO McKENNA  LLP
San Ramon, California
March 3, 2006

                                       23
<PAGE>

                         REDWOOD MORTGAGE INVESTORS VII
                       (A California Limited Partnership)
                                 Balance Sheets
                           December 31, 2005 and 2004


                                                           ASSETS
<TABLE>
<S>                                                                                             <C>                <C>

                                                                                                2005               2004
                                                                                           ---------------    ----------------

Cash and cash equivalents                                                                   $   1,627,384       $     346,393
                                                                                           ---------------    ----------------

Loans
   Loans secured by deeds of trust                                                              5,448,401           7,388,478
   Loans, unsecured, net of discount of $71,971 and
     $107,433 in 2005 and 2004, respectively                                                      161,987             238,484
   Allowance for loan losses                                                                    (700,536)           (745,476)
                                                                                           ---------------    ----------------
     Net loans                                                                                  4,909,852           6,881,486
                                                                                           ---------------    ----------------

Interest and other receivables
   Accrued interest and late fees                                                                  64,304             190,105
   Advances on loans                                                                                    6               8,188
                                                                                           ---------------    ----------------
     Total interest and other receivables                                                          64,310             198,293
                                                                                           ---------------    ----------------

Investment in limited liability company                                                           882,641                   -

Real estate held for sale, net                                                                  1,870,027           1,782,182
                                                                                           ---------------    ----------------

     Total assets                                                                           $   9,354,214       $   9,208,354
                                                                                           ===============    ================
</TABLE>

                        LIABILITIES AND PARTNERS' CAPITAL
<TABLE>
<S>                                                                                         <C>                 <C>

Liabilities
   Accounts payable                                                                         $           -       $       4,951
   Payable to affiliate                                                                            71,998              74,987
                                                                                           ---------------    ----------------
     Total liabilities                                                                             71,998              79,938
                                                                                           ---------------    ----------------

Partners' capital
   Limited partners' capital, subject to redemption                                             9,270,243           9,116,443
   General partners' capital                                                                       11,973              11,973
                                                                                           ---------------    ----------------
     Total partners' capital                                                                    9,282,216           9,128,416
                                                                                           ---------------    ----------------

     Total liabilities and  partners' capital                                               $   9,354,214       $   9,208,354
                                                                                           ===============    ================
</TABLE>







   The accompanying notes are an integral part of these financial statements.

                                       24
<PAGE>

                         REDWOOD MORTGAGE INVESTORS VII
                       (A California Limited Partnership)
                              Statements of Income
              For the Years Ended December 31, 2005, 2004 and 2003

<TABLE>
<S>                                                                          <C>              <C>              <C>

                                                                             2005             2004             2003
                                                                         -------------    -------------    -------------
Revenues
   Interest on loans                                                      $   673,124      $   818,527       $  748,625
   Late fees                                                                   10,903           19,822           24,053
   Other                                                                        7,358           29,925            9,602
                                                                         -------------    -------------    -------------
                                                                              691,385          868,274          782,280
                                                                         -------------    -------------    -------------

Expenses
   Mortgage servicing fees                                                     68,906           81,442           73,062
   Interest expense                                                               693           10,804            8,972
   Clerical costs from Redwood Mortgage Corp.                                  13,663           17,826           23,014
   Asset management fees                                                       34,512           34,073           34,011
   Provisions for (recovery of) losses on loans
     and real estate held for sale                                           (49,745)           65,007         (18,299)
   Professional services                                                       50,220           49,343           43,752
   Other                                                                       35,581           31,133           25,127
                                                                         -------------    -------------    -------------
                                                                              153,830          289,628          189,639
                                                                         -------------    -------------    -------------

Net income                                                                $   537,555      $   578,646       $  592,641
                                                                         =============    =============    =============

Net income
   General partners (1%)                                                  $     5,376      $     5,786       $    5,926
   Limited partners (99%)                                                     532,179          572,860          586,715
                                                                         -------------    -------------    -------------

                                                                          $   537,555      $   578,646       $  592,641
                                                                         =============    =============    =============


Net income per $1,000 invested by limited partners for entire period
   Where income is reinvested                                             $        59      $        65       $       67
   Where partner receives income in monthly distributions                 $        58      $        63       $       65
</TABLE>








   The accompanying notes are an integral part of these financial statements.

                                       25
<PAGE>

                         REDWOOD MORTGAGE INVESTORS VII
                       (A California Limited Partnership)
                   Statements of Changes in Partners' Capital
              For the Years Ended December 31, 2005, 2004 and 2003

<TABLE>
<S>                                                                           <C>              <C>               <C>

                                                                              Limited          General           Total
                                                                             Partners'        Partners'        Partners'
                                                                              Capital          Capital          Capital
                                                                          ----------------   ------------    ---------------

Balances at December 31, 2002                                               $   9,040,290      $  11,978       $  9,052,268

   Net income                                                                     586,715          5,926            592,641

   Early withdrawal penalties                                                     (1,815)              -            (1,815)

   Partners' withdrawals                                                        (608,999)        (5,931)          (614,930)
                                                                          ----------------   ------------    ---------------

Balances at December 31, 2003                                                   9,016,191         11,973          9,028,164

   Net income                                                                     572,860          5,786            578,646

   Early withdrawal penalties                                                     (2,741)              -            (2,741)

   Partners' withdrawals                                                        (469,867)        (5,786)          (475,653)
                                                                          ----------------   ------------    ---------------

Balances at December 31, 2004                                                   9,116,443         11,973          9,128,416

   Net income                                                                     532,179          5,376            537,555

   Early withdrawal penalties                                                     (2,014)              -            (2,014)

   Partners' withdrawals                                                        (376,365)        (5,376)          (381,741)
                                                                          ----------------   ------------    ---------------

Balances at December 31, 2005                                               $   9,270,243      $  11,973       $  9,282,216
                                                                          ================   ============    ===============
</TABLE>















   The accompanying notes are an integral part of these financial statements.

                                       26
<PAGE>

                         REDWOOD MORTGAGE INVESTORS VII
                       (A California Limited Partnership)
                            Statements of Cash Flows
              For the Years Ended December 31, 2005, 2004 and 2003

<TABLE>
<S>                                                                       <C>                <C>                <C>

                                                                          2005               2004               2003
                                                                     ---------------    ---------------    ---------------
Cash flows from operating activities
   Net income                                                          $    537,555        $   578,646       $    592,641
   Adjustments to reconcile net income to
    net cash provided by operating activities
     Provisions for (recovery of) losses on loans and real estate          (49,745)             65,007           (18,299)
     Early withdrawal penalty credited to income                            (2,014)            (2,741)            (1,815)
     Amortization of discount on unsecured loans                           (35,462)           (21,487)           (21,487)
     Change in operating assets and liabilities
        Loans, unsecured                                                     83,391             15,554              5,706
        Accrued interest and late fees                                       76,379          (252,153)          (273,744)
        Advances on loans                                                     2,654            (5,987)            (7,767)
        Accounts payable                                                    (4,951)                849              1,509
        Payable to affiliate                                                (2,989)             23,699             19,112
        Deferred interest                                                         -                  -           (37,704)
                                                                     ---------------    ---------------    ---------------
Net cash provided by operating activities                                   604,818            401,387            258,152
                                                                     ---------------    ---------------    ---------------

Cash flows from investing activities
   Principal collected on loans                                           5,023,486          3,517,558          2,556,852
   Loans originated                                                     (3,859,637)        (3,821,719)        (4,349,527)
   Payments for real estate                                                (54,472)               (17)                  -
   Proceeds from disposition of real estate                                       -            603,723                  -
   Payments on investment in limited liability company                     (51,463)                  -          (149,693)
   Proceeds from investment in limited liability company                          -                  -          1,362,415
                                                                     ---------------    ---------------    ---------------
Net cash provided by (used in) investing activities                       1,057,914            299,545          (579,953)
                                                                     ---------------    ---------------    ---------------

Cash flows from financing activities
   Borrowings (repayments) on line of credit, net                                 -          (200,000)            200,000
   Partners' withdrawals                                                  (381,741)          (475,653)          (614,930)
                                                                     ---------------    ---------------    ---------------
Net cash used in financing activities                                     (381,741)          (675,653)          (414,930)
                                                                     ---------------    ---------------    ---------------

Net increase (decrease) in cash and cash equivalents                      1,280,991             25,279          (736,731)

Cash and cash equivalents at beginning of year                              346,393            321,114          1,057,845
                                                                     ---------------    ---------------    ---------------

Cash and cash equivalents at end of year                               $  1,627,384        $   346,393       $    321,114
                                                                     ===============    ===============    ===============

Supplemental disclosures of cash flow information
   Cash payments for interest                                          $        693        $    10,804       $      8,972
</TABLE>




   The accompanying notes are an integral part of these financial statements.

