FORM 10-Q
                        SECURITIES & EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

                   Quarterly Report Under Section 13 or 15 (d)
                     of the Securities Exchange Act of 1934


For Period Ended                             September 30, 1998
----------------------------------------------------- --------------------------
Commission file number                            33-30427
----------------------------------------------------- --------------------------

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

        California                                             94-3094928
-------------------------- -----------------------------------------------------
 (State or other jurisdiction of                               I.R.S. Employer
 incorporation of organization)                               Identification No.

              650 El Camino Real, Suite G, Redwood City, CA. 94063
--------------------------------------------------------------------------------
                     (address of principal executive office)

                                 (650) 365-5341
--------------------------------------------------------------------------------
              (Registrants 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  reports),  and (2) has been  subject to such
filing requirements for the past 90 days.

YES              XX                                       NO
 -----------------                                          --------------------

                APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
                   PROCEEDINGS DURING THE PRECEDING FIVE YEARS

     Indicate by check mark whether the  registrant  has filed all documents and
reports  required  to be filed by  Sections  12, 13 or 15 (d) of the  Securities
Exchange Act of 1934 subsequent to the  distribution of securities  under a plan
confirmed by a court.

YES                         NO                    NOT APPLICABLE              X
   -------------------        ------------------                  -------------

                      APPLICABLE ONLY TO CORPORATE ISSUERS

     Indicate the number of shares  outstanding  of each of the issuers class of
common stock, as of the latest date.


                                 NOT APPLICABLE
<PAGE>
<TABLE>



                                          REDWOOD MORTGAGE INVESTORS VII
                                        (A California Limited Partnership)
                                                  BALANCE SHEETS
                                          DECEMBER 31, 1997 (audited) and
                                          September 30, 1998 (unaudited)

                                                      ASSETS
<CAPTION>

                                                                         Sept 30, 1998          Dec 31, 1997
                                                                          (unaudited)            (audited)
                                                                         ---------------       ---------------

<S>                                                                            <C>                   <C>     
Cash                                                                           $281,170              $520,837
                                                                         ---------------       ---------------

Accounts receivable:
  Mortgage Investments, secured by deeds of trust                            14,416,793            13,449,741
  Accrued Interest on Mortgage Investments                                      180,926               427,952
  Advances on Mortgage Investments                                               38,426                33,154
  Accounts receivables, unsecured                                               251,597               252,422
                                                                         ---------------
                                                                                               ---------------
                                                                             14,887,742            14,163,269

  Less allowance for doubtful accounts                                          773,037               424,738
                                                                         ---------------       ---------------
                                                                             14,114,705            13,738,531
                                                                         ---------------       ---------------

Real estate owned, acquired through foreclosure, held for sale                  522,381               687,139
Investment in partnership                                                             0               346,017
                                                                         ---------------       ---------------

                                                                            $14,918,256           $15,292,524
                                                                         ===============       ===============

                                         LIABILITIES AND PARTNERS CAPITAL


Liabilities:
  Notes payable - bank line of credit                                          $2,662,662          $2,341,816
  Accounts payable and accrued expenses                                            20,629               1,845
  Deferred Interest                                                                     0              69,316
                                                                            --------------      --------------
                                                                                2,683,291           2,412,977
                                                                            --------------      --------------

Partners Capital
  Limited partners capital, subject to redemption (Note 4E):
     Net of formation loan receivable of $270,434 and $341,275 for
       1998, and 1997, respectively                                            12,222,987          12,867,569

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

           Total Partners Capital                                             12,234,965          12,879,547
                                                                            --------------      --------------

           Total Liabilities and Partners Capital                            $14,918,256         $15,292,524
                                                                            ==============      ==============
<FN>
See accompanying notes to financial statements.
</FN>
</TABLE>
<PAGE>

<TABLE>

                                          REDWOOD MORTGAGE INVESTORS VII
                                        (A California Limited Partnership)
                                               STATEMENTS OF INCOME
                              FOR THE NINE AND THREE MONTHS ENDED SEPTEMBER 30, 1998
                                               AND 1997 (unaudited)

<CAPTION>
                                            9 months ended    9 months ended    3 months ended   3 months ended       
                                             Sept 30, 1998    Sept 30, 1997     Sept 30, 1998     Sept 30, 1997
                                              (unaudited)      (unaudited)       (unaudited)      (unaudited)

Revenues:
<S>                                            <C>                <C>                <C>               <C>     
    Interest on Mortgage Investments           $1,178,911         $1,184,702         $401,928          $418,203
    Interest on bank deposits                       5,416              5,266            2,176             1,673
    Late Charges                                   12,675              3,946            5,298             1,020
    Miscellaneous                                   8,308             12,122            2,450             3,166
    Gain on sale of property                       70,805                  0                0                 0
                                              ------------      -------------     ------------     -------------

                                                1,276,115          1,206,036          411,852           424,062
                                              ------------      -------------     ------------     -------------
Expenses:
    Interest on note payable-bank                 126,343            142,691           38,267            59,877
    Mortgage servicing fee                        104,456             51,621           45,457            19,993
    Asset  management fees                         12,219                  0            4,000                 0
    Clerical costs through Redwood Mortgage        25,895             28,621            8,396             9,285
    Professional Fees                              18,900             22,882              550             3,156
    Provision for doubtful accounts and
losses on
      real estate acquired through                346,920            324,027           91,024           122,705
foreclosure
    Printing, Supplies and Postage                  8,620              8,123            2,349             2,643
    Other                                           6,040              5,576            1,632             1,807
                                              ------------      -------------     ------------     -------------

                                                  649,393            583,541          191,675           219,466
                                              ------------      -------------     ------------     -------------

Net income                                       $626,722           $622,495         $220,177          $204,596
                                              ============      =============     ============     =============
 
Net income:  to General Partners (1%)              $6,267             $6,225           $2,202            $2,046
Net income:  to Limited Partners (99%)           $620,455           $616,270         $217,975          $202,550
                                              ============      =============     ============     =============
                                                 $626,722           $622,495         $220,177          $204,596
                                              ============      =============     ============     =============

Net income per $1000 invested by Limited
  Partners for entire period:
  - where income is reinvested and                 $48.66             $45.27           $17.13            $14.87
compounded
                                              ------------      -------------     ------------     -------------
  - where partner receives income in monthly
       distributions                               $47.64             $44.39           $17.03            $14.80
                                              ------------      -------------     ------------     -------------

<FN>
See accompanying notes to Financial Statements
</FN>
</TABLE>

<PAGE>


<TABLE>
                                          REDWOOD MORTGAGE INVESTORS VII
                                        (A California Limited Partnership)
                                    STATEMENTS OF CHANGES IN PARTNERS CAPITAL
                             FOR THE THREE YEARS ENDED DECEMBER 31, 1997 (audited) AND
                               THE NINE MONTHS ENDED SEPTEMBER 30, 1998 (unaudited)



