UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

                                    FORM 10-Q

(Mark One)
[X]      QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
         SECURITIES EXCHANGE ACT OF 1934

                  For the Quarterly Period Ended June 30, 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
                 JUNE 30, 2004 and DECEMBER 31, 2003 (unaudited)


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

Cash                                                                             $   476,031        $  321,114
                                                                             ----------------   ---------------

Loans
   Loans, secured by deeds of trust                                                8,451,319         8,280,826
   Loans, unsecured, net discount of $118,177 and $128,920 respectively              235,240           232,551
                                                                             ----------------   ---------------
                                                                                   8,686,559         8,513,377
   Less allowance for loan losses                                                  (706,722)         (680,469)
                                                                             ----------------   ---------------
     Net loans                                                                     7,979,837         7,832,908

Interest and other receivables
   Accrued interest                                                                  599,124           489,995
   Advances on loans                                                                   6,404             6,484
                                                                             ----------------   ---------------
     Total interest and other receivables                                            605,528           496,479
                                                                             ----------------   ---------------

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

      Total assets                                                               $ 9,677,439        $9,283,554
                                                                             ================   ===============

                        LIABILITIES AND PARTNERS' CAPITAL

Liabilities
  Line of credit                                                                 $   550,000        $  200,000
  Accounts payable                                                                     4,438             4,102
  Payable to affiliate                                                                62,149            51,288
                                                                             ----------------    --------------
     Total liabilities                                                               616,587           255,390
                                                                             ----------------    --------------

Partners' capital
   Limited partners' capital, subject to redemption                                9,048,879         9,016,191
   General partners' capital                                                          11,973            11,973
                                                                             ----------------    --------------
     Total partners' capital                                                       9,060,852         9,028,164
                                                                             ----------------    --------------

     Total liabilities and partners' capital                                     $ 9,677,439        $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 SIX MONTHS ENDED JUNE 30, 2004 and JUNE 30, 2003 (unaudited)

<TABLE>
<S>                                                              <C>               <C>               <C>              <C>
                                                                    THREE MONTHS ENDED                   SIX MONTHS ENDED
                                                                         JUNE 30,                            JUNE 30,
                                                           ---------------------------------------------------------------------

                                                                 2004              2003              2004             2003
                                                             --------------    -------------     -------------    -------------
Revenues
   Interest - on loans                                        $    192,253      $   181,441       $   395,472      $   350,911
   Interest - interest bearing accounts                                463              572             1,806            2,142
   Late charges                                                      5,990            6,001            10,588           12,628
   Other income                                                      8,698            4,544            17,192            5,554
                                                             --------------    -------------     -------------    -------------
                                                                   207,404          192,558           425,058          371,235
                                                             --------------    -------------     -------------    -------------
Expenses
   Mortgage servicing fees                                          19,631           17,147            39,762           33,301
   Interest expense                                                    336            1,156             1,068            1,325
   Clerical costs through Redwood Mortgage Corp.                     4,598            6,008             9,416           12,493
   Asset management fees                                             8,498            8,505            16,987           17,022
   Provisions for losses on loans and real estate                   14,898         (29,193)            26,253         (46,194)
   Professional services                                             8,810           16,273            29,773           33,591
   Printing, supplies and postage                                    1,996            2,683             4,286            4,269
   Other                                                            10,192            4,123            18,972            5,327
                                                             --------------    -------------     -------------    -------------
                                                                    68,959           26,702           146,517           61,134
                                                             --------------    -------------     -------------    -------------
Net income                                                    $    138,445      $   165,856       $   278,541      $   310,101
                                                             ==============    =============     =============    =============

Net income:    To general partners (1%)                       $      1,384      $     1,659       $     2,785      $     3,101
               To limited partners (99%)                           137,061          164,197           275,756          307,000
                                                             --------------    -------------     -------------    -------------
                                                              $    138,445      $   165,856       $   278,541      $   310,101
                                                             ==============    =============     =============    =============

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

      -where income is reinvested and compounded                    $15.20           $16.31            $30.83           $34.30
                                                             ==============    =============     =============    =============

