UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549  FORM 10-Q  (Mark One) x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934  For the Quarterly Period Ended June 30, 2006  OR  [ ]
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934  For the transition period from ______________ to ______________  Commission File Number: 000-19992  REDWOOD MORTGAGE INVESTORS VII, a California Limited Partnership (Exact name of registrant as specified in its charter)  California

94-3094928(State or other jurisdiction of incorporation

(I.R.S. Employeror organization)

Identification No.)  900 Veterans Blvd., Suite 500, Redwood City, CA
94063-1743(Address of principal executive offices)
(Zip Code)  (650) 365-5341 (Registrants telephone number, including area code)  NOT APPLICABLE (Former name, former address and former fiscal year, if changed since last report)  Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes
XX

No  Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of accelerated filer and large accelerated filer in Rule 12b-2 of the Exchange Act.  Large Accelerated Filer o
Accelerated Filer o
Non-Accelerated Filerx  Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes


No
XX    1       Part I  Item 1.
FINANCIAL STATEMENTS  REDWOOD MORTGAGE INVESTORS VII (A California Limited Partnership) BALANCE SHEETS JUNE 30, 2006 and DECEMBER 31, 2005 (unaudited)  ASSETS  June 30,


December 31,2006


2005Cash and cash equivalents

$
451,956


$
1,627,384LoansLoans, secured by deeds of trust


6,571,958



5,448,401Loans, unsecured, net discount of $69,915 and$71,971 for June 30, 2006 and December 31,2005, respectively


153,118



161,9876,725,076



5,610,388Allowance for loan losses


(627,727
)


(700,536
)Net loans


6,097,349



4,909,852Interest and other receivablesAccrued interest and late fees


86,931



64,304Advances on loans


6



6Total interest and other receivables


86,937



64,310Investment in limited liability company


899,053



882,641Real estate held for sale, net


1,843,527



1,870,027Other


25,804



Total assets

$
9,404,626


$
9,354,214  LIABILITIES AND PARTNERS CAPITAL  LiabilitiesOther liabilities


24,640Payable to affiliate


71,998



71,998Total liabilities


96,638



71,998Partners capitalLimited partners capital, subject to redemption


9,296,015



9,270,243General partners capital


11,973



11,973Total partners capital


9,307,988



9,282,216Total liabilities and partners capital

$
9,404,626


$
9,354,214  The accompanying notes are an integral part of these financial statements.  2       REDWOOD MORTGAGE INVESTORS VII (A California Limited Partnership) STATEMENTS OF INCOME FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2006 and 2005 (unaudited)  THREE MONTHS ENDEDJUNE 30,


SIX MONTHS ENDEDJUNE 30,2006


2005


2006


2005RevenuesInterest on loans
$
141,887

$
148,797

$
271,076

$
320,055Interest-interest bearing accounts

3,975


1,040


5,800


1,235Late fees

2,105


1,824


3,108


3,748Other

1,537


558


3,025


1,670149,504


152,219


283,009


326,708ExpensesMortgage servicing fees




14,259





31,963Clerical costs through RedwoodMortgage Corp.

3,115


2,943


6,379


6,786Asset management fees




8,599





17,182Recovery on losses on loans andreal estate held for sale

(15,310)


(28,002)


(39,601)


(37,865)Professional services

20,641


14,345


40,390


25,524Printing supplies and postage

3,482


2,875


4,295


4,431Other

11,449


1,852


19,293


4,24323,377


16,871


30,756


52,264Net income
$
126,127

$
135,348

$
252,253

$
274,444Net income: general partners (1%)
$
1,261

$
1,353

$
2,523

$
2,744limited partners (99%)

124,866


133,995


249,730


271,700$
126,127

$
135,348

$
252,253

$
274,444Net income per $1,000 invested by limitedpartners for entire period-where income is compounded and retained
$
13

$
15

$
27

$
30-where partner receives income in monthlydistributions
$
13

$
15

$
27

$
30    The accompanying notes are an integral part of these financial statements.  3       REDWOOD MORTGAGE INVESTORS VII (A California Limited Partnership) STATEMENTS OF CASH FLOWS FOR THE SIX MONTHS ENDED JUNE 30, 2006 and 2005 (unaudited)  2006


2005Cash flows from operating activitiesNet income

$
252,253


$
274,444Adjustments to reconcile net income to net cash providedby operating activitiesRecovery of losses on loans and real estate


(39,601
)


(37,865
)Early withdrawal penalty credited to income


(2,598
)


(1,404
)Amortization of discount on unsecured loans


(2,056
)


(10,743
)Change in operating assets and liabilitiesAccrued interest and advances on loans


(22,627
)


14,405Accounts payable and other liabilities


24,640



(5,825
)Other assets


(25,804
)


(527
)Net cash provided by operating activities


184,207



232,485Cash flows from investing activitiesPrincipal collected on loans


1,847,586



2,754,099Loans originated


(2,977,851
)


(2,335,000
)Payments for real estate held for sale






(9,994
)Investment in limited liability company


(16,412
)


(40,238
)Proceeds from unsecured loans


10,925



5,752Net cash provided by (used in) investing activities


(1,135,752
)


374,619Cash flows from financing activitiesPartners withdrawals


(223,883
)


(208,645
)Net cash used in financing activities


(223,883
)


(208,645
)Net (decrease)/increase in cash and cash equivalents


(1,175,428
)


398,459Cash and cash equivalents - beginning of period


1,627,384



346,393Cash and cash equivalents - end of period

$
451,956


$
744,852  The accompanying notes are an integral part of these financial statements.  4       REDWOOD MORTGAGE INVESTORS VII (A California Limited Partnership) NOTES TO FINANCIAL STATEMENTS JUNE 30, 2006 (unaudited)  NOTE 1  GENERAL  In the opinion of the management of the Partnership, the accompanying unaudited financial statements contain all adjustments, consisting of normal, recurring adjustments, necessary to present fairly the financial information included therein. These financial statements should be read in conjunction with the audited financial statements included in the Partnerships Form 10-K for the fiscal year ended December 31, 2005 filed with the Securities and Exchange Commission. The results of operations for the six month period ended June 30, 2006 are not necessarily indicative of the operating results to be expected for the full year.  NOTE 2  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES  Loans, secured by deeds of trust  At June 30, 2006 and December 31, 2005 there were no loans categorized as impaired by the Partnership.  As of June 30, 2006 and December 31, 2005, the Partnership had one and two loans past due 90 days or more in interest payments and/or past maturity. The outstanding principal balances of these loans at June 30, 2006 and December 31, 2005 were $531,559 and $64,332, respectively. In the opinion of management, the delinquent and/or past maturity loan as of June 30, 2006 has sufficient collateral to cover the amount outstanding to the Partnership and is still accruing interest.  Allowance for loan losses  The composition of the allowance for loan losses as of June 30, 2006 and December 31, 2005 was as follows:  June 30,


December 31,2006


2005Amount



Percent of loans in each category to total loans


Amount



Percent of loans in each category to total loansBalance at End of YearApplicable to:DomesticReal estate  mortgageSingle family (1-4 units)

