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, 1996
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Commission file number           33-30427
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                         REDWOOD MORTGAGE INVESTORS VII
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             (exact name of registrant as specified in its charter)

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

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

                                 (415) 365-5341
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              (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>
                                    Part I

                                     Item 1

                         REDWOOD MORTGAGE INVESTORS VII
                       (A California Limited Partnership)
                                 Balance Sheets
                         December 31, 1995 (audited) and
                         September 30, 1996 (unaudited)

<CAPTION>
                                     ASSETS

                                                                                                    Sept. 30, 1996      Dec.31, 1995
                                                                                                     (unaudited)         (audited)
<S>                                                                                                  <C>                 <C>

Cash .......................................................................................         $   728,482         $   514,840
                                                                                                     -----------         -----------

Accounts Receivable:
    Mortgage investments, secured by deeds of trust ........................................          10,795,997          12,382,641
    Accrued interest on mortgage investments ...............................................             223,680             940,541
    Advances on mortgage investments .......................................................              19,748             110,874
    Other receivables - unsecured ..........................................................             306,467             378,200
                                                                                                     -----------         -----------
                                                                                                      11,345,892          13,812,256

    Less allowance for doubtful accounts ...................................................             226,122             200,000
                                                                                                     -----------         -----------
                                                                                                      11,119,770          13,612,256
                                                                                                     -----------         -----------

Real estate owned, acquired through foreclosure,
    at estimated net realizable value ......................................................           1,682,983           1,347,997

Investment in Partnership ..................................................................             223,929             223,245
Formation loan due from Redwood Home Loan Co. ..............................................             435,291             517,051
Organization costs, less accumulated amortization
    of $10,102 and $9,734 respectively .....................................................                0.00                 368
                                                                                                     -----------         -----------

                                                                                                     $14,190,455         $16,215,757
                                                                                                     ===========         ===========

                                         LIABILITIES AND PARTNERS CAPITAL

Liabilities:
    Note payable - bank line of credit .....................................................         $      0.00         $ 2,000,000
    Accounts payable and accrued expenses ..................................................               1,472               1,472
                                                                                                     -----------         -----------
                                                                                                           1,472           2,001,472

Partners capital ...........................................................................          14,188,983          14,214,285
                                                                                                     -----------         -----------

                                                                                                     $14,190,455         $16,215.757
                                                                                                     ===========         ===========
<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, 1996
                                               AND 1995 (unaudited)
<CAPTION>
                                                               9 months ended    9 months ended    3 months ended     3 months ended
                                                               Sept. 30, 1996    Sept. 30, 1995    Sept. 30, 1996     Sept. 30, 1995
                                                                 (unaudited)       (unaudited)       (unaudited)        (unaudited)
<S>                                                                 <C>                <C>                 <C>               <C>

Revenues:
    Interest on mortgage investmentss ......................        $1,083,669         1,026,759           369,526           322,819
    Interest on bank deposits ..............................             4,461             6,965             1,610             2,611
    Late Charges ...........................................            13,817             6,566             5,451             3,265
    Miscellaneous ..........................................            20,779             1,130            14,614               411
                                                                    ----------        ----------        ----------        ----------
                                                                     1,122,726         1,041,420           391,201           329,106
                                                                    ----------        ----------        ----------        ----------


Expenses:
    Interest on note payable - bank ........................           127,066           117,277            38,407            39,046
    General Partner management fees ........................              0.00              0.00              0.00              0.00
    Amortization of organization costs .....................               368             1,512              0.00               504
    Clerical costs through Redwood Home ....................            30,758            19,051            10,464             8,338
Loan Co. ...................................................
    Professional Fees ......................................            17,637            18,366               473             1,364
    Provision for  loss on real estate acquired
      through foreclosure and doubtful accounts.............           285,591           188,095           127,930            47,360
    Electronic Processing ..................................              0.00             2,280              0.00              0.00
    Other ..................................................            13,647            13,149             2,543             3,304
                                                                    ----------        ----------        ----------        ----------
                                                                       475,067           359,730           179,817            99,916
                                                                    ----------        ----------        ----------        ----------

