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

                                December 31, 1998

                                     Part I

                                                                        Page No.
Item 1 - Business                                                              3
Item 2 - Properties                                                          4-5
Item 3 - Legal Proceedings                                                     6
Item 4 - Submission of Matters to a vote of Security Holders (partners)        6

                                     Part II

Item 5 - Market for the Registrants Partners Capital and related matters       6
Item 6 - Selected Financial Data                                             6-8
Item 7 - Managements Discussion and Analysis of Financial condition
and Results of Operations                                                   9-13
Item 8 - Financial Statements and Supplementary Data                       14-38
Item 9 - Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure                                                          39

                                    Part III

Item 10 - Directors and Executive Officers of the Registrant                  39
Item 11 - Executive Compensation                                              40
Item 12 - Security Ownership of Certain Beneficial Owners and management      41
Item 13 - Certain Relationships and Related Transactions                      41

                                     Part IV

Item 14 - Exhibits, Financial Statement Schedules, and Reports on Form 8-K.41-42

Signatures                                                                    43



<PAGE>


                       SECURITIES AND EXCHANGE COMMISSION
                              Washington, DC 20549
                                    Form 10-K
                Annual Report Pursuant to Section 13 or 15 (d) of
                       the Securities Exchange Act of 1934

      For the year ended December 31, 1998 Commission file number 33-30427
--------------------------------------------------------------------------------

                         REDWOOD MORTGAGE INVESTORS VII
             (Exact name of registrant as specified in its charter)

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

 650 El Camino Real Suite G, Redwood City, CA                            94063
--------------------------------------------- ----------------------------------
 (address of principal executive offices)                            (zip code)

Registrants telephone No. including area code                    (650) 365-5341
--------------------------------------------- ----------------------------------

Securities registered pursuant to Section 12(b) of the Act:

Title of each class                    Name of each exchange on which registered
-------------------------------------- -----------------------------------------
Limited Partnership Units                                                 None
-------------------------------------- -----------------------------------------

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

     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 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           XXXX                                              NO
---------------------------                              -----------------------

     Through  December  31, 1992,  the limited  partnership  units  purchased by
non-affiliates  was 119,983.59 units computed at $100.00 a unit for $11,998,359.
The offering was closed on September 30, 1992.

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
referenced in part IV.
<PAGE>


                                     Part I

Item 1 - Business

     Redwood  Mortgage  Investors  VII, a California  limited  partnership  (the
Partnership),  was organized in 1989 of which D. Russell  Burwell,  Michael R.
Burwell  and  Gymno  Corporation,  a  California  corporation,  are the  General
Partners.  The address of the General  Partners is 650 El Camino Real,  Suite G,
Redwood  City,  California  94063.  The  Partnership  is  organized to engage in
business  as a mortgage  lender,  for the  primary  purpose  of making  Mortgage
Investments  secured  by  deeds of trust on  California  real  estate.  Mortgage
Investments are arranged and serviced by Redwood Mortgage Corp., an affiliate of
the General Partners. The Partnerships  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 Partnerships capital.
The  Partnerships  general  business is more fully  described under the section
entitled  Investment  Objectives  and Criteria  pages 26-31 of the  Prospectus
which is incorporated by reference.

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

     The Partnership began selling units in October, 1989 and began investing in
mortgages in December, 1989. At December 31, 1998, the Partnership had a balance
in its Mortgage Investments  portfolio totalling $13,209,186 with interest rates
thereon ranging from 6.50% to 14.50%.

     Currently,  Mortgage  Investments  secured by First  Trust  Deeds  comprise
65.40% of the amount of funds in the Mortgage  Investment  portfolio followed by
Second  Trust Deeds of 31.71%,  and Third Trust Deeds of 1.38%.  A Fourth  Trust
Deed  makes  up the  balance.  Owner-occupied  homes,  combined  with  non-owner
occupied  homes total 18.45% of the Mortgage  Investments.  Commercial  Mortgage
Investments  origination  increased from last year, now comprising 74.76% of the
portfolio, an increase of 6.26%. The past year brought many outstanding low loan
to value lending  opportunities in the commercial segment of the market.  60.70%
of the total  Mortgage  Investments,  are in six  counties of the Bay Area.  The
County of  Stanislaus  makes up 22.25% of the Mortgage  Investments.  Stanislaus
County is a fringe county to the San Francisco Bay Area. In 1998 the Partnership
received  many good  lending  opportunities  from this  county.  The  balance of
Mortgage Investments are primarily in Northern  California.  Mortgage Investment
size  increased  this past year,  and is now  averaging  $249,230  per  Mortgage
Investment,  an  increase of $32,299.  Some of the larger  Mortgage  Investments
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  stood at 38.82%. A 40% equity
average  on  loan  origination  is  generally   considered  very   conservative.
Generally,   the  more  equity,   the  more  protection  for  the  lender.   The
Partnerships  Mortgage  Investment  portfolio  is in  good  condition  with  no
properties in foreclosure as of December, 1998.
<PAGE>

Item 2 - Properties

     A summary of the Partnerships  Mortgage Investment Portfolio as of December
31, 1998 is set forth below.

Mortgage Investments as a Percentage of Total Mortgage Investments

First Trust Deeds                                                 $8,638,975.93
Appraised Value of Properties                                     15,017,642.00
  Total Investment as a % of Appraisal                                    57.53%
First Trust Deeds                                                 $8,638,975.93
Second Trust Deed Mortgage Investments                             4,188,401.09
Third Trust Deed Mortgage Investments                                181,808.20
Fourth Trust Deed Mortgage Investments *                             200,001.20
                                                             -------------------
                                                                  13,209,186.42
First Trust Deeds due other Lenders                               11,769,481.00
Second Trust Deeds due other Lenders                                 816,528.00
Third Trust Deeds due other Lenders                                  142,858.00

Total Debt                                                       $25,938,053.42

  Appraised Property Value                                       $42,393,561.00
  Total Investments as a % of Appraisal                                   61.18%

Number of Mortgage Investments Outstanding                                   53

Average Investment                                                   249,229.93
Average Investment as a % of Net Assets                                    2.09%
Largest Investment Outstanding                                     1,050,000.00
Largest Investment as a % of Net Assets                                    8.79%

Mortgage Investments as a Percentage of Total Mortgage Investments

First Trust Deeds                                                         65.40%
Second Trust Deeds                                                        31.71%
Third Trust Deeds                                                          1.38%
Fourth Trust Deeds                                                         1.51%
                                                             -------------------
Total                                                                    100.00%

Mortgage Investments  by                Amount              Percent
Type of Property

Owner Occupied Homes                     $746,334.37            5.65%
Non-Owner Occupied Homes                1,691,015.81           12.80%
Apartments                                897,291.93            6.79%
Commercial                              9,874,544.31           74.76%
                                   ------------------      -----------

Total                                 $13,209,186.42          100.00%

* Footnotes on following page

<PAGE>

     The following is a distribution of Mortgage  Investments  outstanding as of
December 31, 1998 by Counties.

County                           Total Mortgage             Percent
                                   Investments

Stanislaus                          $2,939,082.26            22.25%
San Francisco                        1,971,467.60            14.93%
Alameda                              1,748,735.54            13.24%
Santa Clara                          1,679,961.01            12.72%
San Mateo                            1,051,446.21             7.96%
Solano                                 994,111.14             7.53%
Contra Costa                           850,970.56             6.44%
Monterey                               757,092.47             5.73%
Marin                                  714,617.48             5.41%
Sonoma                                 174,697.65             1.32%
Sacramento                             132,372.65             1.00%
Ventura                                 91,000.00             0.69%
Shasta                                  81,033.44             0.61%
Santa Cruz                              22,598.41             0.17%
                                ------------------       -----------

Total                              $13,209,186.42           100.00%

     * Redwood Mortgage Investors VII, together with other Redwood Partnerships,
hold a second and a fourth trust deed against the secured property. In addition,
the principals behind the borrower corporation have given personal guarantees as
collateral.  The overall  loan to value ratio at the  inception of this loan was
76.52%.  In addition to the  borrower  paying an  interest  rate of 12.25%,  the
Partnership  and other  lenders will also  participate  in profits.  The General
Partners  have had previous  loan  activity  with this  borrower  which had been
concluded  successfully,  with extra earnings earned for the other  partnerships
involved.

Statement of Condition of Mortgage Investments

Number of Mortgage Investments in Foreclosure                   -0-

     Scheduled  maturity  dates of mortgage  investments as of December 31, 1998
are as follows:

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

                            1999                                      $4,910,183
                            2000                                       3,556,483
                            2001                                       1,794,692
                            2002                                       1,317,987
                            2003                                       1,209,761
                         Thereafter                                      420,080
                                                                 ===============
                                                                     $13,209,186
                                                                 ===============

     The  scheduled  maturities  for 1999 include  approximately  $1,560,605  in
twelve  mortgage  investments  which are past  maturity  at December  31,  1998.
Interest payments on most of these loans are current. $479,308 of these Mortgage
Investments were categorized as delinquent over 90 days.

     Five mortgage  investments  with  principal  outstanding  of $1,566,585 had
interest  payments  overdue in excess of 90 days. Two Mortgage  Investments with
principal outstanding of $231,966 were considered impaired at December 31, 1998.
That is interest accruals are no longer recorded thereon.
<PAGE>
Item 3 - Legal Proceedings

     In the normal  course of business the  Partnership  may become  involved in
various types of legal  proceedings  such as  assignments  of rents,  bankruptcy
proceedings,   appointments   of   receivers,   unlawful   detainers,   judicial
foreclosures, etc., to enforce the provisions of the deeds of trust, collect the
debt owed under the promissory  notes or to  protect/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.  Management  anticipates  that
the ultimate  result of these cases will not have a material  adverse  effect on
the net assets of the Partnership,  with due consideration  having been given in
arriving at the  allowance for doubtful  accounts.  Also refer to a more precise
discussion under Note 6 of the Financial Statements on Page 27 of this report.

Item 4 - Submission of matters to vote of Security Holders (Partners).

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

                                     Part II

Item 5 - Market for the Registrant Units and Related Partnership Matters.

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

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

Item 6 - Selected Financial Data

     Redwood Mortgage Investors VII began operations in December 1989. Financial
results  for  years  1984 to 1989 for prior  partnerships  are  incorporated  by
reference to the  Prospectus  (S-11) dated  October 20, 1989,  Table III pages 7
through  11 and  Supplement  No. 3 dated  October  2, 1990 to  Prospectus  dated
October 20, 1989, Table III pages 27 through 33.


