<PAGE>


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

                                December 31, 1996

                                     Part I

                                                                        Page No.
Item 1 - Business                                                             4
Item 2 - Properties                                                         4-6
Item 3 - Legal Proceedings                                                    6
Item 4 - Submission of Matters to a vote of Security Holders (partners)       7

                                     Part II

Item 5 - Market for the Registrants Partners Capital and related matters      7
Item 6 - Selected Financial Data                                            7-8
Item 7 - Managements Discussion and Analysis of Financial condition
and Results of Operations                                                     9
Item 8 - Financial Statements and Supplementary Data                      11-35
Item 9 - Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure                                                         36

                                    Part III

Item 10 - Directors and Executive Officers of the Registrant                 36
Item 11 - Executive Compensation                                             37
Item 12 - Security Ownership of Certain Beneficial Owners and management     38
Item 13 - Certain Relationships and Related Transactions                     38

                                     Part IV

Item 14 - Exhibits, Financial Statement Schedules, and Reports on 
          Form 8- K.                                                      38-39
 
Signatures                                                                   40
<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, 1996 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               (415) 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  Home Loan Co., dba Redwood
Mortgage, 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 October 19, 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, 1996, the Partnership had a balance
in its Mortgage Investments  portfolio totalling $12,036,293 with interest rates
thereon ranging from 4% to 15.50%.

     Currently,  Mortgage  Investments  secured by First  Trust  Deeds  comprise
34.89% of the Mortgage  Investment  portfolio  followed by Second Trust Deeds of
57.44%,  and  Third  Trust  Deeds of 6.01%.  A Fourth  Trust  Deed  makes up the
balance.  Owner-occupied  homes,  combined with  non-owner  occupied homes total
23.72 % of the Mortgage Investments. Commercial Mortgage Investments origination
increased from last year, now comprising 65.26% of the portfolio, an increase of
10.99%.  The past year  brought us many  outstanding  low loan to value  lending
opportunities in this segment of the market.  Mortgage Investment size increased
this past year,  and is now  averaging  $169,525  per  Mortgage  Investment,  an
increase of $2,192. 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  34.24%.  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 five properties in foreclosure.

Item 2 - Properties

     A summary of the Partnerships Mortgage Investment Portfolio as of December
31, 1996, is set forth below.
<PAGE>

   
Mortgage Investments as a Percentage of Total Mortgage Investments

First Trust Deeds                                             $4,199,551.40
Appraised Value of Properties                                  8,799,746.00
  Total Investment as a % of Appraisal                                47.72%
Second Trust Deed Mortgage Investments                         6,913,852.90
Third Trust Deed Mortgage Investments                            722,887.23
Fourth Trust Deed Mortgage Investments *                         200,001.20
First Trust Deeds due other Lenders                           20,947,294.00
Second Trust Deeds due other Lenders                             979,402.00
Third Trust Deeds due other Lenders                              142,858.00

Total Debt                                                   $34,105,846.73

  Appraised Property Value                                    51,863,991.00
  Total Investments as a % of Appraisal                               65.76%

Number of Mortgage Investments Outstanding                               71


Average Investment                                               169,525.25
Average Investment as a % of Net Assets                               1.21%
Average Investment as a % of Net Assets                               1.25%
Largest Investment Outstanding                                  979,272.93
Largest Investment as a % of Net Assets                               6.99%
Largest Investment as a % of Net Assets                               7.21%


Mortgage Investments as a Percentage of Total Mortgage Investments

First Trust Deeds                                                    34.89%
Second Trust Deeds                                                   57.44%
Third Trust Deeds                                                     6.01%
Fourth Trust Deeds                                                    1.66%
                                                                ------------
Total                                                               100.00%

Mortgage Investments  by                Amount              Percent
Type of Property

Owner Occupied Homes                   $1,742,767.10           14.48%
Non-Owner Occupied Homes                1,112,274.08            9.24%
Apartments                              1,325,871.63           11.02%
Commercial                              7,855,379.92           65.26%
                                   ------------------      -----------

Total                                 $12,036,292.73          100.00%

* Footnotes on following page
    
<PAGE>

     The following is a distribution of Mortgage  Investments  outstanding as of
December 31, 1996 by Counties.

County                           Total Mortgage             Percent
                                   Investments

Santa Clara                         $2,888,907.85            24.00%
San Francisco                        1,950,728.50            16.21%
Stanislaus                           1,665,745.47            13.84%
San Mateo                            1,536,899.28            12.77%
Alameda                              1,233,138.15            10.25%
Contra Costa                         1,147,497.77             9.53%
Sonoma                                 370,953.22             3.08%
El Dorado                              274,178.59             2.28%
Sacramento                             206,893.59             1.72%
Ventura                                195,000.00             1.62%
Santa Barbara                          122,596.76             1.02%
Solano                                 104,713.29             0.87%
Shasta                                  82,407.46             0.68%
Monterey                                79,619.05             0.66%
Tuoloume                                65,213.37             0.54%
Marin                                   62,836.42             0.52%
Santa Cruz                              48,963.96             0.41%
                                ------------------       -----------

Total                              $12,036,292.73           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 on this loan
is 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                   5


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.
<PAGE>

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 Registrants 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.

     Financial  condition and results of operation for the Partnership for three
years to December 31, 1996 were:
<TABLE>

                                                             Balance Sheet
                                                                Assets

                                                                          December 31,
                                                      ------------------------------------------------------
<CAPTION>

                                                               1996                 1995               1994
                                                      --------------       --------------      -------------
<S>                                                        <C>                  <C>                <C>     
   
Cash                                                       $755,089             $514,840           $462,681
Accounts Receivable:
   Mortgage Investments secured by Deeds of Trust        12,036,293           12,382,641         11,345,566
   Accrued interest and other fees                          264,495              940,541            738,142
   Advances on Mortgage Investments                          41,203              110,874             28,767
   Other receivables - Unsecured                            337,242              378,200            359,072
   Less allowance for losses                              (228,647)            (200,000)          (201,608)
Real Estate Owned acquired through foreclosure at
    estimated net realizable value                        1,468,345            1,347,997          2,352,221
Formation loan due from Redwood Mortgage.                   429,163              517,051            604,939
Partnership Interest                                        242,394              223,245                  0
Organization cost net of amortization                             0                  368              2,384


                                                      --------------       --------------      -------------
                                                        $15,345,577          $16,215,757        $15,692,164
                                                      --------------       --------------      -------------
                                                      --------------       --------------      -------------
                                                        $14,916,414          $15,698,706        $15,087,225
                                                      --------------       --------------      -------------
    