$
271,549



59.52
%

$
286,542



54.04
%Apartments


31,771



18.06
%


29,026



10.46
%Commercial


94,537



12.36
%


159,612



27.29
%Land


76,752



10.06
%


63,368



8.21
%Total real estate mortgage

$
474,609



100.00
%

$
538,548



100.00
%Unsecured


153,118



100.00
%


161,988



100.00
%Total unsecured

$
153,118



100.00
%

$
161,988



100.00
%Total allowance for loan losses

$
627,727



100.00
%

$
700,536



100.00
%    5       REDWOOD MORTGAGE INVESTORS VII (A California Limited Partnership) NOTES TO FINANCIAL STATEMENTS JUNE 30, 2006 (unaudited)  NOTE 2  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES(continued)  Allowance for loan losses(continued)  Activity in the allowance for loan losses for the six month period ended June 30, 2006 and the year ended December 31, 2005 was as follows:  June 30,



December 31,2006



2005Balance at beginning of period

$
700,536



$
745,476Charge-offsDomesticReal estate - mortgageSingle family (1-4 units)







Apartments


6,708




Commercial







28,568Land







(6,708
)



(28,568
)RecoveriesDomesticReal estate - mortgageSingle family (1-4 units)







Apartments







Commercial







Land







Net charge-offs


(6,708
)



(28,568
)Additions (recovery) charge to operations


(39,601
)



(16,372
)Transfer to real estate held for sale reserve


(26,500
)



Balance at end of period

$
627,727



$
700,536Ratio of net charge-offs duringthe period to average secured loansoutstanding during the period


0.11
%



0.45
%  Investment in limited liability company  Investment in limited liability company (LLC) is accounted for using the equity method as one of the Partnerships general partners is the managing member of the LLC. In February 2005, the Partnership acquired an 8% interest in Larkin Property Company, LLC (see note 5).  6       REDWOOD MORTGAGE INVESTORS VII (A California Limited Partnership) NOTES TO FINANCIAL STATEMENTS JUNE 30, 2006 (unaudited)  NOTE 2  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES(continued)  Income taxes  No provision for federal and state income taxes (other than an $800 state minimum tax) is made in the financial statements since income taxes are the obligation of the partners if and when income taxes apply.  Reclassifications  Certain reclassifications, not affecting previously reported net income or total partners capital, have been made to the previously issued financial statements to conform to the current year classification.  Profits and losses  Profits and losses are allocated among the limited partners according to their respective capital accounts monthly after 1% of the profits and losses are allocated to the general partners.  Management estimates  The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions about the reported amounts of assets and liabilities, and disclosures of contingent assets and liabilities, at the dates of the financial statements and the reported amounts of revenues and expenses during the reported periods. Such estimates relate principally to the determination of the allowance for loan losses, including the valuation of impaired loans and the valuation of real estate held for sale. Actual results could differ significantly from these estimates.  NOTE 3  GENERAL PARTNERS AND RELATED PARTIES  The following are commissions and fees, which will be paid to the general partners.  Mortgage brokerage commissions  For fees in connection with the review, selection, evaluation, negotiation and extension of loans, Redwood Mortgage Corp., an affiliate of the general partners, may collect an amount equivalent to 12% of the loaned amount until six months after the termination date of the offering. Thereafter, loan brokerage commissions (points) will be limited to an amount not to exceed 4% of the total Partnership assets per year. The loan brokerage commissions are paid by the borrowers and thus, are not an expense of the Partnership.  Mortgage servicing fees  Monthly mortgage servicing fees of up to 1/8 of 1% (1.5% annual) of the unpaid principal are paid to Redwood Mortgage Corp., based on the unpaid principal balance of the loan portfolio, or such lesser amount as is reasonable and customary in the geographic area where the property securing the mortgage is located. Once a loan is categorized as impaired, mortgage servicing fees are no longer accrued. Additional service fees are recorded upon the receipt of any subsequent payments on impaired loans. Redwood Mortgage Corp. waived $27,625 in mortgage servicing fees during the first half of 2006.   7       REDWOOD MORTGAGE INVESTORS VII (A California Limited Partnership) NOTES TO FINANCIAL STATEMENTS JUNE 30, 2006 (unaudited)  NOTE 3  GENERAL PARTNERS AND RELATED PARTIES(continued)  Asset management fees  The general partners receive monthly fees for managing the Partnerships loan portfolio and operations of up to 1/32 of 1% of the net asset value(3/8 of 1% annually). The general partners waived $17,448 in asset management fees during the first half of 2006.  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.  Operating expenses  Redwood Mortgage Corp., an affiliate of the general partners, is reimbursed by the Partnership for all operating expenses actually incurred by it on behalf of the Partnership, including without limitation, out-of-pocket general and administration expenses of the Partnership, accounting and audit fees, legal fees and expenses, postage and preparation of reports to limited partners.  NOTE 4  REAL ESTATE HELD FOR SALE  In 1993 the Partnership, together with two other affiliates, acquired through foreclosure a parcel of land located in East Palo Alto, CA, which is on the market for sale. The general partners believe that this property is worth considerably more than its carrying value, but it may take a considerable amount of additional time to sell the property and realize its full potential. The property is unique in that it may only be utilized for commercial or industrial uses. Until recently, land sales activity has been slow. Interest in land sales for commercial sites has been improving. As of June 30, 2006 the Partnerships investment in this property was $62,720.  In December 2004, the Partnership acquired undeveloped parcels of land through a deed in lieu of foreclosure. The land is located in Stanislaus County, California. It is comprised of three separate lots, which total approximately 14 acres. The parcels are currently for sale. As of June 30, 2006 the Partnerships investment in this property totaled $1,807,307, including accrued interest and advances. Management established a reserve of $26,500 at June 30, 2006 to offset a potential loss based upon the contract sale price on one of the three parcels. This property is jointly owned by two other affiliated partnerships. In February 2005, the Partnership acquired another property through foreclosure (see Note 5).  The following schedule reflects the costs of real estate acquired through foreclosure and the recorded reductions to estimated fair values, including estimated costs to sell as of June 30, 2006 and December 31, 2005:  June 30,



December 31,2006



2005Costs of properties

$
1,870,027



$
1,870,027Reduction in value


(26,500
)



