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, 1997
---------------------------- ----------------------- --------------------------
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)

                                 (415) 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, 1996 (audited) and
                         SEPTEMBER 30, 1997 (unaudited)

                                     ASSETS
<CAPTION>

                                                                           Sept 30, 1997
                                                                            (unaudited)             1996
                                                                           ---------------      --------------

<S>                                                                              <C>                 <C>     
Cash                                                                             $185,165            $755,089
                                                                           ---------------      --------------

Accounts receivable:
  Mortgage Investments, secured by deeds of trust                              14,097,623          12,036,293
  Accrued Interest on Mortgage Investments                                        373,069             264,495
  Advances on Mortgage Investments                                                 42,914              41,203
  Accounts receivables, unsecured                                                 107,817             337,242
                                                                           ---------------
                                                                                                --------------
                                                                               14,621,423          12,679,233
  Less allowance for doubtful accounts                                            264,720             228,647
                                                                           ---------------      --------------

                                                                               14,356,703          12,450,586
                                                                           ---------------
                                                                                                --------------

Real estate owned, acquired through foreclosure, held for sale                    856,577           1,468,345
Investment in partnership                                                         298,237             242,394
                                                                           ---------------      --------------

                                                                              $15,696,682         $14,916,414
                                                                           ===============      ==============

                                         LIABILITIES AND PARTNERS CAPITAL


Liabilities:
  Notes payable - bank line of credit                                          $2,591,816          $1,175,000
  Accounts payable and accrued expenses                                             1,845               1,472
  Deferred Interest                                                                     0             154,598
                                                                            --------------      --------------
                                                                                2,593,661           1,331,070
                                                                            --------------      --------------

Partners Capital
  Limited partners  capital, subject to redemption (Note 4E):
     Net of formation loan receivable of $357,794 and $429,163 for
       September 30, 1997, and December 31, 1996, respectively                 13,091,043          13,573,366

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

           Total Partners  Capital                                             13,103,021          13,585,344
                                                                            --------------      --------------

           Total Liabilities and Partners  Capital                            $15,696,682         $14,916,414
                                                                            ==============      ==============
<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, 1997
                              AND 1996 (unaudited)

                                            9 months ended    9 months ended    3 months ended     3 months ended
                                            Sept. 30, 1997    Sept. 30, 1996    Sept. 30, 1997     Sept. 30,  1996
                                               (unaudited)      (unaudited)       (unaudited)      (unaudited)
<CAPTION>

Revenues:
<S>                                            <C>                <C>                <C>               <C>     
    Interest on mortgage investments           $1,184,702         $1,180,937         $418,203          $402,259
    Interest on bank deposits                       5,266              4,461            1,673             1,610
    Late Charges                                    3,946             13,817            1,020             5,451
    Miscellaneous                                  12,122             20,779            3,166            14,614
                                              ------------      -------------     ------------     -------------

                                                1,206,036          1,219,994          424,062           423,934
                                              ------------      -------------     ------------     -------------
Expenses:
    Interest on note payable-bank                 142,691            127,066           59,877            38,407
    Mortgage Servicing Fees                        51,621             97,268           19,993            32,733
    Amortization of organization costs                  0                368                0                 0
    Clerical costs through Redwood Mortgage        28,621             30,758            9,285            10,464
    Professional Fees                              22,882             17,637            3,156               473
    Provision for doubtful accounts and
losses on
      real estate acquired through                324,027            285,591          122,705           127,930
foreclosure
    Printing, Supplies and Postage                  8,123                  0            2,643                 0
    Other                                           5,576             13,647            1,807             2,543
                                              ------------      -------------     ------------     -------------

                                                  583,541            572,335          219,466           212,550
                                              ------------      -------------     ------------     -------------

Net income                                       $622,495           $647,659         $204,596          $211,384
                                              ============      =============     ============     =============

Net income:  to General Partners (1%)              $6,225             $6,476           $2,046            $2,113
Net income:  to Limited Partners (99%)           $616,270           $641,183         $202,550          $209,271
                                              ============      =============     ============     =============
                                                 $622,495           $647,659         $204,596          $211,384
                                              ============      =============     ============     =============

Net income per $1000 invested by Limited
  Partners for entire period:
  - where income is reinvested and                 $45.27             $44.78           $14.87            $14.71
compounded
                                              ------------      -------------     ------------     -------------
  - where partner receives income in monthly
       distributions                               $44.39             $43.92           $14.80            $14.63
                                              ------------      -------------     ------------     -------------