Net income .................................................        $  647,659           681,690           211,384           229,190
                                                                    ==========        ==========        ==========        ==========

Net income:  to General Partners (1%) ......................        $    6,476             6,816             2,113             2,292
Net income:  to Limited Partners (99%) .....................           641,183           674,874           209,271           226,898
                                                                    ==========        ==========        ==========        ==========
                                                                       647,659           681,690           211,384           229,190
                                                                    ==========        ==========        ==========        ==========

Net income per $1000 invested by Limited
  Partners for entire period:
  - where income is reinvested and compounded...............        $    44.78        $    44.68        $    14.71        $    14.68
                                                                    ----------        ----------        ----------        ----------
  - where partner receives income in monthly
       distributions .......................................        $    43.92        $    43.82        $    14.63        $    14.60
                                                                    ----------        ----------        ----------        ----------

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

                                          REDWOOD MORTGAGE INVESTORS VII
                                        (A California Limited Partnership)
                                             STATEMENTS OF CASH FLOWS
                                     FOR NINE MONTHS ENDED SEPTEMBER 30, 1995
                                               AND 1996 (unaudited)
<CAPTION>
                                                                                             Sept. 30, 1996           Sept. 30, 1995
                                                                                               (unaudited)              (unaudited)

Cash flows from operating activities:
<S>                                                                                             <C>                     <C>

  Net income .......................................................................            $   647,659             $   681,690
  Adjustments to reconcile net income to net cash
    provided by operating activities:
    Amortization of organization costs .............................................                    368                   1,512
    Increase (decrease) in allowance for doubtful accounts .........................                 26,122                 (88,973)
    (Increase) decrease in accrued interest and advances ...........................                807,987                (190,598)
     Increase (decrease) in accounts payable and
         accrued expenses ..........................................................                   0.00                  (7,164)
                                                                                                -----------             -----------

  Net cash provided by operating activities ........................................              1,482,136                 396,467
                                                                                                -----------             -----------

Cash flows from investing activities:

      Net (increase) decrease in:
        Real estate acquired through foreclosure ...................................               (334,986)                492,837
        Mortgage investments .......................................................              1,586,644                (947,722)
        Formation loans ............................................................                 81,760                  48,460
        Partnership interests ......................................................                   (684)               (223,244)
        Other accounts receivables - unsecured .....................................                 71,733                  30,957
                                                                                                -----------             -----------

     Net cash provided by (used in)investing activities ............................              1,404,467                (598,712)
                                                                                                -----------             -----------

Cash flows from financing activities:

       Net increase (decrease) in note payable-bank ................................             (2,000,000)                 70,370
       Partners withdrawals ........................................................               (657,117)               (276,236)
       Early withdrawal penalties, Net .............................................                (15,844)                 (4,516)
                                                                                                -----------             -----------

    Net cash provided by (used  in) financing activities ...........................             (2,672,961)               (210,382)
                                                                                                -----------             -----------

Net increase (decrease) in cash ....................................................                213,642                (412,627)
Cash - beginning of period .........................................................                514,840                 462,681
                                                                                                ===========             ===========
Cash - end of period ...............................................................                728,482                  50,054
                                                                                                ===========             ===========


<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, 1995 (audited)
                           AND FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996 (unaudited)
<CAPTION>

                                                          PARTNERS CAPITAL
                                ---------------------------------------------------------------------

                                                                                                      UNALLOCATED
                                                             GENERAL              LIMITED             SYNDICATION
                                                            PARTNERS             PARTNERS                COSTS               TOTAL
                                                          ----------          ------------        ---------------      ------------
<S>                                                     <C>                  <C>                  <C>                  <C>