Real estate held for sale, net

$
1,843,527



$
1,870,027    8       REDWOOD MORTGAGE INVESTORS VII (A California Limited Partnership) NOTES TO FINANCIAL STATEMENTS JUNE 30, 2006 (unaudited)  NOTE 5  INVESTMENT IN LIMITED LIABILITY COMPANY  In February, 2005, the Partnership acquired a multi-unit property through foreclosure. This property is located in an upscale neighborhood in San Francisco. At the time the Partnership took ownership of the property, the Partnerships investment totaled $836,702 including accrued interest and advances. This property is jointly owned by three other affiliated Partnerships. Upon acquisition the Partnership transferred its interest (principally land and building) to a limited liability company (LLC), Larkin Property Company, LLC (Larkin), which is 8% owned by the Partnership, and 92% owned by three other affiliates. No allowance for loss has been set aside as management believes that the fair value of the property exceeds the combined Partnerships investment in the property. The Partnership intends to undertake additional improvements to the property. As of June 30, 2006 the Partnership has
capitalized approximately $62,351 in costs related to this property.  NOTE 6  BANK LINE OF CREDIT  The Partnership has a bank line of credit secured by its loan portfolio of up to $2,500,000 at .25% over prime. There were no balances outstanding as of June 30, 2006 and December 31, 2005 and the interest rate was 8.25% (8.00% prime plus .25%) at June 30, 2006. This line of credit expires December 2007 and requires the Partnership to meet certain financial covenants. To the best of its knowledge, the Partnership was in compliance with all loan covenants for the six month period ended June 30, 2006 and for the year ended December 31, 2005. The Partnership anticipates that the line of credit will be renewed at its maturity. In the event that a renewal is not forthcoming, the Partnership has the option to convert the line of credit to a three year term loan beginning December 2007.  NOTE 7  NON-CASH TRANSACTIONS  During the year ended December 31, 2005, the Partnership foreclosed on a property (see Note 5), which resulted in an increase in investment in limited liability company of $831,178, a decrease in loans receivable of $776,228, a decrease in accrued interest of $49,422, and a decrease in advances of $5,528. In addition, an unsecured loan was written off against allowance for loan losses in the amount of $28,568.  NOTE 8  FAIR VALUE OF FINANCIAL INSTRUMENTS  The following methods and assumptions were used to estimate the fair value of financial instruments:  Secured loans had a carrying value of $6,571,958 and $5,448,401 at June 30, 2006 and December 31, 2005, respectively. The fair value of these loans of $6,782,798 and $5,566,133, respectively, was estimated based upon projected cash flows discounted at the estimated current interest rates at which similar loans would be made. The applicable amount of the allowance for loan losses along with accrued interest and advances related thereto should also be considered in evaluating the fair value versus the carrying value.    9       REDWOOD MORTGAGE INVESTORS VII (A California Limited Partnership) NOTES TO FINANCIAL STATEMENTS JUNE 30, 2006 (unaudited)  NOTE 9  ASSET CONCENTRATIONS AND CHARACTERISTICS  Most loans are secured by recorded deeds of trust. At June 30, 2006 and December 31, 2005 there were 22 and 23 secured loans outstanding, respectively, with the following characteristics:  June 30,



December 31,2006



2005Number of secured loans outstanding


22




23Total secured loans outstanding

$
6,571,958



$
5,448,401Average secured loan outstanding

$
298,725



$
236,887Average secured loan as percent of total secured loans


4.55
%



4.35
%Average secured loan as percent of partners capital


3.21
%



2.55
%Largest secured loan outstanding

$
570,000



$
634,479Largest secured loan as percent of total secured loans


8.67
%



11.65
%Largest secured loan as percent of partners capital


6.12
%



6.84
%Largest secured loan as percent of total assets


6.06
%



6.78
%Number of counties where security is located (all California)


13




13Largest percentage of loans in one county


28.65
%



22.37
%Average secured loan to appraised value of security based on


62.95
%



67.18
%appraised values and prior liens at time loan was consummatedNumber of secured loans in foreclosure status


1




NoneAmount of secured loans in foreclosure status

$
531,559




None  Over time, loans may exceed 10% of the secured loan portfolio or Partnership assets as the loan portfolio and assets of the Partnership decrease due to limited partner withdrawals and/or loan payoffs.   10


REDWOOD MORTGAGE INVESTORS VII (A California Limited Partnership) NOTES TO FINANCIAL STATEMENTS JUNE 30, 2006 (unaudited)  NOTE 9  ASSET CONCENTRATIONS AND CHARACTERISTICS(continued)  The following categories of secured loans were held at June 30, 2006 and December 31, 2005:  June 30,



December 31,2006



2005First trust deeds

$
4,523,731



$
3,920,466Second trust deeds


2,048,227




1,453,054Third trust deeds







74,881Total loans


6,571,958




5,448,401Prior liens due other lenders at time of loan


4,628,713




4,272,101Total debt

$
11,200,671



$
9,720,502Appraised property value at time of loan

$
17,793,773



$
14,470,371Total secured loans as percent of appraisals based on appraisedvalues and prior liens at time loan was consummated


62.95
%



67.18
%Secured loans by type of propertySingle family homes (1-4 Units)

$
3,911,499



$
2,944,330Apartments


812,500




570,000Commercial


1,186,957




1,487,019Land


661,002




447,052$
6,571,958



$
5,448,401  Scheduled maturity dates of secured loans as of June 30, 2006 are as follows:  Year Ending December 31,2006