                                       27
<PAGE>

                         REDWOOD MORTGAGE INVESTORS VII
                       (A California Limited Partnership)
                          Notes to Financial Statements
                        December 31, 2005, 2004 and 2003


     1. Organization and General

     Redwood Mortgage Investors VII, (the "Partnership") is a California Limited
Partnership  organized  on June 30,  1989.  The general  partners are Michael R.
Burwell, an individual,  and Gymno Corporation,  a California  corporation.  The
Partnership  was  organized  to engage in business as a mortgage  lender for the
primary  purpose of making loans  secured by deeds of trust on  California  real
estate.  Loans are being  arranged and serviced by Redwood  Mortgage  Corp.,  an
affiliate of the general partners.

     Term of the Partnership

     The  Partnership  is scheduled  to  terminate on December 31, 2029,  unless
sooner terminated as provided in the Partnership Agreement.


     2. Summary of Significant Accounting Policies

     Management estimates

     The  preparation  of financial  statements  in conformity  with  accounting
principles   generally  accepted  in  the  United  States  of  America  requires
management  to make  estimates  and  assumptions  about the reported  amounts of
assets and liabilities, and disclosures of contingent assets and liabilities, at
the dates of the financial  statements and the reported  amounts of revenues and
expenses during the reported periods.  Such estimates relate  principally to the
determination  of the  allowance  for loan losses,  including  the  valuation of
impaired  loans and the valuation of real estate held for sale.  Actual  results
could differ significantly from these estimates.

     Loans, secured by deeds of trust

     Loans generally are stated at their  outstanding  unpaid principal  balance
with interest thereon being accrued as earned.

     If the probable  ultimate  recovery of the carrying  amount of a loan, with
due  consideration  for the fair value of  collateral,  is less than amounts due
according to the contractual  terms of the loan agreement,  and the shortfall in
the  amounts  due are not  insignificant,  the  carrying  amount  of the loan is
reduced  to the  present  value of future  cash flows  discounted  at the loan's
effective interest rate. If a loan is collateral dependent,  it is valued at the
estimated fair value of the related collateral.

                                       28
<PAGE>

                         REDWOOD MORTGAGE INVESTORS VII
                       (A California Limited Partnership)
                          Notes to Financial Statements
                        December 31, 2005, 2004 and 2003


     2. Summary of Significant Accounting Policies (continued)

     Loans, secured by deeds of trust (continued)

     If events and or changes in circumstances  cause management to have serious
doubts about the further  collectibility of the contractual payments, a loan may
be  categorized  as impaired and interest is no longer  accrued.  Any subsequent
payments on impaired loans are applied to reduce the  outstanding  loan balances
including  accrued  interest and advances.  At December 31, 2004,  there was one
loan  categorized as impaired by the  Partnership of $96,710.  In addition,  the
impaired loan had accrued interest and advances  totaling $6,936 at December 31,
2004. In 2005, the loan was paid-off in full. The average recorded investment in
impaired  loans  was  $48,355  and  $96,710  for  December  31,  2005 and  2004,
respectively.

     At December 31, 2005, the Partnership had three loans 90 days past maturity
or past due 90 days or more,  totaling $362,867.  In addition,  accrued interest
and advances on these loans totaled $8,226 at December 31, 2005. The Partnership
does not consider any of these loans to be impaired  because there is sufficient
collateral  to cover the  amount  outstanding  to the  Partnership  and is still
accruing interest on these loans. At December 31, 2004, the Partnership had five
loans 90 days past maturity or past due 90 days or more,  including one impaired
loan, totaling $1,049,730.  In addition,  accrued interest and advances on these
loans totaled  $60,233 at December 31, 2004. The  Partnership  does not consider
four of these loans to be impaired  because  there is  sufficient  collateral to
cover the amount  outstanding to the Partnership and is still accruing  interest
on these  loans.  At December  31, 2005 and 2004,  as  presented in Note 11, the
average  loan to appraised  value of security  based upon  appraised  values and
prior  indebtedness  at the time the loans  were  consummated  was  67.18.%  and
71.30%,  respectively.  When loans are  considered  impaired,  the  allowance is
updated to reflect the change in the valuation of collateral security.  However,
a low  loan  to  value  ratio  has  the  tendency  to  minimize  reductions  for
impairment.

     Allowance for loan losses

     Loans and the related accrued interest, late fees and advances are analyzed
on a  periodic  basis  for  recoverability.  Delinquencies  are  identified  and
followed as part of the loan system.  Delinquencies  are  determined  based upon
contractual  terms.  A provision is made for loan losses to adjust the allowance
for loan losses to an amount  considered by management to be adequate,  with due
consideration  to  collateral  value,  to provide  for  unrecoverable  loans and
receivables,  including impaired loans, other loans, accrued interest, late fees
and advances on loans and other accounts receivable. The Partnership charges off
uncollectible  loans and related  receivables  directly to the allowance account
once it is determined that the full amount is not collectible.

                                       29
<PAGE>

                         REDWOOD MORTGAGE INVESTORS VII
                       (A California Limited Partnership)
                          Notes to Financial Statements
                        December 31, 2005, 2004 and 2003


2.     Summary of Significant Accounting Policies (continued)

       Allowance for loan losses (continued)

       The composition of the allowance for loan losses was as follows:
<TABLE>
<S>                                                   <C>            <C>                  <C>            <C>

                                                            December 31,                        December 31,
                                                    ------------------------------     -------------------------------
                                                                2005                                2004
                                                    ------------------------------     -------------------------------

                                                                     Percent of
                                                                      loans in                           Percent of
                                                                        each                              loans in
                                                                      category                              each
                                                                      to total                           category to
                                                      Amount            loans             Amount         total loans
                                                   -------------     ------------      -------------    --------------
        Balance at End of Year
        Applicable to:
        ------------------------------------------

        Domestic
          Real estate - mortgage
            Single family (1-4 units)               $   286,542           54.04%        $    82,380            60.82%
            Apartments                                   29,026           10.46%            139,215            13.15%
            Commercial                                  159,612           27.29%            300,312            26.03%
            Land                                         63,368            8.21%                  0             0.00%
                                                   -------------     ------------      -------------    --------------
                Total real estate mortgage          $   538,548          100.00%        $   521,907           100.00%
                                                   -------------     ------------      -------------    --------------

          Unsecured                                     161,988          100.00%            223,569           100.00%
                                                   -------------     ------------      -------------    --------------
                Total unsecured                     $   161,988          100.00%        $   223,569           100.00%
                                                   -------------     ------------      -------------    --------------

                Total allowance for loan losses     $   700,536          100.00%        $   745,476           100.00%
                                                   =============     ============      =============    ==============
</TABLE>

                                       30
<PAGE>

                         REDWOOD MORTGAGE INVESTORS VII
                       (A California Limited Partnership)
                          Notes to Financial Statements
                        December 31, 2005, 2004 and 2003


2.     Summary of Significant Accounting Policies (continued)

       Allowance for loan losses (continued)

       Activity in the allowance for loan losses is as follows:
<TABLE>
<S>                                                            <C>                   <C>                  <C>

                                                                           Years Ended December 31
                                                         ------------------------------------------------------------

                                                               2005                  2004                 2003
                                                         ------------------    -----------------     ----------------
Balance at beginning of year                               $       745,476        $     680,469         $    791,882

Charge-offs
    Domestic
        Real estate - mortgage
            Single family (1-4 units)                                    -                    -                    -
            Apartments                                                   -                    -               40,573
            Commercial                                              28,568                    -                2,458
            Land                                                         -                    -                    -
                                                         ------------------    -----------------     ----------------
                                                                  (28,568)                    -             (43,031)
                                                         ------------------    -----------------     ----------------
Recoveries
    Domestic
         Real estate - mortgage
            Single family (1-4 units)                                    -                    -                    -
            Apartments                                                   -                    -                    -
            Commercial                                                   -                    -                    -
            Land                                                         -                    -                    -
                                                         ------------------    -----------------     ----------------
                                                                         -                    -                    -
                                                         ------------------    -----------------     ----------------
Net charge-offs                                                   (28,568)                    -             (43,031)
                                                         ------------------    -----------------     ----------------
Additions (recovery) charge to operations                         (16,372)               65,007             (18,299)
                                                         ------------------    -----------------     ----------------
Transfer to real estate held for sale reserve                            -                    -             (50,083)
                                                         ------------------    -----------------     ----------------


                                                           $       700,536        $     745,476         $    680,469
Balance at end of year
                                                         ==================    =================     ================

Ratio of net charge-offs during
    the period  to average secured loans
    outstanding during the period                                    0.45%                0.00%                0.59%
                                                         ==================    =================     ================
</TABLE>

                                       31
<PAGE>

                         REDWOOD MORTGAGE INVESTORS VII
                       (A California Limited Partnership)
                          Notes to Financial Statements
                        December 31, 2005, 2004 and 2003


     2. Summary of Significant Accounting Policies (continued)

     Cash and cash equivalents

     The  Partnership  considers all highly liquid  financial  instruments  with
maturities  of  three  months  or  less  at the  time  of  purchase  to be  cash
equivalents.