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

                         REDWOOD MORTGAGE INVESTORS VII
                       (A California Limited Partnership)
                    STATEMENTS OF CHANGES IN PARTNERS CAPITAL
            FOR THE THREE YEARS ENDED DECEMBER 31, 1996 (audited) and
                NINE MONTHS ENDED SEPTEMBER 30, 1997 (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, 1993              $13,596,915          $(187,807)         $(693,471)       $12,715,637

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


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

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

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

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

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

Formation loan collections                           0                   0             48,447            48,447
Net income                                     616,270                   0                  0           616,270
Early withdrawal penalties                    (33,356)                   0             22,922          (10,434)
Partners  withdrawals                      (1,136,606)                   0                  0       (1,136,606)
                                         --------------     ---------------    ---------------    --------------

Balances at September 30, 1997             $13,448,837                  $0         $(357,794)       $13,091,043
                                         ==============     ===============    ===============    ==============
<FN>
See accompanying notes to financial statements
</FN>
</TABLE>
<PAGE>
<TABLE>

                         REDWOOD MORTGAGE INVESTORS VII
                       (A California Limited Partnership)
                    STATEMENTS OF CHANGES IN PARTNERS CAPITAL
            FOR THE THREE YEARS ENDED DECEMBER 31, 1996 (audited) and
                NINE MONTHS ENDED SEPTEMBER 30, 1997 (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, 1993                      $11,978               $(1,897)          $10,081         $12,725,718

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

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

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

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

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

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

Formation loan collections                               0                      0                0              48,447
Net income                                           6,225                      0            6,225             622,495
Early withdrawal penalties                               0                      0                0            (10,434)
Partners  withdrawals                              (6,225)                      0          (6,225)         (1,142,831)
                                         ------------------    -------------------     ------------    ----------------

Balances at September 30, 1997                     $11,978                     $0          $11,978         $13,103,021
                                         ==================    ===================     ============    ================
<FN>
See accompanying notes to financial statements
</FN>
</TABLE>
<PAGE>
<TABLE>

                         REDWOOD MORTGAGE INVESTORS VII
                       (A Califonira Limited Partnership)
                            STATEMENTS OF CASH FLOWS
                  FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997
<CAPTION>

                                                                               Sept 30, 1997        Sept 30, 1996
                                                                                (unaudited)          (unaudited)
                                                                              ----------------     ----------------
Cash flows from operating activities:
<S>                                                                                  <C>                  <C>     
  Net income                                                                         $622,495             $647,659
  Adjustments to reconcile net income to net cash provided by
      operating activities:
    Amortization of organization costs                                                      0                  368
    Provision for doubtful accounts and for losses on real estate held for            324,027              285,591
sale
    Early withdrawal penalty credited to income                                      (10,434)              (7,212)
    (Increase) decrease in accrued interest & advances                              (110,285)              879,720
    Increase (decrease) in accounts payable and accrued expenses                          373                    0
    (Increase) decrease in amount due from or to Redwood Mortgage                           0                    0
    Increase (decrease) in deferred interest on Mortgage Investments                (154,598)                    0
                                                                              ----------------     ----------------

      Net cash provided by operating activities                                       671,578            1,806,126
                                                                              ----------------     ----------------

Cash flows from investing activities:
    Principal collected on mortgage investments                                     4,145,994            8,206,061
    Mortgage Investments made                                                     (6,207,324)          (7,112,114)
    Additions to Real Estate held for sale                                          (131,707)            (480,921)
    Dispositions of real estate held for sale                                         684,946              379,163
    Investment in partnership                                                        (55,843)                (684)
                                                                              ----------------     ----------------

      Net cash provided by (used in) investing activities                         (1,563,934)              991,505
                                                                              ----------------     ----------------

Cash flows from financing activities:
  Net increase (decrease) in note payable-bank                                      1,416,816          (2,000,000)
  Formation loan collections                                                           48,447               65,916
  Partners withdrawals                                                            (1,142,831)            (649,905)
                                                                              ----------------     ----------------

      Net cash provided by (used in) financing activities                             322,432          (2,583,989)
                                                                              ----------------     ----------------
 
Net increase (decrease) in cash                                                     (569,924)              213,642

Cash - beginning of period                                                            755,089              514,840
                                                                              ----------------     ----------------

Cash - end of period                                                                 $185,165             $728,482
                                                                              ================     ================
<FN>
See accompanying notes to financial statements.
</FN>
</TABLE>
<PAGE>


                         REDWOOD MORTGAGE INVESTORS VII
                       (A California Limited Partnership)
                          NOTES TO FINANCIAL STATEMENTS
                         DECEMBER 31, 1996 (audited) and
                         SEPTEMBER 30, 1997 (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 ten 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, 1997, $556,575 including $98,400 in
early withdrawal penalties,  had been repaid leaving a balance of $357,794.  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, 1996 (audited) and
                         SEPTEMBER 30, 1997 (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 loan is categorized as impaired, interest is no longer accrued thereon.