<PAGE>

     Financial  condition and results of operation for the Partnership for three
years to December 31, 1998 were:
<TABLE>
<CAPTION>

                                                             Balance Sheet
                                                                Assets

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

                                                               1998                 1997                 1996
                                                      --------------       --------------       --------------
<S>                                                        <C>                  <C>                  <C>     
Cash                                                       $461,544             $520,837             $755,089
Accounts Receivable:
   Mortgage Investments secured by Deeds of Trust        13,209,186           13,449,741           12,036,293
   Accrued interest and other fees                          442,350              427,952              264,495
   Advances on Mortgage Investments                          39,733               33,154               41,203
   Other receivables - Unsecured                            242,493              252,422              337,242
   Less allowance for losses                              (787,042)            (424,738)            (228,647)
Real Estate Owned acquired through foreclosure at
    estimated net realizable value                          397,396              687,139            1,468,345
Partnership Interest                                              0              346,017              242,394

                                                      --------------       --------------       --------------
                                                        $14,005,660          $15,292,524          $14,916,414
                                                      --------------       --------------       --------------


</TABLE>
<PAGE>
<TABLE>
<CAPTION>
                                                   Liabilities and Partners Capital


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

                                                               1998                1997                1996
                                                      --------------                          --------------
                                                                          --------------
Liabilities:
<S>                                                      <C>                 <C>                 <C>       
Note payable - Bank                                      $1,912,663          $2,341,816          $1,175,000
Accounts payable and accrued expenses                        12,547               1,845               1,472
Deferred Interest                                           131,743              69,316             154,598
                                                      --------------      --------------      --------------
                                                          2,056,953           2,412,977           1,331,070

Partners Capital:
  General Partners                                           11,978              11,978              11,978
  Limited Partners subject to redemption                 11,936,729          12,867,569          13,573,366
                                                      --------------      --------------      --------------
     Total Partners Capital                              11,948,707          12,879,547          13,585,344
                                                      --------------      --------------      --------------


                                                        $14,005,660         $15,292,524         $14,916,414
                                                      --------------      --------------      --------------


                                                          Statement of Income

Gross revenue                                            $1,657,728          $1,623,863           $1,580,500
Expenses                                                    811,157             796,984              721,401
                                                      --------------      --------------       --------------


Net Income                                                  846,571            $826,879             $859,099
                                                      --------------      --------------       --------------

Net income to General Partners (1%)                           8,466              $8,269               $8,591
                                                      ==============      ==============       ==============

Net Income to Limited Partners (99%)                        838,105            $818,610             $850,508
                                                      ==============      ==============       ==============


Net Income per $1,000 invested by Limited
 Partners for entire period:
   - where income is reinvested and compounded                  $67                 $61                  $60
                                                      ==============      ==============       ==============

   - where partner receives income in monthly
       distributions                                            $65                 $59                  $59
                                                      ==============      ==============       ==============
<FN>

Net income in 1996 averaged at an annualized  yield of 6.02%. In 1997, the annualized  yield was 6.10% and in 1998 the annualized
yield was 6.69%. Average annualized yield since inception through December 31, 1998, was 7.75%.
</FN>
</TABLE>
<PAGE>
            MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
                            AND RESULTS OF OPERATIONS


     On September 30, 1992, the Partnership  had sold  119,983.59  units and its
contributed  capital totaled  $11,998,359 of the approved  $12,000,000 issue, in
units of $100 each.  As of that date,  the  offering  was  formally  closed.  At
December 31, 1998, Partners Capital totaled $11,948,707.

     At December 31, 1998,  the  Partnership  Mortgage  Investments  outstanding
totalled  $13,209,186.  This  represents a decline of $240,555 from the 12/31/97
Mortgage Investments balance. This reduction in Mortgage Investments outstanding
as of 12/31/98  was chiefly due to payments of cash  withdrawals  to the Limited
Partners of  $1,856,833,  a reduction  of Real Estate  owned and a reduction  in
Partnership Interest of $289,743 and $ 346,017, respectively, a decrease in Note
Payable-Bank of $429,153, reinvestment of earnings of $846,571 and investment of
cash.  The  ability of the  Partnership  to invest in new  Mortgage  Investments
during 1998 was  partially  offset by  withdrawals  of income and capital by the
Partners  in the amount of  $1,856,833  including  early  withdrawal  penalties.
Mortgage investment increased from $12,036,293 from 1996 to $13,449,741 in 1997,
an increase of $1,413,448  chiefly due to the ability of the General Partners to
reduce the net amounts  invested  in real  estate  owed (REO)  during the twelve
months,  by increasing  bank credit line  borrowing to $2,341,816 as of December
31, 1997 from  $1,175,000 as of December 31, 1996, by reinvesting of earnings of
$419,231 and investment of cash. Mortgage  Investments  decreased  slightly,  by
$346,348,  during the year ended  December  31,  1996,  from  $12,382,641  as of
December 31,  1995,  to  $12,036,293  as of December  31,  1996.  This  Mortgage
Investment  reduction  was due  primarily to a reduced usage of the bank line of
credit. The Partnership began funding Mortgage Investments on December 27, 1989,
and as of December 31, 1998,  had credited the Partners  accounts with income at
an average annualized (compounded) yield of 7.75%.

     Currently,  general mortgage  interest rates are lower than those prevalent
at  the  inception  of the  Partnership.  New  Mortgage  Investments  are  being
originated  at these lower  interest  rates.  The result is a  reduction  of the
average  return  across the entire  portfolio  held by the  Partnership.  In the
future, interest rates likely will change from their current levels. The General
Partners  cannot at this time predict at what levels  interest  rates will be in
the future. The General Partners believe the rates charged by the Partnership to
its borrowers will change significantly from the beginning of 1999 over the next
twelve months. As of December 31, 1998 the Partnership Real Estate Owned account
and the  investment  in  Partnership  account  have been  reduced  to a combined
balance of $397,396.  These  accounts had combined  balances of  $1,033,156  and
$1,710,739  for the years ended  December 31, 1997 and 1996,  respectively.  The
conversion of these non-earning  assets to income producing assets will generate
increased  income.  The  overall  effect of these  developments  will  allow the
Partnership to increase the annualized  yields paid by the Partnership in future
quarters.  The General  Partners  anticipate  that the annualized  yield for the
coming new year, 1999, will be higher than the previous years.

     The  Partnership has a line of credit with a commercial bank secured by its
Mortgage  Investments to a limit of $3,000,000,  at a variable interest rate set
at one half  percent  above the prime rate.  As of  December  31,  1998,  it has
borrowed  $1,912,663.  This  line of  credit  expires  on March  31,  1999.  The
Partnership  has  successfully  negotiated  for a  replacement  line of  credit,
effective January,  1999, with another  institution for a limit of $3,500,000 at
prime  plus  .25%  (7.75% + .25% = 8%).  This  facility  could  increase  as the
Partnership  capital increases.  This added source of funds helped in maximizing
the  Partnership  yield by allowing  the  Partnership  to minimize the amount of
funds in lower yield investment accounts when appropriate  Mortgage  Investments
are not currently available.  Since most of the Mortgage Investments made by the
Partnership  bear  interest at a rate in excess of the rate  payable to the bank
which  extended  the line of credit,  once the required  principal  and interest
payments on the line of credit are paid to the bank,  the  Mortgage  Investments
funded  using the line of credit  generate  revenue for the  Partnership.  As of
December 31, 1998, the Partnership is current with its interest  payments on the
line of credit. In 1995, the
<PAGE>

     Partnership  incurred  $163,361 of interest on note  payables  reflecting a
small  increase in the  overall  average  credit  balance  outstanding  from the
previous year. The  Partnership  still  maintained a positive spread between the
cost of  borrowing  the funds and the interest  earned in lending the funds.  In
1996,  interest  payments  decreased to $127,454  reflecting  the  Partnerships
overall smaller average outstanding credit line balance due primarily to a large
number of Mortgage Investment payoffs. For the years ended December 31, 1997 and
1998,  interest  paid was  $198,316  and $170,867  respectively,  reflecting  an
overall greater  average  utilization of the credit line from the previous three
years.

     The Partnerships income and expenses, accruals and delinquencies are within
the  normal  range of the  General  Partners  expectations,  based  upon  their
experience in managing  similar  partnerships  over the last  twenty-one  years.
Mortgage  Servicing  Fees  decreased  from $97,267 in 1996,  to $83,559 in 1997,
primarily due to timing of receipt of payments from borrowers and actual payment
of the Mortgage  Servicing  Fee.  Mortgage  Servicing  Fees increased in 1998 to
$128,493 from $83,559 in 1997 chiefly due to an increase during the 1998 year of
the monthly  loan  service  fee to 1/12% (1% per year).  Asset  Management  Fees
increased in 1998 from $0 in 1997 and $0 in 1996 to $16,141 in 1998.  As for the
two previous years, the General Partners waived this fee to the Partnership. All
other  expenses  flucuated  in a very close  range  except for  Interest on Note
Payable - bank and  Provision  for  Doubtful  Accounts and losses on Real Estate
acquired  through  foreclosure  each  discussed  elsewhere  in  this  Management
Discussion  and  Analysis of  Financial  Condition  and  Results of  Operations.
Borrower  foreclosures,  as set forth under Results of Operations,  are a normal
aspect of Partnership  operations and the General Partners  anticipate that they
will not have a material effect on liquidity. As of December 31, 1998, there was
no property in  foreclosure.  Cash is constantly  being  generated from interest
earnings,  late  charges,   pre-payment  penalties,   amortization  of  Mortgage
Investments  and  pay-off on notes.  Currently,  cash flow  exceeds  Partnership
expenses,  earnings and capital  payout  requirements.  Excess cash flow will be
invested in new Mortgage Investment opportunities when available, used to reduce
the Partnership credit line or other Partnership business.

     The General Partners  regularly review the Mortgage  Investment  portfolio,
examining the status of delinquencies,  the underlying collateral securing these
properties,  the REO 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.  Because  of the  number of  variables  involved,  the
magnitude of the possible swings and the General  Partners  inability to control
many of these factors,  actual results may and do sometimes differ significantly
from  estimates  made by the General  Partners.  Management  provided  $419,437,
$434,495  and $423,054 as  provision  for doubtful  accounts for the years ended
December 31,  1996,  1997 and 1998,  respectively.  The  provision  for doubtful
account  was  increased  by $15,058 in 1997,  to  $434,495 as the selling of REO
accumulated  primarily  in the  California  recession of the early to mid 1990s
netted less  proceeds  than  originally  anticipated  and the  General  Partners
further  refinement of anticipated sales proceeds on remaining REO,  collections
of unsecured receivables,  and additional provisions for unspecified losses. The
provision  for doubtful  accounts was  decreased by $11,441 to $423,054 in 1998.
This decrease  reflected  reduced  expected REO anticipated  losses and improved
collections of secured and unsecured receivables.

     The December 1998 issue of Western Economic Developments,  published by the
Federal  Reserve Bank of San Francisco,  said the following about the California
economy:

     The pace of  economic  growth in  California  was solid in recent  months,
despite continued contraction in some major industries. Total payroll employment
rose 3.2 percent on an annual basis in October and  November.  This is above the
average growth rate for the first eleven months of 1998, but it is below the 3.8
percent pace from last year.  Faced by declining export demand and rising import
competition, durable
<PAGE>

     goods manufacturers cut employment in November.  Manufacturers of computers
and  electronic  components  have  been  particularly  hard hit this  year,  and
aerospace  employment  has  contracted.  However,  the pace of job  creation has
remained  strong in  sectors  other than  manufacturing,  and this has helped to
lower the state unemployment rate to 5.7 percent in November.

     Californias  state and local  governments  have created new jobs at about a
2.5 percent annual pace this year, a pickup from prior years that is due in part
to improved fiscal  capacity.  About 21,000 of the 29,000 jobs created this year
were for educators at local schools.

     To the Partnership, the above evaluation of the California economy means an
increase in property values, job growth, personal income growth, etc., which all
translates  into  more  loan  activity,  which of  course,  is  healthy  for the
Partnerships lending activity.