      -where partner receives income in monthly
         distributions                                              $15.12           $16.22            $30.44           $33.82
                                                             ==============    =============     =============    =============
</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 SIX MONTHS ENDED JUNE 30, 2004 and 2003 (unaudited)

<TABLE>
<S>                                                                               <C>                   <C>
                                                                                   SIX MONTHS ENDED JUNE 30,
                                                                             -------------------------------------

                                                                                  2004                  2003
                                                                             ----------------      ---------------
Cash flows from operating activities
  Net income                                                                  $      278,541        $     310,101
  Adjustments to reconcile net income to net cash provided
     by operating activities
        Provision for (recovery of) losses on loans and real estate                   26,253             (56,937)
        Early withdrawal penalty credited to income                                  (1,061)              (1,057)
        Imputed interest income                                                       10,743               10,743
        Amortization of discount on unsecured loans                                 (10,743)             (10,743)
  Change in operating assets and liabilities
        Accrued interest and advances on loans                                     (109,049)             (64,618)
        Accounts payable and other liabilities                                        11,197             (28,224)

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

Net cash provided by operating activities                                            205,881              159,265
                                                                             ----------------      ---------------

Cash flows from investing activities
  Principal collected on loans                                                     1,628,777            1,167,884
  Loans originated                                                               (1,799,270)          (1,681,220)
  Recoveries of (payments for) real estate held for sale                              17,010              (4,364)
  Investments in limited liability company                                                 -            (139,555)
  Proceeds from (payments for) unsecured loans                                       (2,689)                4,801
                                                                             ----------------      ---------------

Net cash used in investing activities                                              (156,172)            (652,454)
                                                                             ----------------      ---------------

Cash flows from financing activities
  Net increase in line of credit                                                     350,000                    -
  Partners withdrawals                                                             (244,792)            (330,825)
                                                                             ----------------      ---------------

Net cash provided by (used) in financing activities                                  105,208            (330,825)
                                                                             ----------------      ---------------

Net increase (decrease) in cash                                                      154,917            (824,014)

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

Cash - end of period                                                                 476,031              233,831
                                                                             ================      ===============

Cash payments for interest                                                    $        1,068        $       1,325
                                                                             ================      ===============
</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
                            JUNE 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 six month period ended June 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 June 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 loans had accrued interest and advances  totaling $7,841
at June 30, 2004 and December 31, 2003.  The reduction in carrying  value of the
impaired loans of $14,596 at June 30, 2004 and December 31, 2003, is included in
the allowance for loan losses.  The average recorded  investment in the impaired
loans was  $96,716  for the six month  period  ended June 30,  2004 and the year
ended December 31, 2003.

     At June 30, 2004 and December 31, 2003, the  Partnership  had four and five
loans past due 90 days or more on  interest  payments  totaling  $1,985,459  and
$2,259,756 (23.49% and 27.29% of the secured loan portfolio),  respectively. All
of these loans are 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 June 30, 2004 and
December 31, 2003 was as follows:

                                              June 30,          December 31,
                                                2004               2003
                                          ---------------    ---------------
      Impaired loans                        $     14,596       $     14,596
      Specified loans                            321,263            321,263
      General                                    252,494            236,984
      Unsecured loans                            118,369            107,626
                                          ---------------    ---------------
                                            $    706,722       $    680,469
                                          ===============    ===============

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

                                              June 30,          December 31,
                                                2004               2003
                                          ---------------    ---------------
      Beginning balance                     $    680,469       $    791,882
      Provision for loan losses                   26,253                  -
      Recoveries                                       -           (18,299)
      Restructures                                     -           (50,083)
      Write-offs                                       -           (43,031)
                                          ---------------    ---------------
                                            $    706,722       $    680,469
                                          ===============    ===============


                                       5
<PAGE>

                         REDWOOD MORTGAGE INVESTORS VII
                       (A California Limited Partnership)
                          NOTES TO FINANCIAL STATEMENTS
                            JUNE 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
                            JUNE 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 June 30, 2004 and December 31, 2003:


                                             June 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
                                          ===============     ===============


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 June 30,
2004 and December 31, 2003 were $550,000 and $200,000; and the interest rate was
4.25% (4.00% prime + .25%) at June 30, 2004 and December 31, 2003.  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 six month period ended June 30, 2004
and for the year ended December 31, 2003.