Balances at December 31, 1992 ..................        $     11,987         $ 13,121,673         $   (277,899)        $ 12,855,761

Net income .....................................              11,260            1,114,723                 0.00            1,125,983
Allocation of syndication costs ................                (810)             (80,190)              81,000                 0.00

Early withdrawal penalties .....................                0.00              (23,000)               7,195              (15,805)
Partners withdrawals ...........................             (10,459)            (536,291)                0.00             (546,750)
                                                        ------------         ------------         ------------         ------------

Balances at December 31, 1993 ..................              11,978           13,596,915             (189,704)          13,419,189

Net income .....................................               9,273              918,018                 0.00              927,291
Allocation of syndication costs ................                (810)             (80,190)              81,000                 0.00
Early withdrawal penalties .....................                0.00              (34,001)              10,635              (23,366)
Partners  withdrawals ..........................              (8,463)            (560,753)                0.00             (569,216)
                                                        ------------         ------------         ------------         ------------

Balances at December 31, 1994 ..................              11,978           13,839,989              (98,069)          13,753,898

Net income .....................................               9,120              902,840                 0.00              911,960
Allocation of syndication costs ................                (810)             (80,190)              81,000                 0.00
Early withdrawal penalties .....................                0.00              (10,690)               3,344               (7,346)
Partners  withdrawals ..........................              (8,310)            (435,917)                0.00             (444,227)
                                                        ------------         ------------         ------------         ------------

Balances at December 31, 1995 ..................              11,978           14,216,032              (13,725)          14,214,285

Net income .....................................               6,476              641,183                 0.00              647,659
Allocation of Syndication Costs ................                (138)             (13,587)              13,725                 0.00
Early withdrawal penalties .....................                0.00              (15,844)                0.00              (15,844)
Partners  withdrawals ..........................              (6,339)            (650,778)                0.00             (657,117)
                                                        ------------         ------------         ------------         ------------

Balance at September 30, 1996 ..................        $     11,977         $ 14,177,006                 0.00         $ 14,188,983
                                                        ============         ============         ============         ============














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


                         REDWOOD MORTGAGE INVESTORS VII
                       (A California Limited Partnership)
                          NOTES TO FINANCIAL STATEMENTS
                         DECEMBER 31, 1995 (audited) and
                         SEPTEMBER 30, 1996 (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 loans secured by
Deeds of  Trust on  California  real  estate.  Mortgage  Investments  are  being
arranged and serviced by Redwood Home Loan Co., dba Redwood Mortgage,  (RHL Co.)
an affiliate  of the General  Partners.  At December 31, 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,
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, 1996,  $479,078  including $65,658 in early withdrawal  penalties,  had been
repaid leaving a balance of $435,291

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.

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Revenues and expenses are accounted for on the accrual basis of accounting.

     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 were capitalized and amortized over a
five year period.  Syndication  costs were charged against  partners capital and
were allocated to individual partners consistent with the partnership agreement.
These costs have been fully amortized and allocated.
<PAGE>
     Property  acquired  through  foreclosure  will  be  held  for  sale  at its
estimated  market value.  Such  property is recorded at cost which  includes the
principal balance of the former mortgage investment made by the Partnership plus
accrued  interest,  payments  made to keep the senior  loans  current,  costs of
obtaining  title  and  possession,  less  rental  income  or  at  estimated  net
realizable value, if less. The difference between such costs and estimated net
realizable  value is deducted  from cost in the  Balance  Sheet to arrive at the
carrying value of such property.

     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 to provide for  unrecoverable
accounts receivable.

     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 and the valuation of real estate acquired
through  foreclosure.  Actual  results  could  differ  significantly  from these
estimates.

     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.

     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 selected other options.  However,  the net income per $1,000 average invested
has  approximated  those reflected for those whose  investments and options have
remained constant.

     The interim financial statements,  dated September 30, 1996, are unaudited,
but in the opinion of the General Partners all adjustments (consisting solely of
normal adjustments) necessary to a fair presentation of the financial statements
at September 30, 1996 have been made.

