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, 2008





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





1


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 if disclosure of delinquent filers pursuant to Item 405 of
Regulations S-K (§ 229.405 of this chapter) is not contained herein, and will
not be contained, to the best of registrant’s knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-K
or any amendment to the Form
10-K.                           [X]





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





Large
      accelerated filer
            [  ]
            
            Accelerated
      filer
            [  ]Non-accelerated
      filer
            [  ]
            
            Smaller
      reporting company
            [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, 2008, the aggregate value of limited partnership units held by
non-affiliates was $9,199,613. This calculation is based on the capital account
balance of the limited partners and excludes 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.


2


REDWOOD
MORTGAGE INVESTORS VII


(a
California Limited Partnership)


Index
to Form 10-K





December
31, 2008





Part IPage
      No.Item
      1
            –
      Business
            4Item
      2
            –
      Properties
            8Item
      3
            –
      Legal Proceedings
            8Item
      4
            –
      Submission of Matters to a Vote of Security Holders
    (Partners)
            8Part IIItem
      5
            –
      Market for the Registrant’s “Limited Partnership Units,” Related
      Unitholder Matters and IssuerPurchases
      of Equity Securities
            9Item
      6
            –
      Selected Financial Data
            9Item
      7
            –
      Management Discussion and Analysis of Financial Condition and Results of
      Operations
            11Item
      7A
            –
      Quantitative and Qualitative Disclosures About Market Risk
            18Item
      8
            –
      Financial Statements and Supplementary Data
            20Item
      9
            –
      Changes in and Disagreements with Accountants on Accounting and Financial
      Disclosure
            45Item
      9A(T)
            –
      Controls and Procedures
            45Item
      9B
            –
      Other Information
            45Part IIIItem
      10
            –
      Directors, Executive Officers and Corporate Governance
            46Item
      11
            –
      Executive Compensation
            47Item
      12
            –
      Security Ownership of Certain Beneficial Owners and Management and Related
      Stockholder Matters
            48Item
      13
            –
      Certain Relationships and Related Transactions, and Director
      Independence
            48Item
      14
            –
      Principal Accountant Fees and Services
            48Part IVItem
      15
            –
      Exhibits and Financial Statement Schedules
            49Signatures
            50Certifications
            51





3


Part I





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, trends in the California real estate market,
estimates as to the allowance for loan losses, estimates of future limited
partner withdrawals, the total amount of the formation loan, 2009 annualized
yield estimates, additional foreclosures in 2009, expectations regarding the
level of loan delinquencies, plans to develop certain properties, beliefs
relating to the impact on the partnership from current economic conditions and
trends in the financial and credit markets, beliefs regarding the partnership’s
ability to recover its investment in certain properties, beliefs regarding the
effect of borrower foreclosures on liquidity, the use of excess cash flow and
the intention not to sell the partnership’s loan portfolio.  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.








Item 1 –
Business





Redwood
Mortgage Investors VII, a California Limited Partnership, was organized in
1989.  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.  The partnership has no employees
as the general partners either perform the needed service, or contract the
service to an affiliate or other provider.  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” on 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 Financial Industry Regulatory Authority (FINRA).  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.  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, 2008, the partnership had a balance
in its secured loan portfolio totaling $6,425,871 with interest rates thereon
ranging from 7.00% to 11.00%.





Currently,
loans secured by First Trust Deeds comprise 82% of the amount of funds in the
secured loan portfolio, followed by Second Trust Deeds at 16% and Third Trust
Deeds at 2%.  Single family homes comprise 59% of the secured loans,
up from 42% in 2007.  Commercial loans decreased from last year, now
comprising 28% of the secured loan portfolio.  Loans on apartments
totaled 2% and 11% are on land.  Of the total secured loans, 63% are
secured by properties located in the nine counties which comprise the San
Francisco Bay Area, 24% are in other Northern California counties and the
remaining 13% are in Southern California.  Average loan size decreased
the past year to $221,582 per loan, a decrease of $26,519.  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 the
partnership’s loan plus any senior loans, divided by the property’s appraised
value, subtracted from 100%, stood at 41%.  Generally, the greater the
equity, the greater the protection for the lender.  At December 31,
2008, the partnership’s loan portfolio had two loans in foreclosure, compared to
none in 2007.


4


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





Competition
and General Economic Conditions.





The
partnership’s major competitors in providing mortgage loans are banks, savings
and loan associations, thrifts, conduit lenders, mortgage brokers, and other
entities both larger and smaller than the partnership.  Many of these
lenders are not portfolio lenders and rely upon their ability to sell notes they
have funded in order to provide further capital resources to continue their
lending operations.  The lenders that have traditionally relied upon
the sale of loans after their origination to replenish their lending capital
have found themselves unable to sell the mortgages into the market place through
the typical means of mortgage securitizations.  This inability to sell
their loans to replenish their funds available for lending has eliminated many
of these lenders. The primary sources of lending capital have been reduced to
loans that may be sold to Fannie Mae, Freddie Mac and large well-capitalized
portfolio lenders.  In all respects, money available for real estate
lending has been greatly curtailed in 2008 particularly in the latter half of
the year.  In addition to less availability of money for real estate
lending, the remaining lenders have both increased their underwriting standards
as well as eliminated a wide variety of lending programs which has significantly
reduced the number of potential borrowers for both residential and commercial
properties that may qualify for loans.  Increased lending standards
have led to reduced potential viable purchasers of real estate in general
contributing to a reduced demand for real estate.





During
2008, numerous events have buffeted the economy, the financial system and the
business sector.  These include, among others: the failure of
brokerage firm Lehman Brothers; the forced merger of the brokerage firm Bear
Stearns; the governmental bailout of insurance giant AIG; the government
takeover of both Fannie Mae and Freddie Mac (the largest holders of residential
mortgages in the United States); the merger of Bank of America with Countrywide
(the third largest holder of residential mortgages in the United States) and the
forced merger of Wachovia Bank; as well as continued declines in real estate
values. These factors have contributed to shrinking credit availability and
exposed the financial system to increased risks and decreased consumer
confidence.





In
response to the turmoil in the financial markets and to help bolster the
financial system and the economy, the United States government, through the
Federal Reserve and Treasury has adopted many measures.  These
measures include, among others, two financial stimulus packages, the temporary
raising of limits on Federal Deposit Insurance Corporation and National Credit
Union Administration from $100,000 to $250,000 per account, enacting the
Troubled Asset Relief Program to provide capital to financial institutions and
to purchase or guarantee troubled mortgage related and possibly other assets,
reducing the Federal Funds rate, placing a temporary guarantee for balances held
in money market mutual funds and enacting the Emergency Economic Stabilization
Act.  The results of these actions and future actions will take time
to have their intended effects.





During
2008, the Gross Domestic Product (GDP) the output of goods and services produced
by labor and property located in the United States began the year with an
increase of 0.9 percent for the 1st quarter, a 2.8 percent increase for the
second quarter and then a decrease of 0.5 percent for the 3rd quarter and a
dramatic decrease of 6.2 percent for the fourth quarter of 2008, thereby
demonstrating the rapid deterioration of the economy during the latter part of
2008.  Economists are generally of the opinion the United States
slipped into recession in December 2007 and that the recession has deepened
during 2008.





The
economic downturn has had a dramatic effect on the United States and
California’s unemployment figures.  For the fourth quarter of 2007,
unemployment for the nation averaged 4.8 percent.  During 2008 the
unemployment rate steadily rose.  Average national unemployment rose
to 4.9 percent during the first quarter of 2008, 5.3 percent in the second
quarter of 2008, 6.0 percent in the third quarter of 2008, and to 6.9 percent as
of December 31, 2008.  California’s unemployment mirrored the nation
with unemployment rising steadily and significantly throughout
2008.  California’s unemployment rate began 2008 at 6.1 percent and
ended the year at 8.7 percent.  The rapid rise in unemployment has
caused significant concerns among workers regarding their job security and
lowered their confidence in their own financial circumstances.





In
September 2007, after having left the Federal Funds Rate unchanged at 5.25
percent for more than two years, the Federal Reserve began to react to the
slowing economy, rising unemployment, and turmoil created by contractions in the
credit market and lowered the rate to 4.75 percent.  In lowering the
Federal Funds Rate, the Federal Reserve’s initial goals were to stimulate the
economy while keeping inflation in check, create jobs and increase liquidity in
the financial system.  Since the September 2007 reduction, the Federal
Funds Rate has been further lowered several times.  The most recent
reduction on December 16, 2008 was to a level of 0.00 to 0.25
percent.  The Federal Reserve has little room to reduce this rate for
any further effects on the economy.





5


Mortgage
interest rates are a key factor in the affordability of real estate. The higher
the interest rate, the less affordable real estate becomes.  Mortgage
interest rates are significantly influenced by the United States 10 year
treasury securities.  These securities began January 2008 at an
average rate of 3.74 percent.  They rose to a high of 4.10 percent
during June of 2008 and have been falling since to a level of 2.42 percent
during December 2008.  Mortgage interest rates followed suit as
measured by Freddie Mac for their fixed–rate 30 year conforming
loans.  They began 2008 with a January average of 5.76 percent with a
0.4 percent fee, rose to a high of 6.48 percent with a 0.7 percent fee in August
2008 and have since dropped through the remainder of 2008 to a level in December
of 5.29 percent with a 0.7 percent fee and in February 2009 to 5.13 percent with
a 0.7 percent fee.





Median
home prices have declined from their highs in 2005 and 2006.  The
median national sales price of existing homes as reported by the National
Association of Realtors was $219,000 for 2005, $221,900 for 2006 and then began
to decline to $219,000 for 2007 and to $198,100 for 2008.





Secured
Loan Portfolio





A summary
of the partnership’s secured loan portfolio as of December 31, 2008 is set forth
below.




Secured
      Loans as a Percentage of Appraised ValuesFirst
      trust deed
              
              $
              5,279,823Second
      trust deed
              
              
              1,056,999Third
      trust deed
              
              
              89,049Total
      secured loans
              
              
              6,425,871Prior
      liens due other lenders at time of loan
              
              
              1,666,711Total
      debt
              
              $
              8,092,582Appraised
      property value at time of loan
              
              $
              13,809,106Total
      secured loans as a percent of appraisals based onappraised
      values and prior liens at date of loan
              
              
              58.60
              %Number
      of Secured Loans Outstanding
              
              
              29Average
      secured loan
              
              
              221,582Average
      secured loan as a percent of partners’ capital
              
              
              2.41
              %Largest
      secured loan outstanding
              
              
              500,000Largest
      secured loan as a percent of partners’ capital
              
              
              5.44
              %Largest
      secured loan as a percent of total assets
              
              
              5.11
              %




Secured
      Loans as a Percentage of Total Secured Loans
              
              PercentFirst
      trust deed loans
              
              
              82
              %Second
      trust deed loans
              
              
              16Third
      trust deed loans
              
              
              2Total
              
              
              100
              %




Secured
      Loans by Type of Property
              
              Amount
              
              PercentSingle
      family
              
              $
              3,811,235
              
              59
              %Apartments
              
              
              99,233
              
              2Commercial
              
              
              1,793,846
              
              28Land
              
              
              721,557
              
              11Total
              
              $
              6,425,871
              
              100
              %





6


The
following is a distribution of secured loans outstanding as of December 31, 2008
by California counties.




TotalCalifornia
      County
              
              Secured
      Loans
              
              
              PercentSan Francisco Bay Area
    CountiesAlameda
              
              $
              1,011,093
              
              
              
              15.73
              %San
      Francisco
              
              
              850,000
              
              
              
              13.23Santa
      Clara
              
              
              603,577
              
              
              
              9.39Solano
              
              
              578,359
              
              
              
              9.00San
      Mateo
              
              
              380,486
              
              
              
              5.92Sonoma
              
              
              342,914
              
              
              
              5.34Contra
      Costa
              
              
              153,000
              
              
              
              2.38Napa
              
              
              99,233
              
              
              
              1.544,018,662
              
              
              
              62.54
              %Other Northern California
      CountiesMonterey
              
              
              467,000
              
              
              
              7.27
              %San
      Joaquin
              
              
              415,732
              
              
              
              6.47Stanislaus
              
              
              228,536
              
              
              
              3.56Calaveras
              
              
              189,443
              
              
              
              2.95Santa
      Cruz
              
              
              126,216
              
              
              
              1.96Mariposa
              
              
              125,000
              
              
              
              1.951,551,927
              
              
              
              24.15
              %Southern California
CountiesLos
      Angeles
              
              
              426,699
              
              
              
              6.64
              %San
      Diego
              
              
              159,161
              
              
              
              2.48Riverside
              
              
              135,000
              
              
              
              2.10San
      Bernardino
              
              
              134,422
              
              
              
              2.09855,282
              
              
              
              13.31
              %Total
              
              $
              6,425,871
              
              
              
              100.00
              %Number
      of secured loans in foreclosure
              
              
              2
              
              
              $
              323,865





Scheduled
maturity dates of secured loans as of December 31, 2008 are as
follows:




Year
      ending December 31,
              
              Amount2009
              
              $
              1,379,6362010
              
              
              1,206,7022011
              
              
              734,2332012
              
              
              1,396,9532013
              
              
              669,559Thereafter
              
              
              1,038,788Total
              
              $
              6,425,871


7


The
scheduled maturities for 2009 include two loans past maturity at December 31,
2008.  The partnership occasionally allows borrowers to continue to
make the payments on debt past maturity for periods of time.  In many
instances, the interest rate on these past maturity loans is higher than current
existing interest rates.  In the partnership’s experience, loans can
be refinanced or repaid before and after the maturity
date.  Therefore, the table of scheduled maturities is not a forecast
of future cash receipts.