</TABLE>
<PAGE>

<TABLE>

                        Liabilities and Partners Capital

                                                                           December 31,
                                                      -------------------------------------------------------
                                                               1996                1995                 1994
                                                      --------------       --------------      --------------
Liabilities:
<S>                                                      <C>                 <C>                  <C>       
Note payable - Bank                                      $1,175,000          $2,000,000           $1,929,630
Accounts payable and accrued expenses                         1,472               1,472                2,973
Discount of Mortgage Investments                            154,598                   0                    0
Due to Related Companies                                          0                   0                5,663
                                                      --------------      --------------       --------------
                                                          1,331,070           2,001,472            1,938,266

   
Partners  Capital                                        14,014,507          14,214,285           13,753,898
Partners  Capital                                        13,573,366          13,685,393           13,137,962
  Limited Partners subject to redemption                     11,978              11,881               10,997
                                                      --------------      --------------       --------------
  General Partners                                       13,585,344          13,697,234           13,148,959
                                                      --------------      --------------       --------------


                                                        $14,916,414         $15,698,706          $15,087,225
                                                      --------------      --------------       --------------

                                                      --------------      --------------       --------------
                                                        $15,345,577         $16,215,757          $15,692,164
                                                      --------------      --------------       --------------

                               Statement of Income

Gross revenue                                            $1,483,233          $1,450,487           $1,489,882
Gross revenue                                            $1,580,500          $1,483,881           $1,489,882
Expenses                                                    624,134             538,527              562,591
                                                      --------------      --------------       --------------
Expenses                                                    721,401             571,921              562,591
                                                      --------------      --------------       --------------


Net Income                                                 $859,099            $911,960             $927,291
                                                      --------------      --------------       --------------

Net income to General Partners (1%)                          $8,591              $9,120               $9,273
                                                      ==============      ==============       ==============

Net Income to Limited Partners (99%)                       $850,508            $902,840             $918,018
                                                      ==============      ==============       ==============


Net Income per $1,000 invested by Limited
 Partners for entire period:
   - where income is reinvested and compounded                  $60                 $60                  $63
                                                      ==============      ==============       ==============

   - where partner receives income in monthly
       distributions                                            $59                 $58                  $61
                                                      ==============      ==============       ==============

     Net income in 1994 averaged at an annualized  yield of 6.28%.  In 1995, the
annualized yield was 6.00% and in 1996 the annualized yield was 6.02%.
    
</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, 1996, Partners Capital totaled $14,014,507 $13,585,344.

     The Partnership began funding Mortgage Investments on December 27, 1989 and
as of December 31, 1996 had credited  the  Partners  accounts  with income at an
average annualized (compounded) yield of 8.14%.

     Currently,  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 not change  significantly  in the  immediate  future.  Based upon the rates
payable in connection with the existing  Mortgage  Investments,  the current and
anticipated interest rates to be charged by the Partnership, and current reserve
requirements,  the General  Partners  anticipate that the annualized  yield next
year will range only slightly higher from its current rate of 6.02%.

     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. Currently, it has borrowed $1,175,000.
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 and 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, 1996, the Partnership is current
with its  interest  payments  on the line of credit.  In 1994,  the  Partnership
incurred $135,790 of interest on note payables. The interest rate on the line of
credit  was Prime + 3/4% and the  Partnership  was able to  maintain  a positive
spread  between the cost of borrowing  the funds and interest  earned on lending
the funds.  In 1995,  the  Partnership  incurred  $163,361  of  interest on note
payables  reflecting  a small  increase in the overall  average  credit  balance
outstanding. 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.

     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  nineteen  years.
Professional services were higher in 1993 and into 1994 as a result of a lawsuit
initiated  to collect  an  outstanding  debt.  The debt was  collected  in 1994.
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. 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 and earnings payout  requirements.  As Mortgage Investment
opportunities become available,  excess cash and available funds are invested in
new Mortgage Investments.

     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 $335,955 and
$306,779 as  provision  for doubtful  accounts for the years ended  December 31,
1994 and December 31, 1995. The decrease in the provision  reflects the decrease
in the  amount  of REO,  unsecured  receivables  and the  decreasing  levels  of
delinquency within the portfolio.  Additionally,  the General Partners felt that
the bottom of the real estate  cycle had been  reached,  reflecting a decreasing
need to set aside reserves for continuously  declining real estate values as had
been the case in the early 1990s in the California real estate market.
<PAGE>
     The Northern  California  recession reached bottom in 1993. Since then, the
California  economy  has  been  improving,   slowly  at  first,  but  now,  more
vigorously.  A wide variety of indicators suggest that the economy in California
was strong in 1996,  and the State is well - positioned  for fast  growth.  This
improvement is reflective in increasing property values, in job growth, personal
income  growth,  etc.,  which all translates  into more loan activity,  which of
course, is healthy for the Partnerships lending activity.

     At the time of subscription to the  Partnership,  Limited  Partners make 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, 1995 and December 31, 1996 the Partnership made distributions
of  earnings to Limited  Partners  after  allocation  of  syndication  costs of,
$262,450 and $327,887 respectively. Distribution of Earnings to Limited Partners
after allocation of syndication  costs for the years ended December 31, 1995 and
December 31, 1996 to Limited  Partners  capital  accounts and not withdrawn was
$640,390  and  $522,621  respectively.  As of December 31, 1995 and December 31,
1996  Limited  Partners  electing to withdraw  earnings  represented  36.00% and
44.00% of the Limited Partners outstanding capital accounts.

     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, 1995 and December 31,
1996, $ and $ 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 we are  experiencing  in
withdrawals  by  Limited  Partners  electing  a  one  year  liquidation  program
represents a small percentage of Limited Partner capital as of December 31, 1995
and December 31, 1996  respectively  and is expected by the General  Partners to
commonly occur at these levels.

     Additionally,  for the years ended  December 31, 1995 and December  31,1996
$97,801 and  $318,902  were  liquidated  by Limited  Partners who have elected a
liquidation program over a period of five years or longer. Once the initial five
year hold  period has passed the General  Partners  expect to see an increase in
liquidations due to the ability of Limited Partners to withdraw without penalty.
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,  the gross figures  generally  should  subside and the  Partnership
capital again tends to increase.
    

<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, 1996, and December 31, 1995,
        Statements of Income for the three years ended December 31, 1996,
        Statements of Changes in Partners Capital for the three years ended 
         December 31,  1996,
        Statements of Cash Flows for the three years ended December 31, 1996,
        Notes to Financial Statements - December 31, 1996.

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, 1996
                         (With Auditors Report Thereon)

<PAGE>

                                PARODI & CROPPER
                          CERTIFIED PUBLIC ACCOUNTANTS
                       3658 Mount Diablo Blvd., Suite #205
                               Lafayette CA 94549
                                 (510) 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, 1996 and 1995 and the
statements of income,  changes in partners capital and cash flows for the three
years ended December 31, 1996. 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, 1996 and 1995, and the results of its operations and cash
flows for the three years ended  December 31, 1996 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.