B. Management Estimates

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

C. Mortgage Investments, Secured by Deeds of Trust

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

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

     At September 30, 1997, December 31, 1996, 1995 and 1994,  reductions in the
cost of loans  categorized  as  impaired  by the  Partnership  totalled  $9,595,
$9,595,  $0  and  $10,000  respectively.  The  reduction  in  stated  value  was
accomplished by increasing the allowance for doubtful accounts.

     As presented in Note 10 to the  financial  statements  as of September  30,
1997, the average mortgage investment to appraised value of security at the time
the loans were  consummated  was  62.73%.  When a loan is valued for  impairment
purposes, an updating is made in the valuation of collateral security.  However,
such a low loan to value ratio tends to minimize reductions for impairment.

D. Cash and Cash Equivalents

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

E. Real Estate Owned, Held for Sale

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


                         REDWOOD MORTGAGE INVESTORS VII
                       (A California Limited Partnership)
                          NOTES TO FINANCIAL STATEMENTS
                         DECEMBER 31, 1996 (audited) and
                         SEPTEMBER 30, 1997 (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, 1997, December 31, 1996 and 1995:
<TABLE>

                                                         Sept, 30,                   December 31,
                                                       ---------------     ---------------------------------
                                                            1997               1996               1995
                                                       ---------------     -------------      --------------

<S>                                                        <C>               <C>                 <C>       
Costs of properties                                        $1,066,280        $1,655,786          $1,410,571
Reduction in value                                            209,703           187,441              62,574
                                                       ---------------
                                                                           -------------      --------------

Fair value reflected in financial statements                 $856,577        $1,468,345          $1,347,997
                                                       ===============     =============      ==============
</TABLE>

     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)

     The  Partnership  accounts  for  its  investment  in a  partnership  as  an
investment  in real estate,  which is at the lower of costs or fair value,  less
estimated  costs to sell.  At September 30, 1997,  cost is considered  less than
fair value and the investment is stated at cost in the financial statements.

G. Income Taxes

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

H. Organization and Syndication Costs

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

<PAGE>

                         REDWOOD MORTGAGE INVESTORS VII
                       (A California Limited Partnership)
                          NOTES TO FINANCIAL STATEMENTS
                         DECEMBER 31, 1996 (audited) and
                         SEPTEMBER 30, 1997 (unaudited)

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, 1997, December 31, 1996 and 1995 was as follows:
<TABLE>

                                                         Sept, 30,                   December 31,
                                                       ---------------     ---------------------------------
                                                            1997               1996               1995
                                                       ---------------     -------------      --------------

<S>                                                            <C>               <C>                     <C>
Impaired mortgage investments                                  $9,595            $9,595                  $0
Unspecified mortgage investments                              163,839            19,052              50,000
Accounts receivable, unsecured                                 91,286           200,000             150,000
                                                       ---------------     -------------      --------------
                                                             $264,720          $228,647            $200,000
                                                       ===============     =============      ==============
</TABLE>

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.

K. Reclassifications and Changes in Presentation

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

NOTE 3 - GENERAL PARTNERS AND RELATED PARTIES

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

A. Mortgage Brokerage Commissions

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

                         REDWOOD MORTGAGE INVESTORS VII
                       (A California Limited Partnership)
                          NOTES TO FINANCIAL STATEMENTS
                         DECEMBER 31, 1996 (audited) and
                         SEPTEMBER 30, 1997 (unaudited)

B. Mortgage Servicing Fees

     Monthly  mortgage  servicing  fees of up to 1/8 of 1% (1.5%  annual) of the
unpaid  principal,  or such lesser amount as is reasonable  and customary in the
geographic area where the property securing the Mortgage  Investment is located.
Mortgage  servicing fees of $51,621,  $97,267,  $33,394 and $0 were incurred for
nine months period ended  September 30, 1997, and for years 1996, 1995 and 1994,
respectively.

