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 September 30, 2004

                                       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: 33-30427

                         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. Employer
         or 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 an  accelerated  filer (as
defined in Rule 12b-2 of the Exchange Act).

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

                                       1
<PAGE>

Part I - Item 1.    FINANCIAL STATEMENTS

                         REDWOOD MORTGAGE INVESTORS VII
                       (A California Limited Partnership)
                                 BALANCE SHEETS
              SEPTEMBER 30, 2004 and DECEMBER 31, 2003 (unaudited)


                                     ASSETS
<TABLE>
<S>                                                                           <C>                 <C>
                                                                              September 30        December 31,
                                                                                  2004               2003
                                                                             ---------------    ---------------

Cash                                                                            $   451,181         $  321,114
                                                                             ---------------    ---------------

Loans
   Loans, secured by deeds of trust                                               8,620,888          8,280,826
   Loans, unsecured, net discount of $112,805 and $128,920 respectively             236,862            232,551
                                                                             ---------------    ---------------
                                                                                  8,857,750          8,513,377
   Less allowance for loan losses                                                 (722,907)          (680,469)
                                                                             ---------------    ---------------
     Net loans                                                                    8,134,843          7,832,908

Interest and other receivables
   Accrued interest                                                                 670,812            489,995
   Advances on loans                                                                  8,831              6,484
   Prepaid expenses                                                                   1,741
                                                                             ---------------    ---------------
     Total interest and other receivables                                           681,384            496,479
                                                                             ---------------    ---------------

Real estate owned, held for sale, net                                               616,043            633,053
                                                                             ---------------    ---------------

      Total assets                                                              $ 9,883,451         $9,283,554
                                                                             ===============    ===============
</TABLE>





                        LIABILITIES AND PARTNERS' CAPITAL
<TABLE>
<S>                                                                              <C>               <C>
Liabilities
  Line of credit                                                                 $   700,000       $  200,000
  Accounts payable                                                                     7,538            4,102
  Payable to affiliate                                                                68,067           51,288
                                                                             ----------------    -------------
     Total liabilities                                                               775,605          255,390
                                                                             ----------------    -------------

Partners' capital
   Limited partners' capital, subject to redemption                                9,095,873        9,016,191
   General partners' capital                                                          11,973           11,973
                                                                             ----------------    -------------
     Total partners' capital                                                       9,107,846        9,028,164
                                                                             ----------------    -------------

     Total liabilities and partners' capital                                     $ 9,883,451      $ 9,283,554
                                                                             ================    =============
</TABLE>

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

                                       2
<PAGE>

                         REDWOOD MORTGAGE INVESTORS VII
                       (A California Limited Partnership)
                              STATEMENTS OF INCOME
           FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2004 and
                         SEPTEMBER 30, 2003 (unaudited)
<TABLE>
<S>                                                                   <C>               <C>               <C>              <C>

                                                                        THREE MONTHS ENDED                   NINE MONTHS ENDED
                                                                           SEPTEMBER 30,                       SEPTEMBER 30,
                                                               ----------------------------------  ---------------------------------

                                                                      2004              2003              2004             2003
                                                                --------------    --------------    -------------    -------------
Revenues
   Interest - on loans                                              $ 198,818         $ 188,377        $ 594,290        $ 539,288
   Interest - interest bearing accounts                                   629                39            2,435            2,181
   Late charges                                                         7,115             5,194           17,703           17,822
   Other income                                                         8,747               933           25,939            6,487
                                                                --------------    --------------    -------------    -------------
                                                                      215,309           194,543          640,367          565,778
                                                                --------------    --------------    -------------    -------------
Expenses
   Mortgage servicing fees                                             20,457            18,368           60,219           51,669
   Interest expense                                                     1,444             5,737            2,512            7,062
   Clerical costs through Redwood Mortgage Corp.                        4,337             5,442           13,753           17,935
   Asset management fees                                                8,520             8,490           25,507           25,512
   Provisions (recoveries) for losses on loans and real estate         16,185             8,744           42,438         (37,450)
   Professional services                                                7,293             5,290           37,066           38,881
   Printing, supplies and postage                                       1,378             1,268            5,664            5,537
   Other                                                                6,362               (8)           25,334            5,319
                                                                --------------    --------------    -------------    -------------
                                                                       65,976            53,331          212,493          114,465
                                                                --------------    --------------    -------------    -------------
Net income                                                            149,333           141,212          427,874          451,313
                                                                ==============    ==============    =============    =============

Net income:    To general partners (1%)                                 1,493             1,412            4,279            4,513
               To limited partners (99%)                              147,840           139,800          423.595          446,800
                                                                --------------    --------------    -------------    -------------
                                                                    $ 149,333         $ 141,212        $ 427,874        $ 451,313
                                                                ==============    ==============    =============    =============

Net income per $1,000 invested by limited
  partners for entire period

      -where income is reinvested and compounded                    $   16.35         $   15.52        $   47.68        $   50.35
                                                                ==============    ==============    =============    =============

      -where partner receives income in monthly
         distributions                                              $   16.26         $   15.44        $   46.70        $   49.26
                                                                ==============    ==============    =============    =============
</TABLE>

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

                                       3
<PAGE>

                         REDWOOD MORTGAGE INVESTORS VII
                       (A California Limited Partnership)
                            STATEMENTS OF CASH FLOWS
        FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2004 and 2003 (unaudited)

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

                                                                                NINE MONTHS ENDED SEPTEMBER 30,
                                                                              -------------------------------------

                                                                                   2004                 2003
                                                                              ----------------     ----------------
Cash flows from operating activities
  Net income                                                                     $    427,874        $     451,313
  Adjustments to reconcile net income to net cash provided
     by operating activities
        Provision for (recovery of) losses on loans and real estate                    42,438             (53,565)
        Early withdrawal penalty credited to income                                   (1,777)              (1,437)
        Amortization of discount on unsecured loans                                  (16,115)             (16,115)
  Change in operating assets and liabilities
        Accrued interest and advances on loans                                      (183,164)            (143,677)
        Accounts payable and other liabilities                                         20,215             (19,374)
        Prepaid expenses                                                              (1,741)                    -
                                                                              ----------------     ----------------