   
     As  explained  in  notes  1(a)  and 11 to  the  financial  statements,  the
formation  loan  receivable  from Redwood  Mortgage has been  reclassified  as a
reduction in Partners  Capital until  collections  are  received.  There was no
effect on net income.
    


                              /S/ A. Bruce Cropper
                                PARODI & CROPPER



Lafayette, California
February 28, 1997
<PAGE>
<TABLE>



                         REDWOOD MORTGAGE INVESTORS VII
                       (A California Limited Partnership)
                                 BALANCE SHEETS
                           DECEMBER 31, 1996 AND 1995
<CAPTION>

                                     ASSETS
                                                                                     1996                1995
                                                                            --------------      --------------

Cash                                                                             $755,089            $514,840
                                                                            --------------      --------------

   
Accounts receivable:
<S>                                                                            <C>                 <C>       
  Mortgage Investments, secured by deeds of trust                              12,036,293          12,382,641
  Accrued Interest on Mortgage Investments                                        264,495             940,541
  Advances on Mortgage Investments                                                 41,203             110,874
  Accounts receivables, unsecured                                                 337,242             378,200
                                                                            --------------      --------------
                                                                               12,679,233          13,812,256
  Less allowance for doubtful accounts                                            228,647             200,000
                                                                            --------------      --------------


                                                                               12,450,586          13,612,256
                                                                            --------------      --------------

Real estate owned, acquired through foreclosure, held for sale                  1,468,345           1,347,997
Investment in partnership                                                         242,394             223,245

Formation loan due from Redwood Mortgage                                          429,163             517,051

Organization costs, less accumulated amortization of $10,102 and
   $9,734, respectively                                                                 0                 368
                                                                            --------------      --------------

                                                                              $15,345,577         $16,215,757
                                                                            ==============      ==============
                                                                              $14,916,414         $15,698,706
                                                                            ==============      ==============

                                                   LIABILITIES AND PARTNERS CAPITAL


Liabilities:
  Notes payable - bank line of credit                                          $1,175,000          $2,000,000
  Accounts payable and accrued expenses                                             1,472               1,472
  Deferred Interest                                                               154,598                   0
                                                                            --------------      --------------
                                                                                1,331,070           2,001,472

Partners Capital                                                               14,014,507          14,214,285
                                                                            --------------      --------------
  Limited partners capital, subject to redemption (Note 4E):
     Net of unallocated sundication costs of $0 and $13,588 for 1996 and
     1995 respectively; and formation loan receivable of $429,163 and
     $517,051 for 1996 and 1995, respectively                                  13,573,366          13,685,393

  General partners  capital, net of unallocated syndication costs of $0
    and $137, for 1996 and 1995, respectively                                      11,978              11,841
                                                                            --------------      --------------

           Total Partners  Capital                                             13,585,344          13,697,234

                                                                              $15,345,577         $16,215,757
           Total Liabilites and Partners  Capital                             $14,916,414         $15,698,706
                                                                            ==============      ==============
<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, 1996
<CAPTION>


   
                                                                            YEARS ENDED DECEMBER 31,
                                                               ----------------------------------------------------
                                                                   1996                1995              1994
                                                               -------------       -------------     --------------
Revenues:
<S>                                                              <C>                 <C>                <C>       
  Interest on Mortgage Investments                               $1,430,183          $1,430,742         $1,453,969
  Interest on Mortgage Investments                               $1,527,450          $1,464,136         $1,453,969
  Interest on bank deposits                                          10,228               8,407             13,843
  Late charges                                                       17,266               9,038             20,232
  Other                                                              25,556               2,300              1,838
                                                               -------------       -------------     --------------
                                                               -------------       -------------     --------------
                                                                  1,483,233           1,450,487          1,489,882
                                                               -------------       -------------     --------------
                                                               -------------       -------------     --------------
                                                                  1,580,500           1,483,881          1,489,882
                                                               -------------       -------------     --------------


Expenses:
  Mortgage sevicing fees                                             97,267              33,394                  0
  Interest on note payable - bank                                   127,454             163,361            135,790
  Clerical costs through Redwood Mortgage                            40,874              27,762                  0
  Amortization of organization costs                                    368               2,016              2,016
  General partners asset management fee                                   0                   0             10,008
  Provision for doubtful accounts and losses
   on real estate acquired through foreclosure                      419,437             306,779            335,955
  Professional services                                              18,802              19,557             53,250
  Printing, supplies and postage                                     12,466              14,703             17,282
  Other                                                               4,733               4,349              8,290
                                                               -------------       -------------     --------------
                                                                    624,134             538,527            562,591
                                                               -------------       -------------     --------------
                                                                    721,401             571,921            562,591


Net Income                                                         $859,099            $911,960           $927,291
                                                               =============       =============     ==============

Net income:  To General Partners(1%)                                 $8,591              $9,120             $9,273
                     To Limited Partners (99%)                      850,508             902,840            918,018
                                                               =============       =============     ==============
                                                                   $859,099            $911,960           $927,291
                                                               =============       =============     ==============

Net income per $1,000 invested by Limited
 Partners for entire period:
     -where income is reinvested and  compounded                       $ 60                $ 60               $ 63
                                                               =============       =============     ==============

     -where partner receives income in monthly distributions           $ 59                $ 58               $ 61
                                                               =============       =============     ==============


<FN>
See accompanying notes to financial statements.
</FN>
    
</TABLE>

<PAGE>
<TABLE>
   

                                                    REDWOOD MORTGAGE INVESTORS VII
                                                  (A California Limited Partnership)
                                              STATEMENTS OF CHANGES IN PARTNERS CAPITAL
                                              FOR THE THREE YEARS ENDED DECEMBER 31, 1996
<CAPTION>

                                                                  PARTNERS CAPITAL

                                                                                 UNALLOCATED
                                         GENERAL             LIMITED             SYNDICATION
                                        PARTNERS             PARTNERS               COSTS                 TOTAL
                                      -------------- ---- --------------- ---- ---------------- ----- ---------------

<S>                                          <C>              <C>                    <C>                  <C>       
Balances at December 31, 1993                11,978           13,596,915             (189,704)            13,419,189

Net income                                    9,273              918,018                     0               927,291
Allocation of syndication costs               (810)             (80,190)                81,000                     0
Early withdrawal penalties                        0             (34,001)                10,635              (23,366)
Partners  withdrawals                       (8,463)            (560,753)                     0             (569,216)
                                      --------------      ---------------      ----------------       ---------------

Balances at December 31, 1994                11,978           13,839,989              (98,069)            13,753,898

Net income                                    9,120              902,840                     0               911,960
Allocation of syndication costs               (810)             (80,190)                81,000                     0
Early withdrawal penalties                        0             (10,690)                 3,344               (7,346)
Partners  withdrawals                       (8,310)            (435,917)                     0             (444,227)
                                      --------------      ---------------      ----------------       ---------------