<CAPTION>
                                                                     PARTNERS CAPITAL
                                         ---------------------------------------------------------------------------
                                                                 LIMITED PARTNERS CAPITAL
                                         ---------------------------------------------------------------------------

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

<S>                                        <C>                   <C>               <C>              <C>        
Balances at December 31, 1994              $13,839,989           $(97,088)         $(604,939)       $13,137,962

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

Balances at December 31, 1995               14,216,032            (13,588)          (517,051)        13,685,393

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

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

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

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

Formation Loan collections                           0                   0             55,023            55,023
Net Income                                     620,455                   0                  0           620,455
Early withdrawal penalties                    (23,018)                   0             15,818           (7,200)
Partners withdrawals                      (1,312,860)                   0                  0       (1,312,860)
                                         --------------     ---------------    ---------------    --------------

Balances at September 30, 1998             $12,493,421                  $0         $(270,434)       $12,222,987
                                         ==============     ===============    ===============    ==============

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

<PAGE>
<TABLE>


                                          REDWOOD MORTGAGE INVESTORS VII
                                        (A California Limited Partnership)
                                    STATEMENTS OF CHANGES IN PARTNERS CAPITAL
                             FOR THE THREE YEARS ENDED DECEMBER 31, 1997 (audited) AND
                               THE NINE MONTHS ENDED SEPTEMBER 30, 1998 (unaudited)

<CAPTION>

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

<S>                                                <C>                     <C>             <C>             <C>        
Balances at December 31, 1994                      $11,978                 $(981)          $10,997         $13,148,959

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

Balances at December 31, 1995                       11,978                  (137)           11,841          13,697,234

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

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

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

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

Formation Loan collections                               0                      0                0              55,023
Net income                                           6,267                      0            6,267             626,722
Early withdrawal penalties                               0                      0                0             (7,200)
Partners withdrawals                               (6,267)                      0          (6,267)         (1,319,127)
                                         ------------------    -------------------     ------------    ----------------

Balances at September 30, 1998                     $11,978                     $0          $11,978         $12,234,965
                                         ==================    ===================     ============     ==============
<FN>
See accompanying notes to financial statements
</FN>
</TABLE>

<PAGE>
<TABLE>


                                          REDWOOD MORTGAGE INVESTORS VII
                                        (A California Limited Partnership)
                                             STATEMENTS OF CASH FLOWS
                         FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997 (unaudited)

<CAPTION>
                                                                           9 months ended         9 months ended
                                                                           Sept 30, 1998           Sept 30, 1997
Cash flows from operating activities:                                       (unaudited)             (unaudited)
                                                                          -----------------      ------------------
  Net income
<S>                                                                               <C>                     <C>     
  Adjustments to reconcile net income to net cash provided by                     $626,722                $622,495
      operating activities:
    Provision for doubtful accounts                                                346,920                 324,027
    Provision for losses on real estate held for sale                                    0                       0
    Early withdrawal penalty credited to income                                    (7,200)                (10,434)
    (Increase) decrease in accrued interest & advances                             241,754               (110,285)
    Increase (decrease) in accounts payable and accrued expenses                    18,784                     373
    Increase (decrease) in deferred interest on Mortgage Investments              (69,316)               (154,598)
                                                                          -----------------      ------------------

      Net cash provided by operating activities                                  1,157,664                 671,578
                                                                          -----------------      ------------------

Cash flows from investing activities:
    Principal collected on mortgage investments                                  4,422,118               4,145,994
    Mortgage Investments made                                                  (5,499,170)             (6,207,324)
    Additions to Real Estate held for sale                                        (33,865)               (131,707)
    Dispositions of real estate held for sale                                      310,002                 684,946
    Investment in partnership                                                      346,017                (55,843)
    Accounts receivable-unsecured                                                      825                       0
                                                                          -----------------      ------------------

      Net cash provided by (used in) investing activities                        (454,073)             (1,563,934)
                                                                          -----------------      ------------------

Cash flows from financing activities:
  Increase (decrease) in note payable-bank                                         320,846               1,416,816
  Formation loan collections                                                        55,023                  48,447
  Partners withdrawals                                                         (1,319,127)             (1,142,831)
                                                                          -----------------      ------------------

      Net cash provided by (used in) financing activities                       ( 943,258)                 322,432
                                                                          -----------------      ------------------

Net increase (decrease) in cash                                                  (239,667)               (569,924)

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

Cash - end of period                                                              $281,170                $185,165
                                                                          =================      ==================
<FN>
See accompanying notes to financial statements.
</FN>
</TABLE>

<PAGE>
                         REDWOOD MORTGAGE INVESTORS VII
                       (A California Limited Partnership)
                          NOTES TO FINANCIAL STATEMENTS
                         DECEMBER 31, 1997(audited) AND
                         SEPTEMBER 30, 1998 (unaudited)

NOTE 1 - ORGANIZATION AND GENERAL

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

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

A. Sales Commissions - Formation Loan

     Sales  commissions  ranging from 0% (Units sold by General Partners) to 10%
of the gross proceeds were paid by Redwood Mortgage, an affiliate of the General
Partners  that  arranges and services the Mortgage  Investments.  To finance the
sales commissions, the Partnership was authorized to loan to Redwood Mortgage an
amount not to exceed 8.3% of the gross proceeds provided that the Formation Loan
for the minimum  offering  period  could be 10% of the gross  proceeds  for that
period.  The Formation Loan is unsecured and is being repaid,  without interest,
in installments of principal, over a ten year period commencing January 1, 1992.
At  December  31,  1992,   Redwood  Mortgage  had  borrowed  $914,369  from  the
Partnership to cover sales commissions  relating to $11,998,359  limited partner
contributions  (7.62%).  Through September 30, 1998, $643,935 including $118,961
in early  withdrawal  penalties,  had been repaid leaving a balance of $270,434.
The Formation Loan, which is due from an affiliate of the General Partners, has
been deducted from Limited  Partners  capital in the balance sheet.  As amounts
are collected from Redwood Mortgage, the deduction from capital will be reduced.