C. Asset Management Fee

     The General Partners  receive a monthly fee for managing the  Partnerships
Mortgage  Investment  portfolio and  operations  equal to 1/32 of 1% of the net
asset value (3/8 of 1% annual).  Management fees of $0, $0, $0 and $10,008 were
incurred for nine months period ended  September  30, 1997,  and for years 1996,
1995 and 1994, respectively.

D. Other Fees

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

E. Income and Losses

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

     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.

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.

<PAGE>

                         REDWOOD MORTGAGE INVESTORS VII
                       (A California Limited Partnership)
                          NOTES TO FINANCIAL STATEMENTS
                         DECEMBER 31, 1996 (audited) and
                         SEPTEMBER 30, 1997 (unaudited)

     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.

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

     The Partnership will not establish a reserve from which to fund withdrawals
and,  accordingly,  the  Partnerships  capacity  to return a Limited  Partners
capital account is restricted to the availability of Partnership cash flow.
<PAGE>

                         REDWOOD MORTGAGE INVESTORS VII
                       (A California Limited Partnership)
                          NOTES TO FINANCIAL STATEMENTS
                         DECEMBER 31, 1996 (audited) and
                         SEPTEMBER 30, 1997 (unaudited)

F. Guaranteed Interest Rate For Offering Period

     During the period commencing with the day a Limited Partner was admitted to
the  Partnership  and ending 3 months after the offering  termination  date, the
General  partners  guaranteed  an  interest  rate equal to the greater of actual
earnings from mortgage operations or 2% above The Weighted Average cost of Funds
Index for the Eleventh  District Savings  Institutions  (Savings & Loan & Thrift
Institutions)  as  computed  by the  Federal  Home  Loan  Bank of San  Francisco
monthly, up to a maximum interest rate of 12%. The guarantee amounted to $12,855
and $5,195 in 1990 and 1991, respectively.  In 1992 and 1993, actual realization
exceeded the guaranteed  amount each month.  None  thereafter was subject to the
guarantee. This guarantee is now no longer applicable.

NOTE 5 - INVESTMENT IN PARTNERSHIP

     The Partnerships  interest in land, acquired through foreclosure,  located
in East Palo Alto with costs  totalling  $298,237 has been invested with that of
two other Partnerships (total cost to date,  primarily land, of $1,258,649) in a
partnership  which is in the  process of  obtaining  approval  for  constructing
approximately 63 single family homes for sale.  Redwood Mortgage Investors V, VI
and VII have first priority on return of investment  plus interest  thereon,  in
addition to a share of profits realized.

NOTE 6 - LEGAL PROCEEDINGS

     The  Partnership  is not a defendant in any legal actions.  However,  legal
actions against  borrowers and other involved parties have been initiated by the
Partnership  to help  assure  payments  against  unsecured  accounts  receivable
totalling $107,817 at September 30, 1997.

     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  December  31,  1995,  1996  and  September  30,  1997,  were
$2,000,000,  $1,175,000  and $2,591,816  respectively,  and the interest rate at
September 30, 1997 was 9.00%% (8.50% prime + .50%).

NOTE 8 - INCOME TAXES

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

                                                          Sept, 30,                    December 31,
                                                        ---------------     -----------------------------------
                                                             1997               1996                 1995
                                                        ---------------     --------------      ---------------

<S>                                                        <C>                <C>                  <C>        
Net assets - Partners  Capital per financial               $13,103,021        $13,585,344          $13,697,234
statements

Formation loan receivable                                      357,794            429,163              517,051
Allowance for doubtful accounts                                264,720            228,647              200,000
                                                                            --------------      ---------------
                                                        ===============
Net assets tax basis                                       $13,725,535        $14,243,154          $14,414,285
                                                        ===============     ==============      ===============
</TABLE>
<PAGE>

                         REDWOOD MORTGAGE INVESTORS VII
                       (A California Limited Partnership)
                          NOTES TO FINANCIAL STATEMENTS
                         DECEMBER 31, 1996 (audited) and
                         SEPTEMBER 30, 1997 (unaudited)

     In 1996,  approximately  69% of taxable  income was allocated to tax exempt
organizations i.e.,  retirement plans. Such plans do not have to file income tax
returns unless their  unrelated  business  income exceeds  $1,000.  Applicable
amounts become taxable when distribution is made to participants.