Balances at December 31, 1995               $11,978           14,216,032              (13,725)            14,214,285

Net income                                    8,591              850,508                     0               859,099
Allocation of syndication costs               (137)             (13,588)                13,725                     0
Early withdrawal penalties                        0             (37,345)                     0              (37,345)
Partners  withdrawals                       (8,454)          (1,013,078)                     0           (1,021,532)
                                      --------------      ---------------      ----------------       ---------------

Balances at December 31, 1996               $11,978           14,002,529                     0            14,014,507
                                      ==============      ===============      ================       ===============
<FN>
See accompanying notes to financial statements
</FN>
    
</TABLE>

<PAGE>
<TABLE>
   


                                                    REDWOOD MORTGAGE INVESTORS VII
                                                  (A California Limited Partnership)
                                              STATEMENTS OF CHANGES IN PARTNERS CAPITAL
                                              FOR THE THREE YEARS ENDED DECEMBER 31, 1996

<CAPTION>

                                                                     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, 1993                  $13,596,915         $(187,807)         $(693,471)        $12,715,637

Formation loan collections                               0                  0             65,166             65,166
Net income                                         918,018                  0                  0            918,018
Allocation of syndication costs                   (80,190)             80,190                  0                  0
Early withdrawal penalties                        (34,001)             10,529             23,366              (106)
Partners  withdrawals                            (560,753)                  0                  0          (560,753)
                                            ---------------    ---------------     --------------    ---------------


Balances at December 31, 1994                   13,839,989           (97,088)           (604,939         13,137,962

Formation loan collections                               0                  0             80,542             80,542
Net income                                         902,840                  0                  0            902,840
Allocation of syndication costs                   (80,190)             80,190                  0                  0
Early withdrawal penalties                        (10,690)              3,310              7,346               (34)
Partners  withdrawals                            (435,917)                  0                  0          (435,917)
                                            ---------------    ---------------     --------------    ---------------

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
                                            ===============    ===============     ==============    ===============

<FN>
See accompanying notes to financial statements
</FN>
    
</TABLE>

<PAGE>


<TABLE>
                                                    REDWOOD MORTGAGE INVESTORS VII
                                                  (A California Limited Partnership)
                                              STATEMENTS OF CHANGES IN PARTNERS CAPITAL
                                              FOR THE THREE YEARS ENDED DECEMBER 31, 1996
<CAPTION>


                                                                          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, 1993                         $11,978               $(1,897)          $10,081         $12,725,718

Formation loan collections                                  0                      0                0              65,166
Net income                                              9,273                      0            9,273             927,291
Allocation of syndication costs                         (810)                    810                0                   0
Early withdrawal penalties                                  0                    106              106                   0
Partners withdrawals                                  (8,463)                      0          (8,463)           (569,216)
                                            ------------------    -------------------     ------------     ---------------

Balances at December 31, 1994                          11,978                  (981)           10,997          13,148,959

Formation loan collections                                  0                      0                0              80,542
Net income                                              9,120                      0            9,120             911,960
Allocation of syndication costs                         (810)                    810                0                   0
Early withdrawal penalties                                  0                     34               34                   0
Partners  withdrawals                                 (8,310)                      0          (8,310)           (444,227)
                                            ------------------    -------------------     ------------     ---------------

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


<FN>
See accompanying notes to financial statements
</FN>
    
</TABLE>

<PAGE>
<TABLE>
   

                                                   REDWOOD MORTGAGE INVESTORS VII
                                                  (A Califonira Limited Partnership)
                                                       STATEMENTS OF CASH FLOWS
                                              FOR THE THREE YEARS ENDED DECEMBER 31, 1996
<CAPTION>

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

                                                                           1996              1995               1994
                                                                       -------------     -------------      -------------
Cash flows from operating activities:
<S>                                                                        <C>               <C>                <C>     
  Net income                                                               $859,099          $911,960           $927,291
  Adjustments to reconcile net income to net cash provided by
      operating activities:
    Amortization of organization costs                                          368             2,016              2,016
    Provision for doubtful accounts                                         204,398            74,812            106,950
    Provision for losses on real estate held for sale                       215,039           231,967            229,005
    Early withdrawal penalty credited to income                            (11,682)                 0                  0
    (Increase) decrease in accrued interest & advances                      745,717         (284,506)          (140,657)
    Increase (decrease) in accounts payable and accrued expenses                  0           (1,501)           (37,549)
    (Increase) decrease in amount due from or to Redwood Mortgage                 0           (5,663)              3,806
    Increase (decrease) in deferred interest on Mortgage Investments        154,598                 0            (8,548)
                                                                       -------------     -------------      -------------

      Net cash provided by operating activities                           2,167,537           929,085          1,082,314
                                                                       -------------     -------------      -------------

Cash flows from investing activities:
    Principal collected on mortgage investments                           8,923,339         1,980,879          3,383,366
    Mortgage Investments made                                           (9,099,688)       (3,592,507)        (4,671,889)
    Formation loan collections                                               87,888            87,888             88,532
    Additions to Real Estate held for sale                                (147,733)         (170,194)          (647,609)
    Dispositions of real estate held for sale                               200,250         1,198,211            334,102
    Investment in partnership                                              (19,149)                 0                  0
                                                                       -------------     -------------      -------------

      Net cash provided by (used in) investing activities                  (55,093)         (495,723)        (1,513,498)
                                                                       -------------     -------------      -------------
      Net cash provided by (used in) investing activities                 (142,981)         (583,611)        (1,602,030)
                                                                       -------------     -------------      -------------

Cash flows from financing activities:
  Net increase (decrease) in note payable-bank                            (825,000)            70,370            999,137
  Formation loan collections                                                 62,225            80,542             65,166
Early withdrawal penalties, net of credit to syndication costs             (37,345)         (444,227)          (569,216)
Partners withdrawals                                                    (1,021,532)         (444,227)          (569,216)
                                                                       -------------     -------------      -------------

      Net cash provided by (used in) financing activities               (1,883,877)         (381,203)            406,555
                                                                       -------------     -------------      -------------
      Net cash provided by (used in) financing activities               (1,784,307)         (293,315)            495,087
                                                                       -------------     -------------      -------------

Net increase (decrease) in cash                                             240,249            52,159           (24,629)

Cash - beginning of period                                                  514,840           462,681            487,310
                                                                       -------------     -------------      -------------

Cash - end of period                                                       $755,089          $514,840           $462,681
                                                                       =============     =============      =============
<FN>
See accompanying notes to financial statements.
</FN>
    
</TABLE>

<PAGE>

                         REDWOOD MORTGAGE INVESTORS VII
                       (A California Limited Partnership)
                          NOTES TO FINANCIAL STATEMENTS
                                DECEMBER 31, 1996

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  Home Loan Co.,  dba
Redwood Mortgage,  an affiliate of the General Partners.  At September 30, 1992,
the offering had been closed with contributed  capital totaling  $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  has  had  borrowed  $914,369  from  the
Partnership to cover sales commissions  relating to $11,998,359  limited partner
contributions (7.62%).  Through December 31, 1996, $485,206 including $75,478 in
early withdrawal penalties,  had been repaid leaving a balance of $429,163.  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.
   