Net cash provided by operating activities                                             287,730              217,145
                                                                              ----------------     ----------------

Cash flows from investing activities
  Principal collected on loans                                                      3,020,006            1,616,607
  Loans originated                                                                (3,360,068)          (2,863,046)
  Recoveries of (payments for) real estate held for sale                               17,010              (5,926)
  Distributions from limited liability company                                              -              433,195
  Proceeds from (payments for) unsecured loans                                         11,804                    -
                                                                              ----------------     ----------------

Net cash used in investing activities                                               (311,248)            (819,170)
                                                                              ----------------     ----------------

Cash flows from financing activities
  Net increase in line of credit                                                      500,000            1,000,000
  Partners withdrawals                                                              (346,415)            (463,047)
                                                                              ----------------     ----------------

Net cash provided by financing activities                                             153,585              536,953
                                                                              ----------------     ----------------

Net increase (decrease) in cash                                                       130,067             (65,072)

Cash - beginning of year                                                              321,114            1,057,845
                                                                              ----------------     ----------------

Cash - end of period                                                                  451,181              992,773
                                                                              ================     ================

Cash payments for interest                                                       $      2,512        $       7,062
                                                                              ================     ================
</TABLE>

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

                                       4
<PAGE>

                         REDWOOD MORTGAGE INVESTORS VII
                       (A California Limited Partnership)
                          NOTES TO FINANCIAL STATEMENTS
                         SEPTEMBER 30, 2004 (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,  2003 filed with the  Securities  and  Exchange
Commission. The results of operations for the nine and three month periods ended
September 30, 2004 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 September 30, 2004 and December 31, 2003 there was one loan  categorized
as impaired by the  Partnership  in the total  aggregate  amount of $96,716.  In
addition, the impaired loan had accrued interest and advances totaling $7,841 at
September 30, 2004 and December 31, 2003. The reduction in carrying value of the
impaired  loan of $14,596 at  September  30,  2004 and  December  31,  2003,  is
included in the allowance for loan losses.  The average  recorded  investment in
the impaired loan was $96,716 for the nine month period ended September 30, 2004
and the year ended December 31, 2003.

     At both September 30, 2004 and December 31, 2003, the  Partnership had five
loans past due 90 days or more on  interest  payments  totaling  $2,025,966  and
$2,259,756 (23.50% and 27.29% of the secured loan portfolio),  respectively.  As
of September  30, 2004 and December 31, 2003,  four and five of these loans were
past  maturity.  The  Partnership  does not consider  these loans to be impaired
because, in the opinion of management,  there is sufficient  collateral to cover
the amount  outstanding to the  Partnership  and is still  accruing  interest on
these loans.

Allowance for loan losses

     The  composition  of the allowance for loan losses as of September 30, 2004
and December 31, 2003 was as follows:

                                             September 30,         December 31,
                                                 2004                 2003
                                           -----------------    ---------------
      Impaired loans                        $        14,596      $      14,596
      Specified loans                               302,500            321,263
      General                                       287,442            236,984
      Unsecured loans                               118,369            107,626
                                           -----------------    ---------------
                                            $       722,907      $     680,469
                                           =================    ===============

     Activity in the  allowance for loan losses is as follows for the nine month
period ended September 30, 2004 and the year ended December 31, 2003:

                                             September 30,         December 31,
                                                 2004                2003
                                           -----------------    ---------------
      Beginning balance                     $       680,469      $     791,882

      Provision for loan losses                      42,438                  -
      Recoveries                                          -           (18,299)
      Restructures                                        -           (50,083)
      Write-offs                                          -           (43,031)
                                           -----------------    ---------------
                                            $       722,907      $     680,469
                                           =================    ===============

                                       5
<PAGE>
                         REDWOOD MORTGAGE INVESTORS VII
                       (A California Limited Partnership)
                          NOTES TO FINANCIAL STATEMENTS
                         September 30, 2004 (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 6
months after the termination  date of the offering.  Thereafter,  loan brokerage
commissions  (points) will be limited to an amount not to exceed 4% of the total
Partnership  assets per year.  The loan  brokerage  commissions  are paid by the
borrowers and thus, are not an expense of the Partnership.

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.

                                       6
<PAGE>

                         REDWOOD MORTGAGE INVESTORS VII
                       (A California Limited Partnership)
                          NOTES TO FINANCIAL STATEMENTS
                         September 30, 2004 (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).

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

     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 September 30, 2004 and December 31, 2003:

                                           September 30,          December 31,
                                               2004                  2003
                                        -----------------     ----------------
Costs of properties                       $    1,263,222        $   1,263,222

Reduction in value                             (647,179)            (630,169)
                                        -----------------     ----------------
Real estate held for sale                 $      616,043        $     633,053
                                        =================     ================

     During October,  2004, one of the real estate  properties held for sale was
sold,  resulting in a loss of approximately  $613,800,  which was fully provided
for.

note 5 - Bank Line of Credit

     The  Partnership has a bank line of credit secured by its loan portfolio of
up to $3,500,000 at .25% over prime.  The balances  outstanding  as of September
30, 2004 and December 31, 2003 were $700,000 and $200,000; and the interest rate
was  4.75%  (4.50%  prime + .25%) at  September  30,  2004.  This line of credit
expires  December 2004 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 nine month period ended  September 30, 2004 and for
the year ended December 31, 2003. 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 of 2004.

     Should the  general  partners  choose not to renew the line of credit,  any
balance then outstanding would be converted to a three-year term loan.