Item 2 –
PropertiesDuring August 2008, the partnership acquired a
commercial-agricultural property encumbered by a first deed of trust securing a
loan in the amount of $500,000 held by a third-party lender.  In a
non-cash transaction, the partnership took ownership of the property through
foreclosure subject to this senior mortgage and assumed the obligation to make
the monthly loan payments.  As of December 31, 2008, the partnership’s
investment in this property was $633,386.





In
February 2005, the partnership acquired through foreclosure a multi-unit
property located in an upscale neighborhood in San Francisco. This property is
jointly owned with 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
the fair value of the property exceeds the combined investment by the
partnership and its affiliates.  The partnership has undertaken
additional improvements to the property.  As of December 31, 2008, the
partnership’s total investment in this property was $1,069,877.





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.  In September 2006, one of the parcels was
sold.  The partnership jointly owns this property with two affiliated
partnerships.  The partnership’s net investment in the land at
December 31, 2008 was $1,470,655.  The remaining two parcels are on
the market for sale.  The general partners believe the property may
not return the partnership’s investment upon sale and have allocated $161,974
reserve against loss.





In 1993,
the partnership acquired through foreclosure an undeveloped parcel of land
located in East Palo Alto, California.  The land was owned with two
other affiliated partnerships.  In December 2008, the partnership,
along with the two other affiliates, sold this property to an affiliate of
Redwood Mortgage Corp. for the property’s current market value.  The
partnership’s share of the current market value was $379,472.  The
partnership received 20% of the sales price in cash ($75,455) and the balance in
the form of a secured loan of $303,578 at 7.00%, amortized for 20 years, due in
full on January 1, 2016.  The partnership’s net investment in the land
at the time of sale was $62,720.








Item 3 –
Legal ProceedingsIn 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


Part II





Item 5 –
Market for the Registrant’s “Limited Partnership Units.” Related Unitholder
Matters and Issuer Purchases of Equity Securities120,000 Units at $100
each (minimum 20 Units) were offered through broker-dealer member firms of FINRA
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, 2008, 448
limited partners had an aggregate capital balance of $9,173,602.


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


During
2008, the partnership’s annualized yield on compounding accounts was 4.96% and
4.85% on monthly distributing accounts.  During 2007, the
partnership’s annualized yield on compounding accounts was 5.50% and 5.37% on
monthly distributing accounts.








Item 6 –
Selected Financial DataRedwood 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, 2008 were:





Balance
Sheets





ASSETS





2008
              
              
              
              2007
              
              
              
              2006
              
              
              
              2005
              
              
              
              2004Cash
      and cash equivalents
              
              $
              183,779
              
              
              $
              351,129
              
              
              $
              584,114
              
              
              $
              1,627,384
              
              
              $
              346,393LoansLoans,
      secured by deedsof
      trust
              
              
              6,425,871
              
              
              
              6,202,522
              
              
              
              6,218,439
              
              
              
              5,448,401
              
              
              
              7,388,478Loans,
      unsecured, net
              
              
              275,181
              
              
              
              772,031
              
              
              
              714,659
              
              
              
              161,987
              
              
              
              238,484Less
      allowance for loanlosses
              
              
              (236,893
              )
              
              
              (386,658
              )
              
              
              (454,417
              )
              
              
              (700,536
              )
              
              
              (745,476
              )Interest
      and other receivablesAccrued
      interest and late fees
              
              
              106,322
              
              
              
              73,259
              
              
              
              67,754
              
              
              
              64,304
              
              
              
              190,105Advances
      on loans
              
              
              4,593
              
              
              
              6,436
              
              
              
              —
              
              
              
              6
              
              
              
              8,188Other
              
              
              5,838
              
              
              
              20,702
              
              
              
              20,634
              
              
              
              —
              
              
              
              —Real
      estate held, net
              
              
              1,942,067
              
              
              
              1,371,401
              
              
              
              1,371,401
              
              
              
              1,870,027
              
              
              
              1,782,182Investment
      in limited liabilitycompany
              
              
              1,069,877
              
              
              
              939,937
              
              
              
              875,408
              
              
              
              882,641
              
              
              
              —Total
      assets
              
              $
              9,776,635
              
              
              $
              9,350,759
              
              
              $
              9,397,992
              
              
              $
              9,354,214
              
              
              $
              9,208,354





9


LIABILITIES AND PARTNERS’
CAPITAL





2008
              
              
              
              2007
              
              
              
              2006
              
              
              
              2005
              
              
              
              2004LiabilitiesLine
      of credit
              
              $
              —
              
              
              $
              —
              
              
              $
              —
              
              
              $
              —
              
              
              $
              —Accounts
      payable
              
              
              16,230
              
              
              
              11,865
              
              
              
              —
              
              
              
              —
              
              
              
              4,951Mortgage
      payable
              
              
              500,000
              
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              —Payable
      to affiliate
              
              
              74,830
              
              
              
              71,998
              
              
              
              71,998
              
              
              
              71,998
              
              
              
              74,987Total
      liabilities
              
              
              591,060
              
              
              
              83,863
              
              
              
              71,998
              
              
              
              71,998
              
              
              
              79,938Partners’
      capitalGeneral
      partners
              
              
              11,973
              
              
              
              11,973
              
              
              
              11,973
              
              
              
              11,973
              
              
              
              11,973Limited
      partners subjectto
      redemption
              
              
              9,173,602
              
              
              
              9,254,923
              
              
              
              9,314,021
              
              
              
              9,270,243
              
              
              
              9,116,443Total
      partners’ capital
              
              
              9,185,575
              
              
              
              9,266,896
              
              
              
              9,325,994
              
              
              
              9,282,216
              
              
              
              9,128,416Total
      liabilities and partners’ capital
              
              $
              9,776,635
              
              
              $
              9,350,759
              
              
              $
              9,397,992
              
              
              $
              9,354,214
              
              
              $
              9,208,354








STATEMENTS OF
INCOME





2008
              
              
              
              2007
              
              
              
              2006
              
              
              
              2005
              
              
              
              2004Gross
      revenue
              
              $
              899,459
              
              
              $
              600,073
              
              
              $
              581,284
              
              
              $
              691,385
              
              
              $
              868,274Expenses
              
              
              446,025
              
              
              
              94,636
              
              
              
              75,900
              
              
              
              153,830
              
              
              
              289,628Net
      income
              
              $
              453,434
              
              
              $
              505,437
              
              
              $
              505,384
              
              
              $
              537,555
              
              
              $
              578,646Net
      income to general partners (1%)
              
              
              4,534
              
              
              
              5,050
              
              
              
              5,054
              
              
              
              5,376
              
              
              
              5,786Net
      income to limited partners (99%)
              
              
              448,900
              
              
              
              500,387
              
              
              
              500,330
              
              
              
              532,179
              
              
              
              572,860$
              453,434
              
              
              $
              505,437
              
              
              $
              505,384
              
              
              $
              537,555
              
              
              $
              578,646Net
      income per $1,000 invested bylimited
      partners for entire period:-
      where income is compounded
              
              $
              50
              
              
              $
              55
              
              
              $
              55
              
              
              $
              59
              
              
              $
              65-
      where partner receives incomein
      monthly distributions
              
              $
              49
              
              
              $
              54
              
              
              $
              54
              
              
              $
              58
              
              
              $
              63





Annualized
yields when income is compounded or distributed monthly for the years 2004
through 2008 are outlined in the table below:





Compounded
              
              
              Distributed2004
              
              
              6.49
              %
              
              
              6.30
              %2005
              
              
              5.94
              %
              
              
              5.78
              %2006
              
              
              5.50
              %
              
              
              5.37
              %2007
              
              
              5.50
              %
              
              
              5.37
              %2008
              
              
              4.96
              %
              
              
              4.85
              %





Average
annualized yield from inception through the years ended December 31, 2006-2008,
when income is compounded and retained, was 7.46%, 7.34% and 7.22%,
respectively.  Average annualized yield from inception through the
years ended December 31, 2006-2008, when income is distributed monthly was
7.23%, 7.13% and 7.01%, respectively.





10


Item 7 – 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, 2008, we owned four
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 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 is not insignificant, the carrying amount of the investment will
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.













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.







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





Recently
issued accounting pronouncements





In May
2008, the FASB issued SFAS No. 162, The Hierarchy of Generally Accepted
Accounting Principles (SFAS 162).  SFAS 162 identifies the
sources of accounting principles and the framework for selecting the principles
to be used in the preparation of financial statements presented in conformity
with generally accepted accounting principles in the United
States.  SFAS 162 became effective on November 15,
2008.  The adoption of this statement did not have a material impact
on the partnership’s financial condition and results of operation.





On
January 1, 2008, the partnership adopted Statement of Financial Accounting
Standards No. 157, Fair Value
Measurements (SFAS 157). SFAS 157 defines fair value, establishes a
framework for measuring fair value and expands disclosure requirements for fair
value measurements. The partnership deferred the application of SFAS 157 for
nonfinancial assets and nonfinancial liabilities as provided for by FASB Staff
Position (FSP) FAS 157-2, “Effective Date of FASB Statement No.
157.” FSP FAS 157-2 defers the effective date of SFAS 157 to fiscal years
beginning after November 15, 2008, and interim periods within those fiscal years
for nonfinancial assets and nonfinancial liabilities, except items that are
recognized or disclosed at fair value in an entity's financial statements on a
recurring basis (at least annually).





In
October 2008, the FASB issued FSP FAS 157-3, Determining the Fair Value of a
Financial Asset When the Market for that Asset is Not Active, with an
immediate effective date.  The purpose of this release was to provide
further clarification regarding Level 3 inputs and the assumptions management
may make when the market for the asset in not active.  The adoption of
FSP FAS 157-3 did not have a material effect on the partnership’s results of
operations, financial position or liquidity.





11


In March
2006, the FASB issued SFAS No. 156, Accounting for Servicing of
Financial Assets, an amendment of FASB Statement No. 140 (SFAS 156),
which permits, but does not require, an entity to account for one or more
classes of servicing rights (i.e., mortgage servicing rights) at fair value,
with the changes in fair value recorded in the statement of
income.  SFAS 156 is effective in the first quarter of
2007.  The adoption of SFAS 156 did not have a material impact on the
partnership’s financial condition and results of operations.







On
February 15, 2007, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 159, The Fair Value Option for Financial
Assets and Financial Liabilities (SFAS 159), which allows an entity the
irrevocable option to elect fair value for the initial and subsequent
measurement for certain financial assets and liabilities on a
contract-by-contract basis.  Subsequent changes in fair value of these
financial assets and liabilities would be recognized in earnings when they
occur.  SFAS 159 further establishes certain additional disclosure
requirements.  SFAS 159 is effective for the partnership’s financial
statements for the year beginning on January 1, 2008, with earlier adoption
permitted.  Management has elected not to adopt the fair value option
for financial assets and financial liabilities.













In
December 2007, the FASB issued SFAS No. 160, Noncontrolling Interests in
Consolidated Financial Statements – an amendment of ARB No. 51 (SFAS
160).  SFAS 160’s objective is to improve the relevance,
comparability, and transparency of the financial information a reporting entity
provides in its consolidated financial statements by establishing accounting and
reporting standards for the noncontrolling interest in a
subsidiary.  SFAS 160 is effective for fiscal years beginning on or
after December 15, 2008, along with the interim periods within those fiscal
years.  Early adoption is prohibited.  Management is
currently evaluating the impact and timing of the adoption of SFAS 160 on the
partnership’s financial condition.













On
July 13, 2006, the FASB released FASB Interpretation No. 48, Accounting for Uncertainty in Income
Taxes, an interpretation of FASB Statement No. 109 (FIN
48).  FIN 48 clarifies the accounting and reporting for income taxes
where interpretation of the tax law may be uncertain.  FIN 48
prescribes a comprehensive model for the financial statement recognition,
measurement, presentation and disclosure of income tax uncertainties with
respect to positions taken or expected to be taken in income tax
returns.  The partnership adopted FIN 48 in the first quarter of
2007.  The adoption of FIN 48 did not have a material impact on the
partnership’s financial condition and results of operations.











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.





·
            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  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,
      2008, 2007 and 2006 loan brokerage commissions paid by borrowers were
      $54,298, $52,150 and $97,358,
respectively.





·
            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 are 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.  The table below
      summarizes these fees paid by the partnership for the past three
      years.





Years
      ended December 31,2008
              
              
              
              2007
              
              
              
              2006Maximum
      chargeable
              
              $
              88,470
              
              
              $
              82,968
              
              
              $
              84,971Waived
              
              
              (74,742
              )
              
              
              (82,968
              )
              
              
              (84,971
              )Net
      charged
              
              $
              13,728
              
              
              $
              —
              
              
              $
              —





12





·
            Asset
      Management FeesThe 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).  The general
      partners have from time to time not charged the maximum allowable
      rate.  The table below summarizes these fees paid by the
      partnership for the past three
years.