     Real estate held for sale

     Real estate held for sale includes real estate acquired through foreclosure
and is stated  at the lower of the  recorded  investment  in the loan,  plus any
senior  indebtedness,  or at the property's estimated fair value, less estimated
costs to sell.

     The Partnership  periodically compares the carrying value of real estate to
expected  future  undiscounted  cash  flows for the  purpose  of  assessing  the
recoverability  of the recorded  amounts.  If the carrying  value exceeds future
undiscounted cash flows, the assets are reduced to fair value.  During 2003, the
Partnership  transferred  $50,083  from the  allowance  for loan  losses  to the
allowance for losses on real estate held for sale.

     Investment in limited liability company

     Investment in limited  liability  company is accounted for using the equity
method.  In 2005,  the Company had an 8% interest in the Larkin Street  Property
Company,  LLC (see Note 6).  In 2003,  the  Company  had a 34%  interest  in the
Stockton Street Property Company, LLC (see Note 6).

     Income taxes

     No  provision  for federal and state income taxes (other than an $800 state
minimum  tax) is made in the  financial  statements  since  income taxes are the
obligation of the partners if and when income taxes apply.

     Net income per $1,000 invested

     Amounts  reflected  in the  statements  of income as net  income per $1,000
invested by limited  partners  for the entire  period are amounts  allocated  to
limited partners who had their investment throughout the period and have elected
to either leave their  earnings to compound or have elected to receive  periodic
distributions  of their net income.  Individual  income is allocated  each month
based on the limited partners' pro rata share of partners' capital.  Because the
net income percentage  varies from month to month,  amounts per $1,000 will vary
for those  individuals who made or withdrew  investments  during the period,  or
select other options.

                                       32
<PAGE>

                         REDWOOD MORTGAGE INVESTORS VII
                       (A California Limited Partnership)
                          Notes to Financial Statements
                        December 31, 2005, 2004 and 2003


     2. Summary of Significant Accounting Policies (continued)

     Late fee revenue

     Late fees are generally  charged at 6% of the monthly  installment  payment
past due. During 2005,  2004 and 2003, late fee revenue of $10,903,  $19,822 and
$24,053,  respectively,  was recorded. The Partnership has a late fee receivable
at December 31, 2005 and 2004 of $891 and $4,513, respectively.

     Recently issued accounting pronouncements

     In June 2005,  the FASB  issued FAS No. 154,  Accounting  Changes and Error
Corrections,  a replacement of APB Opinion No. 20, Accounting Changes,  and FASB
No. 3,  Reporting  Accounting  Changes  in  Interim  Financial  Statements.  The
Statement applies to all voluntary changes in accounting principle,  and changes
the  requirements  for  accounting  for and  reporting of a change in accounting
principle.  FAS  154  requires  retrospective   application  to  prior  periods'
financial  statements of a voluntary change in accounting principle unless it is
impracticable.  It is effective for accounting changes and corrections of errors
made in fiscal years beginning after December 15, 2005.  Earlier  application is
permitted for  accounting  changes and  corrections  of errors made occurring in
fiscal years beginning  after June 1, 2005. The Partnership  does not expect the
effect of FAS 154 will have material impact on its financial statements.

     3. Other Partnership Provisions

     The Partnership is a California Limited Partnership. The rights, duties and
powers of the general and limited  partners of the  Partnership  are governed by
the limited  partnership  agreement and Sections 15611 et seq. of the California
Corporations Code.

     The general partners are in complete  control of the Partnership  business,
subject to the voting rights of the limited partners on specified  matters.  Any
one of the general  partners acting alone has the power and authority to act for
and bind the Partnership.

     A majority of the outstanding  limited  partnership  interests may, without
the permission of the general partners,  vote to: (i) terminate the Partnership,
(ii) amend the limited  partnership  agreement,  (iii) approve or disapprove the
sale of all or  substantially  all of the  assets  of the  Partnership  and (iv)
remove or replace one or all of the general partners.

     The approval of the majority of limited partners is required to elect a new
general partner to continue the Partnership business where there is no remaining
general  partner after a general  partner  ceases to be a general  partner other
than by removal.

     Election to receive monthly, quarterly or annual distributions

     At subscription,  investors elected either to receive monthly, quarterly or
annual distributions of earnings allocations,  or to allow earnings to compound.
Subject to certain  limitations,  a compounding investor may subsequently change
his  election,  but  an  investor's  election  to  have  cash  distributions  is
irrevocable.

     Profits and losses

     Profits and losses are allocated  among the limited  partners  according to
their respective capital accounts monthly after 1% of the profits and losses are
allocated to the general partners.

                                       33
<PAGE>

                         REDWOOD MORTGAGE INVESTORS VII
                       (A California Limited Partnership)
                          Notes to Financial Statements
                        December 31, 2005, 2004 and 2003


     3. Other Partnership Provisions (continued)

     Liquidity, capital withdrawals and early withdrawals

     There are substantial  restrictions on transferability of Partnership units
and accordingly an investment in the Partnership is not liquid. Limited partners
have no right to withdraw from the  Partnership or to obtain the return of their
capital account for at least one year from the date of purchase of units.

     In order to provide a certain  degree of liquidity to the limited  partners
after the one-year  period,  limited  partners may withdraw all or part of their
capital accounts from the Partnership in four quarterly  installments  beginning
on the last day of the  calendar  quarter  following  the  quarter  in which the
notice of withdrawal is given,  subject to a 10% early withdrawal  penalty.  The
10% penalty is  applicable  to the amount  withdrawn  early and will be deducted
from the capital account.

     After five years from the date of purchase of the units,  limited  partners
have the  right to  withdraw  from the  Partnership,  on an  installment  basis.
Generally this is done over a five-year period in twenty quarterly installments.
Once a limited  partner has been in the  Partnership  for the minimum  five-year
period,  no penalty will be imposed if  withdrawal  is made in twenty  quarterly
installments  or longer.  Notwithstanding  the five-year (or longer)  withdrawal
period,  the general  partners may liquidate all or part of a limited  partner's
capital account in four quarterly  installments beginning on the last day of the
calendar  quarter  following  the quarter in which the notice of  withdrawal  is
given. This withdrawal is subject to a 10% early withdrawal  penalty  applicable
to any sums withdrawn prior to the time when such sums could have been withdrawn
without penalty.

     The Partnership will not establish a reserve from which to fund withdrawals
and,  accordingly,  the  Partnership's  capacity  to return a limited  partner's
capital  account is restricted to the  availability  of  Partnership  cash flow.
Furthermore,  no more than 20% of the total limited  partners'  capital accounts
outstanding  at the  beginning  of any  year,  shall be  liquidated  during  any
calendar year.

                                       34
<PAGE>

                         REDWOOD MORTGAGE INVESTORS VII
                       (A California Limited Partnership)
                          Notes to Financial Statements
                        December 31, 2005, 2004 and 2003


     4. General Partners and Related Parties

     The  following are  commissions  and fees which will be paid to the general
partners and affiliates:

     Mortgage brokerage commissions

     For fees in connection with the review, selection, evaluation,  negotiation
and  extension of loans,  an  affiliate  of the general  partners may collect an
amount  equivalent  to 12%  of the  loaned  amount  until  6  months  after  the
termination  date  of  the  offering.  Thereafter,  loan  brokerage  commissions
(points) will be limited to an amount not to exceed 4% of the total  Partnership
assets per year.  The loan brokerage  commissions  are paid by the borrowers and
thus, are not an expense of the  Partnership.  During 2005,  2004 and 2003, loan
brokerage  commissions  paid by the  borrowers to Redwood  Mortgage  Corp.  were
$137,913 and $93,465 and $111,927, respectively.