                                       7
<PAGE>
                         REDWOOD MORTGAGE INVESTORS VII
                       (A California Limited Partnership)
                          NOTES TO FINANCIAL STATEMENTS
                         September 30, 2004 (unaudited)


note 6 - 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  $8,620,888  and  $8,280,826,  at
September 30, 2004 and December 31, 2003, respectively.  The fair value of these
loans of $8,668,931  and  $8,159,401,  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.


note 7 - Asset Concentrations and Characteristics

     Most loans are secured by recorded  deeds of trust.  At September  30, 2004
and  December  31,  2003  there  were  29  and  23  secured  loans  outstanding,
respectively, with the following characteristics:
<TABLE>
<S>                                                                            <C>                   <C>

                                                                               September 30,         December 31,
                                                                                    2004                 2003
                                                                              -----------------     ---------------
Number of secured loans outstanding                                                         29                  23
Total secured loans outstanding                                               $      8,620,888      $    8,280,826

Average secured loan outstanding                                              $        297,272      $      360,036

Average secured loan as percent of total                                                 3.45%               4.35%
Average secured loan as percent of Partnership assets                                    3.01%               3.64%

Largest secured loan outstanding                                              $      1,000,000      $    1,000,000
Largest secured loan as percent of total loans                                          11.60%              12.08%
Largest secured loan as percent of Partnership assets                                   10.12% *            10.77%

Number of counties where security is located (all California)                               13                   8
Largest percentage of loans in one county                                               31.83%              44.11%
Average secured loan to appraised value of security based on appraisals and
senior liens at time of loan inception                                                  64.95%              60.79%

Number of secured loans in foreclosure                                                    None                None
Amount of secured loans in foreclosure                                                    None                None
</TABLE>

* 6.76% and 8.71% of outstanding loans and Partners' capital at loan inception

     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.

                                       8
<PAGE>
                         REDWOOD MORTGAGE INVESTORS VII
                       (A California Limited Partnership)
                          NOTES TO FINANCIAL STATEMENTS
                         September 30, 2004 (unaudited)

note 7 - Asset Concentrations and Characteristics (continued)

     The  following  categories of secured loans were held at September 30, 2004
and December 31, 2003:
<TABLE>
<S>                                                                          <C>                   <C>
                                                                             September 30,         December 31,
                                                                                  2004                2003
                                                                            -----------------    ---------------
First trust deeds                                                           $      5,160,098        $ 3,733,346
Second trust deeds                                                                 2,785,790          3,872,480
Third trust deeds                                                                    675,000            675,000
                                                                            -----------------    ---------------
         Total loans                                                               8,620,888          8,280,826
Senior liens due other lenders                                                     3,783,284          4,319,281
                                                                            -----------------    ---------------

         Total debt                                                         $     12,404,172        $12,600,107
                                                                            =================    ===============


Appraised property value at time of loan                                    $     19,097,123        $20,728,514
                                                                            -----------------    ---------------

Total secured loans as percent of appraisals based on appraisals
    and senior liens at date of loan                                                  64.95%             60.79%
                                                                            -----------------    ---------------

Secured loans by type of property
    Owner occupied homes                                                    $      1,507,105        $   853,869
    Non-owner occupied homes                                                       2,209,343          1,589,092
    Apartments                                                                     1,012,221          1,367,327
    Commercial                                                                     2,598,804          2,410,861
    Land                                                                           1,293,415          2,059,677
                                                                            -----------------    ---------------

                                                                            $      8,620,888        $ 8,280,826
                                                                            =================    ===============
</TABLE>

     Scheduled  maturity  dates of secured loans as of September 30, 2004 are as
follows:


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

                     2004                     $    1,358,288
                     2005                          1,715,125
                     2006                          1,872,945
                     2007                          1,246,754
                     2008                            198,609
                  Thereafter                       2,229,167
                                            -----------------

                     Total                    $    8,620,888
                                            =================

     The scheduled maturities for 2004 above include approximately $1,211,382 in
five loans, which are past maturity at September 30, 2004.  Interest payments on
four of these  loans with an  aggregate  principal  balance of  $1,199,738  were
categorized as delinquent over 90 days. The remaining one loan is making regular
monthly interest payments.

                                       9
<PAGE>
                         REDWOOD MORTGAGE INVESTORS VII
                       (A California Limited Partnership)
                          NOTES TO FINANCIAL STATEMENTS
                         September 30, 2004 (unaudited)


note 7 - Asset Concentrations and Characteristics (continued)

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

     The Partnership has a substantial amount of its loan receivable balance due
on two loans from one borrower. This borrower accounted for approximately 14.46%
of the loan balance and  approximately  12.59% of interest  revenue for the nine
months ended  September 30, 2004.  The value of collateral  securing these loans
was less than the principal balance due under the loans.  Redwood Mortgage Corp.
has provided an indemnity to the Partnership  whereby it has agreed to indemnify
and hold harmless,  the Partnership  from any expenses or losses incurred by the
Partnership  by reason of the  Partnership's  inability to collect all principal
due under the loans after the  Partnership  has exhausted all reserves set aside
for these loans and all remedies  available to it including  foreclosure  of the
underlying collateral. Therefore, these loans are not considered impaired solely
because  the  value  of the  collateral  securing  the  loans  is less  than the
principal balance due to the Partnership. Neither of these loans is past 90 days
or more on interest payments nor are they past maturity.

     The  Partnership  also has a  substantial  amount  of its  loan  receivable
balance due on three loans from another  borrower.  This borrower  accounted for
approximately  13.88% of the loan balance and  approximately  23.69% of interest
revenue for the nine  months  ended  September  30,  2004.  These loans are past
maturity and therefore past due 90 days or more on interest payments.


note 8 - Commitments and Contingencies

Workout agreements

     The Partnership has negotiated various  contractual workout agreements with
borrowers  whose  loans  are  past  maturity  or who are  delinquent  in  making
payments.  Under the terms of these workout  agreements  the  Partnership is not
obligated to make any additional monetary advances for the maintenance or repair
of the  collateral  securing the loans as of September 30, 2004. As of September
30,  2004 the  Partnership  had two  loans  under  workout  agreements  totaling
$64,873.

Construction loans

     The  Partnership  has  construction  loans,  which are at various stages of
completion of the construction  process and loans, which are not fully disbursed
at  September  30, 2004.  The  Partnership  has  approved the  borrowers up to a
maximum loan balance;  however,  disbursements are made during completion phases
throughout the  construction  process or incrementally  upon certain  conditions
being met. At September  30,  2004,  there was one  construction  loan which was
fully 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.

                                       10
<PAGE>
     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 revenue and expenses
for  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
held for sale.

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

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

     If events and or changes in circumstances  cause management to have serious
doubts about the further  collectibility of the contractual payments, a loan may
be  categorized  as impaired and interest is no longer  accrued.  Any subsequent
payments on impaired loans are applied to reduce the  outstanding  loan balances
including accrued interest and advances.