Years
      ended December 31,2008
              
              
              
              2007
              
              
              
              2006Maximum
      chargeable
              
              $
              34,678
              
              
              $
              34,964
              
              
              $
              34,955Waived
              
              
              (34,678
              )
              
              
              (32,042
              )
              
              
              (26,207
              )Net
      charged
              
              $
              —
              
              
              $
              2,922
              
              
              $
              8,748





·
            Other
      Fees   The partnership agreement provides that the
      general partners or their affiliates 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.





·
            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)
      may not exceed 1%.





·
            Operating
      ExpensesAn 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.





·
            Contributed
      CapitalThe 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, 2008 and 2007, a general partner,
      Gymno Corporation, had contributed $11,973 as capital in accordance with
      Section 4.02(a) of the partnership
agreement.





Results
of Operations – For the two years ended December 31, 2008, and
2007





Changes
in the partnership’s operating results for the year ended December 31, 2008 and
2007 are discussed below:





Changes
      for the years ended December 31,2008
              
              
              
              2007Dollars
              
              
              Percent
              
              
              
              Dollars
              
              
              PercentRevenueInterest
      on loans
              
              $
              9,134
              
              
              
              2
              
              %
              
              $
              16,266
              
              
              
              3
              
              %Interest-interest
      bearing accounts
              
              
              (19,246
              )
              
              
              (73
              )
              
              
              
              256
              
              
              
              1Gain
      on sale of real estate owned
              
              
              316,314
              
              
              
              —
              
              
              
              
              —
              
              
              
              —Late
      fees
              
              
              840
              
              
              
              24
              
              
              
              
              (2,738
              )
              
              
              (44
              )Other
              
              
              (7,656
              )
              
              
              (69
              )
              
              
              
              5,005
              
              
              
              82Total
      revenues
              
              
              299,386
              
              
              
              50
              
              
              
              
              18,789
              
              
              
              3ExpensesMortgage
      servicing fees
              
              
              13,728
              
              
              
              —
              
              
              
              
              —
              
              
              
              —Interest
      expense
              
              
              —
              
              
              
              —
              
              
              
              
              (1,068
              )
              
              
              (100
              )Clerical
      costs through Redwood Mortgage Corp.
              
              
              (2,937
              )
              
              
              (27
              )
              
              
              
              (1,545
              )
              
              
              (13
              )Asset
      management fees
              
              
              (2,922
              )
              
              
              (100
              )
              
              
              
              (5,826
              )
              
              
              (67
              )Provision
      for or recovery of losses on loansreal
      estate held
              
              
              327,661
              
              
              
              (1,551
              )
              
              
              
              27,980
              
              
              
              (57
              )Professional
      services
              
              
              (668
              )
              
              
              (1
              )
              
              
              
              4,982
              
              
              
              8Other
              
              
              16,527
              
              
              
              46
              
              
              
              
              (5,787
              )
              
              
              (14
              )Total
      expenses
              
              
              351,389
              
              
              
              371
              
              
              
              
              18,736
              
              
              
              25Net
      income
              
              $
              (52,003
              )
              
              
              (10
              )
              %
              
              $
              53
              
              
              
              —
              
              %





13


Please
refer to the above table throughout the discussion of Results of
Operations





The
increase in interest on loans for both 2008 and 2007 was due to increases in the
average secured loan portfolio balance and the related average interest
rates.  The interest income for both years includes the amortization
of a discount of $8,225 on an unsecured loan.  For 2006 the recorded
discount was $6,169.  The table below recaps the yearly averages and
the effect of the discount on the average interest rate.





AverageInterestAverage
              
              
              
              RateSecured
              
              Average
              
              AdjustedLoan
              
              Interest
              
              ForYear
              
              Balance
              
              Rate
              
              Discount2006
              
              $
              5,906,554
              
              9.19
              %
              9.09
              %2007
              
              $
              5,961,336
              
              9.38
              %
              9.24
              %2008
              
              $
              5,997,450
              
              9.48
              %
              9.34
              %





The
decrease in 2008 in interest from interest bearing accounts was due to a
reduction in the average account balances as the partnership was able to invest
in new loans, and declining interest rates earned.  The table below
summarizes the components in this area.





AverageInterest-
              
              AverageBearing
              
              InterestYear
              
              Balance
              
              Rate2007
              
              $
              708,538
              
              3.70
              %2008
              
              $
              392,987
              
              1.77
              %





The gain
on sale of real estate owned for 2008 is due to the partnership’s sale of its
interest in a property to an affiliate of Redwood Mortgage Corp. in the fourth
quarter of 2008.  See Note 5 to Notes to Financial
Statements.  The property had been held since 1993 in joint ownership
with two affiliated partnerships.





The
decrease in late fee revenue in 2007 was primarily due to improved loan
collections and reduced delinquencies.





Other
income decreased in 2008 primarily due to a reduction in early withdrawal
penalties of $2,138 and the fact that 2007 included extraordinary transfer fees
of $3,200 received from a retirement custodian due to its need to realign some
of their customers within various funds.  These extraordinary transfer
fees are the main reason for the increase in 2007.





The
increase in mortgage servicing fee expenses for 2008 was due to management’s
waiver of the entire mortgage servicing fees for 2007, compared to a waiver of
such fees for only the first three quarters of 2008.





The
decrease in clerical costs for both years was due to the partnership’s lower
allocation percentage in relation to the other partnerships serviced by Redwood
Mortgage Corp.





The
decrease in asset management fees for 2008 and 2007 was due to an increase in
the amount of fees waived by the general partners.  The amount fees
waived for the years 2008, 2007 and 2006, were $34,678, 32,042 and $26,207
respectively.





The
increase in the provision for losses on loans and real estate for 2008 was due
to management’s decision to maintain the allowances for losses for loans and
real estate at adequate levels based upon the current weakness in the U.S.
economy and in particular, the declines in the real estate market related to
property values and available liquidity.  Recovery of loan losses for
2007 increased due to management’s assessment of the appropriate loan loss
allowance.





The
increase in professional fees for 2007 was primarily due to general accounting
cost increases in relation to its legal services, audit and tax return
processing.





14


The
increase in other expenses for 2008 was due to increases in costs to maintain
and market the owned properties, primarily related to the new property acquired
in 2008.  The decrease in other expenses for 2007 was due to
reductions in costs to maintain and market the owned 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 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 the partnership will on occasion take
back real estate security.  The partnership’s loan portfolio had four
loans totaling $691,864 which are in one or more of the following
categories:  mature, had interest payments overdue 90 days, or had a
notice of default filed at December 31, 2008.  Two of the four loans
are mature and total $404,442.  Three of the four loans totaling
$476,865 had interest payments overdue 90 days.  Two of the four loans
totaling $323,865 had a notice of default filed.  The partnership
enters into workout agreements with borrowers who are past maturity or
delinquent in their regular payments.  One of the partnership’s loans
was subject to a workout agreement as of December 31,
2008.  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.





At
December 31, 2008 the partnership owed either solely or jointly, four properties
with a total net loan balance of $3,011,944.  The partnership acquired
one property in 2008 and sold one property.  The property sold was an
undeveloped piece of land located in East Palo Alto, California.  The
partnership had held its interest in this land since April, 1993.  The
land was owned with two other affiliated partnerships.  In December
2008 the land was sold to an affiliate of Redwood Mortgage Corp. at the current
market value.  The partnership achieved a gain on sale of
$316,314.  See Item 2 above for further details regarding all owned
property.





Management
provided a provision for loan losses of $306,539 for the year ended December 31,
2008 and a recovery of ($21,122) for the year ended December 31,
2007.  During 2008, the partnership charged off $456,304 to the
allowance for losses for uncollectible loans and related
receivables.  The general partners believe the current reserves for
losses of $236,893 are adequate to handle potential losses.  If
conditions change, the partnership may increase or decrease its provisions for
loan losses and real estate held.





The
partnership may restructure loans.  This is done either through the
modification of an existing loan or by rewriting a 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 restructured three loans in
2008 by extending the maturity dates between twelve and sixteen
months.  One of the restructured loans resulted in a loss of
$51,453.  No loans were restructured in 2007 or 2006.





15


Liquidity
and Capital Resources.





The
partnership relies upon loan payoffs and borrowers’ mortgage payments for the
source of funds for loans.  Recently, 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 experience 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.  Cash is
generated from borrower payments of interest, principal, loan payoffs and from
the partnership’s sale of real estate owned properties.  Currently the
credit and financial markets are facing a significant and prolonged
disruption.  As a result, loans are not readily available to borrowers
or purchasers of real estate.  These credit constraints impacted the
partnership and our borrowers’ ability to sell properties or refinance their
loans in the event they have difficulty making loan payments or their loan
matures.  A slow down or reduction in loan repayments would likely
reduce the partnership’s cash flows and restrict the partnership’s ability to
invest in new loans or provide earnings and capital
distributions.  During 2008, cash flow exceeded partnership expenses
and earnings distribution requirements.  Excess cash flow is invested
in new loan opportunities, when available, and for other partnership
business.





At the
time of their subscription for units in the partnership, limited partners made a
decision to either take distributions of earnings monthly, quarterly or
annually, or to compound earnings in their capital account.  If a
limited partner initially elects to receive monthly, quarterly or annual
distributions, such election, once made, is irrevocable.  Earnings
allocable to limited partners who elect to compound earnings in their capital
account are retained by the partnership for making further loans or for other
proper partnership purposes and such amounts are added to such limited partners’
capital accounts.  The table below summarizes these allocation
elections.





Years
      ended December 31,2008
              
              
              
              2007
              
              
              
              2006Distributing
              
              $
              172,167
              
              
              $
              193,917
              
              
              $
              187,432Compounding
              
              
              276,733
              
              
              
              306,470
              
              
              
              312,898Total
              
              $
              448,900
              
              
              $
              500,387
              
              
              $
              500,330Percent
      electing distribution
              
              
              38
              %
              
              
              39
              %
              
              
              37
              %





The
partnership also allows the limited partners to withdraw their capital account
subject to certain limitations and penalties (see liquidation provisions of
partnership agreement).  These withdrawals are within the normally
anticipated range the general partners would expect in their experience in this
and other partnerships.  The general partners expect a small
percentage of limited partners will elect to liquidate their capital accounts
over one year with a 10% and/or 8% 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 investments to raise cash.  The demand 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, 2008, 2007 and 2006, respectively, and is expected by
the general partners to commonly occur at these levels.





After a
five year hold period has passed, limited partners may withdraw their capital
account without penalty.  The table below sets forth actual
liquidations for the past three years:





Years
      ended December 31,2008
              
              
              
              2007
              
              
              
              2006Capital
      liquidations – without penalty
              
              $
              329,037
              
              
              $
              311,018
              
              
              $
              214,387Capital
      liquidations – subject to penalty
              
              
              29,017
              
              
              
              54,550
              
              
              
              54,733Total
              
              $
              358,054
              
              
              $
              365,568
              
              
              $
              269,120





16





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 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 FINRA 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 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 Units and
none is likely to develop.  Thus, there is no certainty 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.





The
partnership makes loans secured by California real estate.  As a
result the health of the California economy and real estate market is of primary
concern to the partnership.  The majority of the partnership’s loans
are secured by property located in Northern California, dominated by loans made
in the nine counties of the San Francisco Bay Area.  As of December
31, 2008, approximately 63 percent of the loans held by the partnership were
located in the nine counties which comprise the San Francisco Bay Area
region.





The
California economy has slowed significantly during 2008.  California
unemployment increased from 6.1 percent in December of 2007 to 8.7 percent in
December 2008.  The unemployment rate rose to over 10 percent in
February 2009 and appears likely to go higher as businesses continue to layoff
workers.  The UCLA Anderson Forecast estimates a very weak first three
quarters of 2009.  The California economy is in a recession like the
remainder of the nation.





Residential
real estate values are important to the partnership as they provide the security
behind the loans.  During 2008, residential real estate values
declined from their previous levels in 2007.  According to the
California Association of Realtors, in December 2008 the median price of an
existing single-family home in California was $281,000, a 41.5 percent decrease
from the $480,820 median for December 2007.  Sales volumes began to
increase in the second half of 2008.  The increased sales volumes have
helped to decrease inventories of homes.  The California Association
of Realtors Inventory Index for existing single-family detached homes in
December 2008 was 5.6 months, compared to 13.4 months for the same period a year
ago.  The index indicates the number of months needed to deplete the
supply of homes on the markets at the current sales rate.





For the
partnership loans outstanding at December 31, 2008, the partnership had an
average loan-to-value of 58.60% 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.  Real estate values have declined during 2008 putting upward
pressure on the partnership’s loan-to-value ratio.