B. Other Organizational and Offering Expenses

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

     Organization  costs of  $10,102  and  syndication  costs of  $415,692  were
incurred by the  Partnership.  The sum of organization  and  syndication  costs,
$425,794,  approximated 3.55% of the gross proceeds contributed by the Partners.
Both the  Organization  and  Syndication  Costs  have been fully  amortized  and
allocated to the Partners.
<PAGE>
                         REDWOOD MORTGAGE INVESTORS VII
                       (A California Limited Partnership)
                          NOTES TO FINANCIAL STATEMENTS
                         DECEMBER 31, 1997(audited) AND
                         SEPTEMBER 30, 1998 (unaudited)

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

A. Accrual Basis

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

B. Management Estimates

     In  preparing  the  financial  statements,  management  is required to make
estimates based on the information available that affect the reported amounts of
assets and  liabilities  as of the balance  sheet date and revenues and expenses
for the related periods.  Such estimates relate principally to the determination
of the  allowance  for doubtful  accounts,  including  the valuation of impaired
mortgage  investments,  and  the  valuation  of  real  estate  acquired  through
foreclosure. Actual results could differ significantly from these estimates.

C. Mortgage Investments, Secured by Deeds of Trust

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

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

     At September 30, 1998 and at December 31, 1997,  1996 and 1995,  reductions
in the cost of Mortgage  Investments  categorized as impaired by the Partnership
totalled $0, $0, $9,595, and $0 respectively.  The reduction in stated value was
accomplished by increasing the allowance for doubtful accounts.

     As presented in Note 10 to the  financial  statements  as of September  30,
1998, the average mortgage investment to appraised value of security at the time
the Mortgage Investments were consummated was 60.40%. When a Mortgage Investment
is valued for  impairment  purposes,  an  updating is made in the  valuation  of
collateral security.  However,  such a low loan to value ratio tends to minimize
reductions for impairment.

D. Cash and Cash Equivalents

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

E. Real Estate Owned, Held for Sale

     Real estate owned,  held for sale,  includes real estate  acquired  through
foreclosure,  and is  stated  at the  lower of the  recorded  investment  in the
property,  net of any senior  indebtedness,  or at the propertys estimated fair
value, less estimated costs to sell.
<PAGE>

                         REDWOOD MORTGAGE INVESTORS VII
                       (A California Limited Partnership)
                          NOTES TO FINANCIAL STATEMENTS
                         DECEMBER 31, 1997(audited) AND
                         SEPTEMBER 30, 1998 (unaudited)

     The following  schedule  reflects the costs of real estate acquired through
foreclosure and the recorded reductions to estimated fair values, less estimated
costs to sell as of September 30,1998, and December 31, 1997 and 1996:

                        Sept 30,            December 31,            December 31,
                           1998                  1997                  1996
                    ----------------      ----------------      ----------------

Costs of properties         $747,427              $906,499            $1,655,786
Reduction in value           225,046               219,360               187,441
                     ---------------      ----------------      ----------------

Fair value reflected 
in financial statements     $522,381              $687,139            $1,468,345
                    ================      ================      ================

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

F. Investment in Partnership (see note 5)

G. Income Taxes

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

H. Organization and Syndication Costs

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

I. Allowance for Doubtful Accounts

     Mortgage  Investments and the related accrued  interest,  fees and advances
are  analyzed  on a  continuous  basis  for  recoverability.  Delinquencies  are
identified and followed as part of the Mortgage  Investment  system. A provision
is made for doubtful  accounts to adjust the allowance for doubtful  accounts to
an amount  considered by management to be adequate,  with due  consideration  to
collateral value, to provide for unrecoverable  accounts  receivable,  including
impaired  mortgage  investments,   unspecified  mortgage  investments,   accrued
interest and advances on mortgage  investments,  and other  accounts  receivable
(unsecured).  The  composition  of the  allowance  for  doubtful  accounts as of
September 30, 1998, and December 31, 1997, and 1996 was as follows:
<PAGE>

                         REDWOOD MORTGAGE INVESTORS VII
                       (A California Limited Partnership)
                          NOTES TO FINANCIAL STATEMENTS
                         DECEMBER 31, 1997(audited) AND
                         SEPTEMBER 30, 1998 (unaudited)

                                Sept 30,       December 31,       December 31,
                                  1998             1997                1996
                              -----------     -------------     ---------------

Impaired Mortgage Investments          $0                $0               $9,595
Unspecified Mortgage Investments  573,037           284,738               19,052
Accounts receivable, unsecured    200,000           140,000              200,000
                              ===========     ==============         ===========
                                 $773,037           $424,738            $228,647
                              ===========     ==============         ===========

J. Net Income Per $1,000 Invested

     Amounts  reflected  in the  statements  of income as net  income per $1,000
invested by Limited Partners for the entire period are actual amounts  allocated
to Limited  Partners who have their  investment  throughout  the period and have
elected to either  leave their  earnings to compound or have  elected to receive
monthly  distributions of their net income.  Individual income is allocated each
month  based on the  Limited  partners  pro rata  share of  Partners  Capital.
Because the net income percentage varies from month to month, amounts per $1,000
will vary for those  individuals  who made or  withdrew  investments  during the
period,  or select other  options.  However,  the net income per $1,000  average
invested  has  approximated  those  reflected  for those whose  investments  and
options have remained constant.
<PAGE>
                         REDWOOD MORTGAGE INVESTORS VII
                       (A California Limited Partnership)
                          NOTES TO FINANCIAL STATEMENTS
                         DECEMBER 31, 1997(audited) AND
                         SEPTEMBER 30, 1998 (unaudited)


NOTE 3 - GENERAL PARTNERS AND RELATED PARTIES

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

A. Mortgage Brokerage Commissions

     Redwood Mortgage  receives Mortgage  Brokerage  Commissions for services in
connection with the review, selection, evaluation,  negotiation and extension of
Mortgage  Investments in an amount up to 12% of the principal through the period
ending 6 months after the termination date of the offering. Thereafter, Mortgage
Investment  brokerage  commissions  are limited to an amount not to exceed 4% of
the  total  Partnership  assets  per year.  The  Mortgage  Investment  brokerage
commissions  are  paid  by  the  borrowers,  and  thus,  not an  expense  of the
Partnership.

B. Mortgage Servicing Fees

     Redwood Mortgage also receives monthly mortgage servicing fees of up to 1/8
of 1% (1.5%  annual)  of the  unpaid  principal,  or such  lesser  amount  as is
reasonable and customary in the geographic area where the property  securing the
Mortgage  Investment is located.  Mortgage servicing fees of $104,456,  $83,559,
$97,267 and $33,394 were incurred for nine months through September 30, 1998 and
for years 1997, 1996 and 1995, respectively.

C. Asset Management Fee

     The General  Partners  receive a monthly fee for managing the  Partnerships
Mortgage  Investment  portfolio  and  operations  of up to 1/32 of 1% of the net
asset value (3/8 of 1% annual).  No management fees have been incurred for years
1997, 1996 and 1995,  respectively.  For nine months through September 30, 1998,
management fee of $12,219 was paid to the General Partners.