     Mortgage servicing fees

     Monthly  mortgage  servicing  fees of up to 1/8 of 1% (1.5%  annual) of the
unpaid principal are paid to Redwood Mortgage Corp., an affiliate of the general
partners,  based on the unpaid principal balance of the loan portfolio,  or such
lesser amount as is reasonable  and customary in the  geographic  area where the
property  securing  the  mortgage  is  located.  Once a loan is  categorized  as
impaired, mortgage servicing fees are no longer accrued. Additional service fees
are  recorded  upon the receipt of any  subsequent  payments on impaired  loans.
Mortgage servicing fees of $68,906,  $81,442 and $73,062 were incurred for 2005,
2004 and 2003,  respectively.  The Partnership has a payable to Redwood Mortgage
Corp.  for servicing  fees of $71,998 and $74,987 at December 31, 2005 and 2004,
respectively.

     Asset management fee

     The general  partners  receive monthly fees for managing the  Partnership's
loan  portfolio and operations of up to 1/32 of 1% of the "net asset value" (3/8
of 1%  annually).  Asset  management  fees of $34,512,  $34,073 and $34,011 were
incurred for 2005, 2004 and 2003, respectively.

     Other fees

     The  Partnership  Agreement  provides for other fees such as  reconveyance,
mortgage  assumption and mortgage  extension fees. Such fees are incurred by the
borrowers and are paid to parties related to the general partners.

                                       35
<PAGE>

                         REDWOOD MORTGAGE INVESTORS VII
                       (A California Limited Partnership)
                          Notes to Financial Statements
                        December 31, 2005, 2004 and 2003


     4. General Partners and Related Parties (continued)

     Operating expenses

     Redwood  Mortgage Corp. is reimbursed by the  Partnership for all operating
expenses actually incurred by it on behalf of the Partnership, including without
limitation,   out-of-pocket   general   and   administration   expenses  of  the
Partnership,  accounting  and audit fees,  legal fees and expenses,  postage and
preparation  of  reports  to  limited  partners.  During  2005,  2004 and  2003,
operating  expenses totaling $13,663,  $17,826 and $23,014,  respectively,  were
reimbursed to Redwood Mortgage Corp.

     5. Real Estate Held for Sale

     In December 2004, the  Partnership  acquired land through a deed in lieu of
foreclosure.  At this date,  the  Partnership's  investment  totaled  $1,752,835
including accrued interest and advances.  Management believes the full amount of
the Partnership's investment, $1,807,307 at December 31, 2005, will be recovered
based on its current estimate of the property's fair value.

     During 2004, the Partnership  sold real estate with an original  investment
of  $1,200,518,  and a carrying  value of $586,713,  for $586,713.  The original
investment  in this  property  had been  reduced in prior years to  management's
estimate of the ultimate realizable value of the property.

     During  1993,  the  Partnership  acquired  land  through  a deed in lieu of
foreclosure.   Management   believes  the  full  amount  of  the   Partnership's
investment, $62,720 at December 31, 2005, will be recovered based on its current
estimate of the property's fair value.

     The following  schedule  reflects the costs of real estate acquired through
foreclosure  and the recorded  reductions  to estimated  fair values,  including
estimated costs to sell as of December 31, 2005 and 2004:

                                                 2005               2004
                                            --------------     --------------

       Costs of properties                   $  1,870,027       $  1,815,555
       Reduction in value                               -           (33,373)
                                            --------------     --------------

       Real estate held for sale, net        $  1,870,027       $  1,782,182
                                            ==============     ==============


     6. Investment in Limited Liability Company

     As  a  result  of  acquiring  real  properties  through  foreclosure,   the
Partnership  transferred  its interests  (principally  land and building) to two
limited liability companies,  Stockton Street Property Company, LLC ("Stockton")
and Larkin Street Property Company, LLC ("Larkin").

     Larkin was created during 2005. It is owned 8% by the  Partnership  and 92%
by affiliates.  The property is under  development  and  development  costs were
capitalized. No income or expense was recognized by Larkin during 2005.

     Stockton was created in 2002. It was owned 34% by the  Partnership  and 66%
by an affiliate.  During 2003, the LLC completed  construction  and the property
was sold.  The  Partnership  recognized a loss of $42,518 during 2003 related to
this property.

                                       36
<PAGE>

                         REDWOOD MORTGAGE INVESTORS VII
                       (A California Limited Partnership)
                          Notes to Financial Statements
                        December 31, 2005, 2004 and 2003


     7. Bank Line of Credit

     The  Partnership has a bank line of credit secured by its loan portfolio of
up to $2,500,000 at .25% over prime. There were no balances  outstanding on this
line as of  December  31,  2005 and  2004,  and the  interest  rate was 7.50% at
December 31, 2005 and 5.25% at December 31,  2004.  This line of credit  expires
December  2,  2011  and  requires  the  Partnership  to meet  certain  financial
covenants.  As of December 31, 2005 and 2004, the  Partnership was in compliance
with all loan covenants.


     8. Income Taxes

     The following  reflects a reconciliation  of partners' capital reflected in
the financial statements to the tax basis of the Partnership capital:

                                                    2005               2004
                                               --------------     --------------

Partners' capital per financial statements      $  9,282,216       $  9,128,416
Allowance for loan losses                            700,536            745,476

Allowance for real estate losses                           -             33,373
                                                --------------     -------------

    Partners' capital tax basis                 $  9,982,752       $  9,907,265
                                                ==============     =============

     In 2005 and  2004,  approximately  68% and 69%,  respectively,  of  taxable
income was allocated to tax-exempt organizations (i.e., retirement plans).


9.     Fair Value of Financial Instruments

       The following methods and assumptions were used to estimate the fair
value of financial instruments:

     (a) Cash and cash  equivalents - The carrying amount equals fair value. All
amounts, including interest bearing, are subject to immediate withdrawal.

     (b) Secured  loans had a carrying  value of  $5,448,401  and  $7,388,478 at
December  31,  2005 and 2004,  respectively.  The fair  value of these  loans of
$5,566,133 and $7,531,668, respectively, was estimated based upon projected cash
flows discounted at the estimated  current interest rates at which similar loans
would be made. The applicable amount of the allowance for loan losses along with
accrued  interest and advances  related  thereto  should also be  considered  in
evaluating the fair value versus the carrying value.

                                       37
<PAGE>

                         REDWOOD MORTGAGE INVESTORS VII
                       (A California Limited Partnership)
                          Notes to Financial Statements
                        December 31, 2005, 2004 and 2003


     10. Non-cash Transactions

     During 2005,  the  Partnership  foreclosed  on property (see Note 6), which
resulted in an increase in investment in limited  liability  company of $831,178
and a decrease in loans  receivable,  accrued interest and advances of $776,228,
$49,422 and $5,528, respectively. In addition, an unsecured loan was written-off
against the allowance for loan losses in the amount of $28,568.

     During 2004,  the  Partnership  foreclosed  on property (see Note 5), which
resulted  in an  increase  in real  estate  held  for sale of  $1,752,836  and a
decrease in loans  receivable,  accrued  interest  and  advances of  $1,196,509,
$552,044 and $4,283, respectively.

     During 2003,  the  Partnership  restructured  two loans that resulted in an
increase to loans  receivable of $107,198 and a decrease to accrued interest and
late fees and advances of $88,685 and $18,513, respectively.