Contractual Obligations Table.None








17


Item 7A – Quantitative and
Qualitative Disclosures About Market Risk





The
following table contains information about the cash held in money market
accounts, and loans held in the partnership’s portfolio as of December 31,
2008.  The presentation, for each category of information, aggregates
the assets and liabilities by their maturity dates for maturities occurring in
each of the years 2009 through 2013 and separately aggregates the information
for all maturities arising after 2013.  The carrying values of these
assets and liabilities approximate their fair market values as of December 31,
2008:





2009
              
              
              2010
              
              
              2011
              
              
              2012
              
              
              2013
              
              
              Thereafter
              
              
              TotalInterest
      earning assets:Money
      market accounts
              
              $
              163,686
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              $
              163,686Average
      interest rate
              
              
              1.00
              %
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              1.00
              %Loans
      secured by deedsof
      trust
              
              
              1,379,636
              
              
              
              1,206,702
              
              
              
              734,233
              
              
              
              1,396,953
              
              
              
              669,559
              
              
              
              1,038,788
              
              
              
              6,425,871Average
      interest rate
              
              
              9.17
              %
              
              
              9.76
              %
              
              
              9.16
              %
              
              
              9.41
              %
              
              
              9.50
              %
              
              
              8.76
              %
              
              
              9.30
              %Unsecured
      loans
              
              
              36,647
              
              
              
              79,219
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              159,315
              
              
              
              275,181Average
      interest rate
              
              
              0
              %
              
              
              0
              %
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              0
              %
              
              
              0
              %





Unsecured
loans include three loans that have no stated rate of interest, for which the
partnership is imputing interest.  One other loan, which has become
unsecured, with a coupon rate of 9.25% has been placed by the partnership on
nonaccrual status.  As such, the average interest rate for unsecured
loans has been reflected at 0%.





Market
Risk.





The
partnership’s primary market risk in terms of its profitability is the exposure
to 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 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 as 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.





The
partnership is also at risk for significant declines in the value of the
underlying collateral for the loans.  Should the collateral value
decline to be less than the outstanding loan balance and any related
receivables, the partnership would need to write-down the carrying value of the
loan and any related receivables to match the collateral value.  Also,
borrowers may be less inclined to make their minimum monthly payments, thus
placing a burden on the partnership’s cash flows.








PORTFOLIO
REVIEW – For the years ended December 31, 2008, 2007 and
2006.





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, 2008, 2007
and 2006, the partnership’s loans secured by real property collateral in the
nine San Francisco Bay Area counties (San Francisco, San Mateo, Santa Clara,
Marin, Alameda, Sonoma, Napa, Solano and Contra Costa) represented $4,018,662
(63%), $4,608,692 (74%), and $5,015,392 (81%), respectively, of the outstanding
secured loan portfolio. The majority of the remaining portfolio is represented
by loans secured by real estate located in other Northern California
counties.





18


The
following table sets forth the distribution of loans held by the partnership by
property type for the years ended December 31:





2008
              
              
              2007
              
              
              2006Single
      family homes
              
              $
              3,811,235
              
              
              
              59
              %
              
              $
              2,613,022
              
              
              
              42
              %
              
              $
              2,850,592
              
              
              
              46
              %Apartments
              
              
              99,233
              
              
              
              2
              
              
              
              695,625
              
              
              
              11
              
              
              
              687,500
              
              
              
              11Commercial
              
              
              1,793,846
              
              
              
              28
              
              
              
              2,475,890
              
              
              
              40
              
              
              
              1,774,528
              
              
              
              29Land
              
              
              721,557
              
              
              
              11
              
              
              
              417,985
              
              
              
              7
              
              
              
              905,819
              
              
              
              14Total
              
              $
              6,425,871
              
              
              
              100
              %
              
              $
              6,202,522
              
              
              
              100
              %
              
              $
              6,218,439
              
              
              
              100
              %





The
following table sets forth the priorities, asset concentrations and maturities
of loans held by the partnership as of December 31, 2008:




#
      of Loans
              
              Amount
              
              PercentFirst
      trust deeds
              24
              
              $
              5,279,823
              
              82
              %Second
      trust deeds
              4
              
              
              1,056,999
              
              16Third
      trust deeds
              1
              
              
              89,049
              
              2Total
              29
              
              $
              6,425,871
              
              100
              %Maturing
      prior to 12/31/09
              6
              
              $
              1,379,636
              
              22
              %Maturing
      during 2010
              4
              
              
              1,206,702
              
              19Maturing
      during 2011
              3
              
              
              734,233
              
              11Maturing
      after 12/31/11
              16
              
              
              3,105,300
              
              48Total
              29
              
              $
              6,425,871
              
              100
              %Average
      loan
              
              
              $
              221,582
              
              3.45
              %Largest
      loan
              
              
              
              500,000
              
              7.78
              %Smallest
      loan
              
              
              
              89,049
              
              1.39
              %Average
      Loan-to-Value, based upon appraisalsand
      senior liens at date of inception of loan
              
              
              
              
              
              58.60
              %





At
December 31, 2008 and 2007, the partnership had four unsecured loans totaling
$275,181 and $772,031, respectively.  Three of the loans are
non-interest bearing and are due in monthly installments of $2,647 through
various maturities.  These monthly payments escalate at various times
through the loan maturity date.  Interest has been imputed on these
loans at interest rates for comparable loans made during the same
periods.





During
2006, a loan in the amount of $571,494 became unsecured.  The
partnership placed the loan on nonaccrual status.  The partnership
pursued collection efforts against the borrower for the entire amount of
outstanding principal, advances and past due interest.  The
partnership ultimately negotiated a settlement which resulted in a write-off of
$421,431 from the $615,431 then due, which was charged against the allowance for
loan losses.  The general partners have established an allowance for
loan losses for its unsecured loans as a protection against amounts that may
ultimately prove uncollectible.





ASSET
QUALITY





A
consequence of lending activities is occasionally losses will be experienced and
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.





19


The
conclusion 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.  Rather, 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 allowances for loan losses and real estate held are adequate to cover
potential losses of the partnership.  As of December 31, 2008, the
general partners have determined the allowances for loan losses and real estate
held of $398,867 (4.34% of partners’ capital) 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, 2008, there were
four secured loans either matured or delinquent in interest payments over 90
days, totaling $691,864.





The
partnership may also make loans requiring periodic disbursements of
funds.  These loans include ground up construction of buildings and
loans for rehabilitation of existing structures.  Interest on these
loans is computed at simple interest method and only on the amounts disbursed on
a daily basis. As of December 31, 2008 there were no such loans.








Item 8 – Financial
Statements and Supplementary Data





A
– Financial Statements





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





·
            Report
      of Independent Registered Public Accounting Firm·
            Balance
      Sheets - December 31, 2008 and December 31, 2007·
            Statements
      of Income for the years ended December 31, 2008, 2007 and
    2006·
            Statements
      of Changes in Partners’ Capital for the years ended December 31, 2008,
      2007 and 2006·
            Statements
      of Cash Flows for the years ended December 31, 2008, 2007 and
      2006·
            Notes
      to Financial Statements





B
– Financial Statement Schedules





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





·
            Schedule
      II  - Valuation and Qualifying Accounts·
            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




















REDWOOD MORTGAGE INVESTORS
VII


(A CALIFORNIA LIMITED
PARTNERSHIP)


FINANCIAL
STATEMENTS


AND SUPPLEMENTAL
INFORMATION


AS OF DECEMBER 31, 2008 AND
2007


AND FOR EACH OF THE THREE
YEARS


IN THE PERIOD ENDED DECEMBER
31, 2008








21














TABLE OF
CONTENTS








Page
      No.Report
      of Independent Registered Public Accounting Firm
              
              
              23Balance
      Sheets
              
              
              24Statements
      of Income
              
              
              25Statements
      of Changes in Partners’ Capital
              
              
              26Statements
      of Cash Flows
              
              
              27Notes
      to Financial Statements
              
              
              28Supplemental
      SchedulesSchedule
      II -  Valuation and Qualifying Accounts
              
              
              42Schedule
      IV - Mortgage Loans on Real EstateRule
      12-29 Loans on Real Estate
              
              
              43





22












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, 2008 and 2007 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, 2008. 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 audits 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, 2008 and 2007 and the results of its operations and its cash
flows for each of the three years in the period ended December 31, 2008 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.








/s/
ARMANINO McKENNA  LLP


_____________________________


ARMANINO
McKENNA  LLP


San
Ramon, California


March 31,
2009


23


REDWOOD
MORTGAGE INVESTORS VII


(A
California Limited Partnership)


Balance
Sheets


December
31, 2008 and 2007








ASSETS





2008
              
              
              
              2007Cash
      and cash equivalents
              
              $
              183,779
              
              
              $
              351,129LoansLoans
      secured by deeds of trust
              
              
              6,425,871
              
              
              
              6,202,522Loans,
      unsecured, net of discount of $84,037 and$57,577
      in 2008 and 2007, respectively
              
              
              275,181
              
              
              
              772,031Allowance
      for loan losses
              
              
              (236,893
              )
              
              
              (386,658
              )Net
      loans
              
              
              6,464,159
              
              
              
              6,587,895Interest
      and other receivablesReceivable
      from affiliate
              
              
              5,838
              
              
              
              20,702Accrued
      interest and late fees
              
              
              106,322
              
              
              
              73,259Advances
      on loans
              
              
              4,593
              
              
              
              6,436Total
      interest and other receivables
              
              
              116,753
              
              
              
              100,397Investment
      in limited liability company
              
              
              1,069,877
              
              
              
              939,937Real
      estate held, net
              
              
              1,942,067
              
              
              
              1,371,401Total
      assets
              
              $
              9,776,635
              
              
              $
              9,350,759








LIABILITIES AND PARTNERS’
CAPITAL




LiabilitiesAccounts
      payable
              
              $
              16,230
              
              
              $
              11,865Mortgage
      payable
              
              
              500,000
              
              
              
              —Payable
      to affiliate
              
              
              74,830
              
              
              
              71,998Total
      liabilities
              
              
              591,060
              
              
              
              83,863Partners’
      capitalLimited
      partners’ capital, subject to redemption
              
              
              9,173,602
              
              
              
              9,254,923General
      partners’ capital
              
              
              11,973
              
              
              
              11,973Total
      partners’ capital
              
              
              9,185,575
              
              
              
              9,266,896Total
      liabilities and partners’ capital
              
              $
              9,776,635
              
              
              $
              9,350,759











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





24


REDWOOD
MORTGAGE INVESTORS VII


(A
California Limited Partnership)


Statements
of Income


For
the Years Ended December 31, 2008, 2007 and 2006







2008
              
              
              
              2007
              
              
              
              2006RevenuesInterest
      on loans
              
              $
              568,439
              
              
              $
              559,305
              
              
              $
              543,039Interest-interest
      bearing accounts
              
              
              6,940
              
              
              
              26,186
              
              
              
              25,930Gain
      on sale of real estate held
              
              
              316,314
              
              
              
              —
              
              
              
              —Late
      fees
              
              
              4,346
              
              
              
              3,506
              
              
              
              6,244Other
              
              
              3,420
              
              
              
              11,076
              
              
              
              6,071Total
      revenues
              
              
              899,459
              
              
              
              600,073
              
              
              
              581,284ExpensesMortgage
      servicing fees
              
              
              13,728
              
              
              
              —
              
              
              
              —Interest
      expense
              
              
              —
              
              
              
              —
              
              
              
              1,068Clerical
      costs from Redwood Mortgage Corp.
              
              
              7,817
              
              
              
              10,754
              
              
              
              12,299Asset
      management fees
              
              
              —
              
              
              
              2,922
              
              
              
              8,748Provision
      (recovery) of losses on loansand
      real estate held
              
              
              306,539
              
              
              
              (21,122
              )
              
              
              (49,102
              )Professional
      services
              
              
              65,500
              
              
              
              66,168
              
              
              
              61,186Other
              
              
              52,441
              
              
              
              35,914
              
              
              
              41,701Total
      expenses
              
              
              446,025
              
              
              
              94,636
              
              
              
              75,900Net
      income
              
              $
              453,434
              
              
              $
              505,437
              
              
              $
              505,384Net
      incomeGeneral
      partners (1%)
              
              $
              4,534
              
              
              $
              5,050
              
              
              $
              5,054Limited
      partners (99%)
              
              
              448,900
              
              
              
              500,387
              
              
              
              500,330$
              453,434
              
              
              $
              505,437
              
              
              $
              505,384Net
      income per $1,000 invested by limited partnersfor
      entire period-where
      income is compounded and retained
              
              $
              50
              
              
              $
              55
              
              
              $
              55-where
      partner receives incomein
      monthly distributions
              
              $
              49
              
              
              $
              54
              
              
              $
              54











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


25


REDWOOD
MORTGAGE INVESTORS VII


(A
California Limited Partnership)


Statements
of Changes in Partners’ Capital


For
the Years Ended December 31, 2008, 2007 and 2006







Limited
              
              
              General
              
              
              TotalPartners’
              
              
              Partners’
              
              
              Partners’Capital
              
              
              Capital
              
              
              CapitalBalances
      at December 31, 2005
              
              $
              9,270,243
              
              
              $
              11,973
              
              
              $
              9,282,216Net
      income
              
              
              500,330
              
              
              
              5,054
              
              
              
              505,384Early
      withdrawal penalties
              
              
              (4,744
              )
              
              
              —
              
              
              
              (4,744
              )Partners’
      withdrawals
              
              
              (451,808
              )
              
              
              (5,054
              )
              
              
              (456,862
              )Balances
      at December 31, 2006
              
              
              9,314,021
              
              
              
              11,973
              
              
              
              9,325,994Net
      income
              
              
              500,387
              
              
              
              5,050
              
              
              
              505,437Early
      withdrawal penalties
              
              
              (4,459
              )
              