NOTE 9 - FAIR VALUE OF FINANCIAL INSTRUMENTS

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

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

     (b) The  Carrying  Value  of  Mortgage  Investments  - (see  note 2 (c)) is
$14,097,623.  The  September  30,  1997,  fair  value  of these  investments  of
$14,337,814  is estimated  based upon  projected  cash flows  discounted  at the
estimated  current  interest  rates at which  similar  loans would be made.  The
applicable  amount of the  allowance  for doubtful  accounts  along with accrued
interest and advances  related  thereto  should also be considered in evaluating
the fair value versus the carrying value.

NOTE 10 - ASSET CONCENTRATIONS AND CHARACTERISTICS

     The  Mortgage  Investments  are  secured  by  recorded  deeds of trust.  At
September  30, 1997,  there were 66 Mortgage  Investments  outstanding  with the
following characteristics:

Number of Mortgage Investments outstanding                                66
Total Mortgage Investments outstanding                           $14,097,623

Average Mortgage Investment outstanding                             $213,600
Average Mortgage Investment as percent of total                         1.52%
Average Mortgage Investment as percent of Partners Capital              1.63%

Largest Mortgage Investment outstanding                           $1,400,000
Largest Mortgage Investment as percent of total                         9.93%
Largest Mortgage Investment as percent of Partners Capital             10.68%

Number of counties where security is located(all California)              15

Largest percentage of Mortgage Investments in one county                21.00%
Average Mortgage Investment to appraised value of security at time
 loan was consummated                                                   62.73%

Number of Mortgage Investments in foreclosure                               3

<PAGE>

                         REDWOOD MORTGAGE INVESTORS VII
                       (A California Limited Partnership)
                          NOTES TO FINANCIAL STATEMENTS
                         DECEMBER 31, 1996 (audited) and
                         SEPTEMBER 30, 1997 (unaudited)

     The following categories of mortgage investments are pertinent at September
30, 1997, December 31, 1996 and 1995:

<TABLE>
                                                         Sept. 30,                      December 31,
                                                      ----------------      -------------------------------------
                                                           1997                  1996                  1995
                                                      ----------------      ---------------       ---------------

<S>                                                        <C>                  <C>                   <C>       
First Trust Deeds                                          $6,153,820           $4,199,552            $3,922,120
Second Trust Deeds                                          7,022,857            6,913,853             7,377,189
Third Trust Deeds                                             720,945              722,887               896,188
Fourth Trust Deeds                                            200,001              200,001               187,144
                                                      ----------------      ---------------       ---------------
  Total mortgage investments                               14,097,623           12,036,293            12,382,641
Prior liens due other lenders                              21,487,463           22,069,554            30,575,850
                                                      ----------------      ---------------       ---------------
  Total debt                                              $35,585,086          $34,105,847           $42,958,491
                                                      ================      ===============       ===============

Appraised property value at time of loan                  $56,723,074          $51,863,991           $68,888,224
                                                      ================      ===============       ===============

Total investments as a percent of appraisals                   62.73%               65.76%                62.36%
                                                      ================      ===============       ===============

Investments by Type of Property

Owner occupied homes                                       $1,220,817           $1,742,767            $2,621,800
Non-Owner occupied homes                                      968,493            1,112,274               651,528
Apartments                                                  1,961,990            1,325,872             1,828,877
Commercial                                                  9,946,323            7,855,380             7,280,436
                                                      ================      ===============       ===============
                                                          $14,097,623          $12,036,293           $12,382,641
                                                      ================      ===============       ===============
</TABLE>

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

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

                            1997                    $2,234,127
                            1998                     2,581,163
                            1999                     2,339,825
                            2000                     1,508,571
                            2001                     1,093,216
                         Thereafter                  4,340,721
                                                    ===========
                                                   $14,097,623
                                                    ===========

     The scheduled maturities for 1997 include approximately $1,744,999 in loans
which are past maturity at September 30, 1997. Interest payment on most of these
loans are current.  $841,895 of those loans were  categorized as delinquent over
90 days.

     Three loans with principal  outstanding  of $841,895 had interest  payments
overdue in excess of 90 days. Two loans had impaired provisions totalling $9,595
at September 30, 1997.