     11. Asset Concentrations and Characteristics

     Most loans are secured by recorded deeds of trust. At December 31, 2005 and
2004,  there were 23 and 28 secured loans  outstanding,  respectively,  with the
following characteristics:
<TABLE>
<S>                                                                        <C>                  <C>
                                                                           2005                 2004
                                                                      ---------------      ---------------
Number of secured loans outstanding                                               23                   28
Total secured loans outstanding                                       $    5,448,401       $    7,388,478

                                                                      $                    $
Average secured loan outstanding                                             236,887              263,874
Average secured loan as percent of total secured loans                         4.35%                3.57%
Average secured loan as percent of partners' capital                           2.55%                2.89%

                                                                      $                    $
Largest secured loan outstanding                                             634,479              800,000
Largest secured loan as percent of total secured loans                        11.65%               10.83%
Largest secured loan as percent of partners' capital                           6.84%                8.76%
Largest secured loan as percent of total assets                                6.78%                8.69%

Number of counties where security is located (all California)                     13                   13

Largest percentage of loans in one county                                     22.37%               24.64%

Average secured loan to appraised value of security based on
    appraised values and prior liens at time loan was consummated             67.18%               71.30%

Number of secured loans in foreclosure                                             -                    1
Amount of secured loans in foreclosure                                $            -       $      776,228
</TABLE>

                                       38
<PAGE>


                         REDWOOD MORTGAGE INVESTORS VII
                       (A California Limited Partnership)
                          Notes to Financial Statements
                        December 31, 2005, 2004 and 2003

11.    Asset Concentrations and Characteristics (continued)

       The following categories of secured loans were held at December 31, 2005
and 2004:
<TABLE>
<S>                                                  <C>                  <C>

                                                     2005                 2004
                                                ---------------      ---------------

First trust deeds                               $    3,920,466       $    5,937,736
Second trust deeds                                   1,453,054            1,450,742

Third trust deeds                                       74,881                    -
                                                ---------------      ---------------
    Total loans                                      5,448,401            7,388,478
Prior liens due other lenders at time of loan        4,272,101            1,944,172
                                                ---------------      ---------------

    Total debt                                  $    9,720,502       $    9,332,650
                                                ===============      ===============

Appraised property value at time of loan        $   14,470,371       $   13,089,113

    Total debt as percent of appraisals                 67.18%               71.30%

Loans by type of property
Single family (1-4 units)                       $    2,944,330       $    4,493,519
Apartments                                             570,000              971,864
Commercial                                           1,487,019            1,923,095

Land                                                   447,052                    -
                                                ---------------      ---------------

                                                $    5,448,401       $    7,388,478
                                                ===============      ===============
</TABLE>

     The  interest  rates on these loans ranged from 8.50% to 10.00% at December
31, 2005 and 6.50% to 10.50% at December 31, 2004.

     Scheduled  maturity  dates of secured  loans as of December 31, 2005 are as
follows:

    Year Ending December 31,
----------------------------------

              2006                    $     884,322
              2007                          447,054
              2008                          215,000
              2009                        1,324,441
              2010                        2,577,584
                                      --------------

              Total                    $  5,448,401
                                      ==============

                                       39
<PAGE>

                         REDWOOD MORTGAGE INVESTORS VII
                       (A California Limited Partnership)
                          Notes to Financial Statements
                        December 31, 2005, 2004 and 2003


     11. Asset Concentrations and Characteristics (continued)

     The scheduled  maturities for 2006 above include  approximately  $64,322 in
two loans which were 90 days past  maturity at December 31, 2005.  None of these
loans  had  interest   payments   categorized   as  delinquent   over  90  days.
Occasionally,  the Partnership allows borrowers to continue to make the payments
on debt past maturity for periods of time.

     At times, the Partnership's  cash deposits exceed federally insured limits.
Management  believes  deposits are  maintained in financially  secure  financial
institutions.

     In 2004 the  Partnership  had a substantial  amount of its loan  receivable
balance due on two loans from one borrower.  During 2005,  these loans were paid
in full.  This  borrower  accounted  for  approximately  17% of the secured loan
balance at December 31, 2004. This borrower  accounted for approximately 16% and
34% of  interest  on loans  for the  years  ended  December  31,  2005 and 2004,
respectively.  The value of  collateral  securing  these loans was less than the
principal  balance due under the loans.  Redwood  Mortgage Corp. had provided an
indemnity  to the  Partnership  whereby  it has  agreed  to  indemnify  and hold
harmless the Partnership from any expenses or losses incurred by the Partnership
by reason of the Partnership's  inability to collect all principal due under the
loans after the Partnership has exhausted all reserves set aside for these loans
and  all  remedies  available  to it  including  foreclosure  of the  underlying
collateral.  Therefore,  these loans were not considered impaired solely because
the value of the  collateral  securing  the  loans  was less than the  principal
balance due to the Partnership.

     The Partnership also has 22% and 21% of its receivable balance due from two
borrowers  at  December  31,  2005  and  2004,  respectively.  Loans  to the two
borrowers in 2005 were funded late in the year,  hence income derived from these
investments  accounted  for 3.10% of the  interest  revenue  for the year  ended
December 31, 2005. The other two borrowers had their loans with the  Partnership
for the full term in 2004 and interest revenue  accounted for  approximately 19%
for the year ended December 31, 2004.

     12. Commitments and Contingencies

     Workout agreements

     The Partnership has negotiated various  contractual workout agreements with
borrowers  whose  loans  are  past  maturity  or who are  delinquent  in  making
payments.  The  Partnership  is not  obligated  to fund  additional  money as of
December  31,  2005.  As of December  31, 2005 there are no loans under  workout
agreement.

     Construction / rehabilitation loans

     The Partnership makes construction and  rehabilitation  loans which are not
fully disbursed at loan inception. The Partnership has approved the borrowers up
to a maximum loan balance;  however,  disbursements are made periodically during
completion  phases of the construction or  rehabilitation or at such other times
as required  under the loan  documents.  At  December  31,  2005,  there were no
undisbursed  loan  funds.  The  Partnership  does not  maintain a separate  cash
reserve to hold the undisbursed obligations, which are intended to be funded.

     Legal proceedings

     The  Partnership is involved in various legal actions arising in the normal
course of business.  In the opinion of management,  such matters will not have a
material effect upon the financial position of the Partnership.

                                       40
<PAGE>

                         REDWOOD MORTGAGE INVESTORS VII
                       (A California Limited Partnership)
                          Notes to Financial Statements
                        December 31, 2005, 2004 and 2003


13.  Selected Financial Information (Unaudited)
<TABLE>
<S>                                                <C>               <C>               <C>             <C>                <C>

                                                                         Calendar Quarter
                                                 --------------------------------------------------------

                                                   First             Second            Third           Fourth             Annual
                                              ---------------    -------------    --------------   --------------    --------------

Revenues
    2005                                        $   174,489        $   152,219      $    204,591     $    160,086      $   691,385
    2004                                        $   217,654        $   207,404      $    215,309     $    227,907      $   868,274

Expenses
    2005                                        $    35,393        $    16,871      $     56,016     $     45,550      $   153,830
    2004                                        $    77,558        $    68,959      $     65,976     $     77,135      $   289,628

Net income allocated to general partners
    2005                                        $     1,391        $     1,353      $      1,486     $      1,146      $     5,376
    2004                                        $     1,401        $     1,384      $      1,493     $      1,508      $     5,786

Net income allocated to limited partners
    2005                                        $   137,705        $   133,995      $    147,089     $    113,390      $   532,179
    2004                                        $   138,695        $   137,061      $    147,840     $    149,264      $   572,860

Net income per $1,000 invested where income is
    Reinvested
      2005                                      $        15        $        15      $         16     $         13      $        59
      2004                                      $        15        $        15      $         16     $         19      $        65

    Withdrawn
      2005                                      $        15        $        15      $         16     $         12      $        58
      2004                                      $        15        $        15      $         16     $         17      $        63
</TABLE>

                                       41
<PAGE>

                         REDWOOD MORTGAGE INVESTORS VII
                       (A California Limited Partnership)
                                   Schedule II
              Valuation and Qualifying Accounts for the years ended
                        December 31, 2005, 2004 and 2003
<TABLE>
<S>                                             <C>              <C>               <C>              <C>                  <C>

                                                Col B.              Col. C - Additions                                   Col E.
                                                                -----------------------------
                                               Balance at        Charged to        Charged                                Balance
                 Col A.                        Beginning         Costs and        to Other          Col. D                at End
               Description                     of Period          Expenses        Accounts        Deductions             of Period
------------------------------------------    -------------     -------------    ------------    -------------        -------------

Year Ended December 31, 2003

Deducted from asset accounts

Allowance for doubtful accounts                $   791,882       $  (68,382)       $       -      $  (43,031)  (a)    $   680,469

Cumulative write-down of
  real estate held for sale (REO)              $   580,086       $    50,083       $       -      $         -         $   630,169
                                              -------------     -------------    ------------    -------------       --------------

                                               $ 1,371,968       $  (18,299)       $       -      $  (43,031)  (a)    $ 1,310,638
                                              =============     =============    ============    =============       ==============


Year Ended December 31, 2004

Deducted from asset accounts

Allowance for doubtful accounts                $   680,469       $    65,007       $       -      $         -         $   745,476

Cumulative write-down of
  real estate held for sale (REO)              $   630,169       $         -       $       -      $ (596,796)  (b)    $    33,373
                                              -------------     -------------    ------------    -------------       --------------


                                               $ 1,310,638       $    65,007       $       -      $ (596,796)  (b)    $   778,849
                                              =============     =============    ============    =============       ==============

Year Ended December 31, 2005

Deducted from asset accounts

Allowance for doubtful accounts                $   745,476       $  (16,372)       $       -      $  (28,568)  (a)    $   700,536

Cumulative write-down of
  real estate held for sale (REO)              $    33,373       $  (33,373)       $       -      $         -         $         -
                                              -------------     -------------    ------------    -------------       --------------

                                               $   778,849       $  (49,745)       $       -      $  (28,568)  (a)    $   700,536
                                              =============     =============    ============    =============       ==============
</TABLE>


(a) - Represents write-offs on loans.