              
              —
              
              
              
              (4,459
              )Partners’
      withdrawals
              
              
              (555,026
              )
              
              
              (5,050
              )
              
              
              (560,076
              )Balances
      at December 31, 2007
              
              
              9,254,923
              
              
              
              11,973
              
              
              
              9,266,896Net
      income
              
              
              448,900
              
              
              
              4,534
              
              
              
              453,434Early
      withdrawal penalties
              
              
              (2,321
              )
              
              
              —
              
              
              
              (2,321
              )Partners’
      withdrawals
              
              
              (527,900
              )
              
              
              (4,534
              )
              
              
              (532,434
              )Balances
      at December 31, 2008
              
              $
              9,173,602
              
              
              $
              11,973
              
              
              $
              9,185,575











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


26


REDWOOD
MORTGAGE INVESTORS VII


(A
California Limited Partnership)


Statements
of Cash Flows


For
the Years Ended December 31, 2008, 2007 and 2006




2008
                
                
                2007
                
                
                
                2006Cash
      flows from operating activitiesNet
      income
                $
                453,434
                
                $
                505,437
                
                
                $
                505,384Adjustments
      to reconcile net income tonet
      cash provided by operating activitiesProvisions
      for (recovery of) losses on loansand
      real estate
                
                306,539
                
                
                (21,122
                )
                
                
                (49,102
                )Realized
      gain on sale of real estate
                
                (316,314
                )
                
                —
                
                
                
                —Early
      withdrawal penalty credited to income
                
                (2,321
                )
                
                (4,459
                )
                
                
                (4,744
                )Amortization
      of discount on unsecured loans
                
                (8,225
                )
                
                (8,225
                )
                
                
                (6,169
                )Change
      in operating assets and liabilitiesLoans
      unsecured
                
                48,958
                
                
                (49,147
                )
                
                
                22,186Accrued
      interest and late fees
                
                (36,799
                )
                
                (39,244
                )
                
                
                (38,195
                )Advances
      on loans
                
                (10,013
                )
                
                (6,834
                )
                
                
                (2,379
                )Receivable
      from affiliate
                
                14,864
                
                
                (68
                )
                
                
                (20,634
                )Accounts
      payable
                
                4,365
                
                
                11,865
                
                
                
                —Payable
      to affiliate
                
                2,832
                
                
                —
                
                
                
                —Net
      cash provided by operating activities
                
                457,320
                
                
                388,203
                
                
                
                406,347Cash
      flows from investing activitiesPrincipal
      collected on loans
                
                1,405,304
                
                
                1,764,863
                
                
                
                3,380,178Loans
      originated
                
                (1,424,855
                )
                
                (1,761,446
                )
                
                
                (4,459,946
                )Payments
      for development of real estate
                
                (18,200
                )
                
                —
                
                
                
                —Proceeds
      from disposition of real estate
                
                75,455
                
                
                —
                
                
                
                79,780Payments
      on investment in limited liability company
                
                (132,326
                )
                
                (64,529
                )
                
                
                (27,083
                )Proceeds
      from investment in limited liability company
                
                2,386
                
                
                —
                
                
                
                34,316Net
      cash used in investing activities
                
                (92,236
                )
                
                (61,112
                )
                
                
                (992,755
                )Cash
      flows from financing activitiesPartners’
      withdrawals
                
                (532,434
                )
                
                (560,076
                )
                
                
                (456,862
                )Net
      cash used in financing activities
                
                (532,434
                )
                
                (560,076
                )
                
                
                (456,862
                )Net
      increase (decrease) in cash and cash equivalents
                
                (167,350
                )
                
                (232,985
                )
                
                
                (1,043,270
                )Cash
      and cash equivalents at beginning of year
                
                351,129
                
                
                584,114
                
                
                
                1,627,384Cash
      and cash equivalents at end of year
                $
                183,779
                
                $
                351,129
                
                
                $
                584,114Supplemental
      disclosures of cash flow informationCash
      payments for interest
                $
                —
                
                $
                —
                
                
                $
                1,068Supplemental
      disclosure of non-cash investing activitiesSecured
      loan from sale of real estate held
                $
                303,578Mortgage
      assumed upon foreclosure of 2nd trust deed
                $
                500,000





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





27


REDWOOD
MORTGAGE INVESTORS VII


(A
California Limited Partnership)


Notes
to Financial Statements


December
31, 2008, 2007 and 2006








NOTE 1 – ORGANIZATION
      AND GENERAL





Redwood
Mortgage Investors VII 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 whose stockholders are Michael R.
Burwell and two trusts both of whose trustee is Michael R.
Burwell.  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.





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








NOTE 2 – SUMMARY OF
SIGNIFICANT ACCOUNTING POLICIES





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.  Periodically, partnership cash balances exceed federally
insured limits.





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.





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.  During 2006, a
previous real estate owned property was sold with the partnership providing
financing.  This resulted in a decrease to real estate owned and
allowance for real estate held for sale of $256,873 and $28,336, respectively
and an increase to secured loans of $228,536.





28


REDWOOD
MORTGAGE INVESTORS VII


(A
California Limited Partnership)


Notes
to Financial Statements


December
31, 2008, 2007 and 2006








NOTE 2 – SUMMARY OF
SIGNIFICANT ACCOUNTING POLICIES (continued)





Loans, secured by deeds of
trust (continued)





At
December 31, 2008 and 2007, the partnership had four and three secured loans
past maturity or past due 90 days or more totaling $691,864 and $476,870,
respectively.  In addition, accrued interest and advances on these
secured loans totaled $37,031 and $17,788 at December 31, 2008 and 2007,
respectively.  At December 31, 2008 and 2007, as presented in Note 10,
the average loan to appraised value of security based upon appraised values and
prior indebtedness at the time the loans were consummated was 58.60% and 59.69%,
respectively.  When loans are considered impaired, the allowance is
updated to reflect the change in the valuation of collateral
security.  The table below summarizes the impaired loans for the years
ended December 31:





Number
            
            
            Total
            
            
            Total
            
            
            Impaired
            
            
            Average
            
            
            
            
            
            Interestof
            
            
            Impaired
            
            
            Investment
            
            
            Loans’
            
            
            Investment
            
            
            Interest
            
            
            IncomeImpaired
            
            
            Loan
            
            
            Impaired
            
            
            Loss
            
            
            Impaired
            
            
            Income
            
            
            ReceivedYear
            
            Loans
            
            
            Balance
            
            
            Loans
            
            
            Reserve
            
            
            Loans
            
            
            Accrued
            
            
            In
      Cash2008
            
            1
            
            $
            153,000
            
            $
            161,542
            
            $
            40,151
            
            $
            159,689
            
            $
            14,918
            
            $
            11,4752007
            
            —
            
            $
            
            
            $
            —
            
            $
            —
            
            $
            
            
            $
            —
            
            $
            —2006
            
            —
            
            $
            
            
            $
            —
            
            $
            —
            
            $
            
            
            $
            —
            
            $
            —





During
the year the partnership restructured a loan by reducing its interest rate and
extending its maturity date.  This restructuring required special
accounting treatment under SFAS 114, Accounting by Creditors for
Impairment of a Loan, resulting in a loss of $51,453.





In 2007 a
loan was settled from the sale of the secured property.  The sales
proceeds were insufficient to satisfy the total loan principal balance,
advances, accrued interest and late charges.  The total shortfall of
$46,637 was charged against the allowance for loan losses.





Loans unsecured,
net





During
2006, a previously secured loan became unsecured which resulted in a decrease to
secured loans, advances and accrued interest of $531,559, $2,385 and $34,745,
respectively, and an increase to unsecured loans of $568,689.  During
2008, the partnership negotiated a settlement which resulted in a write-off of
$421,338 from the $615,431 then due which was charged against the allowance for
loan losses.





The
partnership had three unsecured loans, net of a discount, totaling $275,181 and
$772,031 at December 31, 2008 and 2007, respectively.  Interest is not
being accrued as these loans are considered impaired; however, monthly payments
are being received on each loan.





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 the full amount is not
collectible.





29


REDWOOD
MORTGAGE INVESTORS VII


(A
California Limited Partnership)


Notes
to Financial Statements


December
31, 2008, 2007 and 2006








NOTE 2 – SUMMARY OF
SIGNIFICANT ACCOUNTING POLICIES (continued)





Allowance for loan
losses (continued)





The
composition of the allowance for loan losses was as follows:





December
      31, 2008
              
              
              December
      31, 2007Percent
              
              
              
              
              
              Percentof
      loans
              
              
              
              
              
              loans
      ofin
      each
              
              
              
              
              
              in
      eachcategory
              
              
              
              
              
              categoryto
      total
              
              
              
              
              
              to
      totalAmount
              
              
              loans
              
              
              Amount
              
              
              loansBalance
      at end of period applicable to:DomesticReal
      estate – mortgageSingle
      family
              
              $
              90,876
              
              
              
              59
              %
              
              $
              58,262
              
              
              
              42
              %Apartments
              
              
              10,744
              
              
              
              2
              
              
              
              10,217
              
              
              
              11Commercial
              
              
              30,792
              
              
              
              28
              
              
              
              41,701
              
              
              
              40Land
              
              
              29,253
              
              
              
              11
              
              
              
              27,832
              
              
              
              7Total
      real estate – mortgage
              
              $
              161,665
              
              
              
              100
              %
              
              $
              138,012
              
              
              
              100
              %Total
      unsecured loans
              
              $
              75,228
              
              
              
              100
              %
              
              $
              248,646
              
              
              
              100
              %Total
      allowance for losses
              
              $
              236,893
              
              
              
              100
              %
              
              $
              386,658
              
              
              
              100
              %





30


REDWOOD
MORTGAGE INVESTORS VII


(A
California Limited Partnership)


Notes
to Financial Statements


December
31, 2008, 2007 and 2006








NOTE 2 – SUMMARY OF
SIGNIFICANT ACCOUNTING POLICIES (continued)





Allowance for loan
losses (continued)





Activity
in the allowance for loan losses is as follows:





Years
      Ended December 31,2008
              
              
              
              2007
              
              
              
              2006Balance
      at beginning of year
              
              $
              386,658
              
              
              $
              454,417
              
              
              $
              700,536Charge-offsDomesticReal
      estate – mortgageSingle
      family
              
              
              (456,116
              )
              
              
              —
              
              
              
              —Apartments
              
              
              —
              
              
              
              —
              
              
              
              —Commercial
              
              
              (188
              )
              
              
              —
              
              
              
              (6,707
              )Land
              
              
              —
              
              
              
              (46,637
              )
              
              
              —Total
      charge-offs
              
              
              (456,304
              )
              
              
              (46,637
              )
              
              
              (6,707
              )RecoveriesDomesticReal
      estate – mortgageSingle
      family
              
              
              —
              
              
              
              —
              
              
              
              —Apartments
              
              
              —
              
              
              
              —
              
              
              
              —Commercial
              
              
              —
              
              
              
              —
              
              
              
              —Land
              
              
              —
              
              
              
              —
              
              
              
              —Total
      recoveries
              
              
              —
              
              
              
              —
              
              
              
              —Net
      charge-offs
              
              
              (456,304
              )
              
              
              (46,637
              )
              
              
              (6,707
              )Additions
      (recovery) charge to operations
              
              
              306,539
              
              
              
              (21,122
              )
              
              
              (49,102
              )Transfer
      to real estate held reserve
              
              
              —
              
              
              
              —
              
              
              
              (190,310
              )Balance
      at end of year
              
              $
              236,893
              
              
              $
              386,658
              
              
              $
              454,417Ratio
      of net charge-offs during the period to averagesecured
      loans outstanding during the period
              
              
              7.10
              %
              
              
              0.75
              %
              
              
              0.11
              %





Real estate
held





Real
estate held 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
2006, the partnership transferred $190,310 from the allowance for loan losses to
the allowance for losses on real estate held.





31


REDWOOD
MORTGAGE INVESTORS VII


(A
California Limited Partnership)


Notes
to Financial Statements


December
31, 2008, 2007 and 2006








NOTE 2 – SUMMARY OF
SIGNIFICANT ACCOUNTING POLICIES (continued)





Investment in limited
liability company





Investment
in limited liability company is accounted for using the equity
method.  In 2008, the Company had an 8% interest in the Larkin 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.





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.





Reclassifications





Certain
reclassifications, not affecting previously reported net income or total
partners’ capital, have been made to the previously issued financial statements
to conform to the current year classification.





Late fee
revenue





Late fees
are generally charged at 6% of the monthly installment payment past
due.  During 2008, 2007 and 2006, late fee revenue of $4,346, $3,506,
and $6,244, respectively, was recorded.  The partnership has a late
fee receivable at December 31, 2008 and 2007 of $3,090 and $1,352,
respectively.


32


REDWOOD
MORTGAGE INVESTORS VII


(A
California Limited Partnership)


Notes
to Financial Statements


December
31, 2008, 2007 and 2006








NOTE 2 – SUMMARY OF
SIGNIFICANT ACCOUNTING POLICIES (continued)





Recently issued accounting
pronouncements





In May
2008, the FASB issued SFAS No. 162, The Hierarchy of Generally Accepted
Accounting Principles (SFAS 162).  SFAS 162 identifies the
sources of accounting principles and the framework for selecting the principles
to be used in the preparation of financial statements presented in conformity
with generally accepted accounting principles in the United
States.  SFAS 162 became effective on November 15,
2008.  The adoption of this statement did not have a material impact
on the partnership’s financial condition and results of operation.