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES


Revenues and expenses are accounted for on the accrual basis of accounting.

     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 were  capitalized and were amortized
over a five year  period.  Syndication  costs  were  charged  against  partnerP
capital  and  were  allocated  to  individual   partners   consistent  with  the
Partnership Agreement.

     Property  acquired  through  foreclosure  will be held for  prompt  sale to
return the funds to the Mortgage Investment portfolio. Such property is recorded
at cost which includes the principal  balance of the former Mortgage  Investment
made by the Partnership plus accrued interest,  payments made to keep the senior
loans current, costs of obtaining title and possession, less rental income or at
estimated net realizable value, if less. The difference between such costs and
estimated  net  realizable  value is deducted  from cost in the Balance Sheet to
arrive at the carrying value of such property.

     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 account to adjust the allowance for doubtful accounts to an
amount  considered  by  management  to be adequate to provide for  unrecoverable
accounts receivable.

     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 and the valuation of real estate acquired
through  foreclosure.  Actual  results  could  differ  significantly  from these
estimates.

     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.

     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.

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.
    
<PAGE>


                         REDWOOD MORTGAGE INVESTORS VII
                       (A California Limited Partnership)
                          NOTES TO FINANCIAL STATEMENTS
                                DECEMBER 31, 1996

   
     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 the
valuation method previously used on impaired loans.

     At  December  31,  1996,  1995 and  1994,  reductions  in the cost of loans
categorized  as  impaired by the  Partnership  totalled  $9,595,  $0 and $10,000
respectively.  The reduction in stated value was  accomplished by increasing the
allowance for doubtful accounts.

     As presented in Note 8 to the financial statements as of December 31, 1996,
the average  mortgage  investment to appraised value of security at the time the
loans  were  consummated  was  65.76%.  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.


     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, 1996 and 1995:

                                                   December 31,
                                         ----------------------------------
                                         1996                            1995
                                         -----                          ------

Costs of properties                  $1,655,786                      $1,410,571
Reduction in value                      187,441                          62,574
                                 ---------------                 ---------------

Fair value reflected in
  financial statements               $1,468,345                      $1,347,997
                                  =============                    ============

     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.
    
<PAGE>

                         REDWOOD MORTGAGE INVESTORS VII
                       (A California Limited Partnership)
                          NOTES TO FINANCIAL STATEMENTS
                                DECEMBER 31, 1996

   
F. Investment in Partnership (see note 5)


     The  Partnership  accounts  for  its  investment  in a  partnership  as  an
investment  in real estate,  which is at the lower of costs or fair value,  less
estimated costs to sell. At December 31, 1996, cost is considered less than fair
value and the investment is stated at cost in the financial statements.

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 $425,794 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, 1996 and 1995 was as follows:

                                             December 31,
                              -----------------------------------------------
                                      1996                            1995
                                ---------------                 ---------------

Impaired mortgage investments        $9,595                              $0
Unspecified mortgage investments     19,052                          50,000
Accounts receivable, unsecured      200,000                         150,000
                                 ------------                 ---------------
                                   $228,647                        $200,000
                                 ============                 ===============

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, 1996


K. Reclassifications and Changes in Presentation

     Certain  reclassifications not affecting net income have been made to prior
year  amounts to conform to the current  year  presentation.  In  addition,  the
formation loan which was previously  categorized as an asset,  has been deducted
from Limited  Parteners  capital until  collected  from Reddwood  Mortgage,  an
affiliate of the General Partners.

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.

     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.  Amounts  remitted to Redwood  Mortgage  and recorded as
interest on Mortgage  Investments  is net of such fees. In 1994, all $124,049 in
loan servicing  fees were waived by Redwood  Mortgage.  In 1995,  $66,888 of the
total loan servicing fees of $100,282 were waived. In 1996, $92,249 of the total
loan  servicing  fees of  $189,516  were  waived by Redwood  Mortgage.  Mortgage
servicing fees of $97,267, $33,394 and $0 were incurred for years 1996, 1995 and
1994, respectively.

     C. Asset  Management  Fee The  General  Partners  receive a monthly fee for
managing the Partnerships Mortgage Investment portfolio and operations equal to
1/32 of 1% of the net asset value (3/8 of 1% annual).  In 1996, 1995 and 1994,
the asset management fees charged were $10,008, $16,735, and $0.00 respectively.
The computed management fees were $51,519,  $50,360,  and $53,537  respectively,
with the difference being waived by the General Partners. Management fees of $0,
0 and $10,008 were incurred for years 1996, 1995 and 1994, respectively.


     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, 1996


     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.  In 1994, all such expenses were absorbed by Redwood Mortgage.
In  1996  and  1995,   reimbursed   expenses   totalled   $40,874  and  $27,762,
respectively. 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.

     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,
    
<PAGE>

                         REDWOOD MORTGAGE INVESTORS VII
                       (A California Limited Partnership)
                          NOTES TO FINANCIAL STATEMENTS
                                DECEMBER 31, 1996

   
     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.

     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.  None of 1994,  1995, or 1996,  was subject to the guarantee.
This guarantee is now no longer applicable.

NOTE 5 - INVESTMENT IN PARTNERSHIP

     The Partnerships  interest in land, acquired through foreclosure,  located
in East Palo Alto with costs  totalling  $242,394 has been invested with that of
two other Partnerships (total cost to date,  primarily land, of $1,021,798) in a
partnership  which is in the  process of  obtaining  approval  for  constructing
approximately 72 single family homes for sale.  Redwood Mortgage Investors V, VI
and VII have first priority on return of investment  plus interest  thereon,  in
addition to a share of profits realized.

NOTE 6 - LEGAL PROCEEDINGS

     The  Partnership  is not a defendant in any legal actions.  However,  legal
actions against  borrowers and other involved parties have been initiated by the
Partnership  to help  assure  payments  against  unsecured  accounts  receivable
totalling $337,242 at December 31, 1996.

     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.
    
<PAGE>

                         REDWOOD MORTGAGE INVESTORS VII
                       (A California Limited Partnership)
                          NOTES TO FINANCIAL STATEMENTS
                                DECEMBER 31, 1996

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, 1995 and 1996 were  $2,000,000,  and  $1,175,000
respectively,  and the interest rate at December 31, 1996 was 8.75% (8.25% prime
+ .50%).