     The  Partnerships  interest  in land  located in East Palo  Alto,  Ca, was
acquired  through  foreclosure.  The  investment  is classified as Investment in
Partnership in the Financial Statements.  The Partnerships interest is invested
with that of two other  Partnerships.  The Partnerships  basis of $ 0, $346,017
and $242,394 for the years ended December 31, 1998, 1997 and 1996  respectively,
has been invested with that of two other Partnerships.  The Partnership had been
attempting  to  develop  property  into an  approximately  63 units  residential
subdivision,   (the   Development).   The  proposed   Development  had  gained
significant  public  awareness  as a result of certain  environmental,  fish and
wildlife,   density,   and  other  concerns.   Incorporated  into  the  proposed
Development  were various  mitigation  measures  which  included  remediation of
hazardous  material  existing on the property,  and  protection  of  potentially
affected  species due to the  proximity  of the  property  to the San  Francisco
Baylands.  These  issues  and others  sparked  significant  public  controversy.
Opposition against and support for the proposed Development existed. Among those
in opposition to the project was Rhone Poulanc,  Inc. which is responsible for a
nearby  hazardous  waste site.  Rhone Poulanc,  Inc. has been  identified as the
Responsible Party for the Arsenic  Contamination which affected a portion of the
property.  On May 8, 1998, the  Partnership,  in order to resolve disputes which
arose  during  the  course  of the  attempts  to  obtain  entitlements  for this
Development,  entered into agreements with Rhone-Poulanc,  Inc which among other
things,   restricted  the  property  to  non  residential  uses,   provided  for
appropriate  indemnification and included other considerations  including a cash
payment to the  Partnership.  The  Partnership  has  retained  ownership  of the
property,  which is subject to various deed  restrictions,  options and or first
rights of refusal.  The General  Partners  are pleased  with this outcome to the
residential  development  attempt.  The General  Partners may now explore  other
available options with respect to alternative uses for the property. In order to
pursue these options,  rezoning of the propertys  existing  residential  zoning
classification  will be  required.  The  Partnership  is  continuing  to explore
remediation  options  available to mitigate the pesticide  contamination,  which
affects the property.  This pesticide  contamination appears to be the result of
agricultural  operations  by  prior  owners,  and is  unrelated  to the  Arsenic
Contamination for which  Rhone-Poulanc,  Inc. remains  responsible.  The General
Partners  do not  believe  at  this  time  that  remediation  of  the  pesticide
contaminants  will have a material adverse effect on the financial  condition of
the Partnership.

     At the time of subscription to the  Partnership,  Limited  Partners made an
irrevocable decision to either take distributions of earnings monthly, quarterly
or annually or to compound  earnings  in their  capital  account.  For the years
ended  December 31,  1996,  December  31,  1997,  and  December  31,  1998,  the
Partnership made  distributions of earnings to Limited Partners after allocation
of  syndication  costs  of,  $327,887,   $399,379  and  $456,358   respectively.
Distribution  of Earnings to Limited  Partners  after  allocation of syndication
costs for the years ended  December  31, 1996,  December  31, 1997,  and 1998 to
Limited Partners capital accounts and not withdrawn was $522,621, $419,231, and
$381,747  respectively.  As of December 31, 1996, December 31, 1997 and December
31, 1998,  Limited Partners electing to withdraw earnings  represented 36%, 44%,
53% and 54% of the Limited Partners capital.
<PAGE>

     The Partnership  also allows the Limited Partners to withdraw their capital
account  subject  to  certain   limitations  (see   liquidation   provisions  of
Partnership  Agreement).  For the years ended  December 31,  1996,  December 31,
1997, and December 31, 1998, $412,798, $475,348 and $381,458 respectively,  were
liquidated  subject to the 10% penalty for early  withdrawal.  These withdrawals
are within the normally anticipated range that the General Partners would expect
in their experience in this and other partnerships.  The General Partners expect
that a small  percentage  of  Limited  Partners  will elect to  liquidate  their
capital  accounts  over  one  year  with  a 10%  early  withdrawal  penalty.  In
originally  conceiving the  Partnership,  the General Partners wanted to provide
Limited   Partners  needing  their  capital  returned  a  degree  of  liquidity.
Generally, Limited Partners electing to withdraw over one year need to liquidate
investment  to  raise  cash.  The  trend  the  Partnership  is  experiencing  in
withdrawals  by  Limited  Partners  electing  a  one  year  liquidation  program
represents  a small  percentage  of Limited  Partner  capital as of December 31,
1996, December 31, 1997, and December 31, 1998,  respectively and is expected by
the General Partners to commonly occur at these levels.

     Additionally, for the years ended December 31, 1996, December 31, 1997, and
December  31,  1998,  $318,902,  $737,568  and  $1,019,017  respectively,   were
liquidated  by Limited  Partners who have elected a  liquidation  program over a
period of five years or longer.  This  ability to  withdraw  after five years by
Limited Partners has the effect of providing Limited Partner liquidity which the
General  Partners  then  expect  a  portion  of the  Limited  Partners  to avail
themselves  of.  This has the  anticipated  effect of the  Partnership  growing,
primarily  through  reinvestment  of  earnings in years one  through  five.  The
General Partners expect to see increasing numbers of Limited Partner withdrawals
in years five through eleven,  at which time the bulk of those Limited  Partners
who have sought withdrawal have been liquidated.  After year eleven, liquidation
generally subsides and the Partnership capital again tends to increase.

     Actual  liquidation  of both  capital  and  earnings  from year five (1994)
through year nine (1998) is shown hereunder: Years ended December 31,
<TABLE>

                          1994                   1995                  1996                  1997                  1998
                  -------------         --------------        --------------        --------------       ---------------
<S>                   <C>                     <C>                   <C>                   <C>                   <C>    
Earnings              $263,206                270,760               336,341               399,379               456,358
Capital              *$340,011                184,157               722,536             1,212,916             1,400,475
                  =============         ==============        ==============        ==============       ===============
Total                 $603,217               $454,917            $1,058,877            $1,612,295            $1,856,833
                  =============         ==============        ==============        ==============       ===============
</TABLE>

* These amounts represent gross of early withdrawal penalties.

     The Year 2000 will be a challenge for the entire world, with respect to the
conversion of existing computerized operations. The Partnership is completing an
assessment of Year 2000 hardware and software issues. This assessment is not yet
fully complete.  The Partnership  relies on Redwood Mortgage Corp., an affiliate
of the Partnership,  and third parties to provide loan and investor services and
other  computerized  functions  effected by Year 2000  computerized  operations.
Major  services  provided  to  the  Partnership  by  these  companies  are  loan
servicing,  accounting  and  investor  services.  The  vendors  that  supply the
software for loan servicing  have already  confirmed  compliance  with Year 2000
issues.  Installation  of accounting  software that is Year 2000  compliant will
begin  after the  1998-year  end.  The  investor  servicing  software  Year 2000
compliance  is still under  assessment.  Existing  investor  servicing  software
maintenance  agreements  provide for  conversion  to Year 2000  compliance to be
provided by the vendor.  Additionally,  the  Partnership  has contacted  several
vendors that provide investor  services as a possible  alternative to continuing
to provide  investors  services in house.  It would  appear  that these  service
providers  would be more expensive than the current in house systems but they do
provide a back-up  alternative in the event of our own failure to fully convert.
Hardware utilized by Redwood Mortgage Corporation,  is currently being tested to
insure that modifications necessary to be made prior to Year 2000
<PAGE>

can be  accomplished.  At this juncture,  existing  hardware  appears to be
substantially compliant with Year 2000 issues.

     The costs of updating  the various  software  systems  will be borne by the
various  companies  that supply the  Partnership  with services.  Therefore,  no
significant  capital outlays are  anticipated  and the Partnership  expects only
incidental costs of conversion for Year 2000 issues.

     The Partnership is in the business of making Mortgage  Investments  secured
by real estate. The most important factor in making the Mortgage  Investments is
the value of the real estate  security.  Year 2000 issues have some potential to
effect  industries  and  businesses  located  in the  marketplaces  in which the
Partnership places its Mortgage  Investments.  This would only have an affect on
the Partnership if Year 2000 issues cause a significant downturn in the northern
California economy. In fact, Silicon Valley is located in our marketplace. There
may be significant  increased  demand for Silicon Valley type services and goods
as companies make ready for the Year 2000 conversion.

     Although not fully developed if all or any  accounting,  loan servicing and
investor   services   conversions   should  fail  the  size  and  scope  of  the
Partnerships  activities  are such that they  could be  handled  at an equal or
higher cost on a manual basis or outsourced to other  servicers  existing in the
industry while correcting the systems, and are likely to be temporary in nature.
While this would entail some initial set up costs,  these costs would likely not
be so significant as to have a material  effect upon the  Partnership,  shifting
portions of daily operations to manual or outsourced  systems may result in time
delays.  Time delays in  providing  accurate  and  pertinent  information  could
negatively affect customer relations and lead to the potential loss of new loans
and Limited Partner investments.

     The  foregoing  analysis  of  Year  2000  issues  includes  forward-looking
statements  and  predictions  about  possible  or  future  events,   results  of
operations  and  financial  condition.  As such,  this  analysis may prove to be
inaccurate  because of the assumptions made by the General Partner or the actual
development  of  future  events.  No  assurance  can be given  that any of these
forward-looking  statements and predictions  will ultimately prove to be correct
or even substantially correct.

     Various  other  risks and  uncertainties  could  also  affect the Year 2000
analysis  causing the effect on the Partnership to be more severe than discussed
above. The General Partners Year 2000 compliance  testing cannot guarantee that
all computer  systems will function  without  error beyond the Year 2000.  Risks
also exist with respect to Year 2000 compliance by external parties who may have
no  relationship  to the  Partnership  or the  General  Partner,  but who have a
significant  relationship with one or more third parties,  and may have a system
failure that adversely  affects the  Partnerships  ability to conduct business.
While the General  Partner is attempting to identify such external  parties,  no
assurance can be given that it will be able to do so. Furthermore, third parties
with  direct  relationships  with  the  Partnership,  whose  systems  have  been
identified  as likely to be Year 2000  compliant,  may suffer a breakdown due to
unforeseen circumstances.  It is also possible that the information collected by
the General Partner for these third parties regarding their compliance with Year
2000 issues may be  incorrect.  Finally,  it should be noted that the  foregoing
discussion of Year 2000 issues assumes that to the extent the General  Partners
systems fail,  whether because of unforeseen  complications  or because of third
parties  failure,  switching to manual operations will allow the Partnership to
continue  to conduct  its  business.  While the General  Partner  believes  this
assumption to be reasonable,  if it is incorrect,  the Partnerships  results of
operations would likely be adversely affected.



<PAGE>


              Item 8 - Financial Statements and Supplementary Data

     Redwood Mortgage Investors VII, a California Limited  Partnership's list of
Financial Statements and Financial Statement schedules:

A-Financial Statements

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


Independent Auditors Report,
Balance Sheets - December 31, 1998, and December 31, 1997,
Statements of Income for the three years ended December 31, 1998,
Statements of Changes in Partners Capital for the three years ended
           December 31, 1998,
Statements of Cash Flows for the three years ended December 31, 1998,
Notes to Financial Statements - December 31, 1998.