D. Other Fees

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

E. Income and Losses

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

     F.  Operating  Expenses The General  Partners or their  affiliate  (Redwood
Mortgage) are reimbursed by the Partnership for all operating  expenses actually
incurred by them on behalf of the  Partnership,  including  without  limitation,
out-of-pocket general and administration expenses of the Partnership, accounting
and audit fees,  legal fees and expenses,  postage and preparation of reports to
Limited  Partners.   Such  reimbursements  are  reflected  as  expenses  in  the
Statements of Income.
<PAGE>

                         REDWOOD MORTGAGE INVESTORS VII
                       (A California Limited Partnership)
                          NOTES TO FINANCIAL STATEMENTS
                         DECEMBER 31, 1997(audited) AND
                         SEPTEMBER 30, 1998 (unaudited)

G. General Partners Contributions

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

NOTE 4 - OTHER PARTNERSHIP PROVISIONS

A. Applicant Status

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

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

B. Term of the Partnership

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

C. Election to Receive Monthly, Quarterly or Annual Distributions

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

D. Profits and Losses

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

E. Liquidity, Capital Withdrawals and Early Withdrawals

     There  are  substantial   restrictions  on  transferability  of  Units  and
accordingly an investment in the Partnership is illiquid.  Limited Partners have
no right to  withdraw  from the  partnership  or to obtain  the  return of their
capital  account for at least one year from the date of  purchase  of Units.  In
order to provide a certain degree of liquidity to the Limited Partners after the
one-year  period,  Limited  Partners may  withdraw all or part of their  Capital
Accounts from the  Partnership in four quarterly  installments  beginning on the
last day of the calendar  quarter  following  the quarter in which the notice of
withdrawal is given,  subject to a 10% early withdrawal penalty. The 10% penalty
is applicable to the amount  withdrawn as stated in the Notice of Withdrawal and
will be deducted from the Capital  Account and the balance  distributed  in four
quarterly installments.  Withdrawal after the one-year holding period and before
the  five-year  holding  period will be permitted  only upon the terms set forth
above.
<PAGE>

                         REDWOOD MORTGAGE INVESTORS VII
                       (A California Limited Partnership)
                          NOTES TO FINANCIAL STATEMENTS
                         DECEMBER 31, 1997(audited) AND
                         SEPTEMBER 30, 1998 (unaudited)

     Limited  Partners  also have the right  after  five  years from the date of
purchase of the Units to withdraw from the partnership on an installment  basis,
generally  over a five year  period in twenty  (20)  quarterly  installments  or
longer. Once this five year period expires,  which had occurred for all Partners
by the end of 1997,  no penalty would be imposed if withdrawal is made in twenty
(20) quarterly installments or longer. Notwithstanding the five-year (or longer)
withdrawal  period, the General Partners will liquidate all or part of a Limited
Partners capital account in four quarterly  installments  beginning on the last
day of the  calendar  quarter  following  the  quarter  in which  the  notice of
withdrawal is given, subject to a 10% early withdrawal penalty applicable to any
sums  withdrawn  prior to the time  when  such sums  could  have been  withdrawn
pursuant to the five-year (or longer) withdrawal period.

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

F. Guaranteed Interest Rate For Offering Period

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

NOTE 5 - INVESTMENT IN PARTNERSHIP 

     The  Partnerships  interest  in land  located in East Palo Alto,  CA.,  was
acquired through foreclosure.  The Partnerships  interest was invested with that
of two other  Partnerships.  The Partnerships had been attempting to develop the
property into single family residences.  Significant  community  resistance,  as
well as environmental, and fish and wildlife concerns affected efforts to obtain
the required  approvals.  The  Partnership,  in resolving  disputes  which arose
during the course of the Partnerships  attempt to obtain entitlements to develop
the property,  entered into agreements on May 8, 1998 with  Rhone-Poulanc,  Inc.
These agreements,  among other things,  restrict the property to non-residential
uses, provide for appropriate indemnifications,  and include other consideration
including the payment of cash. The Partnership  still retains  liability for the
remediation of pesticide contamination effecting the property.  Investigation of
remediation  options are ongoing.  At this time management does not believe that
remediation of the pesticide contaminants will have a material adverse effect on
the financial condition of the Partnership.

NOTE 6 - LEGAL PROCEEDINGS

     The  Partnership  is not a defendant in any legal actions.  However,  legal
actions against  borrowers and other involved parties have been initiated by the
Partnership  to help assure  payments  against  secured and  unsecured  accounts
receivable totalling $251,597 at September 30, 1998.
<PAGE>
                         REDWOOD MORTGAGE INVESTORS VII
                       (A California Limited Partnership)
                          NOTES TO FINANCIAL STATEMENTS
                         DECEMBER 31, 1997(audited) AND
                         SEPTEMBER 30, 1998 (unaudited)

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

NOTE 7 - NOTE PAYABLE BANK - LINE OF CREDIT

     The  Partnership  has a  bank  line  of  credit  secured  by  its  Mortgage
Investment  portfolio  of up to  $3,000,000  at .50% over  prime.  The  balances
outstanding  as of September  30, 1998,  December 31, 1997 and December 31, 1996
were $2,662,662,  $2,341,816, and $1,175,000 respectively, and the interest rate
at September 30, 1998, was 9.00% (8.50% prime + .50%).  The  expiration  date of
the line of credit is December 31, 1998.

NOTE 8 - INCOME TAXES

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

                                       Sept 30         Dec. 31           Dec. 31
                                         1998            1997              1996
                                    -----------      -----------       ---------

Net assets - Partners Capital
per financial statements            $12,234,965      $12,879,547     $13,585,344
Formation Loan receivable               270,434          341,275         429,163
Allowance for doubtful accounts         773,037          424,738         228,647
                                    ============     ============     ==========
Net assets tax basis                $13,278,436      $13,645,560     $14,243,154
                                    ============     ============     ==========

     In 1997,  approximately  68% of taxable  income was allocated to tax exempt
organizations i.e.,  retirement plans. Such plans do not have to file income tax
returns unless their  unrelated  business  income  exceeds  $1,000.  Applicable
amounts become taxable when distribution is made to participants.