     The cash balance at September  30, 1997 of $185,165 was in one bank with an
interest  bearing  balance  totalling  $173,171.   The  balances  exceeded  FDIC
insurance limits (up to $100,000 per bank) by $85,165.
<PAGE>

                         REDWOOD MORTGAGE INVESTORS VII
                       (A California Limited Partnership)
                          NOTES TO FINANCIAL STATEMENTS
                         DECEMBER 31, 1996 (audited) and
                         SEPTEMBER 30, 1997 (unaudited)


NOTE 11 - CHANGE IN PRESENTATION

     The formation loan  receivable from Redwood  Mortgage,  an affiliate of the
General  Partners,  has been  categorized  as a reduction  in Limited  Partners
Capital,  the source of the funds.  It was previously  reflected as an asset. As
payments are received,  or early withdrawal  penalties  realized,  the formation
loan  balance  will be reduced and restored to Limited  Partners  Capital.  The
total of the formation loan  outstanding was $357,794,  $429,163 and $517,051 at
September 30, 1997, December 31, 1996 and 1995, respectively.
<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, 1997, Partners Capital totaled $13,103,021.

     The Partnership began funding Mortgage Investments on December 27, 1989 and
as of September  30, 1997 had credited the Partners  accounts  with income at an
average annualized (compounded) yield of 8.14%.

     Currently,  mortgage  interest rates are lower than those  prevalent at the
inception of the Partnership.  New Mortgage  Investments are being originated at
these lower  interest  rates.  The result is a reduction  of the average  return
across the entire  portfolio held by the  Partnership.  In the future,  interest
rates likely will change from their current levels.  The General Partners cannot
at this time predict at what levels  interest  rates will be in the future.  The
General  Partners  believe the rates charged by the Partnership to its borrowers
will not change  significantly  in the  immediate  future.  Based upon the rates
payable in connection with the existing  Mortgage  Investments,  the current and
anticipated interest rates to be charged by the Partnership, and current reserve
requirements,  the General  Partners  anticipate that the annualized  yield next
year will range only slightly higher from its current rate.

     The  Partnership has a line of credit with a commercial bank secured by its
Mortgage  Investments to a limit of $3,000,000,  at a variable interest rate set
at one half percent above the prime rate. Currently, it has borrowed $2,591,816.
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,  1997,  the  Partnership  is
current  with  its  interest  payments  on the  line of  credit.  In  1994,  the
Partnership incurred $135,790 of interest on note payables. The interest rate on
the line of credit was Prime + 3/4% and the  Partnership  was able to maintain a
positive  spread between the cost of borrowing the funds and interest  earned on
lending the funds.  In 1995, the  Partnership  incurred  $163,361 of interest on
note payables  reflecting a small increase in the overall average credit balance
outstanding. The Partnership still maintained a positive spread between the cost
of borrowing  the funds and the interest  earned in lending the funds.  In 1996,
interest payments  decreased to $127,454  reflecting the  Partnerships  overall
smaller average  outstanding credit line balance due primarily to a large number
of Mortgage Investment payoffs.  For the nine months through September 30, 1997,
interest paid was $142,691  reflecting  an overall  greater  utilization  of the
credit line from the previous three years.

     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  years.
Professional services were higher in 1993 and into 1994 as a result of a lawsuit
initiated  to collect  an  outstanding  debt.  The debt was  collected  in 1994.
Borrower  foreclosures,  as set forth under Results of Operations,  are a normal
aspect of partnership  operations and the General Partners  anticipate that they
will not have a material effect on liquidity. Cash is constantly being generated
from interest earnings,  late charges,  pre-payment  penalties,  amortization of
Mortgage  Investments  and  pay-off  on  notes.  Currently,  cash  flow  exceeds
Partnership  expenses and earnings payout  requirements.  As Mortgage Investment
opportunities become available,  excess cash and available funds are invested in
new Mortgage Investments.

     The General Partners  regularly review the Mortgage  Investment  portfolio,
examining the status of delinquencies,  the underlying collateral securing these
properties,  the REO expenses and sales  activities,  borrowers payment records,
etc.  Data on the local real estate market and on the national and local economy
are  studied.  Based upon this  information  and other data,  loss  reserves are
increased  or  decreased.  Because  of the  number of  variables  involved,  the
magnitude of the possible swings and the General  Partners  inability to control
many of these factors,  actual results may and do sometimes differ significantly
from estimates made by the General  Partners.  Management  provided $335,955 and
$306,779 as  provision  for doubtful  accounts for the years ended  December 31,
1994 and December 31, 1995. The decrease in the provision  reflects the decrease
in the  amount  of REO,  unsecured  receivables  and the  decreasing  levels  of
delinquency within the portfolio.  Additionally,  the General Partners felt that
the bottom of the real estate  cycle had been  reached,  reflecting a decreasing
need to set aside reserves for continuously  declining real estate values as had
been the case in the early 1990s in the California real estate market.
<PAGE>