$
820,0002007



1,793,5022008



805,0002009



1,241,2852010



1,412,171Thereafter



500,000Total


$
6,571,958  The scheduled maturities for 2006 above had no loans past maturity at June 30, 2006.  11       REDWOOD MORTGAGE INVESTORS VII (A California Limited Partnership) NOTES TO FINANCIAL STATEMENTS JUNE 30, 2006 (unaudited)  NOTE 9  ASSET CONCENTRATIONS AND CHARACTERISTICS(continued)  The Partnership places its cash and temporary cash investments with high credit quality institutions. Periodically, such investments may be in excess of federally insured limits.  NOTE 10  COMMITMENTS AND CONTINGENCIES  Workout agreements  The Partnership occasionally negotiates a contractual workout agreement with borrowers who are delinquent in making payments or where loans are past maturity. Under the terms of the workout agreement the Partnership is not obligated to make any additional monetary advances for the maintenance or repair of the collateral securing the loan. As of June 30, 2006 the Partnership had no loans under workout agreement.  Construction loans  The Partnership makes construction and rehabilitation loans which are not fully disbursed at loan inception. The Partnership approves the borrowers up to a maximum loan balance; however, disbursements are made periodically during completion phases of the construction or rehabilitation or at such other times as required under the loan documents. At June 30, 2006, there were no undisbursed loan funds. The Partnership does not maintain a separate cash reserve to hold the undisbursed obligations, which are intended to be funded.  Legal proceedings  The Partnership is involved in various legal actions arising in the normal course of business. In the opinion of management, such matters will not have a material effect upon the financial position of the Partnership.  Part I  Item 2.  MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION OF THE PARTNERSHIP  Critical Accounting Policies.  In preparing the financial statements, management is required to make estimates based on the information available that affect the reported amounts of assets and liabilities as of the balance sheet dates and income and expenses during the reporting periods. Such estimates relate principally to the determination of (1) the allowance for loan losses (i.e. the amount of allowance established against loans receivable as an estimate of potential loan losses) including the accrued interest and advances that are estimated to be unrecoverable based on estimates of amounts to be collected plus estimates of the value of the property as collateral and (2) the valuation of real estate acquired through foreclosure. At June 30, 2006, the Partnership owned five pieces of real property.   12       Loans and the related accrued interest, late fees and advances are analyzed on a periodic basis for recoverability. Delinquencies are identified and followed as part of the loan system. A provision is made for loan losses to adjust the allowance for loan losses to an amount considered by management to be adequate, with due consideration to collateral value, to provide for unrecoverable loans and receivables, including impaired loans, other loans, accrued interest, late fees and advances on loans and other accounts receivable (unsecured). The Partnership charges off uncollectible loans and related receivables directly to the allowance account once it is determined that the full amount is not collectible.  If the probable ultimate recovery of the carrying amount of a loan, with due consideration for the fair value of collateral, is less than amounts due according to the contractual terms of the loan agreement and the shortfall in the amounts due are not insignificant, the carrying amount of the investment shall be reduced to the present value of future cash flows discounted at the loans effective interest rate. If a loan is collateral dependent, it is valued at the estimated fair value of the related collateral. If events and or changes in circumstances cause management to have serious doubts about the further collectibility of the contractual payments, a loan may be categorized as impaired and interest is no longer accrued. Any subsequent payments on impaired loans are applied to reduce the outstanding loan balances including accrued interest and advances.  Recent trends in the economy have been taken into consideration in the aforementioned process of arriving at the allowance for loan losses. Actual results could vary from the aforementioned provisions for losses.  Real estate held for sale includes real estate acquired through foreclosure and is stated at the lower of the recorded investment in the loan, plus any senior indebtedness, or at the propertys estimated fair value, less estimated costs to sell.  The Partnership periodically compares the carrying value of real estate to expected undiscounted future cash flows for the purpose of assessing the recoverability of the recorded amounts. If the carrying value exceeds future undiscounted cash flows, the assets are reduced to estimated fair value.  Forward-Looking Statements.  Certain statements in this Report on Form 10-Q which are not historical facts may be considered forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities and Exchange Act of 1934, as amended, including statements regarding the Partnerships expectations, hopes, intentions, beliefs and strategies regarding the future. Forward-looking statements include statements regarding future interest rates and economic conditions and their effect on the Partnership and its assets, trends in the California real estate market, estimates as to the allowance for loan losses, estimates of future limited partner withdrawals, 2006 annualized yield estimates, beliefs regarding the value of the parcel of land located in East Palo Alto, California acquired by the Partnership through foreclosure, beliefs relating to the Partnerships compliance with its
loan covenants, beliefs relating to the effects of various legal actions arising in the normal course of business, the Partnerships intention not to sell its loan portfolio, managements beliefs relating to the sufficiency of collateral, trends in the California real estate market moving towards normalcy, and the healthy commercial real estate market increasing lending opportunities. Actual results may be materially different from what is projected by such forward-looking statements. Factors that might cause such a difference include unexpected material adverse changes in economic conditions and interest rates, including such conditions in California, a material adverse decline in the market for real estate in California, the impact of competition and competitive pricing and downturns in the real estate markets in which the Partnership has made loans. All forward-looking statements and reasons why results may differ included in this Form 10-Q are made as of the date hereof, and we assume no
obligation to update any such forward-looking statement or reason why actual results may differ.  Related Parties.  The general partners of the Partnership are Gymno Corporation and Michael R. Burwell. Most Partnership business is conducted through Redwood Mortgage Corp., an affiliate of the general partner, which arranges, services, and maintains the loan portfolio for the benefit of the Partnership. Michael R. Burwell is President and Chief Financial Officer of Gymno Corporation and Redwood Mortgage Corp. The fees received by the affiliate to the general partners are paid pursuant to the Partnership Agreement and are determined at the sole discretion of the affiliate to the general partner subject to limitations imposed by the Partnership Agreement. In the past, the affiliate to the general partners has elected not to take the maximum compensation. The following is a list of various Partnership activities for which related parties are compensated.  13        
Mortgage Brokerage CommissionsFor fees in connection with the review, selection, evaluation, negotiation and extension of loans, Redwood Mortgage Corp. may collect an amount equivalent to 12% of the loaned amount until 6 months after the termination date of the offering. Thereafter, the loan brokerage commissions (points) will be limited to an amount not to exceed 4% of the total Partnership assets per year. The loan brokerage commissions are paid by the borrowers, and thus, are not an expense of the Partnership. Loan brokerage commissions paid by the borrowers were $63,662 and $53,650 for the six month periods ended June 30, 2006 and 2005, and $35,012 and $23,300 for the three month periods ended June 30, 2006 and 2005, respectively.  
Mortgage Servicing FeesMonthly mortgage servicing fees of up to 1/8 of 1% (1.5% on an annual basis) of the unpaid principal of the Partnerships loans is paid to Redwood Mortgage Corp., or such lesser amount as is reasonable and customary in the geographic area where the property securing the mortgage is located. Mortgage servicing fees of $0 and $31,963 were incurred for the six month periods ended June 30, 2006 and 2005, and $0 and $14,259 were incurred for the three month periods ended June 30, 2006 and 2005, respectively. Redwood Mortgage Corp. waived $27,625 in mortgage servicing fees during the first half of 2006.  
Asset Management FeesThe general partners receive monthly fees for managing the Partnerships portfolio and operations up to 1/32 of 1% of thenet asset value(3/8 of 1% on an annual basis). Management fees to the general partners of $0 and $17,182 were incurred by the Partnership for the six month periods ended June 30, 2006 and 2005, and $0 and $8,599 were incurred for the three month periods ended June 30, 2006 and 2005, respectively. The general partners waived $17,448 in asset management fees during the first half of 2006.  
Other FeesThe Partnership Agreement provides that the general partners may receive other fees such as processing and escrow, reconveyance, mortgage assumption and mortgage extension fees. Such fees are incurred by the borrowers and are paid to the general partners. Such fees aggregated $2,320 and $4,155 for the six month periods ended June 30, 2006 and 2005, and $1,020 and $1,121 for the three month periods ended June 30, 2006 and 2005, respectively.  
Income and LossesAll income and losses are credited or charged to partners in relation to their respective Partnership interests. The allocation to the general partners (combined) shall be a total of 1%, which was $2,523 and $2,744 for the six month periods ended June 30, 2006 and 2005, and $1,261 and $1,353 for the three month periods ended June 30, 2006 and 2005, respectively.  
Operating ExpensesAn affiliate of the Partnership, Redwood Mortgage Corp., is reimbursed by the Partnership for all operating expenses actually incurred by it on behalf of the Partnership, including without limitation, out-of-pocket general and administration expenses of the Partnership, accounting and audit fees, legal fees and expenses, postage and preparation of reports to limited partners. Such reimbursements are reflected as expenses in the statements of income. Operating expenses totaling $6,379 and $6,786 for the six month periods ended June 30, 2006 and 2005, and $3,115 and $2,943 for the three month periods ended June 30, 2006 and 2005, respectively.  
Contributed CapitalThe general partners jointly and severally contributed 1/10 of 1% in cash contributions as proceeds from the offerings were received from the limited partners. As of June 30, 2006 and 2005, a general partner, Gymno Corporation, had contributed $11,973 as capital in accordance with Section 4.02(a) of the Partnership Agreement.   14       Results of Operations For the six and three months ended June 30, 2006 and 2005  Changes in the Partnerships operating results for the six and three month periods ended June 30, 2006 as compared to 2005 are discussed below:  Changes during the six months ended June 30, 2006

versus 2005

Changes during the three months ended June 30, 2006

versus 2005Net income decrease

$
(22,191
)
$
(9,221
)RevenueInterest on loans


(48,979
)

(6,910
)Interest  interest bearing accounts


4,565


2,935Late fees


(640
)

281Other


1,355


979$
(43,699
)
$
(2,715
)ExpensesMortgage servicing fees


(31,963
)

(14,259
)Clerical costs through Redwood Mortgage Corp.