     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
                            JUNE 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 $8,451,319 and  $8,280,826,  at June
30, 2004 and December 31, 2003,  respectively.  The fair value of these loans of
$8,501,875 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 June 30, 2004 and
December 31, 2003 there were 29 and 23 secured loans outstanding,  respectively,
with the following characteristics:

<TABLE>
<S>                                                                              <C>               <C>
                                                                                 June 30,          December 31,
                                                                                   2004                2003
                                                                              ---------------     ---------------
Number of secured loans outstanding                                                       29                  23
Total secured loans outstanding                                                 $  8,451,319        $  8,280,826

Average secured loan outstanding                                                   $ 291,425        $    360,036
Average secured loan as percent of total                                               3.45%               4.35%
Average secured loan as percent of Partners' capital                                   3.22%               3.99%

Largest secured loan outstanding                                                $  1,000,000        $  1,000,000
Largest secured loan as percent of total                                              11.83%              12.08%
Largest secured loan as percent of Partnership assets                                 10.33% *            10.77% *

Number of counties where security is located (all California)                             11                   8
Largest percentage of loans in one county                                             32.48%              44.11%
Average secured loan to appraised value of security based on appraisals
    and senior liens(1) at time of loan inception                                     65.60%              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.



--------------------------------
     (1) A senior lien(s) is a recorded  encumbrance  that is senior in right of
payment and priority to the Partnership's loan.

                                       8

<PAGE>

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


note 7 - Asset Concentrations and Characteristics (continued)

     The  following  categories  of secured loans were held at June 30, 2004 and
December 31, 2003:
<TABLE>
<S>                                                                          <C>               <C>
                                                                             June 30,          December 31,
                                                                               2004               2003
                                                                          --------------     --------------
First trust deeds                                                           $ 4,098,362        $ 3,733,346
Second trust deeds                                                            3,677,957          3,872,480
Third trust deeds                                                               675,000            675,000
                                                                          --------------     --------------
         Total loans                                                          8,451,319          8,280,826
Senior liens due other lenders                                                4,916,960          4,319,281
                                                                          --------------     --------------

         Total debt                                                         $13,368,279        $12,600,107
                                                                          ==============     ==============

Appraised property value at time of loan                                    $20,377,817        $20,728,514
                                                                          --------------     --------------

Total secured loans as percent of appraisals based on appraisals
    and senior liens at date of loan                                             65.60%             60.79%
                                                                          --------------     --------------

Secured loans by type of property
    Owner occupied homes                                                    $ 1,908,652        $   853,869
    Non-owner occupied homes                                                  1,209,545          1,589,092
    Apartments                                                                1,011,594          1,367,327
    Commercial                                                                2,276,953          2,410,861
    Land                                                                      2,044,575          2,059,677
                                                                          --------------     --------------

                                                                            $ 8,451,319        $ 8,280,826
                                                                          ==============     ==============
</TABLE>

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

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

                      2004                       $  2,186,927
                      2005                          1,715,125
                      2006                            872,147
                      2007                          1,246,754
                      2008                            198,867
                   Thereafter                       2,231,499
                                              ----------------

                      Total                      $  8,451,319
                                              ================

     The scheduled maturities for 2004 above include approximately $2,074,581 in
six loans,  which are past maturity at June 30, 2004.  Interest payments on four
of  these  loans  with  an  aggregate   principal  balance  of  $1,985,459  were
categorized  as  delinquent  over 90 days.  The  remaining  two loans are making
regular monthly interest payments.

                                       9
<PAGE>

                         REDWOOD MORTGAGE INVESTORS VII
                       (A California Limited Partnership)
                          NOTES TO FINANCIAL STATEMENTS
                            JUNE 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 15% of
the loan  balance and  approximately  13% of interest  revenue for the half year
ended June 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.

     The  Partnership  also has a  substantial  amount  of its  loan  receivable
balance due on three loans from another  borrower.  This borrower  accounted for
approximately  23% of the loan balance and approximately 25% of interest revenue
for the half year ended June 30, 2004.