NOTE 9 - FAIR VALUE OF FINANCIAL INSTRUMENTS

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

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

     (b) The  Carrying  Value  of  Mortgage  Investments  - (see  note 2 (c)) is
$14,416,793.  The  September  30,  1998,  fair  value  of these  investments  of
$14,665,315  is estimated  based upon  projected  cash flows  discounted  at the
estimated current interest rates at which similar Mortgage  Investments would be
made.  The applicable  amount of the allowance for doubtful  accounts along with
accrued  interest and advances  related  thereto  should also be  considered  in
evaluating the fair value versus the carrying value.
<PAGE>
                         REDWOOD MORTGAGE INVESTORS VII
                       (A California Limited Partnership)
                          NOTES TO FINANCIAL STATEMENTS
                         DECEMBER 31, 1997(audited) AND
                         SEPTEMBER 30, 1998 (unaudited)

NOTE 10 - ASSET CONCENTRATIONS AND CHARACTERISTICS

     The  Mortgage  Investments  are  secured  by  recorded  deeds of trust.  At
September  30, 1998,  there were 58 Mortgage  Investments  outstanding  with the
following characteristics:

Number of Mortgage Investments outstanding                                   58
Total Mortgage Investments outstanding                              $14,416,793

Average Mortgage Investment outstanding                                $248,565
Average Mortgage Investment as percent of total                            1.72%
Average Mortgage Investment as percent of Partners Capital                 2.03%

Largest Mortgage Investment outstanding                              $1,050,000
Largest Mortgage Investment as percent of total                            7.28%
Largest Mortgage Investment as percent of Partners Capital                 8.58%

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

Largest percentage of Mortgage Investments in one county                  20.90%
Average Mortgage Investment to appraised value of security at
time Mortgage Investment was consummated                                  60.40%

Number of Mortgage Investments in foreclosure                                 1

     The following categories of mortgage investments are pertinent at September
30, 1998, and December 31, 1997, 1996:

                                     Sept 30        December 31     December 31
                                  -----------     -------------    ------------
                                      1998              1997            1996
                                  -----------      -------------   ------------

First Trust Deeds                  $8,703,777        $6,810,113      $4,199,552
Second Trust Deeds                  5,131,205         5,719,369       6,913,853
Third Trust Deeds                     381,810           720,258         722,887
Fourth Trust Deeds                    200,001           200,001         200,001
                                  -----------      -------------    -----------
  Total mortgage investments       14,416,793        13,449,741      12,036,293
Prior liens due other lenders      13,833,431        17,951,579      22,069,554
                                 ------------      -------------    -----------
         Total debt                28,250,224       $31,401,320     $34,105,847
                                 ============      =============    ===========

Appraised property value
at time of loan                   $46,772,98        $52,077,885     $51,863,991
                                 ============      =============    ===========

Total investments as a 
percent of appraisals                  60.40%             60.30%          65.76%
                                 ============      =============    ============

Investments by Type of Property
Owner occupied homes              $1,057,055         $1,104,742      $1,742,767
Non-Owner occupied homes           2,326,592          1,464,596       1,112,274
Apartments                           868,029          1,666,916       1,325,872
Commercial                        10,165,117          9,213,487       7,855,380
                                 ============      ==============   ============
                                 $14,416,793        $13,449,741     $12,036,293
                                 ============      ==============   ============
<PAGE>



                         REDWOOD MORTGAGE INVESTORS VII
                       (A California Limited Partnership)
                          NOTES TO FINANCIAL STATEMENTS
                         DECEMBER 31, 1997(audited) AND
                         SEPTEMBER 30, 1998 (unaudited)

     Scheduled maturity dates of mortgage  investments as of September 30, 1998,
are as follows:

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

                            1998                                      $1,831,572
                            1999                                       4,696,628
                            2000                                       2,956,756
                            2001                                       1,601,955
                            2002                                       1,319,271
                         Thereafter                                    2,010,611
                                                                ================
                                                                     $14,416,793
                                                                ================

     The scheduled  maturities for 1998 include  approximately  $869,290 in nine
mortgage  investments  which are past maturity at September  30, 1998.  Interest
payment  on most of  these  Mortgage  Investments  are  current.  None of  those
Mortgage  Investments  were categorized as delinquent over 90 days. Two Mortgage
Investments with principal outstanding of $169,483 had interest payments overdue
in excess of 90 days. Five Mortgage  Investments  with principal  outstanding of
$484,528 at September 30, 1998, had no interest accruals recorded thereon.

     The cash balance at September 30, 1998 of $281,170 was in two banks with an
interest  bearing  balance  totalling  $214,976.   The  balances  exceeded  FDIC
insurance  limits (up to  $100,000  per bank) by  $86,302.  One bank is the same
financial  institution  that has provided the  Partnership  with the  $3,000,000
limit line of credit. At September 30, 1998, draw down against this facility was
$2,662,662.
<PAGE>
            MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
                            AND RESULTS OF OPERATIONS

     On September 30, 1992, the Partnership  had sold  119,983.59  units and its
contributed  capital totaled  $11,998,359 of the approved  $12,000,000 issue, in
units of $100 each.  As of that date,  the  offering  was  formally  closed.  At
September 30, 1998, Partners Capital totaled $12,234,965.

     At September 30, 1998, the  Partnership  Mortgage  Investments  outstanding
totalled  $14,416,793,  an  increase  of  $1,766,504  from the end of the second
quarter  of  the  year.  Mortgage  Investments  increased  from  $13,449,741  to
$14,416,793  during nine  months  through  September  30,  1998,  an increase of
$967,052  chiefly due to the  ability of the General  Partners to reduce the net
amounts  invested  in real  estate  owned  (REO)  during  the  nine  months,  by
increasing  bank credit line  borrowing to  $2,662,662 as of September 30, 1998,
from $2,341,816 as of December 31, 1997, by reinvestment of earnings of $290,108
and investment of cash. The ability of the Partnership to invest in new Mortgage
Investments  was partially  offset by  withdrawals  of income and capital by the
Partners in the amount of $1,335,878.  Mortgage Investments  decreased slightly,
by $346,348,  during the year ended  December 31, 1996,  from  $12,382,641 as of
December 31,  1995,  to  $12,036,293  as of December  31,  1996.  This  Mortgage
Investment  reduction  was due  primarily to a reduced usage of the bank line of
credit. The Partnership began funding Mortgage Investments on December 27, 1989,
and as of September 30, 1998, had credited the Partners  accounts with income at
an average annualized (compounded) yield of 7.77%.

     Currently,  general mortgage  interest rates are lower than those prevalent
at  the  inception  of the  Partnership.  New  Mortgage  Investments  are  being
originated  at these lower  interest  rates.  The result is a  reduction  of the
average  return  across the entire  portfolio  held by the  Partnership.  In the
future, interest rates likely will change from their current levels. The General
Partners  cannot at this time predict at what levels  interest  rates will be in
the future. The General Partners believe the rates charged by the Partnership to
its  borrowers  will not change  significantly  in the immediate  future.  As of
September 30, 1998 the Partnership  Real Estate Owned account and the investment
in  Partnership  account  have been  reduced to a combined  balance of $522,381.
These accounts had combined  balances of $1,033,156 and $1,710,739 for the years
ended  December  31,  1997  and  1996,  respectively.  The  conversion  of these
non-earning  assets to income producing assets will generate  increased  income.
The overall effect of these  developments will allow the Partnership to increase
the annualized  yields paid by the Partnership in future  quarters.  The General
Partners anticipate that the annualized yield for the remaining three months and
the overall year 1998 will be higher than the previous years.