     The Northern  California  recession reached bottom in 1993. Since then, the
California  economy  has  been  improving,   slowly  at  first,  but  now,  more
vigorously.  A wide variety of indicators suggest that the economy in California
is strong in 1997,  and the State is well -  positioned  for fast  growth.  This
improvement is reflective in increasing property values, in job growth, personal
income  growth,  etc.,  which all translates  into more loan activity,  which of
course, is healthy for the Partnerships lending activity.

     At the time of subscription to the  Partnership,  Limited  Partners 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 and nine months period to September
30, 1997, the Partnership  made  distributions  of earnings to Limited  Partners
after  allocation  of  syndication  costs of,  $262,450,  $327,887  and $284,956
respectively.  Distribution of Earnings to Limited  Partners after allocation of
syndication  costs for the years ended December 31, 1995,  December 31, 1996 and
nine months  period ended  September  30,  1997,  to Limited  Partners  capital
accounts and not withdrawn was $640,390, $522,621, and $331,314 respectively. As
of December 31, 1995, December 31, 1996 and September 30, 1997, Limited Partners
electing to withdraw earnings represented 36.00%,  44.00% and 53% of the Limited
Partners outstanding capital accounts.

     The Partnership  also allows the Limited Partners to withdraw their capital
account  subject  to  certain   limitations  (see   liquidation   provisions  of
Partnership  Agreement).  For the years ended  December 31,  1995,  December 31,
1996,  and nine months to September  30, 1997,  $106,901,  $412,798 and $423,351
were  liquidated  subject  to  the  10%  penalty  for  early  withdrawal.  These
withdrawals are within the normally  anticipated range that the General Partners
would expect in their  experience  in this and other  Partnerships.  The General
Partners  expect  that a small  percentage  of  Limited  Partners  will elect to
liquidate  their  capital  accounts  over one year with a 10%  early  withdrawal
penalty. In originally  conceiving the Partnership,  the General Partners wanted
to  provide  Limited  Partners  needing  their  capital  returned  a  degree  of
liquidity.  Generally,  Limited Partners electing to withdraw over one year need
to  liquidate  investment  to  raise  cash.  The  trend we are  experiencing  in
withdrawals  by  Limited  Partners  electing  a  one  year  liquidation  program
represents  a small  percentage  of Limited  Partner  capital as of December 31,
1995, December 31, 1996 and September 30, 1997,  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 and
nine  months  to  September  30,  1997,  $97,801,  $318,902  and  $461,656  were
liquidated  by Limited  Partners who have elected a  liquidation  program over a
period of five  years or  longer.  Once the  initial  five year hold  period has
passed the General Partners expect to see an increase in liquidations due to the
ability of  Limited  Partners  to  withdraw  without  penalty.  This  ability to
withdraw  after  five  years by Limited  Partners  has the  effect of  providing
Limited Partner  liquidity  which the General  Partners then expect a portion of
the Limited Partners to avail themselves of. This has the anticipated  effect of
the partnership growing, primarily through reinvestment of earnings in years one
through five. The General  Partners expect to see increasing  numbers of Limited
Partner  withdrawals  in years five  through  eleven,  at which time the bulk of
those Limited  Partners who have sought  withdrawal  will have been  liquidated.
After  year  eleven,   the  gross  figures  generally  should  subside  and  the
Partnership capital again tends to increase.
<PAGE>


I.  COMPENSATION OF THE GENERAL PARTNERS AND AFFILIATES BY PARTNERSHIP

     The  following  compensation  has been  paid to the  General  Partners  and
Affiliates  for services  rendered  during the nine months ending  September 30,
1997. All such compensation is in compliance with the guidelines and limitations
set forth in the Prospectus:

ENTITY RECEIVING      DESCRIPTION OF COMPENSATION                      AMOUNT
COMPENSATION            and SERVICES RENDERED
----------------------------------------------------------------- -------------


Redwood Mortgage   Mortgage servicing fees for servicing 
                   Mortgage Investments                                $51,621

General Partners   Asset Management Fee for managing assets                 $0
 &/or Affiliates

General Partners   1% interest in profits, losses and distributions
                   of cash available for distribution                   $6,225