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 June 30, 2004 and December 31, 2003.
As of June 30, 2004 the  Partnership  had three loans under  workout  agreements
totaling $164,433.

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 June 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 June 30, 2004, there were $1,185 of undistributed loans which will
be funded by a combination of borrower monthly mortgage payments, line of credit
draw-downs,  retirement of principal on current loans,  cash and reinvestment of
investors' earnings.

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 $49,528 and $48,775 for the six
month period ended June 30, 2004 and 2003,  and $31,894 and $6,000 for the three
month period ended June 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 $39,762 and $33,301 were incurred for the
six month  periods  ended June 30, 2004 and 2003,  and $19,631 and $17,147  were
incurred for the three month periods ended June 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 $16,987 and $17,022  were  incurred by the  Partnership  for the six
month period ended June 30, 2004 and 2003,  and $8,498 and $8,505 were  incurred
for the three month period ended June 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 six and three  months  through  June 30,  2004 and 2003,
operating  expenses  totaling  $9,416 and $12,493 for the six month  periods and
$4,598 and $6,008 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 June 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 six and three  months ended June 30, 2004
and 2003

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

Net income increase (decrease)                                   $    (31,560)                      $    ( 27,411)
                                                                ===============                   =================
  Revenue
     Interest on loans                                           $      44,561                      $       10,812
     Interest - interest bearing accounts                                (336)                               (109)
     Late charges                                                      (2,040)                                (11)
     Other income                                                       11,638                               4,154
                                                                ---------------                   -----------------
                                                                 $      53,823                      $       14,846
                                                                ---------------                   -----------------

  Expenses
     Mortgage servicing fees                                     $       6,461                      $        2,484
     Interest expense                                                    (257)                               (820)
     Clerical costs                                                    (3,077)                             (1,410)
     Asset management fees                                                (35)                                 (7)
     Provisions for losses on loans and real estate                     72,447                              44,091
     Professional services                                             (3,818)                             (7,463)
     Printing, supplies and postage                                         17                               (687)
     Other                                                              13,645                               6,069
                                                                ---------------                   -----------------
                                                                 $      85,383                      $       42,257
                                                                ---------------                   -----------------

           Net income (decrease)                                 $    (31,560)                      $     (27,411)
                                                                ===============                   =================
</TABLE>

     The  increase in interest  on loans of $44,561  (12.70%)  for the six month
period,  and  $10,812  (5.96%) for the three  month  period  ended June 30, 2004
versus June 30,  2003 was due  primarily  to an  increase  in the  average  loan
portfolio  outstanding  during these  periods to  $8,451,319 as of June 30, 2004
from $6,937,320 as of June 30, 2003. The increase in interest is also attributed
to an increase of the average interest rate, which stood at 9.67% as of June 30,
2004 versus  9.63% as of June 30,  2003.  The  interest  revenue  increase  also
includes  $10,743 and $5,372 in imputed  interest on discount  notes for the six
and three month periods ended June 30, 2004 and 2003, respectively.

     The  increase in mortgage  servicing  fees of $6,461  (19.40%)  for the six
month period, and $2,484 (14.49%) for the three month period ended June 30, 2004
versus June 30, 2003 is  attributable to a larger average loan portfolio than in
2003.

     Loan loss provisions were $26,253 for the six month period, and $14,898 for
the three month period ended June 30, 2004, as compared to loan loss  recoveries
of $(46,194) for the six month period,  and $(29,193) for the three month period
ended June 30, 2003.  The general  partners  believe that the allowance for loan
losses of $706,722 as of June 30, 2004 was adequate to offset  potential  losses
on loans.

     The  decrease in  professional  fees of $3,818  (11.37%)  for the six month
period,  and $7,463  (45.86%)  for the three  month  period  ended June 30, 2004
versus June 30, 2003 is due to timing of services  provided in 2004  compared to
2003.