     The  Partnership has a line of credit with a commercial bank secured by its
Mortgage  Investments to a limit of $3,000,000,  at a variable interest rate set
at one half  percent  above the prime rate.  As of September  30,  1998,  it has
borrowed  $2,662,662.  This facility could increase as the  Partnership  capital
increases. This added source of funds helped in maximizing the Partnership yield
by  allowing  the  Partnership  to  minimize  the amount of funds in lower yield
investment  accounts when  appropriate  Mortgage  Investments  are not currently
available.  Since most of the Mortgage  Investments made by the Partnership bear
interest at a rate in excess of the rate payable to the bank which  extended the
line of credit, once the required principal and interest payments on the line of
credit are paid to the bank, the Mortgage  Investments  funded using the line of
credit  generate  revenue for the  Partnership.  As of September  30, 1998,  the
Partnership  is current  with its  interest  payments on the line of credit.  In
1994,  the  Partnership  incurred  $135,790 of interest  on note  payables.  The
interest  rate on the line of credit  was Prime + 3/4% (now .5% over  Prime) and
the  Partnership  was able to  maintain a positive  spread  between  the cost of
borrowing  the funds and  interest  earned on lending  the funds.  In 1995,  the
Partnership  incurred  $163,361 of interest on note payables  reflecting a small
increase in the overall  average credit  balance  outstanding.  The  Partnership
still  maintained a positive  spread between the cost of borrowing the funds and
the interest earned in lending the funds. In 1996,  interest payments  decreased
to $127,454  reflecting the  Partnerships  overall smaller average  outstanding
credit  line  balance due  primarily  to a large  number of Mortgage  Investment
payoffs.  For the year ended  December  31, 1997,  and nine months  period ended
September  30, 1998,  interest  paid was  $198,316  and  $126,343  respectively,
reflecting an overall  greater  average  utilization of the credit line from the
previous three years.

<PAGE>

     The  Partnerships  income and  expenses,  accruals and  delinquencies  are
within the normal range of the General Partners expectations,  based upon their
experience in managing  similar  partnerships  over the last  twenty-one  years.
Borrower  foreclosures,  as set forth under Results of Operations,  are a normal
aspect of Partnership  operations and the General Partners  anticipate that they
will not have a material  effect on liquidity.  As of September 30, 1998,  there
was one  property  in  foreclosure.  Cash is  constantly  being  generated  from
interest earnings, late charges, pre-payment penalties, amortization of Mortgage
Investments  and  pay-off on notes.  Currently,  cash flow  exceeds  Partnership
expenses and earnings payout requirements.  As Mortgage Investment opportunities
become  available,  excess cash and available funds are invested in new Mortgage
Investments.

     The General Partners  regularly review the Mortgage  Investment  portfolio,
examining the status of delinquencies,  the underlying collateral securing these
properties,  the REO expenses and sales  activities,  borrowers payment records,
etc.  Data on the local real estate market and on the national and local economy
are  studied.  Based upon this  information  and other data,  loss  reserves are
increased  or  decreased.  Because  of the  number of  variables  involved,  the
magnitude of the possible swings and the General  Partners  inability to control
many of these factors,  actual results may and do sometimes differ significantly
from  estimates  made by the General  Partners.  Management  provided  $306,779,
$419,437, $434,495 and $346,920 as provision for doubtful accounts for the years
ended December 31, 1995, 1996, 1997 and nine months through  September 30, 1998,
respectively.  The provision for doubtful account  increased by $112,658 in 1996
as the General  Partners  determined  that  additional  provision  for  doubtful
accounts should be made to cover  potential  losses in REO accounts or potential
losses on unsecured  receivables  and  unspecified  losses.  The  provision  for
doubtful account was increased by $15,058 in 1997, to $434,495 as the selling of
REO accumulated primarily in the California recession of the early to mid 1990s
netted less  proceeds  than  originally  anticipated  and the  General  Partners
further  refinement of anticipated sales proceeds on remaining REO,  collections
of unsecured receivables,  and additional provisions for unspecified losses. The
Northern California recession reached bottom in 1993. Since then, the California
economy has been  improving,  slowly at first,  but now, more  vigorously.  This
improvement is reflective in increasing property values, in job growth, personal
income growth,  etc.,  which all translates into an improved real estate market,
solidifying  real estate  values,  and an attractive  real estate lending market
place.

     The  Partnerships  interest  in land  located in East Palo  Alto,  Ca, was
acquired through foreclosure.  The Partnerships  interest is invested with that
of two other Partnerships. The Partnerships basis of $ 0, $346,017 and $242,394
for the period  ended  9/30/98,  and the years ended  December 31, 1997 and 1996
respectively,  has  been  invested  with  that of two  other  Partnerships.  The
Partnership had been  attempting to develop  property into an  approximately  63
units residential subdivision, (the Development). The proposed Development had
gained significant public awareness as a result of certain  environmental,  fish
and  wildlife,  density,  and other  concerns.  Incorporated  into the  proposed
Development  were various  mitigation  measures  which  included  remediation of
hazardous  material  existing on the property,  and  protection  of  potentially
affected  species due to the  proximity  of the  property  to the San  Francisco
Baylands.  These  issues  and others  sparked  significant  public  controversy.
Opposition against and support for the proposed Development existed. Among those
in opposition to the project was Rhone Poulanc,  Inc. which is responsible for a
nearby  hazardous  waste site.  Rhone Poulanc,  Inc. has been  identified as the
Responsible Party for the Arsenic  Contamination which affected a portion of the
property.  On May 8, 1998, the  Partnership,  in order to resolve disputes which
arose  during  the  course  of the  attempts  to  obtain  entitlements  for this
Development,  entered into agreements with Rhone-Poulanc,  Inc which among other
things,   restricted  the  property  to  non  residential  uses,   provided  for
appropriate  indemnification and included other considerations  including a cash
payment to the  Partnership.  The  Partnership  has  retained  ownership  of the
property,  which is subject to various deed  restrictions,  options and or first
rights of refusal.  The General  Partners  are pleased  with this outcome to the
residential  development  attempt.  The General  Partners may now explore  other
available options with respect to alternative uses for the property. In order to
pursue these options,  rezoning of the propertys  existing  residential  zoning
classification  will be  required.  The  Partnership  is  continuing  to explore
remediation  options  available to mitigate the pesticide  contamination,  which
affects the property.  This pesticide  contamination appears to be the result of
agricultural  operations  by  prior  owners,  and is  unrelated  to the  Arsenic
Contamination for which  Rhone-Poulanc,  Inc. remains  responsible.  The General
Partners  do not  believe  at  this  time  that  remediation  of  the  pesticide
contaminants  will have a material adverse effect on the financial  condition of
the Partnership.