   
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,
                                                -------------------------------
                                                 1996                    1995
                                               --------                 -------

Net assets - Partners Capital per financial  $13,585,344           $13,697,234*-
statements

Formation loan receivable                        429,163               517,051
Allowance for doubtful accounts                  228,647               200,000
                                               ----------              --------
Net assets tax basis                         $14,243,154           $14,414,285
                                            =============         ============


     In 1996,  approximately  69% 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.

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
$12,036,293.   The  December  31,  1996  fair  value  of  these  investments  of
$12,001,000  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.
    
<PAGE>

   
NOTE 8 10 - ASSET CONCENTRATIONS AND CHARACTERISTICS


     The  Mortgage  Investments  are  secured  by  recorded  deeds of trust.  At
December  31,  1996,  there were 71 Mortgage  Investments  outstanding  with the
following characteristics:

Number of Mortgage Investments outstanding                                 71
Total Mortgage Investments outstanding                            $12,036,293

Average Mortgage Investment outstanding                              $169,525
Average Mortgage Investment as percent of total                          1.41%
Average Mortgage Investment as percent of Partners Capital               1.21%
Average Mortgage Investment as percent of Partners Capital               1.25%

Largest Mortgage Investment outstanding                              $979,273
Largest Mortgage Investment as percent of total                          8.14%
Largest Mortgage Investment as percent of Partners Capital               6.99%
Largest Mortgage Investment as percent of Partners Capital               7.21%

Number of counties where security is located(all California)               17

Largest percentage of Mortgage Investments in one county                24.00%
Average Mortgage Investment to appraised value of security at time loan
 was consummated                                                        65.76%

Number of Mortgage Investments in foreclosure                               5

     The following  categories of mortgage investments are pertinent at December
31, 1996 and 1995:

                                                     December 31,
                                            ------------------------------------
                                               1996                      1995
                                            -----------          ---------------

First Trust Deeds                           $4,199,552               $3,922,120
Second Trust Deeds                           6,913,853                7,377,189
Third Trust Deeds                              722,887                  896,188
Fourth Trust Deeds                             200,001                  187,144
                                            -----------              ----------
  Total mortgage investments                12,036,293               12,382,641
Prior liens due other lenders               22,068,554               30,575,880
                                            -----------              ----------
  Total debt                               $34,105,847              $42,958,491
                                           ===========              ===========

Appraised property value at time of loan   $51,863,991              $68,888,224
                                           ===========              ===========

Total investments as a percent of appraisals     65.76%                   62.36%
                                           ===========              ============

Investments by Type of Property

Owner occupied homes                        $1,742,767               $2,621,800
Non-Owner occupied homes                     1,112,274                  651,528
Apartments                                   1,325,872                1,828,877
Commercial                                   7,855,380                7,280,436
                                           ===========              ============
                                           $12,036,293              $12,382,641
                                           ===========              ============
    
<PAGE>


                         REDWOOD MORTGAGE INVESTORS VII
                       (A California Limited Partnership)
                          NOTES TO FINANCIAL STATEMENTS
                                DECEMBER 31, 1996

     Scheduled  maturity  dates of mortgage  investments as of December 31, 1996
are as follows:

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

                            1997                              $2,825,886
                            1998                               3,834,232
                            1999                               1,295,510
                            2000                               1,029,619
                            2001                               1,076,994
                         Thereafter                            1,974,052
                                                           ===============
                                                             $12,036,293
                                                           ===============

     The scheduled maturities for 1997 include approximately $1,597,297 in loans
which are past maturity at December 31, 1996.  Interest payment on most of these
loans are current.  $315,066 of those loans were  categorized as delinquent over
90 days.

     Five loans with  principal  outstanding  of $652,081 had interest  payments
overdue in excess of 90 days. Two loans had impaired provisions totalling $9,595
at December 31, 1996.

     The cash  balance at December  31, 1996 of $755,089 was in one bank with an
interest  bearing  balance  totalling  $179,572.   The  balances  exceeded  FDIC
insurance limits (up to $100,000 per bank) by $655,089.

   
NOTE 11 - CHANGE IN PRESENTATION

     The formation loan  receivable from Redwood  Mortgage,  an affiliate of the
General  Partners,  has been  categorized  as a reduction  in Limited  Partners
Capital,  the source of the funds.  It was previously  reflected as an asset. As
payments are received,  or early withdrawal  penalties  realized,  the formation
loan  balance  will be reduced and restored to Limited  Partners  Capital.  The
total of the formation loan outstanding was $429,163 and 517,051 at December 31,
1996 and 1995, respectively.
    
<PAGE>
<TABLE>

                                 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 12/31/95                          (1)            (2)           (1)           (2)
                                                                      Amounts        Amounts       Current     Not Current
                                                                     collected     written off              12/31/96
<CAPTION>

<S>                           <C>                     <C>             <C>            <C>            <C>           <C>     
Redwood Mortgage .            $517,051                $0.00           $62,225        $25,663*       $0.00         $429,163


<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 will be  repaid  to the
Partnership in ten annual  installments of principal only commencing  January 1,
1992.

     * The amount written off is comprised of the applications of the applicable
portions of early withdrawal penalty as provided for in the prospectus.
</FN>
</TABLE>
<PAGE>

<TABLE>


                                           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
<CAPTION>

Year Ended
12/31/96

Deducted from
Asset accounts:

   
Allowance for
<S>                      <C>              <C>                  <C>              <C>              <C>     
Doubtful accts           $200,000         $419,437             $0.00            $390,790         $228,647
Doubtful accts           $200,000         $204,398            $175,751             $0            $228,647



Cumulative
write-down of
Real Estate held 
for sale (REO)           $62,574          $215,039            $90,172              $0            $187,441

Total                    $262,574         $419,437            $265,923             $0            $416,088

<FN>
(2) represents loss on mortgage investments and real estate held for sale.
</FN>
    
</TABLE>

<PAGE>

<TABLE>


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
----------------------- ---------------- ------------------- --------------------- ------------------- -------------------
<CAPTION>


<S>                       <C>                  <C>                <C>                  <C>                   <C>   
Year-Ended 12/31/96       $1,175,000           9.300%             $2,000,000           $1,370,413            9.300%

</TABLE>
<PAGE>
<TABLE>

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      Face Amt.    Carrying     Principal    Type of   Geographic
          Rate      Maturity  Payment     Liens      of           amount of    amount of    Lien      County
                    Date      Terms                  Mortgage     Mortgage     Mortgage               Location
                                                     Investments  Investments  Investments
                                                     (original                 subject to
                                                     amount)                   Delinq.
                                                                               Principal
                                                                               or Interest
========= ========= ========= =========== ========== ============ ============ ============ ========= ==============
<CAPTION>