(407
)

172Asset management fees


(17,182
)

(8,599
)Recovery of losses on loans andreal estate held for sale


(1,736
)

12,692Professional services


14,866


6,296Printing supplies and postage


(136
)

607Other


15,050


9,597$
(21,508
)
$
6,506Net income decrease

$
(22,191
)
$
(9,221
)  The decrease in interest on loans of $48,979 (15.30%) for the six month period and $6,910 (4.64%) for the three month period ended June 30, 2006 as compared to the same periods in 2005 was primarily due to a decrease in the average loan portfolio outstanding to $5,944,797 as of June 30, 2006 from $6,790,815 as of June 30, 2005. The decrease in interest is offset by an increase in the average interest rate, which stood at 9.28% as of June 30, 2006 as compared to 9.16% as of June 30, 2005. The decline in average outstanding loans is attributed to loan payoffs in late 2005 and during the first half of 2006 and the inability of the Partnership to find appropriate lending opportunities to replace the paid off loans. The cash generated from these payoffs was substantially invested in loans as of June 30, 2006.  The increase in other income of $1,355 (81.14%) for the six month period and $979 (175.45%) for the three month period ended June 30, 2006 as compared to the same periods in 2005 was primarily due to the Partnership receiving $2,598 in early withdrawal penalties for the six month period ended June 30, 2006 as compared to $1,404 that was received during the same period in 2005. These gains were offset by a decrease in other income of $283 and $281 during the six and three month periods ended June 30, 2006 as compared to the same periods in 2005.  The decrease in late charges of $640 (17.08%) for the six month period ended June 30, 2006 as compared to the same period in 2005 was primarily due to a reduction in late mortgage payments by the borrowers. The increase in late charges of $281 (15.41%) for the three month period ended June 30, 2006 as compared to the same period in 2005 was due to one loan becoming delinquent ninety days or more in interest payment versus no delinquent loans in 2005.  15       An increase in interest income bank of $4,565 (369.64%%) for the six month period and $2,935 (282.21%) for the three month period ended June 30, 2006 as compared to the same periods in 2005 was primarily due to an overall average higher cash balance the Partnership maintained in its money market account of $950,000 during the first half of 2006 as compared to an average balance of $368,669 during the first half of 2005.  The decrease in mortgage servicing fees of $31,963 (100.00%) for the six month period and $14,259 (100.00%) for the three month period ended June 30, 2006 as compared to the same periods in 2005, was partially due to a decrease in the average loan portfolio balance to $5,944,797 as of June 30, 2006 from an average portfolio balance of $6,790,815 as of June 30, 2005. In addition, Redwood Mortgage Corp., the servicing agent for the Partnership, waived the mortgage servicing fees of $27,625 for the first half of 2006.  The increase in recovery of losses on loans and real estate held for sale of $1,736 (4.58%) for the six month period and decrease of $12,692 (45.33%) for the three month period ended June 30, 2006 as compared to the same periods in 2005 is due managements determination that the allowance for loan losses of $627,727 as of June 30, 2006 was adequate to offset potential losses on loans. In addition, the Partnership received $8,597 and $4,260 for the six and three month periods ended June 30, 2006, respectively, in recoveries from an unsecured debtor whose balance has been fully provided for in the loan loss reserve.  The increase in professional fees of $14,866 (58.24%) for the six month period and $6,296 (43.89%) for the three month period ended June 30, 2006 as compared to the same periods in 2005 is due to general professional cost increases in 2006 for legal services, audits, tax return processing and the timing of billings.  The decrease in asset management fees of $17,182 (100.00%) for the six month period and $8,599 (100.00%) for the three month period ended June 30, 2006 as compared to the same periods in 2005 was due to the waiving of such fees by the general partners.  The increase in other expenses of $15,050 (354.71%) for the six month period and $9,597 (518.20%) for the three month period ended June 30, 2006 as compared to the same period in 2005 was primarily due to an increase in upkeep costs for the real estate held for sale properties. The Partnership spent $17,893 and $1,629 during the six month period and $10,049 and $391 during the three month period ended June 30, 2006 and 2005, respectively.  The decrease in clerical costs of $407 (6.00%) for the six month period ended June 30, 2006 as compared to the same period in 2005 is primarily due to lower servicing costs. The increase of $172 (5.84%) for the three month period ended June 30, 2006 as compared to the same period in 2005 was due to a partial waiver of clerical costs totaling $755 for the three month period ended June 30, 2005.  Partnership capital increased by $25,772 during the first six months of 2006 as the aggregate of earnings distributions and capital liquidations was less than the net income level of the Partnership. For the six month period ended June 30, 2006 limited partners net income was $249,730 versus earnings distributions of $89,368 and capital liquidations of $134,590, which totaled $223,959, as compared to limited partners net income of $271,700 versus earnings distributions of $90,284 and capital liquidations of $117,020, which totaled $207,304 for the corresponding period in 2005. Earnings and capital liquidations are a factor of limited partner elections and currently limited partners seeking liquidations of earnings or their capital account continues to decline. Limited partner income, which has continued to be higher than earnings distributions and capital liquidations for the past several quarters, has grown
the limited partners capital. This growth in capital has caused higher asset management fees to the Partnership. The asset management fees for the six month period ended June 30, 2006 was waived. This would have otherwise cost the Partnership $17,448, an increase of $266 (1.55%) as compared to $17,182 for the first half of 2005.  At June 30, 2006 there was one outstanding loan with a filed notice of default.   16       Redwood Mortgage Corp., an affiliate of the general partners, received mortgage brokerage commissions from loan borrowers of $63,662 and $53,650 for the six month periods and $35,012 and $23,300 for the three month periods ended June 30, 2006 and 2005, respectively. The increase of $10,012 (18.66%) and $11,712 (50.27%) for the six and three month periods ended June 30, 2006 as compared to the same period in 2005 is due to more loans that were funded totaling $2,986,448 and $2,335,000 for the six month period and $1,672,500 and $1,190,000 for the three month period ended June 30, 2006 and 2005, respectively.  Allowance for Losses.  The general partners regularly review the loan portfolio, examining the status of delinquencies, the underlying collateral securing these loans, borrowers payment records, etc. Based upon this information and other data, the allowance for loan losses is increased or decreased. Borrower foreclosures are a normal aspect of Partnership operations. The Partnership is not a credit based lender and hence while it reviews the credit history and income of borrowers, and if applicable, the income from income producing properties, the general partners expect that we will on occasion take back real estate security. At June 30, 2006 the Partnership had one loan, which was past due 90 days or more in interest payments and in foreclosure. No loans were past maturity as of June 30, 2006.  Periodically, the Partnership enters into workout agreements with borrowers who are past maturity or delinquent in their regular payments. The Partnership has no loans in workout agreements with borrowers as of June 30, 2006. Typically, a workout agreement allows the borrower to extend the maturity date of the balloon payment and/or allows the borrower to make current monthly payments while deferring for periods of time, past due payments and balloon payments and allows time to pay the loan in full. Workout agreements and foreclosures generally exist within our loan portfolio to greater or lesser degrees, depending primarily on the health of the economy. The number of foreclosures and workout agreements will generally rise during difficult economic times and conversely fall during good economic times. Workout agreements are considered when management arrives at an appropriate allowance for loan losses, and based on our
experience; they are reflective of our loan marketplace segment. In the remainder of 2006, we may initiate foreclosure by filing notices of default on delinquent borrowers or borrowers who become delinquent during the year. Borrower foreclosures are a normal aspect of Partnership operations and the general partners anticipate that they will not have a material effect on liquidity. As a prudent guard against potential losses, the general partners have made provisions for losses on loans and real estate held for sale through foreclosure of $654,227 at June 30, 2006. These provisions for losses were made to guard against collection losses. The total provision for losses as of June 30, 2006 is considered by the general partners to be adequate. Because of the number of variables involved, the magnitude of the swings possible and the general partners inability to control many of these factors, actual results may and do sometimes differ significantly from estimates made by the general partners. Total
provision for losses on loans and real estate held for sale of $654,227 as of June 30, 2006 is considered to be reasonable.  As of June 30, 2006, the Partnership had an average loan to value ratio computed based on appraised values and prior liens as of the date the loan was made of 62.95%. This percentage does not account for any increases or decreases in property values since the date the loan was made, nor does it include any reductions in principal through amortization of payments after the loan was made. This low loan to value ratio will assist the Partnership in weathering loan delinquencies and foreclosures should they eventuate.  PORTFOLIO REVIEW For the six and three months ended June 30, 2006 and 2005  Loan Portfolio  The Partnerships loan portfolio consists primarily of short-term (one to five years), fixed rate loans secured by real estate. As of June 30, 2006 and 2005 the Partnerships loans secured by real property collateral in five and six of the San Francisco Bay Area counties (San Francisco, San Mateo, Santa Clara, Alameda, Marin and Contra Costa) represented $4,741,186 (72.14%) and $4,318,061 (69.72%) of the outstanding secured loan portfolio. The remainder of the portfolio represented loans secured by real estate located primarily in Northern California.  17       As of June 30, 2006 and 2005, the Partnership held 22 and 26 loans respectively in the following categories:  June 30,2006