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

Forward Looking Statements.

     Some of the  information  in the Form  10-Q  may  contain  forward  looking
statements.  Uses of words  such as  "will",  "may",  "anticipate",  "estimate",
"continue"  or other forward  looking  words,  discuss  future  expectations  or
predictions.  The foregoing analysis of 2004 includes forward looking statements
and predictions  about the  possibility of future events,  results of operations
and  financial  condition.  As such,  this  analysis may prove to be  inaccurate
because of assumptions made by the general partners or the actual development of
the future  events.  No assurance  can be given that any of these  statements or
predictions will ultimately prove to be correct or substantially correct.

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.  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.

                                       11
<PAGE>
     o Mortgage  Brokerage  Commissions  For 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 $59,128 and $64,877 for the
nine month periods ended September 30, 2004 and 2003, and $9,600 and $16,102 for
the three month periods ended September 30, 2004 and 2003, respectively.

     o Mortgage  Servicing Fees Monthly mortgage  servicing fees of up to 1/8 of
1% (1.5% on an annual basis) of the unpaid principal of the Partnership's  loans
is paid to Redwood  Mortgage  Corp.,  or such lesser amount as is reasonable and
customary in the  geographic  area where the  property  securing the mortgage is
located.  Mortgage  servicing  fees of $60,219 and $51,669 were incurred for the
nine month  periods ended  September 30, 2004 and 2003,  and $20,457 and $18,368
were  incurred for the three month  periods  ended  September 30, 2004 and 2003,
respectively.

     o Asset  Management  Fees The general  partners  receive  monthly  fees for
managing the Partnership's portfolio and operations up to 1/32 of 1% of the `net
asset  value'  (3/8 of 1% on an annual  basis).  Management  fees to the general
partners of $25,507 and $25,512 were  incurred by the  Partnership  for the nine
month  periods  ended  September  30, 2004 and 2003,  and $8,520 and $8,490 were
incurred  for the  three  month  periods  ended  September  30,  2004 and  2003,
respectively.

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

     o Income and Losses  All  income  and  losses  are  credited  or charged to
partners in relation to their respective Partnership  interests.  The allocation
to the general partners (combined) shall be a total of 1%.

     o Operating  Expenses An affiliate  of the  Partnership,  Redwood  Mortgage
Corp.,  is reimbursed by the  Partnership  for all operating  expenses  actually
incurred  by it on  behalf of the  Partnership,  including  without  limitation,
out-of-pocket general and administration expenses of the Partnership, accounting
and audit fees,  legal fees and expenses,  postage and preparation of reports to
limited partners. Such reimbursements are reflected as expenses in the statement
of income. During the nine and three months through September 30, 2004 and 2003,
operating  expenses  totaling $13,753 and $17,935 for the nine month periods and
$4,337 and $5,442 for the three month periods, respectively,  were reimbursed to
Redwood Mortgage Corp.

     o  Contributed   Capital  The  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 September 30, 2004 and 2003, a general
partner,  Gymno  Corporation,  had contributed  $11,973 as capital in accordance
with Section 4.02(a) of the Partnership Agreement.

                                       12
<PAGE>
     Results of  Operations - For the nine and three months ended  September 30,
2004 and 2003

     The  following   increases/(decreases)  took  place  in  the  Partnership's
operating  results for the nine and three month periods ended September 30, 2004
versus 2003 and are summarized here under :
<TABLE>
<S>                                                             <C>                              <C>

                                                                Changes during the               Changes during the
                                                                nine months ended                three months ended
                                                                September 30, 2004               September 30, 2004
                                                                    versus 2003                      versus 2003
                                                           -----------------------------    ----------------------------
Net income increase (decrease)                                   $       (23,439)                 $       8,121

                                                               ===================              ================
  Revenue
     Interest on loans                                           $         55,022                 $      10,441
     Interest - interest bearing accounts                                     254                           590
     Late charges                                                           (119)                         1,921
     Other income                                                          19,452                         7,814
                                                               -------------------              ----------------
                                                                 $         74,589                 $      20,766

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

  Expenses
     Mortgage servicing fees                                     $          8,550                 $       2,089

     Interest expense                                                     (4,550)                       (4,293)
     Clerical costs                                                       (4,182)                       (1,105)
     Asset management fees                                                    (5)                            30
     Provisions for losses on loans and real estate                        79,888                         7,441
     Professional services                                                (1,815)                         2,003
     Printing, supplies and postage                                           127                           110
     Other                                                                 20,015                         6,370
                                                               -------------------              ----------------
                                                                 $         98,028                 $      12,645

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

           Net income (decrease)                                 $       (23,439)                 $       8,121
                                                               ===================              ================
</TABLE>

     The  increase in interest on loans of $55,002  (10.20%)  for the nine month
period,  and $10,441 (5.54%) for the three month period ended September 30, 2004
versus the periods ended  September 30, 2003 was due primarily to an increase in
the average loan portfolio  outstanding during these periods to $7,993,288 as of
September 30, 2004 from  $7,126,745  as of September  30, 2003.  The increase in
interest is also attributed to an increase of the average  interest rate,  which
stood at 9.62% as of September  30, 2004 versus 9.55% as of  September30,  2003.
The  interest  revenue  increase  also  includes  $16,115  and $5,372 in imputed
interest on discount notes for the nine and three month periods ended  September
30, 2004 and 2003, respectively.

     The  increase in mortgage  servicing  fees of $8,550  (16.55%) for the nine
month period and $2,089  (11.37%) for the three month period ended September 30,
2004,  versus the  corresponding  periods ended  September 30, 2003,  was due to
larger average loan  portfolio  balances of $7,993,288 as of September 30, 2004,
compared to $7,126,745 as of September 30, 2003.

     Loan loss  provisions  were $42,438 for the nine month period,  and $16,185
for the three month period ended  September  30, 2004,  as compared to loan loss
recoveries of $(37,450) for the nine month period, and a provision of $8,744 for
the three month period ended  September 30, 2003. The general  partners  believe
that the  allowance  for loan losses of $722,907  as of  September  30, 2004 was
adequate to offset potential losses on loans.