<S>        <C>      <C>        <C>         <C>        <C>          <C>         <C>          <C>       <C>         
Res.       14.500%  12/01/95   $1,114.35   $336,591   $91,000.00   $89,074.94  $89,074.94   2nd Mtg   San Mateo
Res        14.000%  09/01/94      175.00     67,583    15,000.00    14,708.39     0.00      2nd Mtg   San Mateo
Res        14.500%  06/01/01      782.62     84,303    63,910.49    62,836.42   62,836.42   2nd Mtg   Marin
Res        13.750%  08/01/96    1,258.32       0.00   108,000.00   105,694.70     0.00      1st Mtg   San Francisco
Res        15.000%  09/01/96    1,251.80    319,721    99,000.00    90,740.78   90,740.78   2nd Mtg   San Mateo
Res        12.000%  08/01/04      710.00     70,729    62,000.00    64,393.56     0.00      2nd Mtg   Alameda
Res        13.750%  10/01/96      916.67    369,163    80,000.00    80,000.00     0.00      2nd Mtg   San Mateo
Res        13.750%  10/01/96      988.28       0.00    86,250.00    86,250.00     0.00      1st Mtg   Santa Clara
Res        12.500%  02/01/07      369.76       0.00    30,000.00    25,438.43     0.00      1st Mtg   Santa Cruz
Res        10.000%  12/24/01      308.28       0.00    37,984.50    34,884.05     0.00      1st Mtg   Alameda
Res        10.000%  04/17/97      132.08    126,800    15,850.00    15,788.90     0.00      2nd Mtg   Sonoma
Land       15.000%  06/01/93    1,375.00    210,000   110,000.00   110,000.00     0.00      3rd Mtg   Sacramento
Res        13.000%  07/01/97    1,603.99    254,505   145,000.00   142,127.61     0.00      2nd Mtg   San Mateo
Res        12.500%  07/01/97      453.58    129,491    42,500.00    41,717.30     0.00      2nd Mtg   San Mateo
Res        12.750%  07/01/97      880.22    592,878    81,000.00    79,123.10     0.00      2nd Mtg   San Mateo
Land       15.500%  07/15/94    1,453.13       0.00   112,500.00   112,500.00     0.00      1st Mtg   San Mateo
Comm        7.000%  08/06/02      311.38     17,382    46,803.50    44,532.37     0.00      2nd Mtg   Alameda
Comm       12.000%  10/01/97    4,517.38    796,163   439,172.47   431,064.13     0.00      3rd Mtg   Contra Costa
Res        10.000%  11/06/07       65.91     48,829     6,133.33     5,242.28     0.00      2nd Mtg   San Francisco
Comm       12.500%  01/01/98      587.00       0.00    55,000.00    54,128.70     0.00      1st Mtg   San Mateo
Comm       12.250%  01/01/98    4,083.36    354,077   400,002.42   400,002.42     0.00      2nd Mtg   Contra Costa
Res        12.000%  02/01/98      150.00    208,000    15,000.00     8,528.06     0.00      2nd Mtg   San Mateo
Comm       12.500%  04/05/08      921.02       0.00   175,000.00    65,213.37     0.00      1st Mtg   Tuoloume
Res        12.000%  05/01/98      514.31       0.00    50,000.00    49,257.75     0.00      1st Mtg   San Francisco
Comm       12.000%  06/01/98    2,038.01       0.00   239,850.00   195,804.52     0.00      1st Mtg   Sonoma
Apts        4.000%  05/01/06      540.83     89,904   100,000.00    96,893.59     0.00      2nd Mtg   Sacramento
Res        12.000%  07/01/98    3,085.84     85,930   300,000.00   274,178.59  274,178.59   2nd Mtg   El Dorado
Res        12.750%  07/01/08      370.90    236,164    29,700.00    26,875.11     0.00      2nd Mtg   San Mateo
Res        13.500%  09/01/08    1,647.07    106,044   126,861.90   116,430.02     0.00      2nd Mtg   Contra Costa
Comm       12.000%  09/01/03      848.61       0.00    82,500.00    81,345.94     0.00      1st Mtg   Alameda
Comm        6.000%  09/01/03      885.00       0.00   133,000.00   125,200.12     0.00      1st Mtg   San Mateo
Comm       12.000%  11/01/98    2,057.23      5,635   200,000.00    74,423.44     0.00      2nd Mtg   San Francisco
Res         8.000%  05/01/09      753.50       0.00    81,825.00    71,982.62     0.00      1st Mtg   Alameda
Comm       10.000%  12/01/98      647.21       0.00    73,750.00    72,887.14     0.00      1st Mtg   Stanislaus
Comm       12.250%  01/01/98    2,080.84    891,453   200,001.20   200,001.20     0.00      4th Mtg   Contra Costa
Comm       10.000%  12/01/98    3,619.98       0.00   412,500.00   407,226.68     0.00      1st Mtg   Alameda
Comm        7.000%  12/01/03      575.74    281,250    49,586.38    41,566.43     0.00      2nd Mtg   Alameda
Comm       12.000%  02/01/99    3,420.75       0.00   312,000.00   335,638.30     0.00      1st Mtg   Santa Clara
Comm       12.000%  06/01/04    1,316.53       0.00   125,000.00   122,596.76     0.00      1st Mtg   Santa Barbara
Land       12.000%  07/01/96    1,352.50    679,258   135,250.00   135,250.00  135,250.00   3rd Mtg   Sonoma
Res        11.000%  10/01/99      571.39    478,120    60,000.00    59,375.29     0.00      2nd Mtg   San Mateo
Comm       15.250%  10/01/95    1,270.83    510,979   100,000.00    23,525.53     0.00      2nd Mtg   Santa Cruz
Land       11.500%  12/20/96    6,160.73    907,480   757,144.25   642,858.33     0.00      2nd Mtg   Stanislaus
Apts        7.000%  02/10/05      234.06     80,250    40,125.00    40,125.00     0.00      2nd Mtg   San Francisco
Res        12.000%  03/01/98    1,500.29       0.00   280,000.00   147,206.50     0.00      1st Mtg   Alameda
Apts       11.500%  04/01/05    2,651.89       0.00   550,000.00   267,792.71     0.00      1st Mtg   San Francisco
Comm       11.875%  05/01/05    2,088.00       0.00   200,000.00   197,605.96     0.00      1st Mtg   San Francisco
<PAGE>


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      Face Amt.    Carrying     Principal    Type of   Geographic
          Rate      Maturity  Payment     Liens      of           amount of    amount of    Lien      County
                    Date      Terms                  Mortgage     Mortgage     Mortgage               Location
                                                     Investments  Investments  Investments
                                                     (original                 subject to
                                                     amount)                   Delinq.
                                                                               Principal
                                                                               or Interest
========= ========= ========= =========== ========== ============ ============ ============ ========= ==============
<S>         <C>     <C>           <C>          <C>     <C>          <C>           <C>       <C>       <C>      