On
January 1, 2008, the partnership adopted Statement of Financial Accounting
Standards No. 157, Fair Value
Measurements (SFAS 157). SFAS 157 defines fair value, establishes a
framework for measuring fair value and expands disclosure requirements for fair
value measurements. The partnership deferred the application of SFAS 157 for
nonfinancial assets and nonfinancial liabilities as provided for by FASB Staff
Position (FSP) FAS 157-2, “Effective Date of FASB Statement No.
157.” FSP FAS 157-2 defers the effective date of SFAS 157 to fiscal years
beginning after November 15, 2008, and interim periods within those fiscal years
for nonfinancial assets and nonfinancial liabilities, except items that are
recognized or disclosed at fair value in an entity's financial statements on a
recurring basis (at least annually).





In
October 2008, the FASB issued FSP FAS 157-3, Determining the Fair Value of a
Financial Asset When the Market for that Asset is Not Active, with an
immediate effective date.  The purpose of this release was to provide
further clarification regarding Level 3 inputs and the assumptions management
may make when the market for the asset in not active.  The adoption of
FSP FAS 157-3 did not have a material effect on the partnership’s results of
operations, financial position or liquidity.





In March
2006, the FASB issued SFAS No. 156, Accounting for Servicing of
Financial Assets, an amendment of FASB Statement No. 140 (SFAS 156),
which permits, but does not require, an entity to account for one or more
classes of servicing rights (i.e., mortgage servicing rights) at fair value,
with the changes in fair value recorded in the statement of
income.  SFAS 156 is effective in the first quarter of
2007.  The adoption of SFAS 156 did not have a material impact on the
partnership’s financial condition and results of operations.







On
February 15, 2007, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 159, The Fair Value Option for Financial
Assets and Financial Liabilities (SFAS 159), which allows an entity the
irrevocable option to elect fair value for the initial and subsequent
measurement for certain financial assets and liabilities on a
contract-by-contract basis.  Subsequent changes in fair value of these
financial assets and liabilities would be recognized in earnings when they
occur.  SFAS 159 further establishes certain additional disclosure
requirements.  SFAS 159 is effective for the partnership’s financial
statements for the year beginning on January 1, 2008, with earlier adoption
permitted.  Management has elected not to adopt the fair value option
for financial assets and financial liabilities.













In
December 2007, the FASB issued SFAS No. 160, Noncontrolling Interests in
Consolidated Financial Statements – an amendment of ARB No. 51 (SFAS
160).  SFAS 160’s objective is to improve the relevance,
comparability, and transparency of the financial information a reporting entity
provides in its consolidated financial statements by establishing accounting and
reporting standards for the noncontrolling interest in a
subsidiary.  SFAS 160 is effective for fiscal years beginning on or
after December 15, 2008, along with the interim periods within those fiscal
years.  Early adoption is prohibited.  Management is
currently evaluating the impact and timing of the adoption of SFAS 160 on the
partnership’s financial condition.













On
July 13, 2006, the FASB released FASB Interpretation No. 48, Accounting for Uncertainty in Income
Taxes, an interpretation of FASB Statement No. 109 (FIN
48).  FIN 48 clarifies the accounting and reporting for income taxes
where interpretation of the tax law may be uncertain.  FIN 48
prescribes a comprehensive model for the financial statement recognition,
measurement, presentation and disclosure of income tax uncertainties with
respect to positions taken or expected to be taken in income tax
returns.  The partnership adopted FIN 48 in the first quarter of
2007.  The adoption of FIN 48 did not have a material impact on the
partnership’s financial condition and results of operations.











33


REDWOOD
MORTGAGE INVESTORS VII


(A
California Limited Partnership)


Notes
to Financial Statements


December
31, 2008, 2007 and 2006








NOTE 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 the
time of their subscription for units, 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.





Liquidity, capital
withdrawals and early withdrawals





There are
substantial restrictions on transferability of units and accordingly an
investment in the partnership is non- 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 does 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, may be liquidated
during any calendar year.


34


REDWOOD
      MORTGAGE INVESTORS VII


(A
California Limited Partnership)


Notes
to Financial Statements


December
31, 2008, 2007 and 2006








NOTE 4 –
GENERAL PARTNERS AND RELATED PARTIES





The
following commissions and fees are paid to the general partners and their
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 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 2008, 2007 and 2006, loan brokerage
commissions paid by the borrowers to Redwood Mortgage Corp. were $54,298,
$52,150 and $97,358, respectively.





Mortgage servicing
fees





Monthly
mortgage servicing fees of up to 1/8 of 1% (1.5% annually) 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.  The table below summarizes the
mortgage servicing fees paid for the years 2006-2008.





Years
      ended December 31,2008
              
              
              
              2007
              
              
              
              2006Maximum
      chargeable
              
              $
              88,470
              
              
              $
              82,968
              
              
              $
              84,971Waived
              
              
              (74,742
              )
              
              
              (82,968
              )
              
              
              (84,971
              )Net
      charged
              
              $
              13,728
              
              
              $
              —
              
              
              $
              —





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).  From time to time the general partners have waived some or
this entire fee.  The table below summarizes the asset management fees
paid for the years 2006-2008.





Years
      ended December 31,2008
              
              
              
              2007
              
              
              
              2006Maximum
      chargeable
              
              $
              34,678
              
              
              $
              34,964
              
              
              $
              34,955Waived
              
              
              (34,678
              )
              
              
              (32,042
              )
              
              
              (26,207
              )Net
      charged
              
              $
              —
              
              
              $
              2,922
              
              
              $
              8,748





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 the general partners or affiliates.





35


REDWOOD
      MORTGAGE INVESTORS VII


(A
California Limited Partnership)


Notes
to Financial Statements


December
31, 2008, 2007 and 2006








NOTE 4 –
GENERAL PARTNERS AND RELATED PARTIES (continued)





Operating
expenses





The
partnership receives certain operating and administrative services from Redwood
Mortgage Corp.  Redwood Mortgage Corp may be reimbursed by the
partnership for operating expenses incurred 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, and
postage and preparation of reports to limited partners.  During 2008,
2007 and 2006, operating expenses totaling $7,817, $10,754 and $12,299,
respectively, were reimbursed to Redwood Mortgage Corp.  For the first
quarter of 2008, $3,052 of costs was waived by Redwood Mortgage
Corp.








NOTE 5 – REAL ESTATE
HELD





During
August 2008, the partnership acquired a commercial-agricultural property
encumbered by a first deed of trust in the amount of $500,000 with a private
party (see Note 7).  In a non-cash transaction, the partnership has
taken ownership through foreclosure subject to this mortgage and the partnership
is now making the monthly payments.  As of December 31, 2008, the
partnership’s investment in this property was $633,386.





In
December 2004, the partnership acquired land through a deed in lieu of
foreclosure.  At the date of acquisition, the partnership’s investment
totaled $1,752,836 including accrued interest and advances.  During
2006, management established a $190,310 reserve against this property to reduce
the carrying amount to management’s estimate of the ultimate net realizable
value of the property.  One of the parcels comprising the property was
sold during 2006 for $336,652.  The partnership incurred a loss of
$28,336 on this sale, which was fully reserved.  At December 31, 2008,
the partnership’s total investment in this property was $1,470,655, less a
remaining reserve of $161,974.





In 1993,
the partnership, together with two other affiliates, acquired through
foreclosure a parcel of land located in East Palo Alto,
California.  In December 2008, the partnership, along with the two
other affiliates, sold this property to an affiliate of Redwood Mortgage Corp.
for the property’s current market value.  The partnership’s share of
the current market value was $379,472.  The partnership received 20%
of the sales price in cash ($75,455) and the balance in the form of a secured
loan of $303,578 at 7.00%, amortized for 20 years, due in full on January 1,
2016.  The related gain on sale was recognized in accordance with
Statement of Financial Accounting Standard No. 66, Accounting for Sales of Real
Estate.  The partnership is not obligated for any future
performance related this property.





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, 2008 and 2007:




2008
            
            
            
            2007Costs
      of properties
            
            $
            2,104,041
            
            
            $
            1,533,375Reduction
      in value
            
            
            (161,974
            )
            
            
            (161,974
            )Real
      estate held for sale, net
            
            $
            1,942,067
            
            
            $
            1,371,401


36


REDWOOD
      MORTGAGE INVESTORS VII


(A
California Limited Partnership)


Notes
to Financial Statements


December
31, 2008, 2007 and 2006








NOTE 6 – INVESTMENT IN
LIMITED LIABILITY COMPANY





In
February 2005, the partnership acquired through foreclosure a multi-unit
property located in an upscale neighborhood in San Francisco.  At the
time the partnership took ownership of the property, the partnership’s
investment totaled $836,702 including accrued interest and
advances.  This property is jointly owned with three other affiliated
partnerships.  Upon acquisition the partnership transferred its
interest (principally land and building) to Larkin Property Company, LLC
(“Larkin”).  The partnership owns 8% of the interests in Larkin and
92% is owned by three other affiliates of the partnership.  No
allowance for loss has been set aside as management believes 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 30, 2008, the
partnership has capitalized $233,175 in costs, net of recovery in 2006 from the
guarantors of the original loan, related to this property.  At
December 30, 2008, the partnership’s investment in Larkin totaled
$1,069,877.
















NOTE 7 –
BORROWINGS





Bank line of
credit





The
partnership had a bank line of credit secured by its loan portfolio of up to
$2,500,000 at .25% over prime.  This credit facility was terminated in
2007.





Mortgage





The
partnership obtained a property through foreclosure which was subject to an
interest only first lien of $500,000 with a 7.20% interest rate and matures on
April 1, 2011.  The partnership is making the monthly payments to the
senior mortgage holder.








NOTE 8 – INCOME
TAXES





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




2008
              
              
              
              2007Partners’
      capital per financial statements
              
              $
              9,185,575
              
              
              $
              9,266,896Allowance
      for loan losses
              
              
              236,893
              
              
              
              386,658Allowance
      for real estate losses
              
              
              161,974
              
              
              
              161,974Partners’
      capital tax basis
              
              $
              9,584,442
              
              
              $
              9,815,528





In 2008
and 2007, approximately 71% of taxable income was allocated to tax-exempt
organizations (i.e., retirement plans).


37


REDWOOD
      MORTGAGE INVESTORS VII


(A
California Limited Partnership)


Notes
to Financial Statements


December
31, 2008, 2007 and 2006








NOTE 9 – FAIR VALUE OF
FINANCIAL INSTRUMENTS





SFAS 157
defines fair value as the exchange price that would be received for an asset or
paid to transfer a liability (an exit price) in the principal or most
advantageous market for the asset or liability in an orderly transaction between
market participants on the measurement date. The partnership determines the fair
values of its financial assets and financial liabilities based on the fair value
hierarchy established in SFAS 157. The standard describes three levels of inputs
that may be used to measure fair value (Level 1, Level 2 and Level 3). Level 1
inputs are quoted prices (unadjusted) in active markets for identical assets or
liabilities that the Partnership has the ability to access at the measurement
date. An active market is a market in which transactions occur with sufficient
frequency and volume to provide pricing information on an ongoing basis. Level 2
inputs are inputs other than quoted prices that are observable for the asset or
liability, either directly or indirectly. Level 3 inputs are unobservable inputs
for the asset or liability. Unobservable inputs reflect the partnership’s own
assumptions about the assumptions market participants would use in pricing the
asset or liability (including assumptions about risk). Unobservable inputs are
developed based on the best information available in the circumstances and may
include the partnership’s own data.





The
partnership does not record loans at fair value on a recurring
basis.





Financial
assets and liabilities measured at fair value on a non-recurring basis as of
December 31, 2008:  ($ in thousands)





Fair
      Value Measurement at Report Date UsingQuoted
      Prices
              Significantin
      Active
              Other
              SignificantMarkets
      for
              Observable
              Unobservable
              TotalIdentical
      Assets
              Inputs
              Inputs
              as
      ofItem
              (Level
      1)
              (Level
      2)
              (Level
      3)
              12/31/2008Impaired
      loans
              $—
              $—
              $153,000
              $153,000





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 accounts, are
      subject to immediate withdrawal.





(b)
            Secured
      loans (Level 2).  The fair value of these non-impaired loans of
      $6,393,000 and $6,206,000 at December 31, 2008 and 2007, 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. For
      loans in which a specific allowance is established based on the fair value
      of the collateral, the partnership records the loan as nonrecurring Level
      2 if the fair value of the collateral is based on an observable market
      price or a current appraised value.  If an appraised value is
      not available or the fair value of the collateral is considered impaired
      below the appraised value and there is no observable market price, the
      partnership records the loan as nonrecurring Level
  3.





(c)
            Unsecured
      loans (Level 3).  Unsecured loans are valued at their principal
      less any discount or loss reserves established by management after taking
      into account the borrower’s creditworthiness and ability to repay the
      loan.