(b) - Represents sales of REO.

                                       42
<PAGE>

                         REDWOOD MORTGAGE INVESTORS VII
                       (A California Limited Partnership)
                                   Schedule IV
                          Mortgage Loans on Real Estate
                         Rule 12-29 Loans on Real Estate
                                December 31, 2005

<TABLE>
<S>             <C>         <C>         <C>          <C>           <C>              <C>          <C>          <C>        <C>

                                                                                                 Col. H
                                                                                                Principal
                                                                   Col. F                        Amount
                                                                    Face            Col. G       of Loans
                            Col. C      Col. D                     Amount of       Carrying     Subject to    Col. I     Col. J
                Col. B      Final     Periodic       Col. E       Mortgage       Amount of      Delinquent    Type     California
   Col. A      Interest    Maturity    Payment        Prior        Original        Mortgage     Principle      of      Geographic
  Descrip.       Rate        Date       Terms         Liens         Amount        Investment    or Interest   Lien     Location
-----------  ---------- ------------ ------------ ------------- ------------- -------------- -------------- ---------- ----------

Comm.          10.00%     12/01/03    $     471    $        -    $   53,636    $   53,062    $     53,062     1st     Stanislaus
Comm.          10.00%     12/01/01          105        82,723        11,919        11,260          11,260     2nd     Stanislaus
Res.            9.00%     04/01/09        1,139             -       141,500       138,706               -     1st     San Joaquin
Res.            9.25%     07/01/09        1,892       416,018       230,000       227,491               -     2nd     Contra Costa
Res.            9.25%     07/01/09          921       265,759       112,000       110,759               -     2nd     San Mateo
Comm.           9.00%     08/01/09        3,000             -       400,000       400,000               -     1st     San Francisco
Res.            8.50%     09/01/06        1,417             -       200,000       250,000               -     1st     Monterey
Res.            9.25%     11/01/09        1,234       352,177       150,000       148,941               -     2nd     San Mateo
Res.            9.25%     11/01/09        2,468             -       300,000       298,545         298,545     1st     San Mateo
Res.            8.75%     02/01/10        1,180       571,769       150,000       147,565               -     2nd     San Mateo
Comm.           9.50%     03/01/10        3,279             -       390,000       388,218               -     1st     San Mateo
Res.            9.00%     03/01/10        1,046             -       130,000       129,341               -     1st     Santa Cruz
Res.            9.25%     07/01/10        1,686             -       205,000       204,460               -     1st     Solano
Res.            9.25%     08/01/10          617       627,455        75,000        74,882               -     2nd     Solano
Res.            9.25%     08/01/10        4,387     1,460,802       533,250       532,131               -     2nd     Santa Clara
Res.            9.25%     08/01/10        1,316             -       160,000       159,664               -     1st     Santa Barbara
Res.            9.25%     09/01/10          494       295,000        60,000        59,906               -     2nd     Alameda
Land            9.50%     10/01/07        3,651             -       487,500       447,054               -     1st     Santa Clara
Apts.           9.50%     10/01/06        4,513             -       570,000       570,000               -     1st     Contra Costa
Res.            9.25%     11/01/10        1,004             -       122,000       121,937               -     1st     Tulare
Res.            8.50%     12/01/10          961             -       125,000       125,000               -     1st     San Mateo
Comm.           9.50%     12/01/10        5,548             -       635,000       634,479               -     1st     Marin
Res.            8.50%     01/01/08        1,523       200,398       215,000       215,000               -     2nd     Solano

   Total                                          $4,272,101     $5,456,805    $5,448,401    $    362,867
                                                 ============= ============= ============= ===============
</TABLE>


     Note: Most loans have balloon payments due at maturity.



                                       43
<PAGE>

                         REDWOOD MORTGAGE INVESTORS VII
                       (A California Limited Partnership)
                             Schedule IV (continued)
                          Mortgage Loans on Real Estate
                         Rule 12-29 Loans on Real Estate
                                December 31, 2005


Reconciliation of carrying amount (cost) of loans at close of periods

<TABLE>
<S>                                                                         <C>                <C>                 <C>

                                                                                      Year ended December 31,
                                                                       ------------------------------------------------------
                                                                            2005               2004                2003
                                                                       ---------------    ----------------    ---------------

Balance at beginning of year                                              $ 7,388,478         $ 8,280,826        $ 6,423,984
                                                                       ---------------    ----------------    ---------------
Additions during period
   New loans                                                                3,859,637           3,821,719          4,349,527
   Other                                                                            -                   -            107,198
                                                                       ---------------    ----------------    ---------------
     Total additions                                                        3,859,637           3,821,719          4,456,725
                                                                       ---------------    ----------------    ---------------

Deductions during period
   Collections of principal                                                 5,023,486           3,517,558          2,556,852
   Foreclosures                                                               776,228           1,196,509                  -
   Cost of loans sold                                                               -                   -                  -
   Amortization of premium                                                          -                   -                  -
   Other                                                                            -                   -             43,031
                                                                       ---------------    ----------------    ---------------
     Total deductions                                                       5,799,714           4,714,067          2,599,883
                                                                       ---------------    ----------------    ---------------

Balance at close of year                                                  $ 5,448,401         $ 7,388,478        $ 8,280,826
                                                                       ===============    ================    ===============
</TABLE>


     Item 9 - Changes in and  Disagreements  with  Accountants on Accounting and
Financial Disclosure

     There were no disagreements with the Partnership's  independent  registered
public accounting firm during the years ended December 31, 2005 and 2004.


     Item 9a. - Controls and Procedures

     The Partnership  carried out an evaluation,  under the supervision and with
the participation of the general partners of the effectiveness of the design and
operation of the Partnership's  disclosure controls and procedures as of the end
of the period  covered by this report  pursuant to Rule 13a-15 of the Securities
Exchange  Act of 1934,  as  amended  Based  upon that  evaluation,  the  general
partners  concluded that the  Partnership's  disclosure  controls and procedures
were effective in timely alerting the general  partners to material  information
related to the  Partnership  that is required  to be  included  in our  periodic
filings with the Securities and Exchange Commission.

     There were no significant  changes in the  Partnership's  internal  control
over financial  reporting  during the  Partnership's  fourth fiscal quarter that
have materially affected,  or are likely to materially affect, the Partnership's
internal control over financial reporting.


     Item 9b. - Other Information

     None

                                       44
<PAGE>

                                    Part III


     Item 10 - Directors and Executive Officers of the Registrant

     The Partnership has no Officers or Directors. Rather, the activities of the
Partnership  are  managed  by  the  two  general  partners,  one of  whom  is an
individual, Michael R. Burwell. The second general partner is Gymno Corporation,
a  California  corporation,  formed  in  1986.  Mr.  Burwell  is one of the  two
shareholders  of Gymno  Corporation,  a  California  corporation,  and has a 50%
interest in the corporation.

     The General Partners.

     Michael R.  Burwell.  Michael R. Burwell,  age 49,  General  Partner,  past
member  of  Board  of  Trustees  and  Treasurer,   Mortgage  Brokers   Institute
(1984-1986);  President,  Director,  Chief Financial  Officer,  Redwood Mortgage
Corp.  (1979-present);  Director,  Secretary  and  Treasurer  A  &  B  Financial
Services, Inc. (1980-present);  President, Director, Chief Financial Officer and
Secretary (since 1986) of Gymno Corporation;  President, Director, Secretary and
Treasurer of The Redwood Group, Ltd. (1979-present).  Mr. Burwell is licensed as
a real estate sales person.