     The  decrease  in  professional  fees of $1,815  (4.67%) for the nine month
period,  and an increase of $2,003  (37.86%)for  the three  month  period  ended
September  30,  2004  versus  September  30,  2003 is due to timing of  services
provided in 2004 compared to 2003.

                                       13
<PAGE>
     Partnership  capital increased during the first nine months of 2004 as both
earnings distributions and capital liquidations declined. For the nine and three
month periods  ended  September  30, 2004  earnings and capital  liquidated  was
$145,076 and $198,838 for the nine month period, and $49,828 and $51,018 for the
three month  period,  respectively,  versus  $159,354  and $300,615 for the nine
month period,  and $49,239 and $81,951 for the three month period,  respectively
for the corresponding  periods in 2003. Earnings and capital  liquidations are a
factor of limited  partner  elections and  currently  limited  partners  seeking
liquidations of earnings or their capital account has declined.

     For the nine and three month periods ended September 30, 2004, other income
was mainly  comprised  of $23,143 and $7,714,  respectively,  of  non-refundable
option payments  against the purchase price of real estate held for sale.  Other
expenses consisted of $21,772 for the nine month period and $6,286 for the three
month  period  ended  September  30,  2004,  spent on the upkeep of  Partnership
properties.  One of the real estate owned properties was sold in October,  2004,
therefore no further  non-refundable option payments will be forthcoming and the
upkeep expenses should reduce substantially.

     A decrease in clerical costs of $4,182 for the nine month period and $1,105
for the three month period ended  September 30, 2004 versus  September 30, 2003,
is due to the basis of  computation  of this  expense.  All of the  partnerships
reimburse  Redwood  Mortgage  Corp for their  share of cost based on the capital
balances at the end of the preceding month. One partnership,  whose capital base
is  substantially  larger  with  significant  increases  every  month due to new
subscriptions,  continues to absorb a larger  percentage of this cost,  reducing
the other partnerships' portion on a pro rata basis.

     A decrease  in  interest  expense  of $4,550 for the nine month  period and
$4,293 for the three month period ended September 30, 2004 versus  September 30,
2003,  is due to a lower  average use of the line of credit in the former period
than in the latter. Average line of credit used during the nine months preceding
September 30, 2004, was $70,500 as compared to an average use of $221,500 during
the nine months through September 30, 2003

     At September 30, 2004,  there were no outstanding  loans with filed notices
of default. During the 4th quarter of 2004, the partnership anticipates filing a
foreclosure  on one of its 90 day past  due  loans in the  principal  amount  of
$776,228.

     Redwood  Mortgage  Corp.,  an affiliate of the general  partners,  received
Mortgage Brokerage Commissions from the loan borrowers of $59,128 and $9,600 for
the nine and three month periods ended September 30, 2004 as compared to $64,877
and $16,102 for the nine and three month periods ended  September 30, 2003.  The
decrease is due to loans with reduced  commissions written in the nine and three
month periods ended September 30, 2004.

                                       14
<PAGE>
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.  During
2001,  the Northern  California  real estate  market slowed and the national and
local  economies  slipped  into  recession.  During  2002 and 2003,  the economy
stabilized.  During  2004 the economy and the  Northern  California  Real Estate
Market has strengthened.  At September 30, 2004 the Partnership had 5 loans past
due 90 days or more totaling $2,025,966 with no loans in foreclosure.

     The Partnership has entered into workout  agreements with borrowers who are
past  maturity or  delinquent  in their  regular  payments.  The total number of
Partnership loans in workout agreements with borrowers is two, consisting of two
matured  loans  totaling  $64,873.  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.
These  workout  agreements  and  foreclosures  generally  exist  within our loan
portfolio to greater or lesser degrees, depending primarily on the health of the
economy.  The number of foreclosures and workout  agreements will generally rise
during difficult  economic times and conversely fall during good economic times.
The number and amount of workout  agreements  existing at September 30, 2004, in
management's  opinion,  does  not  have a  material  effect  on our  results  of
operations or liquidity.  These workouts have been  considered  when  management
arrived at an appropriate allowance for loan losses and based on our experience,
are reflective of our loan marketplace segment. In the remainder of 2004, we may
initiate  foreclosure  by filing  notices of default on delinquent  borrowers or
borrowers who become  delinquent  during the year. We anticipate that one notice
of default in the  principal  amount of $776,228 will be filed during the fourth
quarter  of  2004.  Management  has  considered  this  expected  foreclosure  in
determining  the adequacy of the loan loss reserve.  We may take back additional
real estate through the foreclosure process in 2004. 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 owned through  foreclosure  of $1,370,086 at September 30, 2004.
These provisions for losses were made to guard against  collection  losses.  The
total cumulative  provision for losses as of September 30, 2004 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
provisions  for losses on loans of  $722,907  and real  estate  held for sale of
$647,179 as of September 30, 2004, is considered to be  reasonable.  In October,
2004,  one  of  the  real  estate  properties  owned  was  sold  at  a  loss  of
approximately $613,800 which was fully provided for.

     As of September  30,  2004,  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 64.95%.  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 nine month period ended September 30, 2004 and 2003

Loan Portfolio

     The Partnership's  loan portfolio  consists primarily of short-term (one to
five years),  fixed rate loans secured by real estate.  As of September 30, 2004
and 2003 the Partnership's  loans secured by real property collateral in the six
San Francisco Bay Area counties (San Francisco, San Mateo, Santa Clara, Alameda,
Contra Costa, and Marin) represented $5,417,331 (62.84%) and $5,295,139 (68.85%)
of the  outstanding  secured loan  portfolio.  The  remainder  of the  portfolio
represented   loans  secured  by  real  estate  located  primarily  in  Northern
California.