2005Single Family Homes (1-4 units)
$ 3,911,499

60%

$ 3,059,916

50%Commercial
1,186,957

18%

2,311,519

37%Apartments (5+ units)
812,500

12%

821,716

13%Land
661,002

10%



Total
$ 6,571,958

100%

$ 6,193,151

100%  As of June 30, 2006, the Partnership held 22 loans secured by deeds of trust. The following table sets forth the priorities, asset concentrations and maturities of the loans held by the Partnership as of June 30, 2006:  PRIORITIES, ASSET CONCENTRATIONS AND MATURITIES OF LOANS As of June 30, 2006  # of Loans

Amount


Percent1st Mortgages

13

$4,523,731


69%2nd Mortgages

9

2,048,227


31%Total

22

$ 6,571,958


100%Maturing 12/31/06 and prior

2

$ 820,000


13%Maturing prior to 12/31/07

5

1,793,502


27%Maturing prior to 12/31/08

3

805,000


12%Maturing after 12/31/08

12

3,153,456


48%Total

22

$ 6,571,958


100%Average Secured Loan



$ 298,725


5%Largest Secured Loan



570,000


9%Smallest Secured Loan



5,141


0.08%Average Loan-to-Value based upon appraisals andprior liens at time loan was consummated






62.95%  The Partnerships largest loan in the principal amount of $570,000 represents 8.67% of outstanding secured loans and 6.08% of Partnership assets. Over time, loans may increase above 10% of the secured loan portfolio or Partnership assets as the loan portfolio and assets of the Partnership decrease due to limited partner withdrawals and/or loan payoffs.   18       Borrower Liquidity and Capital Resources.  The Partnership relies upon loan payoffs, borrowers mortgage payments, and, to a lesser degree, its line of credit for the source of funds for loans. Over the past several years, mortgage interest rates have decreased somewhat from those available at the inception of the Partnership. If interest rates were to increase substantially, the yield of the Partnerships loans may provide lower yields than other comparable debt-related investments. Additionally, since the Partnership has made primarily fixed rate loans, if interest rates were to rise, the likely result would be a slower prepayment rate for the Partnership. This could cause a lower degree of liquidity as well as a slowdown in the ability of the Partnership to invest in loans at the then current interest rates. Conversely, in the event interest rates were to decline, the Partnership could see significant borrower prepayments, which, if the Partnership
can only obtain the then existing lower rates of interest, may cause a dilution of the Partnerships yield on loans, thereby lowering the Partnerships overall yield to the limited partners. The Partnership to a lesser degree relies upon its line of credit to fund loans. Generally, the Partnerships loans are fixed rate, whereas the credit line is a variable rate loan. In the event of a significant increase in overall interest rates, the credit line rate of interest could increase to a rate above the average portfolio rate of interest. Should such an event occur, the general partners would desire to pay off the line of credit. Retirement of the line of credit would reduce the overall liquidity of the Partnership. Cash is constantly being generated from borrower payments of interest, principal and loan payoffs. Currently, cash flow greatly exceeds Partnership expenses and earnings distribution requirements. Excess cash flow is invested in new loan opportunities, when available, and is
used to reduce the Partnership credit line or for other Partnership business.  At the time of subscription to the Partnership, limited partners made an irrevocable decision to either take distributions of earnings monthly, quarterly or annually or to compound earnings in their capital account. For the six and three month period ended June 30, 2006 and 2005, the Partnership made following allocations of earnings both to the limited partners who elected to compound their earnings, and those that chose to distribute:  Six months ended June 30,


Three months ended June 30,2006


2005


2006


2005Compounding
$
160,362

$
181,416

$
80,250

$
88,970Distributing
$
89,368

$
90,284

$
44,616

$
45,025  As of June 30, 2006 and 2005, limited partners electing to withdraw earnings represented 37% and 33% of the limited partners capital.  The Partnership agreement also allows the limited partners to withdraw their capital account subject to certain limitations. For the six and three month periods ended June 30, 2006 and 2005, $32,481, $17,556, $15,755 and $5,552, respectively, were liquidated subject to the 10% penalty for early withdrawal. These withdrawals are within the normally anticipated range that the general partners would expect in their experience in this and other partnerships. The general partners expect that a small percentage of limited partners will elect to liquidate their capital accounts over one year with a 10% early withdrawal penalty. In originally conceiving the Partnership, the general partners wanted to provide limited partners needing their capital returned a degree of liquidity. Generally, limited partners electing to withdraw over one year need to liquidate their investment to raise cash. The trend the Partnership is experiencing
in withdrawals by limited partners electing a one year liquidation program represents a small percentage of limited partner capital as of June 30, 2006 and 2005, respectively.  Additionally, for the six and three month periods ended June 30, 2006 and 2005, $102,109, $99,465, $40,731 and $37,239, respectively, were liquidated by limited partners who have elected a liquidation program over a period of five years or longer. This ability to withdraw after five years by limited partners has the effect of providing limited partner liquidity. The general partners expect a portion of the limited partners to take advantage of this provision. This has the anticipated effect of the Partnership growing, primarily through reinvestment of earnings in years one through five. The general partners expect to see increasing numbers of limited partner withdrawals in years five through eleven, after which time the bulk of those limited partners who have sought withdrawal have been liquidated. After year eleven, liquidation generally subsides.  19       Earnings and capital liquidations, including early withdrawals, during the six and three months ended June 30, 2006 and 2005 were:  Six months ended June 30,