38


REDWOOD
      MORTGAGE INVESTORS VII


(A
California Limited Partnership)


Notes
to Financial Statements


December
31, 2008, 2007 and 2006








NOTE 10 – LOAN
CONCENTRATIONS AND CHARACTERISTICS





At
December 31, 2008 and 2007, the loans secured by recorded deeds of trust had the
following characteristics:





2008
              
              
              
              2007Number
      of secured loans outstanding
              
              
              29
              
              
              
              25Total
      secured loans outstanding
              
              $
              6,425,871
              
              
              $
              6,202,522Average
      secured loan outstanding
              
              $
              221,582
              
              
              $
              248,101Average
      secured loan as percent of total secured loans
              
              
              3.45
              %
              
              
              4.00
              %Average
      secured loan as percent of partners’ capital
              
              
              2.41
              %
              
              
              2.68
              %Largest
      secured loan outstanding
              
              $
              500,000
              
              
              $
              500,000Largest
      secured loan as percent of total secured loans
              
              
              7.78
              %
              
              
              8.06
              %Largest
      secured loan as percent of partners’ capital
              
              
              5.44
              %
              
              
              5.40
              %Largest
      secured loan as percent of total assets
              
              
              5.11
              %
              
              
              5.35
              %Number
      of counties where security is located (all California)
              
              
              18
              
              
              
              15Largest
      percentage of loans in one county
              
              
              15.73
              %
              
              
              31.37
              %Number
      of secured loans in foreclosure
              
              
              2
              
              
              
              —Amount
      of secured loans in foreclosure
              
              
              323,865
              
              
              
              —





At times,
a specific loan may increase above 10% of the secured loan portfolio or
partnership assets as the loan portfolio and assets of the partnership decrease
due to limited partner withdrawals and/or loan payoffs.





The
following categories of secured loans were held at December 31, 2008 and
2007:




2008
              
              
              
              2007First
      trust deeds
              
              $
              5,279,823
              
              
              $
              5,046,885Second
      trust deeds
              
              
              1,056,999
              
              
              
              1,065,972Third
      trust deeds
              
              
              89,049
              
              
              
              89,665Total
      secured loans
              
              
              6,425,871
              
              
              
              6,202,522Prior
      liens due other lenders at time of loan
              
              
              1,666,711
              
              
              
              2,308,163Total
      debt
              
              $
              8,092,582
              
              
              $
              8,510,685Appraised
      property value at time of loan
              
              $
              13,809,106
              
              
              $
              14,257,967Total
      secured loans as percent of appraisals based on appraisedvalues
      and prior liens at time loan was consummated
              
              
              58.60
              %
              
              
              59.69
              %Secured
      loans by type of propertySingle
      family
              
              $
              3,811,235
              
              
              $
              2,613,022Apartments
              
              
              99,233
              
              
              
              695,625Commercial
              
              
              1,793,846
              
              
              
              2,475,890Land
              
              
              721,557
              
              
              
              417,985Total
      secured loans
              
              $
              6,425,871
              
              
              $
              6,202,522


39


REDWOOD
      MORTGAGE INVESTORS VII


(A
California Limited Partnership)


Notes
to Financial Statements


December
31, 2008, 2007 and 2006








NOTE 10 – LOAN
CONCENTRATIONS AND CHARACTERISTICS (continued)





The
interest rates on these loans ranged from 7.00% to 11.00% at December 31, 2008
and 2007.





Scheduled
maturity dates of secured loans as of December 31, 2008 are as
follows:





Year
      Ending December 31,2009
              
              $
              1,379,6362010
              
              
              1,206,7022011
              
              
              734,2332012
              
              
              1,396,9532013
              
              
              669,559Thereafter
              
              
              1,038,788Total
      secured loans
              
              $
              6,425,871





The
scheduled maturities for 2008 above include two loans past maturity at December
31, 2008.  Occasionally, the partnership allows borrowers to continue
to make the payments on loans past maturity for periods of time.  It
is the partnership’s experience loans are sometimes refinanced or repaid before
the maturity date.  Therefore, the above tabulation for scheduled
maturities is not a forecast of future cash receipts.








NOTE 11 – COMMITMENTS AND
CONTINGENCIES





Workout
agreements





The
partnership periodically negotiates 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, 2008.  As of December 31, 2008, there was one loan
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, 2008, 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


REDWOOD
      MORTGAGE INVESTORS VII


(A
California Limited Partnership)


Notes
to Financial Statements


December
31, 2008, 2007 and 2006








NOTE 12 – SELECTED FINANCIAL
INFORMATION (Unaudited)





Calendar
      QuarterFirst
              
              
              Second
              
              
              Third
              
              
              Fourth
              
              
              AnnualRevenues2008
              
              $
              147,772
              
              
              $
              149,987
              
              
              $
              148,167
              
              
              $
              453,533
              
              
              $
              899,4592007
              
              $
              149,715
              
              
              $
              137,484
              
              
              $
              157,471
              
              
              $
              155,403
              
              
              $
              600,073Expenses2008
              
              $
              25,866
              
              
              $
              32,785
              
              
              $
              37,649
              
              
              $
              349,725
              
              
              $
              446,0252007
              
              $
              23,003
              
              
              $
              11,100
              
              
              $
              31,188
              
              
              $
              29,345
              
              
              $
              94,636Net
      income allocatedto
      general partners2008
              
              $
              1,229
              
              
              $
              1,172
              
              
              $
              1,095
              
              
              $
              1,038
              
              
              $
              4,5342007
              
              $
              1,267
              
              
              $
              1,264
              
              
              $
              1,263
              
              
              $
              1,256
              
              
              $
              5,050Net
      income allocatedto
      limited partners2008
              
              $
              120,677
              
              
              $
              116,030
              
              
              $
              109,423
              
              
              $
              102,770
              
              
              $
              448,9002007
              
              $
              125,445
              
              
              $
              125,120
              
              
              $
              125,020
              
              
              $
              124,802
              
              
              $
              500,387Net
      income per$1,000
      investedWhere
      income isReinvested2008
              
              $
              13
              
              
              $
              13
              
              
              $
              12
              
              
              $
              12
              
              
              $
              502007
              
              $
              13
              
              
              $
              14
              
              
              $
              14
              
              
              $
              14
              
              
              $
              55Withdrawn2008
              
              $
              13
              
              
              $
              13
              
              
              $
              11
              
              
              $
              12
              
              
              $
              492007
              
              $
              13
              
              
              $
              13
              
              
              $
              13
              
              
              $
              15
              
              
              $
              54





41


REDWOOD
      MORTGAGE INVESTORS VII


(A
California Limited Partnership)


Schedule
II


Valuation
and Qualifying Accounts for the years ended


December
31, 2008, 2007 and 2006








B
              
              
              
              CBalance
      at
              
              
              Additions
              
              
              
              
              
              
              
              EA
              
              
              Beginning
              
              
              Charged
      to Costs
              
              
              Charged
      to
              
              
              
              D
              
              
              
              Balance
      atDescription
              
              
              of
      Period
              
              
              and
      Expenses
              
              
              Other
      Accounts
              
              
              Deductions
              
              
              
              End
      of PeriodYear
      ended December 31, 2006Deducted
      from asset accountsAllowance
      for loan losses
              
              
              $
              700,536
              
              
              $
              (49,102
              )
              
              $
              —
              
              
              $
              (197,017
              )
              (b)
              
              $
              454,417Cumulative
      write-down ofreal
      estate owned
              
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              161,974
              
              (b)
              
              
              161,974$
              700,536
              
              
              $
              (49,102
              )
              
              $
              —
              
              
              $
              (35,043
              )
              
              
              $
              616,391Year
      ended December 31, 2007Deducted
      from asset accountsAllowance
      for loan losses
              
              
              $
              454,417
              
              
              $
              (21,122
              )
              
              $
              —
              
              
              $
              (46,637
              )
              (b)
              
              $
              386,658Cumulative
      write-down ofreal
      estate owned
              
              
              
              161,974
              
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              
              161,974$
              616,391
              
              
              $
              (21,122
              )
              
              $
              —
              
              
              $
              (46,637
              )
              
              
              $
              548,632Year
      ended December 31, 2008Deducted
      from asset accountsAllowance
      for loan losses
              
              
              $
              386,658
              
              
              $
              306,539
              
              
              $
              —
              
              
              $
              (456,304
              )
              (a)
              
              $
              236,893Cumulative
      write-down ofreal
      estate owned
              
              
              
              161,974
              
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              
              161,974$
              548,632
              
              
              $
              306,539
              
              
              $
              —
              
              
              $
              (456,304
              )
              
              
              $
              398,867(a) Represents
      write-offs of loans(b) Represents
      sales of REO











42


REDWOOD
MORTGAGE INVESTORS VII


(A
California Limited Partnership)


Schedule
IV


Mortgage
Loans on Real Estate


Rule
12-29 Loans on Real Estate


December
31, 2008








Col.
      HPrincipalCol.
      F
              
              
              
              
              
              AmountFace
              
              
              Col.
      G
              
              
              of
      LoansCol.
      C
              
              Col.
      D
              
              
              
              
              
              Amount
      of
              
              
              Carrying
              
              
              Subject
      to
              
              Col.
      I
              Col.
      JCol.
      B
              
              Final
              
              Periodic
              
              
              Col.
      E
              
              
              Mortgage
              
              
              Amount
      of
              
              
              Delinquent
              
              Type
              CaliforniaCol.
      A
              
              Interest
              
              Maturity
              
              Payment
              
              
              Prior
              
              
              Original
              
              
              Mortgage
              
              
              Principal
              
              of
              GeographicDescription
              
              Rate
              
              Date
              
              Terms
              
              
              Liens
              
              
              Amount
              
              
              Investment
              
              
              or
      Interest
              
              Lien
              LocationRes.
              
              
              9.50
              %
              11/01/13
              
              $
              2,087
              
              
              $
              —
              
              
              $
              248,240
              
              
              $
              248,118
              
              
              $
              —
              
              1st
              Los
      AngelesRes.
              
              
              10.00
              %
              11/01/15
              
              
              1,398
              
              
              
              —
              
              
              
              159,250
              
              
              
              159,161
              
              
              
              —
              
              1st
              San
      DiegoRes.
              
              
              9.25
              %
              12/01/15
              
              
              1,193
              
              
              
              —
              
              
              
              145,000
              
              
              
              145,000
              
              
              
              —
              
              1st
              AlamedaRes.
              
              
              9.50
              %
              11/01/13
              
              
              1,503
              
              
              
              —
              
              
              
              178,750
              
              
              
              178,581
              
              
              
              —
              
              1st
              Los
      AngelesRes.
              
              
              9.25
              %
              01/01/14
              
              
              1,028
              
              
              
              100,000
              
              
              
              125,000
              
              
              
              125,000
              
              
              
              —
              
              2nd
              MariposaRes.
              
              
              9.50
              %
              01/01/14
              
              
              1,825
              
              
              
              183,153
              
              
              
              217,000
              
              
              
              217,000
              
              
              
              —
              
              2nd
              MontereyRes.
              
              
              9.00
              %
              04/01/09
              
              
              1,139
              
              
              
              —
              
              
              
              141,500
              
              
              
              133,297
              
              
              
              —
              
              1st
              San
      JoaquinRes.
              
              
              8.50
              %
              03/01/09
              
              
              1,771
              
              
              
              —
              
              
              
              200,000
              
              
              
              250,000
              
              
              
              —
              
              1st
              MontereyComm.
              
              
              9.50
              %
              03/01/10
              
              
              3,279
              
              
              
              —
              
              
              
              390,000
              
              
              
              380,486
              
              
              
              —
              
              1st
              San
      MateoRes.
              
              
              9.00
              %
              03/01/10
              
              
              1,046
              
              
              
              —
              
              
              
              130,000
              
              
              
              126,216
              
              
              
              —
              
              1st
              Santa
      CruzRes.
              
              
              8.50
              %
              01/01/08
              
              
              1,523
              
              
              
              200,398
              
              
              
              215,000
              
              
              
              214,999
              
              
              
              —
              
              2nd
              SolanoLand
              
              
              11.00
              %
              02/01/08
              
              
              1,742
              
              
              
              —
              
              
              
              190,000
              
              
              
              189,443
              
              
              
              189,443
              
              1st
              CalaverasRes.
              
              
              8.88
              %
              07/01/11
              
              
              3,698
              
              
              
              1,083,333
              
              
              
              500,000
              
              
              
              500,000
              
              
              
              —
              
              2nd
              San
      FranciscoComm.
              
              
              10.25
              %
              02/01/10
              
              
              2,563
              
              
              
              —
              
              
              
              300,000
              
              
              
              300,000
              
              
              
              —
              
              1st
              Santa
      ClaraLand
              
              
              7.00
              %
              10/01/09
              
              
              1,333
              
              
              
              —
              
              
              
              228,536
              
              
              
              228,536
              
              
              
              —
              
              1st
              StanislausRes.
              
              
              9.25
              %
              01/01/11
              
              
              1,041
              
              
              
              —
              
              
              
              135,000
              
              
              
              135,000
              
              
              
              —
              
              1st
              RiversideRes.
              
              
              10.00
              %
              01/01/12
              
              
              1,275
              
              
              
              —
              
              
              
              153,000
              
              
              
              153,000
              
              
              
              153,000
              
              1st
              Contra
      CostaRes.
              