     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  Investment paid by the borrower
                   and not by the Partnership.                         $278,636

Redwood Mortgage   Processing  and Escrow  Fees for  services  in  connection
                   with notary,  document preparation,  credit investigation,
                   and escrow  fees  payable by the  borrower  and not by the
                   Partnership                                           $4,908


     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.
<PAGE>

         MORTGAGE INVESTMENT PORTFOLIO SUMMARY AS OF SEPTEMBER 30, 1997

                                              Partnership Highlights

Mortgage Investment to Value Ratios

First Trust Deeds                                              $6,153,820.20
Appraised Value of Properties *                                13,327,913.00
   Total Investment as a % of Appraisal                               46.17%

First Trust Deed Mortgage Investments                           6,153,820.20
Second Trust Deed Mortgage Investments                          7,022,856.77
Third Trust Deed Mortgage Investments                             720,945.11
Fourth Trust Deed Mortgage Investments  **                        200,001.20
                                                            -----------------
                                                              $14,097,623.28

First Trust Deeds due other Lenders                            20,365,203.00
Second Trust Deeds due other Lenders                              979,402.00
Third Trust Deeds due other Lenders                               142,858.00
                                                            -----------------

Total Debt                                                    $35,585,086.28

   Appraised Property Value *                                  56,723,074.00
   Total Investment as a % of Appraisal                               62.73%

Number of Mortgage Investments Outstanding                                66

Average Investment                                               $213,600.35
Average Investment as a % of Net Assets                                1.63%
Largest Investment Outstanding                                 $1,400,000.00
Largest Investment as a % of Net Assets                               10.68%

Loans as a Percentage of Total Mortgage Investments

First Trust Deed Mortgage Investments                                 43.65%
Second Trust Deed Mortgage Investments                                49.82%
Third Trust Deed Mortgage Investments                                  5.11%
Fourth Trust Deed Mortgage Investments                                 1.42%
                                                             ----------------
Total                                                                100.00%

Mortgage Investments by Type of
Property                               Amount                    Percent

Owner Occupied Homes                  $1,220,817.34                    8.66%
Non Owner Occupied Homes                 968,493.37                    6.87%
Apartments                             1,961,989.64                   13.92%
Commercial                             9,946,322.93                   70.55%
                                                             ----------------
                                  ------------------
Total                                $14,097,623.28                  100.00%

Statement of Conditions of Mortgage Investments
         Number of Mortgage Investments in Foreclosure                 3

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

<PAGE>


Diversification by County

County                                         Total Loans          Percent


Alameda                                      $2,960,083.12           21.00%
Santa Clara                                   2,495,411.23           17.70%
San Francisco                                 2,123,416.02           15.06%
Stanislaus                                    1,665,745.47           11.82%
San Mateo                                     1,314,969.73            9.33%
Contra Costa                                  1,289,095.68            9.14%
Solano                                          584,503.88            4.15%
Sonoma                                          370,045.84            2.62%
Monterey                                        357,134.44            2.53%
El Dorado                                       274,178.59            1.94%
Sacramento                                      264,487.53            1.88%
Santa Barbara                                   121,748.32            0.86%
Santa Cruz                                      103,882.60            0.74%
Ventura                                          91,000.00            0.65%
Shasta                                           81,920.83            0.58%
                                        -------------------      -----------

Total                                       $14,097,623.28          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 overall loan to value ratio on this loan
is 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, 1997

<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, 1997.


REDWOOD MORTGAGE INVESTORS VII


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


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


By:      Gymno Corporation, General Partner


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


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


     Pursuant to the  requirements of the Securities  Exchange Act of 1934, this
report has been signed below by the following person on behalf of the registrant
and in the capacity indicated on the 6th day of November, 1997.


Signature                       Title                                Date


/s/ D. Russell Burwell
-----------------------
D. Russell Burwell          General Partner                  November 6, 1997


/s/ Michael R. Burwell
-----------------------
Michael R. Burwell          General Partner                  November 6, 1997



/s/ D. Russell Burwell
-----------------------
D. Russell Burwell      President of Gymno Corporation,      November 6, 1997
                        (Principal Executive Officer);
                        Director of Gymno Corporation


/s/ Michael R. Burwell
-----------------------
Michael R. Burwell       Secretary/Treasurer of Gymno        November 6, 1997
                         Corporation (Principal Financial
                         and Accounting Officer);
                         Director of Gymno Corporation