                                       15
<PAGE>
     As of September 30, 2004 and September 30, 2003,  the  Partnership  held 29
and 24 loans respectively in the following categories:
<TABLE>
<S>                                        <C>                         <C>       <C>                        <C>

                                                    September 30,                         September 30,
                                                         2004                                  2003
                                           ---------------------------------     ---------------------------------

Single Family Residences (1-4 units)       $  3,716,448                43%       $  1,793,249               23%
Multiple family dwellings (5+ units)          1,012,221                12%          1,798,982               23%
Commercial                                    2,598,804                30%          2,715,484               36%
Land                                          1,293,415                15%          1,383,624               18%
                                          --------------    ---------------    ---------------    --------------

   Total                                   $  8,620,888               100%       $  7,691,339              100%
                                          ==============    ===============    ===============    ==============
</TABLE>

     As of September 30, 2004, the Partnership held 29 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 September 30, 2004:

            PRIORITIES, ASSET CONCENTRATIONS AND MATURITIES OF LOANS
                            As of September 30, 2004
<TABLE>
<S>                                                          <C>                <C>              <C>

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

1st Mortgages                                                        18     $  5,160,098              60%
2nd Mortgages                                                        10        2,785,790              32%
3rd Mortgages                                                         1          675,000               8%
                                                             ===========    =============    =============
       Total                                                         29     $  8,620,888             100%

Maturing 12/31/04 and prior                                           6     $  1,358,288              16%
Maturing prior to 12/31/05                                            3        1,715,125              20%
Maturing prior to 12/31/06                                            4        1,872,945              22%
Maturing after 12/31/06                                              16        3,674,530              42%
                                                             ===========    =============    =============
       Total                                                         29     $  8,620,888             100%

Average Loan                                                                $    297,272               3%
Largest Loan                                                                   1,000,000              12%
Smallest Loan                                                                     11,644            0.14%
Average Loan-to-Value based upon appraisal and senior
    liens at date of loan                                                                          64.95%
</TABLE>


     The  Partnership's  largest  loan in the  principal  amount  of  $1,000,000
represents 11.60% of outstanding secured loans and 10.12% 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.

Borrower Liquidity and Capital Resources.

     At the time of subscription  to the  Partnership,  limited  partners made a
decision to either take distributions of earnings monthly, quarterly or annually
or to compound  earnings in their capital account.  For the nine and three month
periods ended September 30, 2004 and 2003, the Partnership made distributions of
earnings  to  limited  partners  of  $145,076  and  $159,354  for the nine month
periods,  and $49,828 and  $49,239  for the three month  periods,  respectively.
Distribution of earnings to limited  partners,  which were not withdrawn for the
nine and three month periods ended September 30, 2004 and 2003 were $278,519 and
$287,444 for the nine month periods, and $98,012 and $90,561 for the three month
periods,  respectively.  As of  September  30, 2004 and 2003,  limited  partners
electing to withdraw  earnings  represented 34% and 35% of the limited partners'
capital.

                                       16
<PAGE>
     The Partnership  also allows the limited partners to withdraw their capital
account  subject  to  certain   limitations  (see   liquidation   provisions  of
Partnership agreement). For the nine and three month periods ended September 30,
2004 and 2003,  $22,213 and $17,940 for the nine month  periods,  and $8,950 and
$4,750 for the three month periods, 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 September 30, 2004 and 2003.

     Additionally, for the nine and three month periods ended September 30, 2004
and 2003,  $176,625  and $282,675  for the nine month  periods,  and $42,068 and
$77,201 for the three month periods,  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.

     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 (See the section of
the  Prospectus  entitled  "Risk  Factors  -  Purchase  of Units is a long  term
investment").

Current Economic Conditions.

     On July 1, and again on September 1, 2004,  the Federal  Reserve  increased
the Federal Funds Rate by one quarter  percentage point in each month(1/4 of one
percent) to 1.50%.  These were the first  Federal  Funds Rate  increases in more
than three  years and may  indicate  that the  Federal  Reserve  has changed its
interest rate policy to increased rates for the foreseeable future. A 1/2 of one
percent  upward shift in the Federal  Funds Rate will have an almost  negligible
effect upon the interest rates the Partnership  charges borrowers.  If, however,
there are future  interest  rate  increases  or if they remain at their  current
levels,  borrowers will no longer be encouraged  through  continually  declining
interest rates to prepay their debts through  refinancing of their  obligations.
This could mean that the Partnership may begin  experiencing less prepayments by
borrowers in its  portfolio.  This would reduce the need for the  Partnership to
replace  these  prepaid   loans  with  new  loans  at  lower   interest   rates.
Additionally, the overall real estate marketplace has become much more active in


                                       17
<PAGE>

the last nine months,  particularly in Northern California.  This has translated
into more loan activity for the Partnership,  as demand for loans is strong from
qualified  borrowers.  The  general  partners  believe  that  the  average  loan
portfolio  interest rate may decline as some  remaining  borrowers  that did not
refinance  their loans to lower interest rates take advantage of the current low
rates of interest available. Based upon existing note rates in the portfolio and
the Partnership's  expectations of stable interest rates in the near future, the
Partnership  anticipates  that the average  loan  portfolio  interest  rate will
decline  approximately 5 to 25 basis points over the remainder of 2004. From the
general partners'  experience,  we anticipate that the annualized yield for 2004
will range between 6% and 7%.

     The  Partnership  makes  loans  primarily  in  Northern  California.  As of
September 30, 2004, approximately 62.84%, ($5,417,331) of the secured loans held
by the Partnership were in six San Francisco Bay Area Counties. The remainder of
the loans held was secured primarily by Northern  California real estate outside
the San Francisco Bay Area.  Like the rest of the nation,  the San Francisco Bay
Area has felt the slow down in economic growth and increasing unemployment.