B-Financial Statement Schedules

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

      Schedule II      Amounts receivable from related parties and underwriters,
                       promoters, and employees other than related parties
      Schedule VIII    Valuation of Qualifying Accounts
      Schedule IX      Short Term Borrowings
      Schedule XII     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.

<PAGE>



                         REDWOOD MORTGAGE INVESTORS VII
                       (A California Limited Partnership)
                              FINANCIAL STATEMENTS
                                DECEMBER 31, 1998
                         (With Auditors Report Thereon)



<PAGE>

                                PARODI & CROPPER
                          CERTIFIED PUBLIC ACCOUNTANTS
                       3658 Mount Diablo Blvd., Suite #205
                               Lafayette CA 94549
                                 (925) 284-3590




                           INDEPENDENT AUDITORS REPORT


THE PARTNERS
REDWOOD MORTGAGE INVESTORS VII

     We have audited the financial  statements and related  schedules of REDWOOD
MORTGAGE  INVESTORS VII (A California Limited  Partnership)  listed in Item 8 on
form 10-K  including  balance  sheets as of  December  31, 1998 and 1997 and the
statements of income,  changes in partners capital and cash flows for the three
years ended December 31, 1998. These financial statements are the responsibility
of the Partnerships management.  Our responsibility is to express an opinion on
these financial statements based on our audits.

     We conducted  our audits in accordance  with  generally  accepted  auditing
standards.  Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement.  An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements.  An audit also includes
assessing the  accounting  principles  used and  significant  estimates  made by
management,  as well as 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, 1998 and 1997, and the results of its operations and cash
flows for the three years ended  December 31, 1998 in conformity  with generally
accepted  accounting  principles.  Further, it is our opinion that the schedules
referred to above present fairly the information set forth therein in compliance
with the  applicable  accounting  regulations  of the  Securities  and  Exchange
Commission.


                                                           /s/ Bruce Cropper
                                                           PARODI & CROPPER








Lafayette, California
March 3, 1999



<PAGE>
<TABLE>
<CAPTION>

                                                    REDWOOD MORTGAGE INVESTORS VII
                                                  (A California Limited Partnership)
                                                            BALANCE SHEETS
                                                      DECEMBER 31, 1998 AND 1997

                                                                ASSETS
                                                                                1998                1997
                                                                            --------------      --------------

<S>                                                                              <C>                 <C>     
Cash                                                                             $461,544            $520,837
                                                                            --------------      --------------

Accounts receivable:
  Mortgage Investments, secured by deeds of trust                              13,209,186          13,449,741
  Accrued Interest on Mortgage Investments                                        442,350             427,952
  Advances on Mortgage Investments                                                 39,733              33,154
  Accounts receivables, unsecured                                                 242,493             252,422
                                                                            --------------      --------------
                                                                               13,933,762          14,163,269
  Less allowance for doubtful accounts                                            787,042             424,738
                                                                            --------------      --------------

                                                                               13,146,720          13,738,531
                                                                            --------------      --------------

Real estate owned, acquired through foreclosure, held for sale                    397,396             687,139
Investment in partnership                                                               0             346,017
                                                                            --------------      --------------

                                                                              $14,005,660         $15,292,524
                                                                            ==============      ==============

                                                   LIABILITIES AND PARTNERS CAPITAL


Liabilities:
  Notes payable - bank line of credit                                          $1,912,663          $2,341,816
  Accounts payable and accrued expenses                                            12,547               1,845
  Deferred Interest                                                               131,743              69,316
                                                                            --------------      --------------
                                                                                2,056,953           2,412,977
                                                                            --------------      --------------

Partners Capital
  Limited partners capital, subject to redemption (Note 4E):
     Net of Formation Loan receivable of $253,387 and $341,275 for
         1998 and 1997, respectively                                           11,936,729          12,867,569

  General partners capital,                                                        11,978              11,978
                                                                            --------------      --------------

           Total Partners Capital                                              11,948,707          12,879,547
                                                                            --------------      --------------

           Total Liabilities and Partners Capital                             $14,005,660         $15,292,524
                                                                            ==============      ==============
<FN>
See accompanying notes to financial statements.
</FN>
</TABLE>
<PAGE>
<TABLE>

                                                    REDWOOD MORTGAGE INVESTORS VII
                                                  (A California Limited Partnership)
                                                         STATEMENTS OF INCOME
                                              FOR THE THREE YEARS ENDED DECEMBER 31, 1998


                                                                            YEARS ENDED DECEMBER 31,
                                                               ----------------------------------------------------
                                                                   1998                1997              1996
                                                               -------------       -------------     --------------
Revenues:
<S>                                                              <C>                 <C>                <C>       
  Interest on Mortgage Investments                               $1,625,573          $1,593,335         $1,527,450
  Interest on bank deposits                                           7,465               7,882             10,228
  Late charges                                                       13,632               8,598             17,266
  Other                                                              11,058              14,048             25,556
                                                               -------------       -------------     --------------
                                                               -------------       -------------     --------------
                                                                  1,657,728           1,623,863          1,580,500
                                                               -------------       -------------     --------------

Expenses:
  Mortgage servicing fees                                           128,493              83,559             97,267
  Interest on note payable - bank                                   170,867             198,316            127,454
  Clerical costs through Redwood Mortgage                            34,173              37,760             40,874
  Asset management fee                                               16,141                   0                  0
  Amortization of organization costs                                      0                   0                368
  Provision for doubtful accounts and losses
   on real estate acquired through foreclosure                      423,054             434,495            419,437
  Professional services                                              19,983              25,107             18,802
  Printing, supplies and postage                                     12,326              11,997             12,466
  Other                                                               6,120               5,750              4,733
                                                               -------------       -------------     --------------
                                                                    811,157             796,984            721,401
                                                               -------------       -------------     --------------


Net Income                                                         $846,571            $826,879           $859,099
                                                               =============       =============     ==============

Net income:  To General Partners(1%)                                 $8,466              $8,269             $8,591
                     To Limited Partners (99%)                      838,105             818,610            850,508
                                                               =============       =============     ==============
                                                                   $846,571            $826,879           $859,099
                                                               =============       =============     ==============

Net income per $1,000 invested by Limited
 Partners for entire period:
     -where income is reinvested and  compounded                        $67                 $61               $ 60
                                                               =============       =============     ==============

     -where partner receives income in monthly distributions            $65                 $59               $ 59
                                                               =============       =============     ==============



See accompanying notes to financial statements.

</TABLE>

<PAGE>

<TABLE>
                                                    REDWOOD MORTGAGE INVESTORS VII
                                                  (A California Limited Partnership)
                                              STATEMENTS OF CHANGES IN PARTNERS CAPITAL
                                              FOR THE THREE YEARS ENDED DECEMBER 31, 1998


                                                                     PARTNERS CAPITAL
                                         ---------------------------------------------------------------------------
                                                                 LIMITED PARTNERS CAPITAL
                                         ---------------------------------------------------------------------------

                                            Capital
                                           Account-          Unallocated         Formation
                                            Limited          Syndication            Loan
                                           Partners             Costs            Receivable           Total
                                         --------------     ---------------    ---------------    --------------

<S>                                        <C>                   <C>               <C>              <C>        
Balances at December 31, 1995              $14,216,032           $(13,588)         $(517,051)       $13,685,393

Formation Loan collections                           0                   0             62,225            62,225
Net income                                     850,508                   0                  0           850,508
Allocation of syndication costs               (13,588)              13,588                  0                 0
Early withdrawal penalties                    (37,345)                   0             25,663          (11,682)
Partners withdrawals                       (1,013,078)                   0                  0       (1,013,078)
                                         --------------     ---------------    ---------------    --------------

Balances at December 31, 1996              $14,002,529                  $0         $(429,163)       $13,573,366

Formation Loan collections                           0                   0             60,223            60,223
Net Income                                     818,610                   0                  0           818,610
Early withdrawal penalties                    (40,258)                   0             27,665          (12,593)
Partners withdrawals                       (1,572,037)                   0                  0       (1,572,037)
                                         --------------     ---------------    ---------------    --------------

Balances at December 31, 1997              $13,208,844                  $0         $(341,275)       $12,867,569

Formation Loan collections                           0                   0             66,908            66,908
Net Income                                     838,105                   0                  0           838,105
Early withdrawal penalties                    (30,529)                   0             20,980           (9,549)
Partners withdrawals                       (1,826,304)                   0                  0       (1,826,304)
                                         --------------     ---------------    ---------------    --------------

Balances at December 31, 1998              $12,190,116                  $0         $(253,387)       $11,936,729
                                         ==============     ===============    ===============    ==============



See accompanying notes to financial statements
</TABLE>
<PAGE>
<TABLE>
                                                    REDWOOD MORTGAGE INVESTORS VII
                                                  (A California Limited Partnership)
                                              STATEMENTS OF CHANGES IN PARTNERS CAPITAL
                                              FOR THE THREE YEARS ENDED DECEMBER 31, 1998


                                                                       PARTNERS CAPITAL
                                         ------------------------------------------------------------------------------
                                                         GENERAL PARTNERS CAPITAL
                                         ----------------------------------------------------------
                                          Capital Account         Unallocated                               Total
                                         General Partners      Syndication Costs                          Partners
                                                                                          Total            Capital
                                         ------------------    -------------------     ------------    ----------------

<S>                                                <C>                     <C>             <C>             <C>        
Balances at December 31, 1995                      $11,978                 $(137)          $11,841         $13,697,234

Formation Loan collections                               0                      0                0              62,225
Net income                                           8,591                      0            8,591             859,099
Allocation of syndication costs                      (137)                    137                0                   0
Early withdrawal penalties                               0                      0                0            (11,682)
Partners withdrawals                               (8,454)                      0          (8,454)         (1,021,532)
                                         ------------------    -------------------     ------------    ----------------

Balances at December 31, 1996                      $11,978                     $0          $11,978         $13,585,344

Formation Loan collections                               0                      0                0              60,223
Net income                                           8,269                      0            8,269             826,879
Early withdrawal penalties                               0                      0                0            (12,593)
Partners withdrawals                               (8,269)                      0          (8,269)         (1,580,306)
                                         ------------------    -------------------     ------------    ----------------

Balances at December 31, 1997                      $11,978                     $0          $11,978         $12,879,547

Formation Loan collections                               0                      0                0              66,908
Net income                                           8,466                      0            8,466             846,571
Early withdrawal penalties                               0                      0                0             (9,549)
Partners withdrawals                               (8,466)                      0          (8,466)         (1,834,770)
                                         ------------------    -------------------     ------------    ----------------

Balances at December 31, 1998                      $11,978                     $0          $11,978         $11,948,707
                                         ==================    ===================     ============    ================


See accompanying notes to financial statements

</TABLE>
<PAGE>
<TABLE>
                                                    REDWOOD MORTGAGE INVESTORS VII
                                                  (A California Limited Partnership)
                                                       STATEMENTS OF CASH FLOWS
                                              FOR THE THREE YEARS ENDED DECEMBER 31, 1998

                                                                                YEARS ENDED DECEMBER 31,
                                                                   ----------------------------------------------------