Three months ended June 30,Earnings



Capital



Earnings


CapitalLiquidation



Liquidation

Total

Liquidation


Liquidation

Total2006

$
89,368

*
$
134,590

$
223,958

$
44,616

*
$
56,486

$
101,1022005

$
90,284

*
$
117,021

$
207,305

$
45,025

*
$
42,791

$
87,816  * These are gross amounts, which are not net of early withdrawal penalties.  In some cases in order to satisfy Broker Dealers and other reporting requirements, the general partners have valued the limited partners interest in the Partnership on a basis which utilizes a per Unit system of calculation, rather than based upon the investors capital account. This information has been reported in this manner in order to allow the Partnership to integrate with certain software used by the Broker Dealers and other reporting entities. In those cases, the Partnership will report to Broker Dealers, Trust Companies and others a reporting number of Units based upon a $1.00 per Unit calculation. The number of reporting Units provided will be calculated based upon the limited partners capital account value divided by $1.00. Each investors capital account balance is set forth periodically on the Partnership account statement provided to investors. The reporting Units are solely
for Broker Dealers requiring such information for their software programs and do not reflect actual Units owned by a limited partner or the limited partners right or interest in cash flow or any other economic benefit in the Partnership. Each investors capital account balance is set forth periodically on the Partnership account statement provided to investors. The amount of Partnership earnings each investor is entitled to receive is determined by the ratio that each investors capital account bears to the total amount of all investor capital accounts then outstanding. The capital account balance of each investor should be included on any NASD member client account statement in providing a per Unit estimated value of the clients investment in the Partnership in accordance with NASD Rule 2340.  While the general partners have set an estimated value for the Partnership Units, such determination may not be representative of the ultimate price realized by an investor for such Units upon sale. No public trading market exists for the Partnerships Units and none is likely to develop. Thus, there is no certainty that the Units can be sold at a price equal to the stated value of the capital account. Furthermore, the ability of an investor to liquidate his or her investment is limited subject to certain liquidation rights provided by the Partnership, which may include early withdrawal penalties.  Current Economic Conditions.  The current economic expansion is now in its fifth year. Having begun in 2001, this expansion started slowly but gathered momentum in response to fiscal and monetary stimulus. As part of the increased economic activity the national unemployment rate has declined from about 6.0% three years ago to about 4.6% today. The California unemployment rate has declined to 4.9% from 5.4% in June of 2005 and its last high of 6.9% in 2003. The United States economy seems to be operating relatively close to full production. As such inflation is a concern. Inflation increased 4.0% in the second quarter of 2006 after increasing 2.7% in the first quarter. In response to this and other concerns the federal reserve has been increasing interest rates by raising the federal funds rate seventeen consecutive times since June of 2004 to the present 5.25% at its June 2006 meeting. Short term interest rates responded quickly to the changes in the
Federal Funds Rate. At August 1, 2006 the Prime Rate was 8.25%. Longer term interest rates have been slower to react. During the second quarter of 2006 June 30-year fixed rate mortgages increased to 6.68%. This was 19.7% higher than the June 2005 30-year fixed rate of 5.58% (California Association of Realtors). It would seem that the increases in the Federal Funds Rate are having their desired effect of slowing the economy and the expansion down.   20


The Partnership makes loans primarily in Northern California. As such the regional real estate market is of primary concern to the Partnership. As of June 30, 2006 and 2005, approximately 72.14% ($4,741,186) and 69.72% ($4,318,061) of the loans held by the Partnership were in five and six of the San Francisco Bay Area Counties, respectively. The remainder of the loans held was secured primarily by Northern California real estate outside of the San Francisco Bay Area.  In general, California residential real estate continued to appreciate in value during the second quarter of 2006. According to Dataquick, the median price in California of new and resale houses and condos in June 2006 was a new record high of $478,000. This compares to $469,000 in June 2005. Like California, the San Francisco Bay Area also saw a record median sales price of $644,000 up 2.1% from the May 2006 record median and up 5.6% from the June of 2005 median price of $610,000. The number of houses sold is trending down and inventories of unsold homes are increasing. Statewide the number of homes sold in June of 2006 compared to June 2005 was down 20.7% to 53,700 from 67,750. Likewise, San Francisco Bay Area sales slowed with 9,892 new and resale and condos sold in June of 2006 compared to 13,014 in June of 2005 a 24% reduction. These numbers might be of concern if they were being compared to a normal market; however,
the market place in 2005 and 2004 was by most accounts one of the most robust on record. The trends we are now seeing are moving towards normalcy. A more normal real estate marketplace is positive for the Partnership as transactions can occur in a more orderly fashion and residential values will tend to stabilize.  The commercial real estate market in the San Francisco Bay Area continued to improve. Grubb and Ellis reported that San Francisco experienced its 12th straight quarter of rising office rents and shrinking vacancies. During the second quarter of 2006, the city saw 355,000 square feet of positive office space absorption causing the vacancy rate to fall to 13.6%. Silicon Valley and the East Bay communities also experienced similar rental absorption and slowly increasing lease rates. The healthy commercial real estate market increases lending opportunities an assists in providing adequate equity to help protect our mortgage debt.  For Partnership loans outstanding as of June 30, 2006, the Partnership had an average loan-to-value ratio of 62.95%, computed based on appraised values and senior liens as of the date the loan was made. This percentage does not account for any increases or decreases in property values since the date the loan was made, nor does it include any reductions in principal on senior indebtedness through amortization of payments after the loan was made. This low loan-to-value ratio will assist the Partnership in weathering loan delinquencies and foreclosures should they eventuate.   21       Contractual Obligations Table.None  Part I  Item 3. Quantitative and Qualitative Disclosures About Market Risk  The following table contains information about the cash held in money market accounts, loans held in the Partnerships portfolio and loans to the Partnership pursuant to its line of credit as of June 30, 2006. The presentation, for each category of information, aggregates the assets and liabilities by their maturity dates for maturities occurring in each of the years 2006 through 2010 and separately aggregates the information for all maturities arising after 2010. The carrying values of these assets and liabilities approximate their fair market values as of June 30, 2006:  2006