     In 2004 the Northern California economy has begun to rebound.  Unemployment
is still a concern as job creation is an important aspect of continued  economic
expansion. The unemployment rate in California was 5.9% as of September, 2004 as
compared to an  unemployment  rate of 6.7% in September,  2003. This decrease in
unemployment  indicates  improvement  but is still  higher than many  economists
would like.  The Labor  Department  reported that the consumer  price index rose
0.6% in  September,  2004 and for the first nine  months of this year,  consumer
prices went up at an annual rate of 3.5%,  compared  with a rate of 1.9% for all
of 2003. In July and September, 2004, the Federal Reserve, after more than three
years of lowering its core interest rates, raised its core interest rate .25% in
each of these  months to 1.50%.  This  marks a  dramatic  change in policy  from
lowering  interest rates to a probable policy of raising interest rates over the
foreseeable  future.  Real estate prices are, in part,  directly impacted by the
cost of money.  The value of real estate is important to the partnership as real
estate  collateral  is backing  each of our loans.  At current  interest  rates,
demand for residential real estate is at all time highs.  DataQuick  Information
Systems reported all time high numbers in July and August, 2004 for many tracked
California real estate categories. These included a record $520,000 median sales
price for a San  Francisco  Bay Area  home.  In July,  2004 there was a total of
12,862 house and  condominium  sales in the nine county San  Francisco  Bay Area
marketplace.  In August,  2004 there was 12,674 sales recorded.  This was due to
strong demand,  increased  inventory and continued low mortgage  interest rates.
Home  affordability  in San Francisco,  as measured by the  affordability  index
stood at 11% for September, 2004, down from 12% in August, 2004. Many buyers are
expecting  interest  rates to rise over the next  year so they are  doing  their
buying now rather than later.  Interest  rates have  cooperated,  dropping to an
average of 5.75% as of  September  16, 2004 from 5.83% as of  September 9, 2004.
For the partnership,  stable and rising  residential real estate values are good
as the  partnership is more  collateral  dependent than credit  dependent in its
loan underwriting  decisions.  A strong and active real estate  marketplace also
serves to produce a substantial  number of real estate  financing  opportunities
which the partnership may compete for.

     The San Francisco Bay Area  commercial  real estate  marketplace  is on the
rebound.  Grubb and Ellis  reports that downtown San  Francisco  building  sales
through the third  quarter of 2004 are  tracking to beat $2.4  billion,-the  all
time high set in 2000. Additionally, Grubb and Ellis reports that there has been
five  consecutive  quarters of  positive  net rental  absorption  or 1.1 million
square feet over these same 5 quarters and 670,000 square feet in 2004.  Vacancy
rates  declined to 21.2  percent or 2.9  percentage  points from the peak in the
second quarter of 2002. Grubb and Ellis also reports that asking rents increased
albeit  minimally by 21 cents per square foot. CB Richard Ellis reports  overall
vacancy considerably lower at 17.4 percent and puts absorption at 884,421 square
feet for 2004.  In any  case,  the  commercial  market  is  improving.  Improved
occupancies in commercial  properties will assist owners of those  properties in
handling their debt payments Improved occupancies will stabilize commercial real
estate values, which is a benefit to the partnership.

     For Partnership loans outstanding as of September 30, 2004, the Partnership
had an average loan to value ratio of 64.95%, 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.

                                       18
<PAGE>
Part I - Item 3.  Quantitative and Qualitative Disclosures About Market Risk

     The  following  table  contains  information  about  the cash held in money
market accounts,  secured loans held in the Partnership's portfolio and our line
of credit as of  September  30, 2004.  The  presentation,  for each  category of
information,  aggregates the assets and  liabilities by their maturity dates for
maturities  occurring  in each of the years  2004  through  2008 and  separately
aggregates the information  for all maturities  arising after 2008. The carrying
values of these assets and liabilities  approximate  their fair market values as
of September 30, 2004:
<TABLE>
<S>                              <C>           <C>          <C>          <C>          <C>      <C>             <C>

                                 2004          2005         2006         2007         2008     Thereafter      Total
                             ------------- ------------- ------------ ------------ ----------- ------------ -------------
Interest earning assets:
Money market accounts          $  402,507                                                                     $  402,507
Average interest rate               0.70%                                                                          0.70%
Unsecured loans                                                        $  236,862                             $  236,862
Loans secured by deeds
   of trust                    $1,358,288     1,715,125    1,872,945    1,246,754     198,609    2,229,167    $8,620,888
Average interest rate              10.81%         9.73%        9.46%        9.00%      10.50%        9.20%         9.62%
Interest bearing
   liabilities
Line of credit                 $  700,000                                                                     $  700,000
Average interest rate               4.75%                                                                          4.75%
</TABLE>

Market Risk.

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

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

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

                                       19
<PAGE>
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 September 30, 2004 the general partners have determined that
the allowance  for loan losses of $722,907  (7.94% 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 September 30, 2004, 5 loans were delinquent over 90
days amounting to $2,025,966.  The Partnership  does not consider these loans to
be impaired because in the opinion of management there is sufficient  collateral
to cover  the  amount  outstanding  to the  Partnership  and is  still  accruing
interest on the loans. In addition,  allowance for loan losses of $722,907 as of
September 30, 2004 is considered  reasonable  to offset  potential  loss in loan
collections in the future.

Part I - Item 4.    Controls and Procedures

     As of September 30, 2004, the general  partner of the  Partnership  carried
out an  evaluation,  under the  supervision  and with the  participation  of the
general  partner's  management,  including the general  partner's  President and
Chief Financial Officer, of the effectiveness of the design and operation of the
Partnership's  disclosure  controls and procedures pursuant to Exchange Act Rule
13a-15. Based upon that evaluation, the President and Chief Financial Officer of
the general partner  concluded that the  Partnership's  disclosure  controls and
procedures are effective. There were no significant changes in the Partnership's
internal  controls or in other  factors  that could  significantly  affect these
controls subsequent to the date of their evaluation.

                                       20
<PAGE>
       COMPENSATION OF THE GENERAL PARTNERS AND AFFILIATES BY PARTNERSHIP

     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 part of Form S-11 and subsequent  amendments  related to the offering
of Partnership  interests,  pages 12-13, under the section  "Compensation of the
General Partners and the Affiliates",  which are 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 nine month period ended  September
30,  2004.  All such  compensation  is in  compliance  with the  guidelines  and
limitations set forth in the Prospectus.
<TABLE>
<S>                              <C>                                                              <C>

Entity Receiving
Compensation                     Description of Compensation and Services Rendered                Amount
---------------------------------------------------------------------------------------------------------
I.  Redwood Mortgage Corp.       Loan Servicing Fee for servicing loan ..........................$60,219

   General Partners
      &/or Affiliates            Asset Management Fee for managing assets .......................$25,507

   General Partners              1% interest in profits ..........................................$4,279
</TABLE>

     II. FEES PAID BY  BORROWERS  ON LOANS  PLACED BY  COMPANIES  RELATED TO THE
GENERAL  PARTNERS  WITH  THE  PARTNERSHIP  (EXPENSES  OF  BORROWERS  NOT  OF THE
PARTNERSHIP)
<TABLE>
<S>                              <C>                                                             <C>