                                                                           1998               1997               1996
                                                                       --------------    ----------------    -------------
Cash flows from operating activities:
<S>                                                                         <C>                 <C>              <C>     
  Net income                                                                $846,571            $826,879         $859,099
  Adjustments to reconcile net income to net cash provided by
      operating activities:
    Amortization of organization costs                                             0                   0              368
    Provision for doubtful accounts                                          362,304             374,499          204,398
    Provision for losses on real estate held for sale                         60,750              59,996          215,039
    Early withdrawal penalty credited to income                              (9,549)            (12,593)         (11,682)
    (Increase) decrease in accrued interest & advances                      (20,977)           (155,408)          745,717
    Increase (decrease) in accounts payable and accrued expenses              10,702                 373                0
    (Increase) decrease in amount due from or to Redwood Mortgage                                      0                0
    Increase (decrease) in deferred interest on Mortgage Investments          62,427            (85,282)          154,598
                                                                       --------------    ----------------    -------------

      Net cash provided by operating activities                            1,312,228           1,008,464        2,167,537
                                                                       --------------    ----------------    -------------

Cash flows from investing activities:
    Principal collected on mortgage investments                            6,529,324           6,278,832        8,923,339
    Mortgage Investments made                                            (6,398,769)         (7,841,128)      (9,099,688)
    Additions to Real Estate held for sale                                   323,720           (202,645)        (147,733)
    Dispositions of Real Estate held for sale                               (55,532)             979,115          200,250
    Proceeds from Partnership                                                522,212                   0                0
    Investment in Partnership                                              (105,390)           (103,623)         (19,149)
    Proceeds from unsecured Accounts Receivable                                9,929                   0                0
                                                                       --------------    ----------------    -------------

      Net cash provided by (used in) investing activities                    825,494           (889,449)        (142,981)
                                                                       --------------    ----------------    -------------

Cash flows from financing activities:
  Net increase (decrease) in note payable-bank                             (429,153)           1,166,816        (825,000)
  Formation loan collections                                                  66,908              60,223           62,225
  Partners withdrawals                                                   (1,834,770)         (1,580,306)      (1,021,532)

                                                                       --------------    ----------------    -------------
      Net cash provided by (used in) financing activities                (2,197,015)           (353,267)      (1,784,307)
                                                                       --------------    ----------------    -------------

Net increase (decrease) in cash                                             (59,293)           (234,252)          240,249

Cash - beginning of period                                                   520,837             755,089          514,840
                                                                       --------------    ----------------    -------------

Cash - end of period                                                        $461,544            $520,837         $755,089
                                                                       ==============    ================    =============

See accompanying notes to financial statements.
</TABLE>
<PAGE>
                         REDWOOD MORTGAGE INVESTORS VII
                       (A California Limited Partnership)
                          NOTES TO FINANCIAL STATEMENTS
                                DECEMBER 31, 1998

NOTE 1 - ORGANIZATION AND GENERAL

     Redwood Mortgage  Investors VII, (the Partnership) is a California  Limited
Partnership,  of which the General Partners are D. Russell  Burwell,  Michael R.
Burwell and Gymno  Corporation,  a California  corporation owned and operated by
the individual  General  Partners.  The  Partnership  was organized to engage in
business  as a  mortgage  lender  for the  primary  purpose  of making  Mortgage
Investments  secured  by  Deeds of Trust on  California  real  estate.  Mortgage
Investments  are being  arranged  and  serviced by Redwood  Mortgage  Corp.,  an
affiliate of the General Partners.  At September 30, 1992, the offering had been
closed with contributed capital totalling $11,998,359 for limited partners.

     A  minimum  of 2,500  units  ($250,000)  and a  maximum  of  120,000  units
($12,000,000)  were  offered  through  qualified  broker-dealers.   As  Mortgage
Investments were identified,  partners were transferred from applicant status to
admitted partners participating in Mortgage Investment  operations.  Each months
income is allocated to partners based upon their proportionate share of partners
capital.  Some partners have elected to withdraw income on a monthly,  quarterly
or annual basis.

A. Sales Commissions - Formation Loan

     Sales  commissions  ranging from 0% (Units sold by General Partners) to 10%
of the gross proceeds were paid by Redwood Mortgage, an affiliate of the General
Partners  that  arranges and services the Mortgage  Investments.  To finance the
sales commissions, the Partnership was authorized to loan to Redwood Mortgage an
amount not to exceed 8.3% of the gross proceeds provided that the Formation Loan
for the minimum  offering  period  could be 10% of the gross  proceeds  for that
period.  The Formation Loan is unsecured and is being repaid,  without interest,
in ten installments of principal,  over a ten year period commencing  January 1,
1992.  At December 31, 1992,  Redwood  Mortgage had borrowed  $914,369  from the
Partnership to cover sales commissions  relating to $11,998,359  limited partner
contributions (7.62%). Through December 31, 1998, $660,982 including $124,123 in
early withdrawal penalties,  had been repaid leaving a balance of $253,387.  The
Formation  Loan,  which is due from an affiliate of the General  Partners,  has
been deducted from Limited  Partners  capital in the balance sheet.  As amounts
are collected from Redwood Mortgage, the deduction from capital will be reduced.

B. Other Organizational and Offering Expenses

     Organizational  and  offering  expenses,   other  than  sales  commissions,
(including printing costs,  attorney and accountant fees, and other costs), were
paid by the Partnership. Such costs were limited to 10% of the gross proceeds of
the offering or $500,000  whichever was less.  The General  Partners were to pay
any amount of such expenses in excess of 10% of the gross proceeds or $500,000.

     Organization  costs of  $10,102  and  syndication  costs of  $415,692  were
incurred by the  Partnership.  The sum of organization  and  syndication  costs,
$425,794,  approximated 3.55% of the gross proceeds contributed by the Partners.
Both the  Organization  and  Syndication  Costs  have been fully  amortized  and
allocated to the Partners.
<PAGE>
                         REDWOOD MORTGAGE INVESTORS VII
                       (A California Limited Partnership)
                          NOTES TO FINANCIAL STATEMENTS
                                DECEMBER 31, 1998

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

A. Accrual Basis

     Revenues and expenses are  accounted for on the accrual basis of accounting
wherein  income is recognized as earned and expenses are recognized as incurred.
Once a loan is categorized as impaired, interest is no longer accrued thereon.

B. Management Estimates

     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 date and revenues and expenses
for the related periods.  Such estimates relate principally to the determination
of the  allowance  for doubtful  accounts,  including  the valuation of impaired
mortgage  investments,  and  the  valuation  of  real  estate  acquired  through
foreclosure. Actual results could differ significantly from these estimates.

C. Mortgage Investments, Secured by Deeds of Trust

     The  Partnership  has both the  intent  and  ability  to hold the  Mortgage
Investments to maturity, i.e., held for long-term investment. They are therefore
valued at cost for financial  statement  purposes  with  interest  thereon being
accrued by the simple interest method.

     Financial   Accounting  Standards  Board  Statements  (SFAS)  114  and  118
(effective  January 1, 1995) provide that if the probable  ultimate  recovery of
the carrying amount of a mortgage  investment,  with due  consideration  for the
fair value of  collateral,  is less than the  recorded  investment,  and related
amount due and the  impairment  is considered  to be other than  temporary,  the
carrying  amount of the investment  (cost) shall be reduced to the present value
of future cash flows.  The adoption of these  statements did not have a material
effect  on  the  financial  statements  of  the  Partnership  because  that  was
substantially the valuation method previously used on impaired loans.

     At December 31,  1998,  1997 and 1996,  reductions  in the cost of Mortgage
Investments  categorized as impaired by the Partnership totalled $38,634, $0 and
$9,595,  respectively.  The  reduction  in  stated  value  was  accomplished  by
increasing the allowance for doubtful accounts.

     As  presented  in Note 10 to the  financial  statements  as of December 31,
1998, the average mortgage investment to appraised value of security at the time
the loans were  consummated  was  61.18%.  When a loan is valued for  impairment
purposes, an updating is made in the valuation of collateral security.  However,
such a low loan to value ratio tends to minimize reductions for impairment.

D. Cash and Cash Equivalents

     For purposes of the  statements  of cash flows,  cash and cash  equivalents
include interest bearing and non-interest bearing bank deposits.

E. Real Estate Owned, Held for Sale

     Real estate owned,  held for sale,  includes real estate  acquired  through
foreclosure,  and is  stated  at the  lower of the  recorded  investment  in the
property,  net of any senior  indebtedness,  or at the propertys estimated fair
value, less estimated costs to sell.
<PAGE>
                         REDWOOD MORTGAGE INVESTORS VII
                       (A California Limited Partnership)
                          NOTES TO FINANCIAL STATEMENTS
                                DECEMBER 31, 1998

     The following  schedule  reflects the costs of real estate acquired through
foreclosure and the recorded reductions to estimated fair values, less estimated
costs to sell as of December 31, 1998 and 1997:

                                            December 31,
                              -----------------------------------------------
                                   1998                            1997
                              ---------------                 ---------------

Costs of properties             $765,986                        $906,499
Reduction in value              (348,590)                       (219,360)
REO prior lien                   (20,000)                               0
                              ---------------                 ---------------
Fair value reflected in 
financial statements            $397,396                        $687,139
                              ===============                 ===============

     Effective  January 1, 1996,  the  Partnership  adopted  the  provisions  of
statement  No 121  (SFAS  121)  of the  Financial  Accounting  Standards  Board,
Accounting  for the Impairment of Long Lived Assets and for Long Lived Assets to
be disposed of. The adoption of SFAS 121 did not have a material  impact on the
Partnerships  financial  position because the methods indicated were essentially
those previously used by the Partnership.

F. Investment in Partnership (see note 5)

G. Income Taxes

     No provision  for Federal and State  income taxes is made in the  financial
statements  since  income taxes are the  obligation  of the partners if and when
income taxes apply.

H. Organization and Syndication Costs

     The Partnership  bears its own  organization  and syndication  costs (other
than certain sales  commissions  and fees described  above)  including legal and
accounting expenses,  printing costs, selling expenses, a 1% wholesale brokerage
fee and filing fees.  Organizational  costs of $10,102 were capitalized and were
amortized  over a five year period.  Syndication  costs of $415,692 were charged
against partners capital and were allocated to individual  partners  consistent
with the Partnership Agreement.

I. Allowance for Doubtful Accounts

     Mortgage  Investments and the related accrued  interest,  fees and advances
are  analyzed  on a  continuous  basis  for  recoverability.  Delinquencies  are
identified and followed as part of the Mortgage  Investment  system. A provision
is made for doubtful  accounts to adjust the allowance for doubtful  accounts to
an amount  considered by management to be adequate,  with due  consideration  to
collateral value, to provide for unrecoverable  accounts  receivable,  including
impaired  mortgage  investments,   unspecified  mortgage  investments,   accrued
interest and advances on mortgage  investments,  and other  accounts  receivable
(unsecured).  The  composition  of the  allowance  for  doubtful  accounts as of
December 31, 1998 and 1997 was as follows:





<PAGE>
                         REDWOOD MORTGAGE INVESTORS VII
                       (A California Limited Partnership)
                          NOTES TO FINANCIAL STATEMENTS
                                DECEMBER 31, 1998

                                               December 31,
                                 -----------------------------------------------
                                       1998                            1997
                                 ---------------                 ---------------

Impaired mortgage investments       $38,634                              $0
Unspecified mortgage investments    606,299                         284,738
Accounts receivable, unsecured      142,109                         140,000
                                 ---------------                 ---------------
                                   $787,042                        $424,738
                                 ===============                 ===============

J. 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 actual amounts  allocated
to Limited  Partners who have their  investment  throughout  the period and have
elected to either  leave their  earnings to compound or have  elected to receive
monthly  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. However, the net income per $1,000 average invested has
approximated  those  reflected  for those whose  investments  and  options  have
remained constant.
<PAGE>

                         REDWOOD MORTGAGE INVESTORS VII
                       (A California Limited Partnership)
                          NOTES TO FINANCIAL STATEMENTS
                                DECEMBER 31, 1998


NOTE 3 - GENERAL PARTNERS AND RELATED PARTIES

     The following are commissions and/or fees which will be paid to the General
Partners and/or related parties.