Comm        9.000%  05/10/02      670.52       0.00    83,333.33    82,407.46     0.00      1st Mtg   Shasta
Comm       12.000%  10/31/99    7,000.00  2,684,430   700,000.00   700,000.00     0.00      2nd Mtg   Santa Clara
Res         8.000%  09/27/00      530.79    106,333    79,619.05    79,619.05     0.00      2nd Mtg   Monterey
Land        8.000%  12/01/97      400.00       0.00    60,000.00    60,000.00     0.00      1st Mtg   Solano
Comm.      11.875%  02/01/06    4,437.00       0.00   425,000.00   422,581.57     0.00      1st Mtg   San Mateo
Comm.      12.000%  12/31/01    9,792.73  5,492,794   955,000.00   979,272.93     0.00      2nd Mtg   Santa Clara
Comm       12.000%  03/15/98    4,000.00  3,000,000   400,000.00   400,000.00     0.00      2nd Mtg   Santa Clara
Land       12.000%  02/01/97    3,822.50       0.00   382,250.00   382,250.00     0.00      1st Mtg   Santa Clara
Apts       12.000%  02/01/98    9,106.84    883,750  1,427,500.00  921,060.33     0.00      2nd Mtg   San Francisco
Res        12.000%  02/01/98    2,107.47    825,000   320,000.00   246,903.83     0.00      2nd Mtg   San Francisco
Res         8.000%  09/18/03       87.56       0.00    11,932.83    11,908.65     0.00      1st Mtg   Sonoma
Res        12.000%  05/01/98      235.43       0.00   238,000.00    42,622.50     0.00      1st Mtg   San Francisco
Res         8.000%  09/30/03       89.71       0.00    12,225.92    12,201.15     0.00      1st Mtg   Sonoma
Res         8.000%  04/10/97      199.63       0.00    29,944.39    29,944.39     0.00      1st Mtg   San Mateo
Comm       12.000%  02/01/99       56.65    312,000    12,000.00     5,496.62     0.00      2nd Mtg   Santa Clara
Res        13.000%  12/01/99      704.17       0.00    65,000.00    65,000.00     0.00      1st Mtg   Ventura
Res        13.000%  12/01/99      704.17       0.00    65,000.00    65,000.00     0.00      1st Mtg   Ventura
Res        13.000%  12/01/99      704.17       0.00    65,000.00    65,000.00     0.00      1st Mtg   Ventura
Res        12.000%  01/01/98    3,400.00       0.00   340,000.00   340,000.00     0.00      1st Mtg   Alameda
Land       12.000%  01/01/00    9,500.00     89,692   950,000.00   950,000.00     0.00      2nd Mtg   Stanislaus
Res        13.000%  01/01/03      999.54     15,400    79,000.00    51,719.39     0.00      2nd Mtg   San Mateo
Res        10.000%  08/01/97      388.67    309,872    45,000.00    46,573.10     0.00      3rd Mtg   San Mateo
Res        13.500%  04/01/95      732.61       0.00    63,960.00    61,981.43     0.00      1st Mtg   San Mateo
Res        15.250%  04/01/95      588.29     11,601    45,800.00    44,713.29     0.00      2nd Mtg   Solano
                              ----------- ---------- ------------ ------------ ------------


Totals                    $124,899.62  $22,069,554  $13,811,765.96 $12,036,292.73  $652,080.73
   
<FN>


     Notes: Two loans had impaired  provisions  totalling $9,595 included in the
allowance for doubtful  accounts of $28,647 relating to mortgage  investments at
December  31,  1996.  Impaired  loans are  defined  as loans  where the costs of
related balances exceeds the anticipated fair value less costs to collect.


     Amounts  reflected  in column G (carrying  amount of mortgage  investments)
represents both costs and the tax basis of the loans.
</FN>
</TABLE>
    
<PAGE>

   
Schedule XII

     Reconciliation  of  carrying  amount of  Mortgage  Investments  at close of
period (12/31/96)

Balance at beginning of period 1/01/96                             $12,382,641
Additions during period:
New Mortgage Investments                            $9,099,688
Other                                                        0       $9,099,688
------------------------------------------- ------------------ ----------------

                                                                    $21,482,329

Deduction during period:
Collections of principal                            $8,923,339
Foreclosures                                           492,697
Cost of Mortgage Investment sold                             0
Amortization of Premium                                      0
Other                                                   30,000       $9,446,036
-------------------------------------------- ------------------ ----------------


Balance at close of period (12/31/96)                               $12,036,293
                                                                    ------------
    

Schedule XII

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

<TABLE>
                                                             Year ended December 31,
                                            ----------------------------------------------------------

                                                 1996                  1995                 1994
                                            ---------------       ---------------      ---------------
<CAPTION>

<S>                                            <C>                   <C>                  <C>        
Balance at beginning of year                   $12,382,641           $11,345,566          $11,766,189
                                            ---------------       ---------------      ---------------
Additions during period:
New Mortgage Investments                         9,099,688             3,592,507            4,671,889
Other                                                    0                     0                    0
                                            ---------------       ---------------      ---------------
                  Total Additions                9,099,688             3,592,507            4,671,889
                                            ---------------       ---------------      ---------------


Deduction during period:
Collections of principal                         8,923,339             1,980,879            3,383,366
Foreclosures                                       492,697               485,322            1,709,146
Cost of Mortgage Investments sold                        0                     0                    0
Amortization of Premium                                  0                     0                    0
Other                                               30,000                89,231                    0
                                            ---------------       ---------------      ---------------
                  Total Deductions               9,446,036             2,555,432            5,092,512
                                            ---------------       ---------------      ---------------

Balance at close of year                       $12,036,293           $12,382,641          $11,345,566
                                            ===============       ===============      ===============
</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, 1996. All
such compensation is in compliance with the guidelines and limitations set forth
in the Prospectus.

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

I.  Redwood Mortgage       Mortgage Servicing Fee for servicing 
                            Mortgage Investments................        $97,267

General Partners &/or
Affiliate                  Asset Management Fee for managing               
                           assets...........................                 $0
General Partners           1% interest in profits...........             $8,591
                           
                           Less allowance for syndication costs             137
                                                                         $8,454

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

Redwood Mortgage.          Loan 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                     $236,310
                          
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...............                   $5,609

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.                                               $40,874

<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 Interest.


                                     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 18th day of March,
1997.


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 18th day of March, 1997.


Signature                          Title                           Date


/S/ D. Russell Burwell
--------------------------
D. Russell Burwell           General Partner                     March 18, 1997


/S/ Michael R. Burwell
--------------------------
Michael R. Burwell           General Partner                     March 18, 1997



/S/ D. Russell Burwell
--------------------------
D. Russell Burwell         President of Gymno Corporation,       March 18, 1997
                           (Principal Executive Officer);
                           Director of Gymno Corporation


/S/ Michael R. Burwell
--------------------------
Michael R. Burwell         Secretary/Treasurer of Gymno          March 18, 1997
                           Corporation (Principal Financial
                           and Accounting Officer);
                           Director of Gymno Corporation