                                       13
<PAGE>

     Partnership  capital  increased  during  the  first  half  of  2004 as both
earnings  distributions and capital liquidations declined. For the six and three
month periods ended June 30, 2004  earnings and capital  liquidated  was $95,247
and  $147,820  for the six month  period,  and $47,050 and $80,212 for the three
month  period,  respectively,  versus  $110,116  and  $218,663 for the six month
period,  and $52,958 and $105,512 for the three month period,  respectively  for
the corresponding period 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 six and three month periods  ended June 30, 2004,  other income was
mainly comprised of $15,429 and $7,714,  respectively,  of non-refundable option
payments against the purchase price of real estate held for sale. Other expenses
consisted  of $15,486  for the six month  period and $8,141 for the three  month
period ended June 30, 2004, spent on the upkeep of Partnership properties.

     At June 30, 2004,  outstanding  foreclosures were reduced to none ($0) from
the two ($500,000) that existed at June 30, 2003. These  foreclosures  reflected
more  difficult  economic  times at June 30,  2003,  yet were not unusual in the
general partners' experience.

     Redwood  Mortgage  Corp.,  an affiliate of the general  partners,  received
Mortgage  Brokerage  Commissions  from the loan borrowers of $49,528 and $31,894
for the six and three month  periods  ended June 30, 2004 as compared to $48,775
and $6,000 for the six and three month periods ended June 30, 2003. The increase
is due to more loans  written in the six and three month  periods ended June 30,
2004.

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 June 30, 2004 the Partnership had 4 loans past due
90 days or more totaling $1,985,459 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 three,  consisting of
two  matured  loans  totaling  $64,888 and one current  loan  totaling  $99,545.
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 June 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 2004, we may initiate  foreclosure on delinquent
borrowers or borrowers who become  delinquent  during the year. 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
$1,353,901  at June 30,  2004.  These  provisions  for losses were made to guard
against collection losses. The total cumulative  provision for losses as of June
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 $706,722 and real estate held
for sale of $647,179 as of June 30, 2004, is considered to be reasonable.

                                       14
<PAGE>

     As of June 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 65.60%.  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.

     Since January,  2001 and continuing through June, 2004, the Federal Reserve
reduced  interest rates  significantly  by cutting the Federal Funds Rate to one
percent.  These  interest  rate cuts  significantly  lowered long and short term
interest rates. On July 1, 2004, the Federal Reserve increased the Federal Funds
Rate by one quarter percentage point (1/4 of one percent) to 1.25%. This was the
first Federal Funds Rate increase 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 1/4 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 the last six 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  0.25% over the
remainder of 2004. From the general partners' experience, we anticipate that the
annualized yield for 2004 will range between 6% and 7%.


PORTFOLIO REVIEW - For the six month period ended June 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 June 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 $5,424,371 (64.18%) and $4,684,545 (62.76%)
of the  outstanding  secured loan  portfolio.  The  remainder  of the  portfolio
represented   loans  secured  by  real  estate  located  primarily  in  Northern
California.

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

Single Family Residences (1-4 units)           $  3,118,197        36.90%      $  1,077,213         15.53%
Multiple family dwellings (5+ units)              1,011,594        11.97%         1,759,955         25.37%
Commercial                                        2,276,953        26.94%         1,943,095         28.01%
Land                                              2,044,575        24.19%         2,157,057         31.09%
                                              --------------   -----------    --------------    -----------

   Total                                       $  8,451,319       100.00%      $  6,937,320        100.00%
                                              ==============   ===========    ==============    ===========
</TABLE>


                                       15
<PAGE>

     As of June 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 June 30, 2004:

            PRIORITIES, ASSET CONCENTRATIONS AND MATURITIES OF LOANS
                               As of June 30, 2004
<TABLE>
<S>  <C>                                                            <C>             <C>              <C>
                                                                    # of
                                                                    Loans           Amount           Percent
                                                                 -----------    --------------    -------------

     1st Mortgages                                                       17       $ 4,098,362              48%
     2nd Mortgages                                                       11         3,677,957              44%
     3rd Mortgages                                                        1           675,000               8%
                                                                 ===========    ==============    =============
            Total                                                        29       $ 8,451,319             100%