A. Mortgage Brokerage Commissions

     For  services  in  connection  with  the  review,  selection,   evaluation,
negotiation and extension of Mortgage  Investments in an amount up to 12% of the
principal  through the period ending 6 months after the termination  date of the
offering. Thereafter, loan brokerage commissions are limited to an amount not to
exceed  4% of  the  total  Partnership  assets  per  year.  The  loan  brokerage
commissions  are  paid  by  the  borrowers,  and  thus,  not an  expense  of the
Partnership.  Loan  brokerage  fees  for 1998 and  1997  totalled  $166,752  and
$83,559, respectively.

B. Mortgage Servicing Fees

     Monthly  mortgage  servicing  fees of up to 1/8 of 1% (1.5%  annual) of the
unpaid  principal,  or such lesser amount as is reasonable  and customary in the
geographic area where the property  securing the Mortgage  Investment is located
are paid to Redwood Mortgage Corp. Mortgage servicing fees of $128,493,  $83,559
and $97,267 were incurred for years 1998, 1997 and 1996, respectively.

C. Asset Management Fee

     The General Partners  receive a monthly fee for managing the  Partnerships
Mortgage  Investment  portfolio  and  operations of up to 1/32 of 1% of the net
asset value (3/8 of 1% annual). Asset management fees were $16,141 during 1998.
No management fees were incurred for either 1997 or 1996.

D. Other Fees

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

E. Income and Losses

     All  income is  credited  or  charged  to  partners  in  relation  to their
respective  partnership  interests.  The  partnership  interest  of the  General
Partners (combined) is a total of 1%.

<PAGE>

                         REDWOOD MORTGAGE INVESTORS VII
                       (A California Limited Partnership)
                          NOTES TO FINANCIAL STATEMENTS
                                DECEMBER 31, 1998

     F.  Operating  Expenses The General  Partners or their  affiliate  (Redwood
Mortgage) are reimbursed by the Partnership for all operating  expenses actually
incurred by them 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.   Such  reimbursements  are  reflected  as  expenses  in  the
Statements of Income.

G. General Partners Contributions

     The General  Partners  collectively or severally were to contribute 1/10 of
1% in cash  contributions as proceeds from the offering were admitted to limited
Partner capital.  As of December 31, 1992 a General Partner,  GYMNO Corporation,
had  contributed  $11,998,  1/10  of  1% of  limited  partner  contributions  in
accordance with Section 4.02(a) of the Partnership Agreement.

NOTE 4 - OTHER PARTNERSHIP PROVISIONS

A. Applicant Status

     Subscription  funds received from  purchasers of units were not admitted to
the Partnership until appropriate lending  opportunities were available.  During
the period  prior to the time of  admission,  which ranged  between  1-120 days,
purchasers  subscriptions  remained  irrevocable  and earned  interest at money
market  rates,  which  were  lower  than the  return on the  Partnerships  loan
portfolio.

     Interest  earned prior to  admission  was credited to partners in applicant
status.  As Mortgage  Investments  were made and partners  were  transferred  to
regular status to begin sharing in income from Mortgage  Investments  secured by
deeds of trust,  the  interest  credited  was either  paid to the  investors  or
transferred to Partners Capital along with the original investment.

B. Term of the Partnership

     The term of the  Partnership  is  approximately  40  years,  unless  sooner
terminated as provided. The provisions provide for no capital withdrawal for the
first five  years,  subject  to the  penalty  provision  set forth in (E) below.
Thereafter,  investors  have the right to withdraw over a five-year  period,  or
longer.

C. Election to Receive Monthly, Quarterly or Annual Distributions

     Upon subscriptions,  investors elected either to receive monthly, quarterly
or  annual  distributions  of  earnings  allocations,  or to allow  earnings  to
compound for at least a period of 5 years.

D. Profits and Losses

     Profits and losses are allocated  among the Limited  Partners  according to
their respective capital accounts after 1% is allocated to the General Partners.

<PAGE>
                         REDWOOD MORTGAGE INVESTORS VII
                       (A California Limited Partnership)
                          NOTES TO FINANCIAL STATEMENTS
                                DECEMBER 31, 1998

E. Liquidity, Capital Withdrawals and Early Withdrawals

     There  are  substantial   restrictions  on  transferability  of  Units  and
accordingly an investment in the Partnership is illiquid.  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 as stated in the Notice of Withdrawal and
will be deducted from the Capital  Account and the balance  distributed  in four
quarterly installments.  Withdrawal after the one-year holding period and before
the  five-year  holding  period will be permitted  only upon the terms set forth
above.

     Limited  Partners  also have the right  after  five  years from the date of
purchase of the Units to withdraw from the partnership on an installment  basis,
generally  over a five year  period in twenty  (20)  quarterly  installments  or
longer.  Once this five year  period  expires,  no  penalty  will be  imposed if
withdrawal   is  made  in  twenty  (20)   quarterly   installments   or  longer.
Notwithstanding  the  five-year  (or  longer)  withdrawal  period,  the  General
Partners will liquidate all or part of a Limited  Partners  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,  subject to a
10% early withdrawal  penalty applicable to any sums withdrawn prior to the time
when such sums could have been  withdrawn  pursuant to the five-year (or longer)
withdrawal period.

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

F. Guaranteed Interest Rate For Offering Period

     During the period commencing with the day a Limited Partner was admitted to
the  Partnership  and ending 3 months after the offering  termination  date, the
General  partners  guaranteed  an  interest  rate equal to the greater of actual
earnings from mortgage operations or 2% above The Weighted Average cost of Funds
Index for the Eleventh  District Savings  Institutions  (Savings & Loan & Thrift
Institutions)  as  computed  by the  Federal  Home  Loan  Bank of San  Francisco
monthly, up to a maximum interest rate of 12%. The guarantee amounted to $12,855
and $5,195 in 1990 and 1991, respectively.  In 1992 and 1993, actual realization
exceeded the  guaranteed  amount each month.  Beginning  with fiscal years after
1993, the guarantee no longer applies.

NOTE 5 - INVESTMENT IN PARTNERSHIP

     The  Partnerships  interest in land  located in East Palo Alto,  CA.,  was
acquired through foreclosure.  The Partnerships interest was invested with that
of two other  Partnerships.  The Partnerships had been attempting to develop the
property into single family residences.  Significant  community  resistance,  as
well as environmental, and fish and wildlife concerns affected efforts to obtain
the required  approvals.  The  Partnership,  in resolving  disputes  which arose
during the course of the Partnerships attempt to obtain entitlements to develop
the property,  entered into agreements on May 8, 1998 with  Rhone-Poulanc,  Inc.
These agreements,  among other things,  restrict the property to non-residential
uses, provide for appropriate indemnifications,  and include other consideration
including the payment of cash.

<PAGE>
The Partnership still REDWOOD MORTGAGE  INVESTORS VII (A California Limited
Partnership) NOTES TO FINANCIAL  STATEMENTS  DECEMBER 31, 1998 retains liability
for  the  remediation  of  pesticide   contamination   effecting  the  property.
Investigation of remediation  options are ongoing.  At this time management does
not believe that remediation of the pesticide  contaminants will have a material
adverse effect on the financial condition of the Partnership. As of December 31,
1998, the Partnership had recovered $70,805 in excess of its costs.

NOTE 6 - LEGAL PROCEEDINGS

     Legal  actions  against  borrowers  and other  involved  parties  have been
initiated by the Partnership to help assure payments against unsecured  accounts
receivable  totalling  $242,493 at  December  31,  1998.  The  Partnership  is a
defendant, along with numerous defendants including a developer,  contractor and
other lenders, in a lawsuit involving the Partnerships  attempt to recover its
investment in Real Estate acquired through foreclosure.

     Management  anticipates  that the ultimate  results of these cases will not
have a material  adverse effect on the net assets of the  Partnership,  with due
consideration  having  been given in  arriving  at the  allowance  for  doubtful
accounts.

NOTE 7 - NOTE PAYABLE BANK - LINE OF CREDIT

     The  Partnership  has a  bank  line  of  credit  secured  by  its  Mortgage
Investment  portfolio  of up to  $3,000,000  at .50% over  prime.  The  balances
outstanding as of December 31, 1998 and 1997 were  $1,912,663,  and  $2,341,816,
respectively,  and the interest rate at December 31, 1998 was 8.25% (7.75% prime
+ .50%).

     The line of credit  expired in 1998 but was formally  extended to March 31,
1999.  In 1999 a new line of credit has been secured  with another  institution.
The new borrowing limit is $3,500,000 at prime +.25%. (7.75% + .25% = 8.00%)

NOTE 8 - INCOME TAXES

     The following reflects a reconciliation from net assets (Partners Capital)
reflected in the financial statements to the tax basis of those net assets:

                                                December 31,
                                    --------------------------------------------
                                       1998                           1997
                                    ----------------             ---------------

Net assets - Partner Capital 
per financial statements              $11,948,707                   $12,879,547


Formation loan receivable                 253,387                       341,275
Allowance for doubtful accounts           787,042                       424,738
                                    ----------------             ---------------
Net assets tax basis                  $12,989,136                   $13,645,560
                                    ================             ===============
     In 1998,  approximately  68% of taxable  income was allocated to tax exempt
organizations i.e.,  retirement plans. Such plans do not have to file income tax
returns unless their  unrelated  business  income exceeds  $1,000.  Applicable
amounts become taxable when distribution is made to participants.

<PAGE>
                         REDWOOD MORTGAGE INVESTORS VII
                       (A California Limited Partnership)
                          NOTES TO FINANCIAL STATEMENTS
                                DECEMBER 31, 1998

NOTE 9 - FAIR VALUE OF FINANCIAL INSTRUMENTS

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

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

     (b) The  Carrying  Value  of  Mortgage  Investments  - (see  note 2 (c)) is
$13,209,186.   The  December  31,  1998  fair  value  of  these  investments  of
$13,278,844  is 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 doubtful  accounts  along with accrued
interest and advances  related  thereto  should also be considered in evaluating
the fair value versus the carrying value.