     Gymno  Corporation.  Gymno  Corporation,  General Partner,  is a California
corporation  formed in 1986 for the  purpose  of acting as a general  partner of
this  Partnership  and of other limited  partnerships  formed by the  individual
general partners. The shares in Gymno Corporation are held equally by Michael R.
Burwell and the Burwell  trusts.  Michael R.  Burwell is a director of Gymno and
the director position held by D. Russell Burwell is currently vacant. Michael R.
Burwell is its President,  Chief Financial  Officer,  and Secretary.  Michael R.
Burwell has a  controlling  interest in this  company  through his  ownership of
stock and as trustee of the Burwell trusts.

     Financial Oversight by General Partners.

     The Partnership  does not have a board of directors or an audit  committee.
Accordingly,  the general  partners  serve the  equivalent  function of an audit
committee  for,  among  other  things,  the  following  purposes:   appointment,
compensation,  review  and  oversight  of the  work  of our  independent  public
accountants,  and  establishing  the  enforcing of the Code of Ethics.  However,
since the Partnership  does not have an audit committee and the general partners
are not independent of the Partnership,  the Partnership does not have an "audit
committee financial expert."

     Code of Ethics.

     The  general  partners  have  adopted  a Code of Ethics  applicable  to the
general partners and to any agents, employees or independent contractors engaged
by the  general  partners  to perform the  functions  of a  principal  financial
officer, principal accounting officer or controller of the Partnership,  if any.
You may obtain a copy of this Code of Ethics,  without  charge,  upon request by
calling our Investor Services Department at (650) 365-5341.

                                       45
<PAGE>

     Item 11 - Executive Compensation

       COMPENSATION OF THE GENERAL PARTNERS AND AFFILIATES BY PARTNERSHIP

     As  indicated  above  in  Item  10,  the  Partnership  has no  Officers  or
Directors. The Partnership is managed by the general partners. There are certain
fees and other items paid to management and related parties.

     A more  complete  description  of management  compensation  is found in the
Prospectus, pages 12-13, under the section "Compensation of the General Partners
and the Affiliates",  which is incorporated by reference.  Such  compensation is
summarized below.

     The  following  compensation  has been  paid to the  general  partners  and
affiliates  for services  rendered  during the year ended December 31, 2005. All
such compensation is in compliance with the guidelines and limitations set forth
in the partnership agreement.
<TABLE>
<S>                                     <C>                                                                  <C>

    Entity Receiving Compensation              Description of Compensation and Services Rendered             Amount
    ----------------------------------- ----------------------------------------------------------------- --------------
    I.  Redwood Mortgage Corp.          Mortgage Servicing Fee for servicing loans..............................$68,906

    General Partners &/or Affiliates    Asset Management Fee for managing assets................................$34,512

    General Partners                    1% interest in profits...................................................$5,376
</TABLE>


     II. FEES PAID BY BORROWERS ON MORTGAGE LOANS PLACED WITH THE PARTNERSHIP BY
COMPANIES  RELATED TO THE GENERAL  PARTNERS  (EXPENSES OF  BORROWERS  NOT OF THE
PARTNERSHIP) DURING THE YEAR ENDED DECEMBER 31, 2004
<TABLE>
<S>                                     <C>                                                                    <C>

    Redwood Mortgage Corp.              Mortgage Brokerage Commissions for services in connection
            with the review, selection, evaluation, negotiation, and
                                        extension
                                        of the loans paid by the borrowers and not by the Partnership..........$137,913

    Redwood Mortgage Corp.              Processing and Escrow Fees for services in connection with fees
                                        notary, document preparation, credit investigation, and escrow
                                        payable by the borrowers and not by the Partnership......................$9,536

    Gymno Corporation                   Reconveyance Fee...........................................................$749
</TABLE>


     III. IN ADDITION, THE GENERAL PARTNERS AND/OR RELATED COMPANIES PAY CERTAIN
EXPENSES ON BEHALF OF THE PARTNERSHIP FOR WHICH IT IS REIMBURSED AS NOTED IN THE
STATEMENT OF INCOME DURING THE YEAR ENDED DECEMBER 31, 2005 . . . . . . $13,663

                                       46
<PAGE>

     Item 12 - Security Ownership of Certain Beneficial Owners and Management

     The general partners are to own an aggregate total of 1% of the Partnership
including a 1% portion of income and losses.


     Item 13 - Certain Relationships and Related Transactions

     Refer to footnotes 3 and 4 of the Notes to Financial  Statements in Part II
item 8, which describes related party fees and data.

     Also refer to the Prospectus dated October 20, 1989 (incorporated herein by
reference) on page 12 "Compensation of General Partners and Affiliates" and page
14 "Conflicts of Interest".


     Item 14 - Principal Accountant Fees and Services

     Fees for services performed for the Partnership by the principal accountant
for 2005 and 2004 are as follows:

     Audit Fees The aggregate  fees billed  during the years ended  December 31,
2005  and  2004  for  professional  services  rendered  for  the  audit  of  the
Partnership's  annual financial  statements included in the Partnership's Annual
Report  on  Form  10-K  and  review  of  financial  statements  included  in the
Partnership's   Quarterly  Reports  on  Form  10-Q  were  $38,054  and  $40,643,
respectively.

     Audit  Related  Fees  There  were no fees  billed  during  the years  ended
December 31, 2005 and 2004 for audit-related services.

     Tax fees The  aggregate  fees billed for tax  services  for the years ended
December  31, 2005 and 2004,  were $3,588 and $4,854,  respectively.  These fees
relate to professional services rendered primarily for tax compliance.

     All Other  Fees  There were no other  fees  billed  during the years  ended
December 31, 2005 and 2004.

     All audit and non-audit  services are approved by the general partner prior
to the accountant being engaged by the Partnership.

                                       47
<PAGE>

                                     Part IV

Item 15 - Exhibits, Financial Statements and Schedules

A.      Documents filed as part of this report are incorporated:

        1. In Part II, Item 8 under A - Financial Statements.

        2. The Financial Statement Schedules are listed in Part II - Item 8
           under B - Financial Statement Schedules.

        3. Exhibits.
<TABLE>
<S>                   <C>

   Exhibit No.        Description of Exhibits
------------------   ---------------------------------------------------------------------------------------------

    3.1               Limited Partnership Agreement
    3.2               Form of Certificate of Limited Partnership Interest
    3.3               Certificate of Limited Partnership
    10.1              Escrow Agreement
    10.2              Servicing Agreement
    10.3           (a)Form of Note secured by Deed of Trust which provides for principal and interest payments.
                   (b)Form of Note secured by Deed of Trust which provides principal and interest payments and
                      right of assumption
                   (c)Form of Note secured by Deed of Trust which provides for
                   interest only payments (d)Form of Note
    10.4           (a)Deed of Trust and Assignment of Rents to accompany Exhibits   10.3  (a), and (c)
                   (b)Deed of Trust and Assignment of Rents to accompany Exhibit 10.3 (b)
                   (c)Deed of Trust to accompany Exhibit 10.3 (d)
    10.5              Promissory Note for Formation Loan
    10.6              Agreement to Seek a Lender
    31.1              Certification of General Partner pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
    31.2              Certification of General Partner pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
    32.1              Certification of General Partner pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
    32.2              Certification of General Partner pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
</TABLE>

     All of the above  exhibits,  other than  31.1,  31.2,  32.1 and 32.2,  were
previously  filed  as the  exhibits  to  Registrant's  Statement  on  Form  S-11
(Registration No. 33-30427 and incorporated by reference herein).


B.       See A (3) above.

C.       See A (2) above. Additional reference is made to the prospectus (S-11
         filed as part of the Registration statement) dated October 20, 1989 to
         pages 65 through 67 and Supplement #5 dated February 14, 1992 for
         financial data related to Gymno Corporation, a general partner.

                                       48
<PAGE>

                                   SIGNATURES

     Pursuant  to the  requirements  of Section  13 or 15 (d) of the  Securities
Exchange Act of 1934 the  registrant has duly caused this report to be signed on
its behalf by the undersigned,  thereto duly authorized on the 30st day of March
2006.

REDWOOD MORTGAGE INVESTORS VII

          By: /S/ Michael R. Burwell
          ---------------------------------------------
              Michael R. Burwell, General Partner


          By: Gymno Corporation, General Partner

              By:  /S/ Michael R. Burwell
                  -------------------------------------------
                  Michael R. Burwell, President, Secretary
                  & Chief Financial Officer


     Pursuant to the  requirements of the Securities  Exchange Act of 1934, this
report has been signed below by the following person on behalf of the registrant
and in the capacity indicated on the 30st day of March 2006.