     Maturing 12/31/04 and prior                                          7       $ 2,186,927              26%
     Maturing prior to 12/31/05                                           3         1,715,125              20%
     Maturing prior to 12/31/06                                           2           872,147              10%
     Maturing after 12/31/06                                             17         3,677,120              44%
                                                                 ===========    ==============    =============
            Total                                                        29       $ 8,451,319             100%

     Average Loan                                                                    $291,425               3%
     Largest Loan                                                                   1,000,000              12%
     Smallest Loan                                                                     11,659            0.14%
     Average Loan-to-Value based upon appraisal and senior
         liens at date of loan                                                                          65.60%
</TABLE>

     The  Partnership's  largest  loan in the  principal  amount  of  $1,000,000
represents 11.83% of outstanding secured loans and 10.33% 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 an
irrevocable decision to either take distributions of earnings monthly, quarterly
or annually or to compound  earnings in their capital  account.  For the six and
three  month  periods  ended  June  30,  2004 and  2003,  the  Partnership  made
distributions  of earnings to limited  partners of $95,247 and  $110,116 for the
six  month  periods,  and  $47,050  and  $52,958  for the three  month  periods,
respectively.  Distribution  of  earnings  to limited  partners,  which were not
withdrawn  for the six and three month periods ended June 30, 2004 and 2003 were
$180,509 and $196,884  for the six month  periods,  and $90,011 and $111,239 for
the three month  periods,  respectively.  As of June 30, 2004 and 2003,  limited
partners  electing to withdraw  earnings  represented 34% and 37% of the limited
partners' capital.

     The Partnership  also allows the limited partners to withdraw their capital
account  subject  to  certain   limitations  (see   liquidation   provisions  of
Partnership agreement).  For the six and three month periods ended June 30, 2004
and 2003,  $13,263 and $13,190 for the six month periods,  and $8,513 and $3,750
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 June 30, 2004 and 2003.


                                       16
<PAGE>

     Additionally,  for the six and three month  periods ended June 30, 2004 and
2003, $134,557 and $205,473 for the six month periods,  and $71,699 and $101,762
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.

     The Partnership  makes loans primarily in Northern  California.  As of June
30, 2004,  approximately  64.18%,  ($5,424,371) 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  recession  and  accompanying  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 6.3% as of June,  2004 as
compared  to an  unemployment  rate of 6.9% in  June,  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
0.3% in June,  2004 and for the first six months of this year,  consumer  prices
went up at an annual rate of 4.9%  compared with a rate of 1.9% for all of 2003.
Core prices have risen at a more  moderate  2.6% rate so far this year. In July,
2004,  the Federal  Reserve,  after more than three  years of lowering  its core
interest  rates,  raised  its core  interest  rate .25% to 1.25%.  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
June, 2004 for many tracked California real estate categories.  These included a
record $382,000 median sales price for a California  home, a record 14,184 house
and condominium sales in the nine county San Francisco Bay Area marketplace, and
a record  $545,000  median home sales price in the San Francisco Bay Area.  Home
affordability  in the San Francisco  Bay Area, as measured by the  affordability

                                       17
<PAGE>

index,  has  declined  from 32% to 22% as both real estate  prices and  interest
rates have risen in the year ended May, 2004. A lower number of households being
able  to  afford  homes  will  serve  to  mitigate  future  price  increases  in
residential real estate particularly if interest rates continue to rise. Freddie
Mac, which has said it expects  30-year  mortgages to range between 6% and 7% in
2004, said the housing market should remain buoyant for at least the rest of the
year. 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 improving.
Vacancy in office  buildings  declined to 18.2% in the second quarter of 2004 as
reported by Colliers International. Cushman Wakefield reported an office vacancy
of 20.5% in 2004 versus 22.9% in 2003. These reduced vacancies  continue a trend
which began in the third  quarter of 2003.  Improved  occupancies  in commercial
properties  will assist the owners of those  properties  in handling  their debt
payments.  Improved  occupancies  will help  stabilize  commercial  real  estate
values, which is a benefit to the partnership.