NOTE 10 - ASSET CONCENTRATIONS AND CHARACTERISTICS

     The  Mortgage  Investments  are  secured  by  recorded  deeds of trust.  At
December  31,  1998,  there were 53 Mortgage  Investments  outstanding  with the
following characteristics:

Number of Mortgage Investments outstanding                                   53
Total Mortgage Investments outstanding                              $13,209,186

Average Mortgage Investment outstanding                                $249,230
Average Mortgage Investment as percent of total                            1.89%
Average Mortgage Investment as percent of Partners Capital                 2.09%

Largest Mortgage Investment outstanding                              $1,050,000
Largest Mortgage Investment as percent of total                            7.95%
Largest Mortgage Investment as percent of Partners Capital                 8.79%

Number of counties where security is located(all California)                 14

Largest  percentage of Mortgage  Investments  in one county               22.25%
Average Mortgage  Investment to appraised value of security
at time loan was consummated                                              61.18%

Number of Mortgage Investments in foreclosure                                -0-


<PAGE>
                         REDWOOD MORTGAGE INVESTORS VII
                       (A California Limited Partnership)
                          NOTES TO FINANCIAL STATEMENTS
                                DECEMBER 31, 1998

     The following  categories of mortgage investments are pertinent at December
31, 1998 and 1997:

                                                December 31,
                                      ------------------------------------------
                                              1998                      1997
                                      -----------------          ---------------

First Trust Deeds                           $8,638,976               $6,810,113
Second Trust Deeds                           4,188,401                5,719,369
Third Trust Deeds                              181,808                  720,258
Fourth Trust Deeds                             200,001                  200,001
                                      -----------------          ---------------
  Total mortgage investments                13,209,186               13,449,741
Prior liens due other lenders               12,728,867               17,951,579
                                      -----------------          ---------------
  Total debt                               $25,938,053              $31,401,320
                                      =================          ===============

Appraised property value at time           $42,393,561              $52,077,885
  of loan                             =================          ===============

Total investments as a percent of 
appraisals                                       61.18%                   60.30%
                                      =================          ===============


Investments by Type of Property
Owner occupied homes                          $746,334               $1,104,742
Non-Owner occupied homes                     1,691,016                1,464,596
Apartments                                     897,292                1,666,916
Commercial                                   9,874,544                9,213,487
                                      =================          ===============
                                           $13,209,186              $13,449,741
                                      =================          ===============

     Scheduled  maturity  dates of mortgage  investments as of December 31, 1998
are as follows:

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

                     1999                                         $4,910,183
                     2000                                          3,556,483
                     2001                                          1,794,692
                     2002                                          1,317,987
                     2003                                          1,209,761
                  Thereafter                                         420,080
                                                            =================
                                                                 $13,209,186
                                                            =================

     The  scheduled  maturities  for 1999 include  approximately  $1,560,605  in
twelve  mortgage  investments  which are past  maturity  at December  31,  1998.
Interest payments on most of these loans are current. $479,308 of these Mortgage
Investments were categorized as delinquent over 90 days.

     Five mortgage  investments  with  principal  outstanding  of $1,566,585 had
interest  payments  overdue in excess of 90 days. Two Mortgage  Investments with
principal outstanding of $231,966 were considered impaired at December 31, 1998.
That is interest accruals are no longer recorded thereon.



<PAGE>


                         REDWOOD MORTGAGE INVESTORS VII
                       (A California Limited Partnership)
                          NOTES TO FINANCIAL STATEMENTS
                                DECEMBER 31, 1998

     The cash balance at December 31, 1998 of $461,544  were in three banks with
an interest  bearing  balance  totalling  $244,294.  The balances  exceeded FDIC
insurance limits (up to $100,000 per bank) by $165,573.  The Partnerships  main
bank is the same financial  institution  that has provided the Partnership  with
the  $3,000,000  limit line of credit.  At December 31, 1998,  draw down against
this facility was  $1,912,663.  As and when deposits in the  Partnerships  bank
accounts increase  significantly  beyond the insured limit, the funds are either
placed on new  Mortgage  Investments  or used to  pay-down on the line of credit
balance.
<PAGE>


<TABLE>
<CAPTION>

         SCHEDULE II AMOUNTS RECEIVABLE FROM RELATED PARTIES AND UNDERWRITERS,
          PROMOTERS, AND EMPLOYEES OTHER THAN RELATED PARTIES. Rule 12-03


Column A                    Column B               Column C            Column D                   Column E
Name of Debtor              Balance Beginning      Additions                  Deductions          Balance at end of period
                            of period 12/31/97                          (1)            (2)           (1)           (2)
                                                                      Amounts        Amounts       Current     Not Current
                                                                     collected     written off                    12/31/98
<S>                         <C>                      <C>              <C>            <C>            <C>           <C>     
Redwood Mortgage            $341,275                 $0.00            $66,908        $20,980*       $0.00         $253,387


<FN>

The above schedule  represents the Formation Loan borrowed by Redwood Mortgage from the Partnership to pay for the selling  
commissions on Units.  It is an unsecured loan and will not bear interest.  It is being repaid to the  Partnership  in ten annual
installments of principal only which began January 1, 1992.

* The amount  written off  represents  the  proportionate  amount of early  withdrawal  penalties  allocated to the  Formation
  Loan as provided for in the Prospectus.

</FN>
</TABLE>
<PAGE>
<TABLE>
<CAPTION>


                                           SCHEDULE VIII - VALUATION AND QUALIFYING ACCOUNTS
                                                    REDWOOD MORTGAGE INVESTORS VII


Column A              Column B                     Column C                Column D           Column E
Description           Balance at                   Additions               Deductions         Balance at
                                      ------------------------------------
                      beginning of           (1)                (2)          Describe         End of Period
                      of period       Charged to         Charged to                 *
                                      Costs & Expenses   Other accounts -
                                                         Describe
Year Ended
12/31/98
Deducted from
Asset accounts:

Allowance for
<S>                    <C>              <C>                       <C>                  <C>        <C>     
Doubtful accts         $424,738         $362,304                  $0                   $0         $787,042
Cumulative
write-down of
Real Estate held
for sale (REO)         $219,360           $60,750                 $0            $(68,480)         $348,590
                      --------------- ------------------ ------------------- ---------------- ----------------

Total                  $644,098        $423,054                   $0            $(68,480)      $1,135,632
                      ============== =================== =================== ================ ================

<FN>

(*) represents net loss or net (gain) on Mortgage Investments and real estate held for sale.
</FN>
</TABLE>
<PAGE>
<TABLE>
<CAPTION>


SCHEDULE IX

                                                         SHORT TERM BORROWINGS
                                                    REDWOOD MORTGAGE INVESTORS VII

RULE 12-10

Column A                Column B         Column C            Column D              Column E            Column F
Category of Aggregate   Balance at End   Weighted Average    Maximum Amount        Average Amount      Weighted Average
Short-Term Borrowings   of Period        Interest Rate       Outstanding           Outstanding         Interest Rate
                                                                                                       during
                                                             During the Period     During the Period   the period


<S>                      <C>                  <C>                <C>                  <C>                   <C>  
Year-Ended 12/31/98       $1,912,663           8.99%              $2,662,663           $1,899,987            8.99%


</TABLE>
<PAGE>


<TABLE>
<CAPTION>

SCHEDULE XII

                                                 MORTGAGE INVESTMENTS ON REAL ESTATE.
                                               RULE 12-29 MORTGAGE LOANS ON REAL ESTATE

Col. A    Col. B   Col. C    Col. D      Col. E         Col. F          Col. G            Col. H       Col. I      Col. J
Descp.    Interest Final     Periodic    Prior Liens    Face Amt. of    Carrying       Principal      Type of      Geographic
          Rate     Maturity  Payment                    Mortgage        amount of      amt of             Lien         County
                   Date      Terms                      Investments     Mortgage       Mortgage                      Location
                                                        (original       Investments    Investments
                                                        amount)                        subject to
                                                                                       Delinq.
                                                                                       Prin. or
                                                                                       Interest
========= ======== ========= =========== ============== =============== ============== ============== ========= ==============

<S>         <C>    <C>           <C>        <C>              <C>            <C>                 <C>    <C>                   
Res         13.75  10/01/96      916.67     369,163.00       80,000.00      80,000.00           0.00   2nd Mtg      San Mateo
Res         13.75  10/01/96      988.28           0.00       86,250.00      86,250.00           0.00   1st Mtg    Santa Clara
Res         12.50  02/01/07      369.76           0.00       30,000.00      22,598.41           0.00   1st Mtg     Santa Cruz
Res         10.00  04/17/97      132.08     126,800.00       15,850.00      15,774.68           0.00   2nd Mtg         Sonoma
Comm        10.00  08/06/02      400.63      17,382.00       46,803.50      43,409.17           0.00   2nd Mtg        Alameda
Comm        14.50  01/01/00    4,926.06     354,077.00      400,002.40     400,002.42           0.00   2nd Mtg   Contra Costa
Res         12.00  01/10/04      150.00     208,000.00       15,000.00       6,773.07           0.00   2nd Mtg      San Mateo
Apts         6.50  05/01/06      540.83      89,904.00       75,000.00      96,716.11       8,112.45   2nd Mtg     Sacramento
Res         12.75  07/01/08      370.90     236,164.00       29,700.00      24,529.12           0.00   2nd Mtg      San Mateo
Res         13.50  09/01/08    1,647.07     106,044.00      126,861.90     107,422.56           0.00   2nd Mtg   Contra Costa
Comm        12.00  09/01/03      848.61           0.00       82,500.00      80,397.94           0.00   lst Mtg        Alameda
Comm        10.00  09/01/03    1,167.00           0.00      133,000.00     122,189.51           0.00   lst Mtg      San Mateo
Comm        12.00  11/01/98    2,057.23       5,635.00      200,000.00      35,656.54           0.00   2nd Mtg     Sacramento
Res          8.00  05/01/09      753.50           0.00       81,825.00      64,886.89           0.00   lst Mtg        Alameda
Comm        10.00  12/01/98      647.21           0.00       73,750.00      72,766.69       3,883.26   lst Mtg     Stanislaus
Comm        14.00  01/01/00    2,760.29     891,453.00      200,001.20     200,001.20           0.00   4th Mtg   Contra Costa
Comm        10.00  12/01/98    3,619.98           0.00      412,500.00     406,541.72      18,099.90   lst Mtg        Alameda
Comm         7.00  12/01/03      575.74     281,250.00       49,586.38      40,560.78       2,878.70   2nd Mtg        Alameda
Comm        12.00  02/01/99    3,420.76           0.00      335,638.30     335,638.30           0.00   1st Mtg    Santa Clara
Land        12.00  07/01/96    1,352.50     679,258.00       13,250.00     135,250.00           0.00   3rd Mtg         Sonoma
Land        13.75  12/20/98    7,366.08     338,793.00      757,144.25     232,315.57      14,732.16   2nd Mtg     Stanislaus
Apts         7.00  02/10/05      234.06      80,250.00       40,125.00      40,125.00           0.00   2nd Mtg  San Francisco
Apts        11.50  04/01/05      453.88           0.00      550,000.00      45,833.34           0.00   1st Mtg  San Francisco
Comm         9.00  05/10/02      670.52           0.00       83,333.33      81,033.44           0.00   lst Mtg         Shasta
Res          8.00  09/27/00      530.79     106,333.00       79,619.05      77,679.33           0.00   2nd Mtg       Monterey
Comm        12.00  12/31/01   10,106.91   5,492,794.00      955,000.00   1,010,691.25           0.00   2nd Mtg    Santa Clara
Land        14.00  02/01/97    3,822.50           0.00      382,250.00     235,381.46           0.00   lst Mtg    Santa Clara
Res          8.00  09/18/03       87.56           0.00       11,932.83      11,688.87           0.00   1st Mtg         Sonoma
Res          8.00  09/30/03       89.71           0.00       12,225.92      11,984.10           0.00   lst Mtg         Sonoma
Comm        12.00  02/01/99      124.00     312,000.00       12,000.00      12,000.00           0.00   2nd Mtg    Santa Clara
Res         13.00  12/01/99      704.17           0.00       65,000.00      65,000.00         248.00   1st Mtg        Ventura
Res         13.00  12/01/99      140.83           0.00       65,000.00      13,000.00           0.00   lst Mtg        Ventura
Res         13.00  12/01/99      140.83           0.00       65,000.00      13,000.00           0.00   lst Mtg        Ventura
Res         14.00  01/01/98    1,983.34           0.00      340,000.00     170,000.00           0.00   lst Mtg        Alameda
Land        12.00  01/01/00    9,500.00      89,692.00      950,000.00     950,000.00      28,500.00   2nd Mtg     Stanislaus
Land        12.00  05/01/99    2,354.00           0.00      235,400.00     235,400.00           0.00   lst Mtg      San Mateo
Comm         7.00  07/01/02    1,131.11           0.00      146,666.66     143,544.38           0.00   lst Mtg   Contra Costa
Comm        12.00  07/01/02   10,500.00           0.00    1,350,000.00   1,050,000.00           0.00   lst Mtg  San Francisco
Res         12.00  01/01/99    6,726.86     250,668.00      700,000.00     679,413.14           0.00   2nd Mtg       Monterey
Res          9.00  09/01/07      154.77      61,645.00       12,217.98      11,196.31           0.00   2nd Mtg      San Mateo
Land        12.00  05/01/99      460.00     235,400.00       46,000.00      46,000.00           0.00   2nd Mtg      San Mateo
Res         12.00  05/01/99    5,773.22           0.00    1,225,000.00     601,484.36           0.00   lst Mtg  San Francisco
Comm        12.00  01/01/03    9,736.79           0.00    1,075,000.00     942,939.04           0.00   lst Mtg        Alameda
Land        11.50  09/01/99    3,833.33           0.00      400,000.00     400,000.00           0.00   lst Mtg     Stanislaus
Land        12.00  03/01/00    4,788.00           0.00      478,800.00     478,800.00           0.00   lst Mtg      San Mateo
Land        11.00  07/01/99    2,216.74   2,074,689.00      400,000.00     234,024.90           0.00   2nd Mtg  San Francisco