2007

2008

2009

2010

Thereafter

TotalInterest earning assets:Money marketaccounts

$
235,601















$
235,601Average interest rate


0.59
%















0.59
%Unsecured loans










$
153,118






$
153,118Average interest rate











0
%






0
%Loans secured bydeeds of trust

$
820,000


1,793,502


805,000


1,241,285


1,412,171

500,000

$
6,571,958Average interest rate


9.20
%

9.29
%

9.77
%

8.81
%

9.24
%
8.87


9.21
%Interest bearingliabilities:Line of credit



















Interest rate


8.25
%















8.25
%  Market Risk.  The Partnerships line of credit bears interest at a variable rate, which is tied to the prime rate. As a result, the Partnerships primary market risk exposure with respect to its obligations is to changes in interest rates, which will affect the interest cost of outstanding amounts on the line of credit. The Partnership may also suffer market risk tied to general trends affecting real estate values that may impact the Partnerships security for its loans.  The Partnerships primary market risk in terms of its profitability is the exposure to fluctuations in earnings resulting from fluctuations in general interest rates. The majority of the Partnerships mortgage loans earn interest at fixed rates. Changes in interest rates may also affect the value of the Partnerships investment in mortgage loans and the rates at which the Partnership reinvests funds obtained from loan repayments and new capital contributions from limited partners. If interest rates increase, the interest rates the Partnership obtains from reinvested funds will generally increase, but the value of the Partnerships existing loans at fixed rates will generally tend to decrease. The risk is mitigated by the fact that the Partnership does not intend to sell its loan portfolio, rather such loans are expected to be held until they are paid off. If interest rates decrease, the amounts
becoming available to the Partnership for investment due to repayment of Partnership loans may be reinvested at lower rates than the Partnership had been able to obtain in prior investments, or than the rates on the repaid loans. In addition, interest rate decreases may encourage borrowers to refinance their loans with the Partnership at a time where the Partnership is unable to reinvest in loans of comparable value.  The Partnership does not hedge or otherwise seek to manage interest rate risk. The Partnership does not enter into risk sensitive instruments for trading purposes.   22       ASSET QUALITY  A consequence of lending activities is that occasionally losses will be experienced and that the amount of such losses will vary from time to time, depending upon the risk characteristics of the loan portfolio as affected by economic conditions and the financial experiences of borrowers. Many of these factors are beyond the control of the general partners. There is no precise method of predicting specific losses or amounts that ultimately may be charged off on particular segments of the loan portfolio, especially in light of the current economic environment.  The conclusion that a loan may become uncollectible, in whole or in part, is a matter of judgment. Although institutional lenders are subject to requirements and regulations that, among other things, require them to perform ongoing analyses of their portfolios, loan-to-value ratios, reserves, etc., and to obtain and maintain current information regarding their borrowers and the securing properties, the Partnership is not subject to these regulations and has not adopted certain of these practices. Rather, the general partners, in connection with the periodic closing of the accounting records of the Partnership and the preparation of the financial statements, determine whether the allowance for loan losses is adequate to cover potential loan losses of the Partnership. As of June 30, 2006 the general partners have determined that the allowance for loan and real estate losses of $654,227 7.03% of net assets) is adequate in
amount. Because of the number of variables involved, the magnitude of the swings possible and the general partners inability to control many of these factors, actual results may and do sometimes differ significantly from estimates made by the general partners. As of June 30, 2006, one loan was past due 90 days or more in interest payments totaling $531,559. This loan was also in foreclosure status. Management believes that there is sufficient collateral to cover the amount outstanding to the Partnership on these loans. The allowance for loan and real estate losses of $654,227 as of June 30, 2006 is considered reasonable to offset potential loss in loan collections and real estate losses in the future.  Part I  Item 4.
CONTROLS AND PROCEDURES  As of June 30, 2006, the Partnership carried out an evaluation, under the supervision and with the participation of the general partners of the effectiveness of the design and operation of the Partnerships disclosure controls and procedures pursuant to Rule 13a-15 of the Securities Exchange Act of 1934, as amended. Based upon that evaluation, the general partners concluded that the Partnerships disclosure controls and procedures are effective in timely alerting the general partners to material information relating to the Partnership that is required to be included in our periodic filings with the Securities and Exchange Commission. There were no significant changes in the Partnerships internal control over financial reporting during the Partnerships second fiscal quarter that have materially affected, or are reasonably likely to materially affect, the Partnerships internal control over
financial reporting.   23       PART II  OTHER INFORMATION   Item 1.
Legal Proceedings  The Partnership is involved in various legal actions arising in the normal course of business. In the opinion of management, such matters will not have a material effect upon the financial position of the Partnership.   Item 1A.
Risk Factors  Not Applicable  Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds  Not Applicable.   Item 3.
Defaults upon Senior Securities  Not Applicable.   Item 4.
Submission of Matters to a Vote of Security Holders  Not Applicable.   Item 5.
Other Information  Not Applicable.   Item 6.
Exhibits  31.1 Certification of General Partner pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 31.2 Certification of General Partner pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 32.1 Certification of General Partner pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 32.2 Certification of General Partner pursuant to Section 906 of the Sarbanes-Oxley Act of 2002   24       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 14th day of August, 2006.   REDWOOD MORTGAGE INVESTORS VII  By:
/S/ Michael R. BurwellMichael R. Burwell, General PartnerBy:
Gymno Corporation, General PartnerBy:
/S/ Michael R. BurwellMichael R. Burwell, President,Secretary/Treasurer & Chief Financial Officer    25       Exhibit 31.1  GENERAL PARTNER CERTIFICATION  I, Michael R. Burwell, General Partner, certify that:  1.
I have reviewed this quarterly report on Form 10-Q of Redwood Mortgage Investors VII, a California Limited Partnership (the Registrant);  2.
Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;  3.
Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the Registrant as of, and for, the periods presented in this quarterly report;  4.
The Registrants other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the Registrant and we have:  (a)
designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the Registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;  (b)
evaluated the effectiveness of the Registrants disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and  (c)
disclosed in this report any change in the Registrants internal control over financial reporting that occurred during the Registrants most recent fiscal quarter (the Registrants fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the Registrants internal control over financial reporting; and  5.
The Registrants other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the Registrants auditors and the audit committee of Registrants board of directors (or persons performing the equivalent functions):  (a)
all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the Registrants ability to record, process, summarize and report financial information; and  (b)
any fraud, whether or not material, that involves management or other employees who have a significant role in the Registrants internal control over financial reporting.   /s/ Michael R. Burwell _____________________________ Michael R. Burwell, General Partner August 14, 2006   26       Exhibit 31.2  PRESIDENT AND CHIEF FINANCIAL OFFICER CERTIFICATION  I, Michael R. Burwell, President and Chief Financial Officer of Gymno Corporation, General Partner, certify that:  1.
I have reviewed this quarterly report on Form 10-Q of Redwood Mortgage Investors VII, a California Limited Partnership (the Registrant);  2.
Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;  3.
Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the Registrant as of, and for, the periods presented in this quarterly report;  4.
The Registrants other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the Registrant and we have:  (a)
designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the Registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;  (b)
evaluated the effectiveness of the Registrants disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and  (c)
disclosed in this report any change in the Registrants internal control over financial reporting that occurred during the Registrants most recent fiscal quarter (the Registrants fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the Registrants internal control over financial reporting; and  5.
The Registrants other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the Registrants auditors and the audit committee of Registrants board of directors (or persons performing the equivalent functions):  (a)
all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the Registrants ability to record, process, summarize and report financial information; and  (b)
any fraud, whether or not material, that involves management or other employees who have a significant role in the Registrants internal control over financial reporting.   /s/ Michael R. Burwell ____________________________ Michael R. Burwell, President and Chief Financial Officer of Gymno Corporation, General Partner August 14, 2006  27       Exhibit 32.1  CERTIFICATION PURSUANT TO 18 U.S.C SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002  In connection with the Quarterly Report of Redwood Mortgage Investors VII (the Partnership) on Form 10-Q for the period ending June 30, 2006 as filed with the Securities and Exchange Commission on the date hereof (the Report), pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, I, Michael R. Burwell, General Partner of the Partnership, certify, that to the best of my knowledge:  (1)
The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and  (2)
The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Partnership at the dates and for the periods indicated.  This certification has not been, and shall not be deemed filed with the Securities and Exchange Commission.   /s/ Michael R. Burwell ______________________________ Michael R. Burwell, General Partner August 14, 2006   28       Exhibit 32.2  CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350 AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002  In connection with the Quarterly Report of Redwood Mortgage Investors VII (the Partnership) on Form 10-Q for the period ending June 30, 2006 as filed with the Securities and Exchange Commission on the date hereof (the Report), pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, I, Michael R. Burwell, President, Secretary/Treasurer & Chief Financial Officer of Gymno Corporation, General Partner of the Partnership, certify that to the best of my knowledge:  (1)
The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and  (2)
The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Partnership at the dates and for the periods indicated.  This certification has not been, and shall not be deemed filed with the Securities and Exchange Commission.   /s/ Michael R. Burwell ________________________________ Michael R. Burwell, President, Secretary/Treasurer & Chief Financial Officer of Gymno Corporation, General Partner August 14, 2006   29