              
              7.00
              %
              01/01/12
              
              
              1,111
              
              
              
              —
              
              
              
              135,000
              
              
              
              134,422
              
              
              
              134,422
              
              1st
              San
      BernardinoRes.
              
              
              9.25
              %
              05/01/17
              
              
              740
              
              
              
              99,827
              
              
              
              90,000
              
              
              
              89,049
              
              
              
              —
              
              3rd
              AlamedaRes.
              
              
              9.75
              %
              06/01/12
              
              
              2,449
              
              
              
              —
              
              
              
              285,000
              
              
              
              282,434
              
              
              
              —
              
              1st
              San
      JoaquinComm.
              
              
              10.50
              %
              07/01/09
              
              
              3,285
              
              
              
              —
              
              
              
              450,000
              
              
              
              363,360
              
              
              
              —
              
              1st
              SolanoComm.
              
              
              9.00
              %
              07/01/12
              
              
              2,625
              
              
              
              —
              
              
              
              350,000
              
              
              
              350,000
              
              
              
              —
              
              1st
              San
      FranciscoRes.
              
              
              10.00
              %
              10/01/12
              
              
              1,185
              
              
              
              —
              
              
              
              135,000
              
              
              
              134,184
              
              
              
              —
              
              1st
              AlamedaRes.
              
              
              10.00
              %
              10/01/12
              
              
              3,028
              
              
              
              —
              
              
              
              345,000
              
              
              
              342,914
              
              
              
              —
              
              1st
              SonomaRes.
              
              
              9.50
              %
              04/01/13
              
              
              1,207
              
              
              
              —
              
              
              
              143,500
              
              
              
              143,148
              
              
              
              —
              
              1st
              AlamedaComm.
              
              
              9.88
              %
              05/01/10
              
              
              3,292
              
              
              
              —
              
              
              
              400,000
              
              
              
              400,000
              
              
              
              —
              
              1st
              AlamedaApts.
              
              
              10.50
              %
              06/01/11
              
              
              875
              
              
              
              —
              
              
              
              100,000
              
              
              
              99,233
              
              
              
              —
              
              1st
              NapaRes.
              
              
              9.50
              %
              06/01/13
              
              
              841
              
              
              
              —
              
              
              
              100,000
              
              
              
              99,712
              
              
              
              —
              
              1st
              AlamedaLand
              
              
              7.00
              %
              01/01/16
              
              
              2,354
              
              
              
              —
              
              
              
              303,578
              
              
              
              303,578
              
              
              
              —
              
              1st
              Santa
      ClaraTotal
              
              
              
              
              
              
              $
              52,436
              
              
              $
              1,666,711
              
              
              $
              6,493,354
              
              
              $
              6,425,871
              
              
              $
              476,865








Note:  Most
loans have balloon payments due at maturity.





43


REDWOOD
MORTGAGE INVESTORS VII


(A
California Limited Partnership)


Schedule
IV (continued)


Mortgage
Loans on Real Estate


Rule
12-29 Loans on Real Estate, continued





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





Year
      ended December 31,2008
              
              
              
              2007
              
              
              
              2006Balance
      at beginning of year
              
              $
              6,202,522
              
              
              $
              6,218,439
              
              
              $
              5,488,401Additions
      during periodNew
      loans
              
              
              1,728,433
              
              
              
              1,761,446
              
              
              
              4,459,946Other
              
              
              —
              
              
              
              —
              
              
              
              228,536Total
      additions
              
              
              1,728,433
              
              
              
              1,761,446
              
              
              
              4,688,482Deductions
      during periodCollections
      of principal
              
              
              1,405,304
              
              
              
              1,764,863
              
              
              
              3,380,178Foreclosures
              
              
              99,780
              
              
              
              —
              
              
              
              —Cost
      of loans sold
              
              
              —
              
              
              
              —
              
              
              
              —Amortization
      of premium
              
              
              —
              
              
              
              —
              
              
              
              —Other
              
              
              —
              
              
              
              12,500
              
              
              
              538,266Total
      deductions
              
              
              1,505,084
              
              
              
              1,777,363
              
              
              
              3,918,444Balance
      at close of year
              
              $
              6,425,871
              
              
              $
              6,202,522
              
              
              $
              6,218,439








44


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, 2008 and 2007.








Item 9A(T) – Controls and
Procedures





Evaluation
of Disclosure 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 defined in
Rule 13a-15(e) of the Securities Exchange Act of 1934) as of the end of the
period covered by this report.  Based upon that evaluation, the
general partners concluded the partnership’s disclosure controls and procedures
were effective.





General Partner's Report on Internal
Control Over Financial Reporting.





The
general partners are responsible for establishing and maintaining adequate
internal control over financial reporting, as such term is defined in the
Exchange Act Rule 13a-15(f). The internal control over financial reporting is
designed to provide reasonable assurance regarding the reliability of financial
reporting and the preparation of financial statements for external purposes in
accordance with accounting principles generally accepted in the United States of
America.





The
general partners and their respective managements conducted an evaluation of the
effectiveness of the partnership’s internal control over financial reporting
based on the Internal Control
- Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission. Based on the results of this
evaluation, the general partners concluded the partnership’s internal control
over financial reporting was effective as of December 31, 2008.





This
annual report does not include an attestation report of the partnership's
independent registered public accounting firm regarding internal control over
financial reporting. The general partner’s report was not subject to attestation
by the partnership's independent registered public accounting firm pursuant to
temporary rules of the Securities and Exchange Commission permitting the
partnership to provide only the general partner’s report in this annual
report.





Changes
to Internal Control Over Financial Reporting.





There
have not been any changes in the partnership’s internal control over financial
reporting (as such term is defined in Rule 13a-15(f) under the Exchange Act)
during the quarter ended December 31, 2008 that have materially affected, or are
reasonably likely to materially affect, the partnership’s internal control over
financial reporting.





Item 9B – Other
Information





None








45


Part III








Item 10 –
Directors,  Executive Officers  and Corporate
Governance





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 three shareholders of Gymno Corporation, a California corporation, and
has a 50% interest in the corporation.  The remaining two shareholders
are trusts as to which Mr. Burwell is the trustee of each trust.





The
General Partners.





Michael R.
Burwell.Michael R. Burwell, age 52, 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 two trusts, each of which Michael R.
Burwell is the trustee.  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.


46


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.





I.  THE
FOLLOWING COMPENSATION HAS BEEN PAID TO THE GENERAL PARTNERS AND/OR THEIR
AFFILIATES FOR SERVICES RENDERED DURING THE YEAR ENDED DECEMBER 31,
2008.  ALL SUCH COMPENSATION IS IN COMPLIANCE WITH THE GUIDELINES AND
LIMITATIONS SET FORTH IN THE PARTNERSHIP AGREEMENT.





Entity
      Receiving Compensation
              Description
      of Compensation and Services Rendered
              
              AmountRedwood
      Mortgage Corp.
              Mortgage
      Servicing Fee for servicing loans
              
              $
              13,728General
      Partners &/or Affiliates
              Asset
      Management Fee for managing assets
              
              $
              0General
      Partners
              1%
      interest in profits
              
              $
              4,534








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, 2008





Redwood
      Mortgage Corp.
              Mortgage
      Brokerage Commissions for services in connectionwith
      the review, selection, evaluation, negotiation, and
    extensionof
      the loans paid by the borrowers and not by the Partnership
              
              $
              54,298Redwood
      Mortgage Corp.
              Processing
      and Escrow Fees for services in connection with feesnotary,
      document preparation, credit investigation, and escrowpayable
      by the borrowers and not by the Partnership
              
              $
              4,656Gymno
      Corporation
              Reconveyance
      Fee
              
              $
              144








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, 2008  . . . . . . .
$7,817


47


Item 12 – Security Ownership
of Certain Beneficial Owners and Management and Related Stockholder
Matters





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








Item 13 – Certain
Relationships and Related Transactions, and Director
Independence





Refer to
footnotes 3 and 4 of the Notes to Financial Statements in Part II item 8, which
describes related party fees and data, and to footnote 5 which describes a sale
of property in which the partnership had an interest to an affiliate of Redwood
Mortgage Corp.








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”.





Since the
partnership does not have a board of directors and since the general partners
are not considered independent of the partnership, the partnership does not have
the equivalent of independent directors.








Item 14 – Principal
Accountant Fees and Services





Fees for
services performed for the partnership by the principal accountant for 2008 and
2007 are as follows:





Audit Fees  The
aggregate fees billed during the years ended December 31, 2008 and 2007 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 $53,826 and $54,414, respectively.





Audit Related
Fees   There were no fees billed during the years ended
December 31, 2008 and 2007 for audit-related services.





Tax fees   The
aggregate fees billed for tax services for the years ended December 31, 2008 and
2007 were $3,318 and $4,475, 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, 2008 and 2007.





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


48


Part
IV





Item 15 – Exhibits and
Financial Statement 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.





Exhibit
      No.
            
            Description
      of Exhibits





3.1
            
            Limited
      Partnership Agreement3.2
            
            Form
      of Certificate of Limited Partnership Interest3.3
            
            Certificate
      of Limited Partnership10.1
            
            Escrow
      Agreement10.2
            
            Servicing
      Agreement10.3
            (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 Note10.4
            (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 Loan10.6
            
            Agreement
      to Seek a Lender31.1
            
            Certification
      of General Partner pursuant to Section 302 of the Sarbanes-Oxley Act of
      200231.2
            
            Certification
      of General Partner pursuant to Section 302 of the Sarbanes-Oxley Act of
      200232.1
            
            Certification
      of General Partner pursuant to Section 906 of the Sarbanes-Oxley Act of
      200232.2
            
            Certification
      of General Partner pursuant to Section 906 of the Sarbanes-Oxley Act of
      2002





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.





49


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 31st day of March
2009.





REDWOOD
      MORTGAGE INVESTORS VII





By:
              /S/
      Michael R. BurwellMichael
      R. Burwell, General PartnerBy:
              Gymno
      Corporation, General PartnerBy:
              /S/
      Michael R. BurwellMichael
      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 31st day of March 2009.





Signature
            Title
            Date








/S/
      Michael R. BurwellMichael
      R. Burwell
            
            General
      Partner
            
            March
      31, 2009








/S/
      Michael R. BurwellMichael
      R. Burwell
              
              President,
      Secretary & Chief Financial Officer of Gymno Corporation (Principal
      Financial and Accounting Officer);
                Director
      of Gymno Corporation
              
              March
      31, 2009





50





Exhibit
31.1


GENERAL
PARTNER CERTIFICATION





I,
      Michael R. Burwell, 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 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
      report;





3.
            Based
      on my knowledge, the financial statements, and other financial information
      included in this 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
      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)) and internal
      control over financial reporting (as defined in Exchange Act Rules
      13a-15(f) and 15-d-15(f)) for the Registrant and
  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 report is being
      prepared;





(b)
            designed
      such internal control over financial reporting, or caused such internal
      control over financial reporting to be designed under our supervision, to
      provide reasonable assurance regarding the reliability of financial
      reporting and the preparation of financial statements for external
      purposes in accordance with generally accepted accounting
      principles;





(c)
            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





(d)
            disclosed
      in this report any change in the registrant’s internal control over
      financial reporting that occurred during the registrant’s most recent
      fiscal quarter (the registrant’s forth 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, General Partner


March 31,
2009


51


Exhibit
31.2





PRESIDENT
AND CHIEF FINANCIAL OFFICER CERTIFICATION





I,
      Michael R. Burwell, 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 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
      report;





3.
            Based
      on my knowledge, the financial statements, and other financial information
      included in this 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
      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)) and internal
      control over financial reporting (as defined in Exchange Act Rules
      13a-15(f) and 15-d-15(f)) for the Registrant and
  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 report is being
      prepared;





(b)
            designed
      such internal control over financial reporting, or caused such internal
      control over financial reporting to be designed under our supervision, to
      provide reasonable assurance regarding the reliability of financial
      reporting and the preparation of financial statements for external
      purposes in accordance with generally accepted accounting
      principles;





(c)
            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





(d)
            disclosed
      in this report any change in the registrant’s internal control over
      financial reporting that occurred during the registrant’s most recent
      fiscal quarter (the registrant’s forth 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, Secretary/Treasurer and


Chief
Financial Officer, of Gymno


Corporation,
General Partner


March 31,
2009


52


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, 2008 as filed with
the Securities and Exchange Commission on the date hereof (the “Report”),
pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002, I, Michael R. Burwell, certify, 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.





A signed
original of this written statement required by Section 906 has been provided to
Redwood Mortgage Investors VII and will be retained by Redwood Mortgage
Investors VII and furnished to the Securities and Exchange Commission or its
staff upon request.








/s/
Michael R. Burwell


_____________________________


Michael
R. Burwell, General Partner


March 31,
2009


53





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, 2008 as filed with
the Securities and Exchange Commission on the date hereof (the “Report”),
pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002, I, Michael R. Burwell, certify, 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.





A signed
original of this written statement required by Section 906 has been provided to
Redwood Mortgage Investors VII and will be retained by Redwood Mortgage
Investors VII and furnished to the Securities and Exchange Commission or its
staff upon request.














/s/
Michael R. Burwell


_____________________________


Michael
R. Burwell, President,


Secretary/Treasurer
& Chief Financial


Officer
of Gymno Corporation, General Partner


March
      31, 2009





54