<PAGE>

     At the time of subscription to the  Partnership,  Limited  Partners made an
irrevocable decision to either take distributions of earnings monthly, quarterly
or annually or to compound  earnings  in their  capital  account.  For the years
ended December 31, 1995,  December 31, 1996,  December 31, 1997, and nine months
ended  September 30, 1998, the  Partnership  made  distributions  of earnings to
Limited Partners after allocation of syndication  costs of, $262,450,  $327,887,
$399,379 and $330,347 respectively. Distribution of Earnings to Limited Partners
after  allocation of  syndication  costs for the years ended  December 31, 1995,
December 31, 1996,  December 31, 1997, and nine months ended  September 30, 1998
to Limited Partners capital accounts and not withdrawn was $640,390,  $522,621,
$419,231, and $290,108 respectively. As of December 31, 1995, December 31, 1996,
December 31, 1997, and September 30, 1998, Limited Partners electing to withdraw
earnings represented 36%, 44%, 53% and 54% 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 years ended  December 31,  1995,  December 31,
1996,  December 31, 1997, and nine months through September 30, 1998,  $106,901,
$412,798, $475,348 and $287,720 respectively, were liquidated subject to the 10%
penalty  for  early  withdrawal.  These  withdrawals  are  within  the  normally
anticipated  range that the General Partners would expect in their experience in
this and other partnerships. The General Partners expect that a small percentage
of Limited Partners will elect to liquidate their capital accounts over one year
with a 10% early withdrawal penalty.  In originally  conceiving the Partnership,
the General  Partners wanted to provide Limited  Partners  needing their capital
returned a degree of liquidity. Generally, Limited Partners electing to withdraw
over one  year  need to  liquidate  investment  to raise  cash.  The  trend  the
Partnership is  experiencing in withdrawals by Limited  Partners  electing a one
year  liquidation  program  represents  a small  percentage  of Limited  Partner
capital as of December 31, 1995,  December 31, 1996, December 31, 1997, and nine
months to  September  30,  1998,  respectively  and is  expected  by the General
Partners to commonly occur at these levels.

     Additionally,  for the years ended  December 31,  1995,  December 31, 1996,
December  31,  1997,  and nine  months  through  September  30,  1998,  $97,801,
$318,902,  $737,568  and  $717,811  respectively,  were  liquidated  by  Limited
Partners who have elected a  liquidation  program over a period of five years or
longer.  This ability to withdraw  after five years by Limited  Partners has the
effect of providing  Limited Partner  liquidity which the General  Partners then
expect a portion of the Limited  Partners to avail  themselves  of. This has the
anticipated effect of the Partnership growing, primarily through reinvestment of
earnings  in  years  one  through  five.  The  General  Partners  expect  to see
increasing numbers of Limited Partner  withdrawals in years five through eleven,
at which time the bulk of those Limited Partners who have sought withdrawal have
been  liquidated.  After year  eleven,  liquidation  generally  subsides and the
Partnership capital again tends to increase.

<TABLE>
     Actual  liquidation  of both  capital  and  earnings  from year five (1994)
through year eight (1997) and through  nine months ended  September  30, 1998 is
shown hereunder:

<CAPTION>
                                            Years ended December 31,

                          1994                   1995                  1996                  1997         Sept 30, 1998
                  -------------         --------------        --------------        --------------       ---------------
<S>                   <C>                     <C>                   <C>                   <C>                   <C>    
Earnings              $263,206                270,760               336,341               399,379               330,347
Capital              *$340,011                184,157               722,536             1,212,916             1,005,531
                  =============         ==============        ==============        ==============       ===============
Total                 $603,217               $454,917            $1,058,877            $1,612,295            $1,335,878
                  =============         ==============        ==============        ==============       ===============
<FN>
* These amounts represent gross of early withdrawal penalties.
</FN>
</TABLE>

     The Year 2,000 will be a challenge  for the entire  world,  with respect to
the  conversion  of  existing  computerized   operations.   The  Partnership  is
completing  an  assessment  of Year 2,000  hardware  and software  issues.  This
assessment is not yet fully complete. The Partnership relies on Redwood Mortgage
Corporation, an affiliate of the

<PAGE>

     Partnership,  and third  parties  to  provide  loan and  investor  services
effected by Year 2,000 computerized  operations.  Major services provided to the
Partnership  by these  companies  are loan  servicing,  accounting  and investor
services.  The vendors that supply the software for loan  servicing have already
confirmed compliance with Year 2,000 issues. Installation of accounting software
that is Year 2,000  compliant will begin after the 1998-year  ends. The investor
servicing  software Year 2,000  compliance is still under  assessment.  Existing
investor  servicing  software  maintenance  agreements provide for conversion to
Year  2,000  compliance  to  be  provided  by  the  vendor.  Additionally,   the
Partnership has contacted  several vendors that provide  investor  services as a
possible  alternative to continuing to provide  investors  services in house. It
would  appear that these  service  providers  would be more  expensive  than the
current in house systems but they do provide a back-up  alternative in the event
of our own  failure to fully  convert.  Hardware  utilized  by Redwood  Mortgage
Corporation, is currently being tested to insure that modifications necessary to
be made  prior to Year 2,000 can be  accomplished.  At this  juncture,  existing
hardware appears to be substantially compliant with Year 2,000 issues.

     The costs of updating  the various  software  systems  will be borne by the
various  companies  that supply the  Partnership  with services.  Therefore,  no
significant  capital outlays are  anticipated  and the Partnership  expects only
incidental costs of conversion for Year 2,000 issues.

     The Partnership is in the business of making Mortgage  Investments  secured
by real estate. The most important factor in making the Mortgage  Investments is
the value of the real estate  security.  Year 2000 issues have some potential to
effect  industries  and  businesses  located  in the  marketplaces  in which the
Partnership places its Mortgage  Investments.  This would only have an affect on
the Partnership if Year 2000 issues cause a significant downturn in the northern
California economy. In fact, Silicon Valley is located in our marketplace. There
may be significant  increased  demand for Silicon Valley type services and goods
as companies make ready for the Year 2,000 conversion.

     Although not fully developed if all accounting, loan servicing and investor
services  conversions  should  fail  the size  and  scope  of the  Partnerships
activities  are such that they could be handled at an equal or higher  cost on a
manual basis or outsourced to other  servicers  existing in the industry.  While
this would entail some initial set up costs,  these costs would likely not be so
significant as to have a material effect upon the Partnership.