Redwood Mortgage Corp.           Mortgage Brokerage Commissions for services in connection
                                 with  the  review,  selection,   evaluation,   negotiation,
                                 and extension of the loan paid by the borrowers and not by
                                 the Partnership.................................................$59,128

Redwood Mortgage Corp.           Processing and Escrow Fees for services in connection with
                                 notary, document preparation, credit investigation, and
                                 escrow fees paid by the borrowers and not by the Partnership.... $5,733

Gymno Corporation, Inc.          Reconveyance Fee  ................................................ $873
</TABLE>


     III. IN ADDITION, THE GENERAL PARTNERS AND/OR RELATED COMPANIES PAY CERTAIN
EXPENSES ON BEHALF OF THE PARTNERSHIP FOR WHICH IT IS REIMBURSED AS NOTED IN THE
STATEMENT  OF INCOME . . . . . . . . . . . . . . . . . . . . . . . . . . $13,753

                                       21
<PAGE>
PART II -   OTHER INFORMATION


Item 1.  Legal Proceedings

           The Partnership periodically is a defendant in various legal
           actions. Please refer to Note 8 of the Financial Statements.

Item 2.  Changes in the Securities

           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 and Reports on Form 8-K

           (a) Exhibits

                (99.1)   Certification of Michael R. Burwell, General Partner

                (99.2)   Certification of Michael R. Burwell,
                         President, Secretary/Treasurer & Chief
                         Financial Officer of Gymno Corporation,
                         General Partner

           (b) Form 8-K

                Not Applicable

                                       22
<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 15th day of
November 2004.


REDWOOD MORTGAGE INVESTORS VII


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


By:       Gymno Corporation, General Partner


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


     Pursuant to the  requirements of the Securities  Exchange Act of 1934, this
report has been signed below by the following person on behalf of the registrant
and in the capacity indicated on the 15th day of November 2004.


   Signature                         Title                          Date


/S/ Michael R. Burwell
-----------------------
Michael R. Burwell              General Partner                November 15, 2004


/S/ Michael R. Burwell
----------------------
Michael R. Burwell       President, Secretary/Treasurer        November 15, 2004
                        of Gymno Corporation (Principal
                           Financial and Accounting
                          Officer); Director of Gymno
                                  Corporation

                                       23
<PAGE>



                                                                    Exhibit 99.1

                          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-14 and 15d-14) for the Registrant and we have:

     (a)  designed  such  disclosure  controls  and  procedures  to ensure  that
material  information  relating  to  the  Registrant,   is  made  known  to  us,
particularly during the period in which this quarterly report is being prepared;

     (b) evaluated the effectiveness of the Registrant's disclosure controls and
procedures as of September 30, 2004 (the "Evaluation Date"); and

     (c)  presented  in  this  quarterly   report  our  conclusions   about  the
effectiveness of the disclosure  controls and procedures based on our evaluation
as of the Evaluation Date.

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

     (a) all  significant  deficiencies  in the design or  operation of internal
controls  which  could  adversely  affect  the  Registrant's  ability to record,
process,  summarize  and  report  financial  data  and have  identified  for the
Registrant's auditors any material weaknesses in internal controls; and

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

     6. The Registrant's other certifying  officers and I have indicated in this
quarterly  report  whether or not there  were  significant  changes in  internal
controls or in other factors that could  significantly  affect internal controls
subsequent to the date of our most recent  evaluation,  including any corrective
actions with regard to significant deficiencies and material weaknesses.



/s/ Michael R. Burwell
------------------------------
Michael R. Burwell, General Partner
November 15, 2004

                                       24
<PAGE>



                                                                    Exhibit 99.1

                            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  September 30, 2004 as
filed with the  Securities  and  Exchange  Commission  on the date  hereof  (the
"Report"), pursuant to 18 U.S.C. (S) 1350, as adopted pursuant to (S) 906 of the
Sarbanes-Oxley  Act of 2002,  I,  Michael  R.  Burwell,  General  Partner of the
Partnership, certify, that to the best of my knowledge:

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

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




/s/ Michael R. Burwell
------------------------------
Michael R. Burwell, General Partner
November 15, 2004

                                       25
<PAGE>

                                                                    Exhibit 99.2

               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-14 and 15d-14) for the Registrant and we have:

     (a)  designed  such  disclosure  controls  and  procedures  to ensure  that
material  information  relating  to  the  Registrant,   is  made  known  to  us,
particularly during the period in which this quarterly report is being prepared;

     (b) evaluated the effectiveness of the Registrant's disclosure controls and
procedures as of September 30, 2004 (the "Evaluation Date"); and

     (c)  presented  in  this  quarterly   report  our  conclusions   about  the
effectiveness of the disclosure  controls and procedures based on our evaluation
as of the Evaluation Date.

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

     (a) all  significant  deficiencies  in the design or  operation of internal
controls  which  could  adversely  affect  the  Registrant's  ability to record,
process,  summarize  and  report  financial  data  and have  identified  for the
Registrant's auditors any material weaknesses in internal controls; and

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

     6. The Registrant's other certifying  officers and I have indicated in this
quarterly  report  whether or not there  were  significant  changes in  internal
controls or in other factors that could  significantly  affect internal controls
subsequent to the date of our most recent  evaluation,  including any corrective
actions with regard to significant deficiencies and material weaknesses.



/s/ Michael R. Burwell
----------------------------
Michael R. Burwell, President and
Chief Financial Officer of Gymno
Corporation, General Partner
November 15, 2004

                                       26
<PAGE>



                                                                    Exhibit 99.2


                            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  September 30, 2004 as
filed with the  Securities  and  Exchange  Commission  on the date  hereof  (the
"Report"), pursuant to 18 U.S.C. (S) 1350, as adopted pursuant to (S) 906 of the
Sarbanes-Oxley    Act   of   2002,   I,   Michael   R.    Burwell,    President,
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.





/s/ Michael R. Burwell
--------------------------------
Michael R. Burwell, President,
Secretary/Treasurer & Chief Financial
Officer of Gymno Corporation, General Partner
November 15, 2004


                                       27