     For Partnership  loans outstanding as of June 30, 2004, the Partnership had
an average loan to value ratio of 65.60%, computed based on appraised values and
senior liens as of the date the loan was made.  This percentage does not account
for any  increases or  decreases in property  values since the date the loan was
made,  nor does it include any  reductions  in principal on senior  indebtedness
through amortization of payments after the loan was made. This low loan to value
ratio  will  assist  the  Partnership  in  weathering  loan   delinquencies  and
foreclosures should they eventuate.

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  June  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 June 30, 2004:

<TABLE>
<S>                              <C>            <C>          <C>         <C>          <C>      <C>              <C>
                                 2004           2005         2006        2007         2008     Thereafter       Total
                             --------------------------------------------------------------------------------------------
Interest earning assets:
Money market accounts         $   292,683                                                                   $   292,683
Average interest rate               0.59%                                                                         0.59%
Unsecured loans                                                       $  235,240                              $ 235,240
Loans secured by deeds
   of trust                   $ 2,186,927     1,715,125     872,147    1,246,754     198,867    2,231,499   $ 8,451,319
Average interest rate              10.85%         9.73%       8.72%        9.00%      10.50%        9.14%         9.67%
Interest bearing
   liabilities
Line of credit                $   550,000                                                                   $   550,000
Average interest rate               4.25%                                                                         4.25%
</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.

                                       18
<PAGE>

     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 (100% as of
June 30, 2004) 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.


ASSET QUALITY

     A consequence  of lending  activities is that  occasionally  losses will be
experienced  and that the  amount  of such  losses  will vary from time to time,
depending  upon the risk  characteristics  of the loan  portfolio as affected by
economic  conditions and the financial  experiences of borrowers.  Many of these
factors  are beyond the  control of the  general  partners.  There is no precise
method of predicting  specific  losses or amounts that ultimately may be charged
off on  particular  segments of the loan  portfolio,  especially in light of the
current economic environment.

     The conclusion that a loan may become  uncollectible,  in whole or in part,
is  a  matter  of  judgment.  Although  institutional  lenders  are  subject  to
requirements and regulations  that, among other things,  require them to perform
ongoing analyses of their portfolios,  loan-to-value ratios, reserves, etc., and
to obtain and maintain  current  information  regarding  their borrowers and the
securing properties, the Partnership is not subject to these regulations and has
not  adopted  certain of these  practices.  Rather,  the  general  partners,  in
connection  with  the  periodic  closing  of  the  accounting   records  of  the
Partnership and the preparation of the financial  statements,  determine whether
the allowance for loan losses is adequate to cover  potential loan losses of the
Partnership.  As of June 30, 2004 the general  partners have determined that the
allowance  for loan  losses of  $706,722  (7.80% of net  assets) is  adequate in
amount. Because of the number of variables involved, the magnitude of the swings
possible and the general  partners'  inability to control many of these factors,
actual results may and do sometimes differ  significantly from estimates made by
the general partners.  As of June 30, 2004, 4 loans were delinquent over 90 days
amounting to  $1,985,459.  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 $706,722 as of June 30,
2004 is considered  reasonable to offset any potential loss in loan  collections
in the future.


Part I - Item 4.    Controls and Procedures

     As of June 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.

                                       19
<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 six month  period ended June 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 ................................$39,762

   General Partners
      &/or Affiliates            Asset Management Fee for managing assets .............................$16,987

   General Partners              1% interest in profits ................................................$2,785
</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.......................................................$49,528

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 .................$4,983

Gymno Corporation, Inc.          Reconveyance Fee.........................................................$717
</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 . . . . . . . . . . . . . . . . . . . . . . . . . . . $9,416


                                       20
<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



                                       21
<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 16th day of August
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 16th day of August 2004.


      Signature                        Title                        Date


/S/ Michael R. Burwell
----------------------
Michael R. Burwell                General Partner              August 16, 2004


/S/ Michael R. Burwell
----------------------
Michael R. Burwell        President, Secretary/Treasurer       August 16, 2004
                          of Gymno Corporation (Principal
                             Financial and Accounting
                            Officer); Director of Gymno
                                    Corporation



                                       22
<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 June 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
August 16, 2004

                                       23
<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 June 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
August 16, 2004


                                       24
<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 June 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
August 16, 2004

                                       25
<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 June 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
August 16, 2004



                                       26