       Signature                Title                                 Date


/S/ Michael R. Burwell
------------------------
Michael R. Burwell         General Partner                        March 30, 2006


/S/ Michael R. Burwell
------------------------
Michael R. Burwell        President, Secretary & Chief            March 30, 2006
                           Financial Officer of Gymno
                        Corporation (Principal Financial
                            and Accounting Officer);
                         Director of Gymno Corporation

                                       49
<PAGE>

                                                                    Exhibit 31.1

                          GENERAL PARTNER CERTIFICATION


I, Michael R. Burwell, General Partner of the Partnership, certify that:

     1. I have  reviewed  this  annual  report on Form 10-K of Redwood  Mortgage
Investors VII, a California Limited Partnership (the "Registrant");

     2. Based on my  knowledge,  this annual  report does not contain any untrue
statement of a material fact or omit to state a material fact  necessary to make
the statements made, in light of the  circumstances  under which such statements
were made,  not  misleading  with  respect to the period  covered by this annual
report;

     3. Based on my knowledge,  the financial  statements,  and other  financial
information  included  in this annual  report,  fairly  present in all  material
respects the financial  condition,  results of operations  and cash flows of the
Registrant as of, and for, the periods presented in this annual report;

     4. The  Registrant's  other  certifying  officers and I are responsible for
establishing and maintaining  disclosure  controls and procedures (as defined in
Exchange Act Rules 13a-15(e) and 15d-15(e)) for the Registrant and we have:

     (a)  designed  such  disclosure  controls  and  procedures,  or caused such
disclosure  controls and  procedures to be designed  under our  supervision,  to
ensure that  material  information  relating to the  Registrant,  including  its
consolidated subsidiaries,  is made known to us by others within those entities,
particularly during the period in which this annual report is being prepared;

     (b) evaluated the effectiveness of the Registrant's disclosure controls and
procedures and presented in this report our conclusions  about the effectiveness
of the disclosure  controls and procedures,  as of the end of the period covered
by this report based on such evaluation; and

     (c)  disclosed in this report any change in the  Registrant's  control over
financial  reporting that occurred  during the  Registrant's  most recent fiscal
quarter (the Registrant's fourth fiscal quarter in the case of an annual report)
that has materially affected,  or is reasonably likely to materially affect, the
Registrant's internal control over financial reporting; and

     5. The Registrant's other certifying  officers and I have disclosed,  based
on our most recent evaluation of internal control over financial  reporting,  to
the Registrant's  auditors and the audit committee of the Registrant's  board of
directors (or persons performing the equivalent functions):

     (a) all significant  deficiencies and material  weaknesses in the design or
operation of internal  controls over  financial  reporting  which are reasonably
likely  to  adversely  affect  the  Registrant's  ability  to  record,  process,
summarize and report financial information; and

     (b) any fraud,  whether or not material,  that involves management or other
employees who have a significant role in the Registrant's  internal control over
financial reporting.




/s/ Michael R. Burwell
----------------------------
Michael R. Burwell, General Partner
March 30, 2006

                                       50
<PAGE>



                                                                    Exhibit 31.2


               PRESIDENT AND CHIEF FINANCIAL OFFICER CERTIFICATION

     I,  Michael R.  Burwell,  President  and Chief  Financial  Officer of Gymno
Corporation, General Partner of the Partnership, certify that:

     1. I have  reviewed  this  annual  report on Form 10-K of Redwood  Mortgage
Investors VII, a California Limited Partnership (the "Registrant");

     2. Based on my  knowledge,  this annual  report does not contain any untrue
statement of a material fact or omit to state a material fact  necessary to make
the statements made, in light of the  circumstances  under which such statements
were made,  not  misleading  with  respect to the period  covered by this annual
report;

     3. Based on my knowledge,  the financial  statements,  and other  financial
information  included  in this annual  report,  fairly  present in all  material
respects the financial  condition,  results of operations  and cash flows of the
Registrant as of, and for, the periods presented in this annual report;

     4. The  Registrant's  other  certifying  officers and I are responsible for
establishing and maintaining  disclosure  controls and procedures (as defined in
Exchange Act Rules 13a-15(e) and 15d-15(e)) for the Registrant and we have:

     (a)  designed  such  disclosure  controls  and  procedures,  or caused such
disclosure  controls and  procedures to be designed  under our  supervision,  to
ensure that  material  information  relating to the  Registrant,  including  its
consolidated subsidiaries,  is made known to us by others within those entities,
particularly during the period in which this annual report is being prepared;

     (b) evaluated the effectiveness of the Registrant's disclosure controls and
procedures and presented in this report our conclusions  about the effectiveness
of the disclosure  controls and procedures,  as of the end of the period covered
by this report based on such evaluation; and

     (c)  disclosed in this report any change in the  Registrant's  control over
financial  reporting that occurred  during the  Registrant's  most recent fiscal
quarter (the Registrant's fourth fiscal quarter in the case of an annual report)
that has materially affected,  or is reasonably likely to materially affect, the
Registrant's internal control over financial reporting; and

     5. The Registrant's other certifying  officers and I have disclosed,  based
on our most recent evaluation of internal control over financial  reporting,  to
the Registrant's  auditors and the audit committee of the Registrant's  board of
directors (or persons performing the equivalent functions):

     (a) all significant  deficiencies and material  weaknesses in the design or
operation of internal  control over  financial  reporting  which are  reasonably
likely  to  adversely  affect  the  Registrant's  ability  to  record,  process,
summarize and report financial information; and

     (b) any fraud,  whether or not material,  that involves management or other
employees who have a significant role in the Registrant's  internal control over
financial reporting.



/s/ Michael R. Burwell
--------------------------
Michael R. Burwell, President and
Chief Financial Officer of Gymno
Corporation, General Partner
March 30, 2006

                                       51
<PAGE>

                                                                    Exhibit 32.1

                            CERTIFICATION PURSUANT TO
                             18 U.S.C SECTION 1350,
                             AS ADOPTED PURSUANT TO
                  SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002


     In connection with the Annual Report of Redwood Mortgage Investors VII (the
"Partnership") on Form 10-K for the period ended December 31, 2005 as filed with
the  Securities  and  Exchange  Commission  on the date hereof  (the  "Report"),
pursuant  to 18  U.S.C.  (S)  1350,  as  adopted  pursuant  to  (S)  906  of the
Sarbanes-Oxley  Act of 2002,  I,  Michael  R.  Burwell,  General  Partner of the
Partnership, certify, that to the best of my knowledge:

     (1) The Report fully  complies  with the  requirements  of section 13(a) or
15(d) of the Securities Exchange Act of 1934; and

     (2)  The  information  contained  in the  Report  fairly  presents,  in all
material  respects,  the  financial  condition  and results of operations of the
Partnership at the dates and for the periods indicated.

     This Certification has not been, and shall not be deemed,  "filed" with the
Securities and Exchange Commission.


/s/ Michael R. Burwell
-----------------------------
Michael R. Burwell, General Partner
March 30, 2006

                                       52
<PAGE>

                                                                    Exhibit 32.2


                            CERTIFICATION PURSUANT TO
                             18 U.S.C. SECTION 1350
                             AS ADOPTED PURSUANT TO
                  SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002


     In connection with the Annual Report of Redwood Mortgage Investors VII (the
"Partnership") on Form 10-K for the period ended December 31, 2005 as filed with
the  Securities  and  Exchange  Commission  on the date hereof  (the  "Report"),
pursuant  to 18  U.S.C.  (S)  1350,  as  adopted  pursuant  to  (S)  906  of the
Sarbanes-Oxley Act of 2002, I, Michael R. Burwell, President and Chief Financial
Officer of Gymno Corporation,  General Partner of the Partnership,  certify that
to the best of my knowledge:

     (1) The Report fully  complies  with the  requirements  of section 13(a) or
15(d) of the Securities Exchange Act of 1934; and

     (2)  The  information  contained  in the  Report  fairly  presents,  in all
material  respects,  the  financial  condition  and results of operations of the
Partnership at the dates and for the periods indicated.

     This Certification has not been, and shall not be deemed,  "filed" with the
Securities and Exchange Commission.


/s/ Michael R. Burwell
-----------------------------
Michael R. Burwell, President and
Chief Financial Officer of Gymno
Corporation, General Partner
March 30, 2006

                                       53
<PAGE>