<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,  pages 12-13, under the section Compensation of the General partners
and the Affiliates,  which is incorporated  by reference.  Such  compensation is
summarized below.

     The  following  compensation  has been  paid to the  General  Partners  and
Affiliates for services  rendered  during the nine months period ended September
30,  1998.  All such  compensation  is in  compliance  with the  guidelines  and
limitations set forth in the Prospectus.

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

I.  Redwood Mortgage       Mortgage Servicing Fee for servicing
                           Mortgage Investments                         $104,456

General Partners &/or
Affiliate                  Asset Management Fee for managing assets      $12,219
                          
General Partners           1% interest in profits                         $6,267
                          
     II. FEES PAID BY  BORROWERS  ON MORTGAGE  INVESTMENTS  PLACED BY  COMPANIES
RELATED TO THE GENERAL PARTNERS WITH THE PARTNERSHIP  (EXPENSES OF BORROWERS NOT
OF THE PARTNERSHIP)

Redwood Mortgage.          Mortgage  Brokerage  Commissions  for  services in
                           connection    with    the    review,    selection,
                           evaluation,  negotiation,  and  extension  of  the
                           Mortgage  Investments  paid by the  borrowers  and
                           not by the Partnership                       $151,752
                           

Redwood Mortgage           Processing   and  Escrow  Fees  for   services  in
                           connection  with  notary,   document  preparation,
                           credit  investigation,  and escrow fees payable by
                           the borrowers and not by the Partnership       $3,077
                           


     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.                                                     $25,895

<PAGE>
         MORTGAGE INVESTMENT PORTFOLIO SUMMARY AS OF SEPTEMBER 30, 1998

                             Partnership Highlights

Mortgage Investment to Value Ratios

First Trust Deeds                                              $8,703,776.80
Appraised Value of Properties *                                17,269,209.00
   Total Investment as a % of Appraisal                                50.40%

First Trust Deed Mortgage Investments                           8,703,776.80
Second Trust Deed Mortgage Investments                          5,131,204.89
Third Trust Deed Mortgage Investments                             381,810.22
Fourth Trust Deed Mortgage Investments  **                        200,001.20
                                                            -----------------
                                                              $14,416,793.11

First Trust Deeds due other Lenders                            12,605,645.00
Second Trust Deeds due other Lenders                            1,084,928.00
Third Trust Deeds due other Lenders                               142,858.00
                                                            -----------------

Total Debt                                                    $28,250,224.11

   Appraised Property Value *                                  46,772,985.00
   Total Investment as a % of Appraisal                                60.40%

Number of Mortgage Investments Outstanding                                58

Average Investment                                               $248,565.40
Average Investment as a % of Net Assets                                 2.03%
Largest Investment Outstanding                                     1,050,000
Largest Investment as a % of Net Assets                                 8.58%

Loans as a Percentage of Total Mortgage Investments

First Trust Deed Mortgage Investments                                  60.37%
Second Trust Deed Mortgage Investments                                 35.59%
Third Trust Deed Mortgage Investments                                   2.65%
Fourth Trust Deed Mortgage Investments                                  1.39%
                                                             ----------------
Total                                                                 100.00%

Mortgage Investments by Type of
Property                               Amount                    Percent

Owner Occupied Homes                  $1,057,055.34                     7.33%
Non Owner Occupied Homes               2,326,591.42                    16.14%
Apartments                               868,029.37                     6.02%
Commercial                            10,165,116.98                    70.51%
                                                             ----------------
                                  ------------------
Total                                $14,416,793.11                   100.00%
 
Statement of Conditions of Mortgage Investments
         Number of Mortgage Investments in Foreclosure                 1

     *Values  used are the  appraisal  values  utilized at the time the mortgage
investment was consummated.

<PAGE>

Diversification by County

County                                         Total Loans          Percent

San Francisco                                $3,012,383.30           20.90%
Stanislaus                                    2,439,082.26           16.92%
San Mateo                                     1,725,412.00           11.97%
Alameda                                       1,709,907.55           11.86%
Santa Clara                                   1,679,961.01           11.65%
Solano                                          994,224.00            6.90%
Contra Costa                                    853,096.98            5.92%
Monterey                                        702,761.76            4.88%
Marin                                           685,354.92            4.75%
Sonoma                                          174,759.45            1.21%
Sacramento                                      137,374.26            0.95%
Santa Cruz                                      130,256.66            0.90%
Ventura                                          91,000.00            0.63%
Shasta                                           81,218.96            0.56%
                                         ------------------      -----------

Total                                       $14,416,793.11          100.00%

     **  Redwood   Mortgage   Investors   VII,   together   with  other  Redwood
Partnerships,  holds a second  and a  fourth  trust  deed  against  the  secured
property. In addition, the principals behind the borrower corporation have given
personal  guarantees as  collateral.  The loan to value ratio at the issuance of
this loan was  76.52%.  Besides the  borrower  paying a fixed  interest  rate of
12.25%,  the  partnership  and other  lenders  will also be entitled to share in
profits generated by the corporation with respect to the secured  property.  The
affiliates of the Partnership had entered into previous loan  transactions  with
this borrower  which had been  concluded  successfully,  resulting in additional
revenue beyond interest payments for the affiliates involved.


<PAGE>



                                     PART 2
                                OTHER INFORMATION

         Item 1.           Legal Proceedings

                                    None, where the Partnership is a defendant.
                                    Please refer to Note 6 of Notes to 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

                                    Not Applicable

                           (b)      Form 8-K

                                    The registrant has not filed any reports on
                                    Form 8-K during the nine month period ending
                                    September 30, 1998

<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 12th day of
November, 1998.


REDWOOD MORTGAGE INVESTORS VII


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


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


By:      Gymno Corporation, General Partner


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


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


     Pursuant to the  requirements of the Securities  Exchange Act of 1934, this
report has been signed below by the following person on behalf of the registrant
and in the capacity indicated on the 12th day of November, 1998.


Signature                                  Title                     Date


/s/ D. Russell Burwell
-----------------------------
D. Russell Burwell                     General Partner         November 12, 1998
 

/s/ Michael R. Burwell
-----------------------------
Michael R. Burwell                     General Partner         November 12, 1998



/s/ D. Russell Burwell
-----------------------------
D. Russell Burwell                    President of Gymno       November 12, 1998
                                      Corporation, (Principal 
                                      Executive Officer);
                                      Director of Gymno 
                                      Corporation


/s/ Michael R. Burwell
----------------------------  
Michael R. Burwell                    Secretary/Treasurer of   November 12, 1998
                                      Gymno Corporation            
                                      (Principal Financial
                                      and Accounting Officer);
                                      Director of Gymno 
                                      Corporation


<PAGE>