</TABLE>

<PAGE>

<TABLE>
<CAPTION>
Col. A    Col. B   Col. C    Col. D      Col. E         Col. F          Col. G            Col. H       Col. I      Col. J
Descp.    Interest Final     Periodic    Prior Liens    Face Amt. of    Carrying       Principal      Type of      Geographic
          Rate     Maturity  Payment                    Mortgage        amount of      amount of          Lien         County
                   Date      Terms                      Investments     Mortgage       Mortgage                      Location
                                                        (original       Investments    Investments
                                                        amount)                        subject to
                                                                                       Delinq.
                                                                                       Principal or
                                                                                       Interest
========= ======== ========= =========== ============== =============== ============== ============== ========= ==============

<S>         <C>    <C>         <C>                <C>       <C>            <C>                  <C>                          
Apts        12.00  08/01/99    7,010.66           0.00      725,000.00     714,617.48           0.00   lst Mtg          Marin
Comm        11.50  12/05/01    4,791.67           0.00      500,000.00     500,000.00           0.00   lst Mtg     Stanislaus
Land        13.00  10/01/00   10,291.67           0.00      950,000.00     950,000.00           0.00   lst Mtg         Solano
Res         11.00  10/01/01    2,603.33           0.00      284,000.00     284,000.00           0.00   lst Mtg     Stanislaus
Land        11.50  02/01/00    4,791.67           0.00      500,000.00     500,000.00           0.00   lst Mtg     Stanislaus
Res         10.00  08/01/97      388.67     309,872.00       45,000.00      46,558.20           0.00   3rd Mtg      San Mateo
Res         15.25  04/01/95      588.29      11,601.00       45,800.00      44,111.14           0.00   2nd Mtg         Solano
                            ------------ -------------- --------------- -------------- --------------
                            $141,741.06  $12,728,867.00 $15,975,033.70  $13,209,186.42    $76,454.47
<FN>

Notes:
         Mortgage Investments  classified as impaired Mortgage  Investments had principal balances totalling $231,966 at 
         December 31, 1998.  Impaired  Mortgage  Investments are defined as Mortgage  Investments  where the costs of related
         balances  exceeds the anticipated fair value less costs to collect. Accrued interest is no longer recorded thereon.

         Amounts  reflected  in column G  (carrying  amount of  Mortgage Investments) represents both costs and the tax basis of the
         Mortgage Investments.
</FN>
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Schedule XII

Reconciliation of carrying amount (cost) of Mortgage Investments at close of periods

                                                             Year ended December 31,
                                            ----------------------------------------------------------

                                                 1998                  1997                 1996
                                            ---------------       ---------------       --------------

<S>                                            <C>                   <C>                  <C>        
Balance at beginning of year                   $13,449,741           $12,036,293          $12,382,641
                                            ---------------       ---------------       --------------
Additions during period:
New Mortgage Investments                         6,398,769             7,841,128            9,099,688
Other                                                    0                     0                    0
                                            ---------------       ---------------       --------------
                  Total Additions                6,398,769             7,841,128            9,099,688
                                            ---------------       ---------------       --------------


Deduction during period:
Collections of principal                         6,529,324             6,278,832            8,923,339
Foreclosures                                       110,000               148,848              492,697
Cost of Mortgage Investments sold                        0                     0                    0
Amortization of Premium                                  0                     0                    0
Other                                                    0                     0               30,000
                                            ---------------       ---------------       --------------
                  Total Deductions               6,639,324             6,427,680            9,446,036
                                            ---------------
                                                                  ---------------       --------------

Balance at close of year                       $13,209,186           $13,449,741          $12,036,293
                                            ===============       ===============       ==============
</TABLE>
<PAGE>

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

     The  Partnership  has neither  changed its accountants nor does it have any
disagreement  on any matter of  accounting  principles or practices of financial
statement disclosures.

                                    Part III

          Item 10 - Directors and Executive Officers of the Registrant

     The Partnership has no Officers or Directors. Rather, the activities of the
Partnership  are managed by the three General  Partners of which two individuals
are D. Russell  Burwell and Michael R.  Burwell.  The third  General  Partner is
Gymno Corporation,  a California  corporation,  formed in 1986. The Burwells are
the two shareholders of Gymno Corporation, a California corporation, on an equal
(50-50) basis.

<PAGE>
Item 11 - Executive Compensation

COMPENSATION OF THE GENERAL PARTNERS AND AFFILIATES BY PARTNERSHIP

     As  indicated  above  in  Item  10,  the  Partnership  has no  officers  or
directors. The Partnership is managed by the General Partners.
There are certain fees and other items paid to management and related parties.

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

     The  following  compensation  has been  paid to the  General  Partners  and
Affiliates  for services  rendered  during the year ended December 31, 1998. All
such compensation is in compliance with the guidelines and limitations set forth
in the Prospectus.

Entity Receiving          Description of Compensation and                 Amount
Compensation              Services Rendered
------------------------- ----------------------------------------- ------------

I. Redwood Mortgage       Mortgage Servicing Fee for servicing 
                          Mortgage Investments                          $128,493

General Partners &/or
Affiliate                 Asset Management Fee for managing assets       $16,141
                          
General Partners          1% interest in profits                          $8,466

                         
II. FEES PAID BY  BORROWERS  ON MORTGAGE  INVESTMENTS  PLACED BY  COMPANIES
RELATED TO THE GENERAL PARTNERS WITH THE PARTNERSHIP  (EXPENSES OF BORROWERS NOT
OF THE PARTNERSHIP)

Redwood Mortgage         Mortgage Brokerage Commissions for services in
                         connection with the review, selection, evaluation,
                         negotiation, and extension of the Mortgage Investments
                         paid by the borrowers and not by the 
                         Partnership                                    $166,752
                        

Redwood Mortgage         Processing and Escrow Fees for services in
                         connection with notary, document preparation,
                         credit investigation, and escrow fees payable by
                         the borrowers and not by the Partnership         $3,383
                      

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.                                                     $34,173

<PAGE>

Item 12 - Security Ownership of Certain Beneficial Owners and Management

     The General  Partners are to own a combined total of 1% of the  Partnership
including a 1% portion of income and losses.

Item 13 - Certain Relationships and Related Transactions

     Refer to footnote 3 of the notes to financial  statements in Part II item 8
which describes related party fees and data.

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




                                     Part IV

Item 14 - Exhibits, Financial Statements and Schedules, and Reports on Form 8-K.

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.

<PAGE>

3.  Exhibits.

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

       3.1     Limited Partnership Agreement
       3.2     Form of Certificate of Limited Partnership Interest
       3.3     Certificate of Limited Partnership
      10.1     Escrow Agreement
      10.2     Servicing Agreement
      10.3     (a)  Form of Note secured by Deed of Trust which provides for
                principal and interest payments.
               (b)  Form of Note secured by Deed of Trust which provides
                principal and interest payments and right of assumption
               (c)  Form of Note secured by Deed of Trust which provides
               for interest only payments
               (d)  Form of Note
      10.4     (a)  Deed of Trust and Assignment of Rents to accompany 
               Exhibits 10.3 (a), and (c)
               (b)  Deed of Trust and Assignment of Rents to accompany 
               Exhibit 10.3 (b)
               (c)  Deed of Trust to accompany Exhibit 10.3 (d)
      10.5     Promissory Note for Formation Loan
      10.6     Agreement to Seek a Lender
      24.1     Consent of Parodi & Cropper
      24.2     Consent of Stephen C. Ryan & Associates.



     All of these exhibits were previously  filed as the exhibits to Registrants
Statement on Form S-11  (Registration No. 33-30427 and incorporated by reference
herein).


B.       Reports of Form 8-K.

     No  reports  on Form 8-K have been  filed  during  the last  quarter of the
period covered by this report.

C.       See A (3) above.

     D. 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.

<PAGE>
                                   SIGNATURES

     Pursuant  to the  requirements  of Section  13 or 15 (d) of the  Securities
Exchange Act of 1934 the  registrant has duly caused this report to be signed on
its behalf by the undersigned, thereto duly authorized on the 23rd day of March,
1999.


REDWOOD MORTGAGE INVESTORS VII


By:      /S/ D. Russell Burwell
         ---------------------------------------------
         D. Russell Burwell, General Partner


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


By:      Gymno Corporation, General Partner


         By:     /S/ D. Russell Burwell
                 ---------------------------------------------
                 D. Russell Burwell, President


         By:     /S/ Michael R. Burwell
                 ---------------------------------------------
                 Michael R. Burwell, Secretary/Treasurer


     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 23rd day of March, 1999.


Signature                                  Title                      Date


/S/ D. Russell Burwell
---------------------------------
D. Russell Burwell                      General Partner           March 23, 1999


/S/ Michael R. Burwell
---------------------------------
Michael R. Burwell                      General Partner           March 23, 1999



/S/ D. Russell Burwell
---------------------------------
D. Russell Burwell               President of Gymno Corporation,  March 23, 1999
                                 (Principal Executive Officer);
                                 Director of Gymno Corporation


/S/ Michael R. Burwell
---------------------------------
Michael R. Burwell               Secretary/Treasurer of Gymno     March 23, 1999
                                 Corporation (Principal Financial
                                 and Accounting Officer);
                                 Director of Gymno Corporation