NOTE 3 - GENERAL PARTNERS AND RELATED PARTIES

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

A. Loan Brokerage Commissions
     Loan  brokerage  commissions  are paid for services in connection  with the
review, selection, evaluation, negotiation and extension of Partnership loans in
an amount up to 12% of the  principal  through the period  ending 6 months after
the termination date of the offering. Thereafter, loan brokerage commissions are
limited to an amount not to exceed 4% of the total Partnership  assets per year.
The loan  brokerage  commissions  are paid by the  borrowers,  and thus,  not an
expense of the partnership.
<PAGE>
 
B. Loan Servicing Fees
     Monthly loan servicing fees are payable to Redwood Mortgage 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 investment
is located. Amounts remitted to the Company and recorded as interest on mortgage
investments  is net of such fees. In 1993,  $57,825 of the total loan  servicing
fees of $116,627 were waived by Redwood Mortgage.  In 1994, all $124,049 in loan
servicing fees were waived. In 1995, $66,888 of the total loan servicing fees of
$100,282  were waived and during the nine months  through  September  30,  1996,
$55,079 of the total loan servicing fees of $152,347 were also waived by RHL Co.

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).  In 1995,  1994 and 1993,  the asset  management
fees  charged  were $-0-,  $10,008,  and  $16,735,  respectively.  The  computed
management  fees were $ 52,801,  $51,519,  and  $50,360  respectively,  with the
difference being waived by the General Partners.  During the nine months through
September 30, 1996,  management  fees totalling  $40,193 were also waived by the
General Partners.

D. Other Fees
     The  Partnership  Agreement  provides for other fees such as  reconveyance,
loan assumption and loan 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.  In
1994,  all such expenses were  absorbed by Redwood  Mortgage.  In 1995 and 1993,
reimbursed expenses totalled $27,762 and $33,641, respectively.  During the nine
month  period under  review,  Redwood  Mortgage  was paid $30,758 for  operating
expenses.

     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
partners 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 PartnersCapital along with the original investment.
<PAGE>

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 had
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 will 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>

NOTE 5 - INVESTMENT IN PARTNERSHIP

     The Partnerships interest in land, acquired through foreclosure, located in
East Palo Alto with costs totalling  $223,929 has been invested with that of two
other  Partnerships  (total cost of $943,920) in a  partnership  which is in the
preliminary  process of obtaining approval to construct  approximately 72 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 $306,467 at September 30, 1996.

     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 - NOTES PAYABLE BANK - LINE OF CREDIT

     The  Partnership  has a  bank  line  of  credit  secured  by  its  mortgage
investment   portfolio  up  to  $3,000,000  at  1/2%  over  prime.  The  balance
outstanding  as of  September  30,  1996 was  $0.00,  and the  interest  rate at
September 30, 1996 was 8.75% (8.25% prime + 1/2%).

NOTE 8 - ASSET CONCENTRATIONS AND CHARACTERISTICS

     The  mortgage  investments  are  secured  by  recorded  deeds of trust.  At
September  30, 1996,  there were 65 mortgage  investments  outstanding  with the
following characteristics:

Number of mortgage investments outstanding                                  65
Total mortgage investments outstanding                             $10,795,997

Average mortgage investment outstanding                               $166,092
Average mortgage investment as percent of total                          1.54%
Average mortgage investment as percent of Partners Capital               1.17%

Largest mortgage investment outstanding                               $955,000
Largest mortgage investment as percent of total                          8.85%
Largest mortgage investment as percent of Partners Capital               6.73%

Number of counties where security is
   located (all California)                                                 16
Largest percentage of mortgage investments in one county                26.48%
Average mortgage investment to appraised value of security
    at time mortgage investment was consummated                         64.89%
Number of mortgage investments in foreclosure status                         2
Amount of mortgage investments in foreclosure                         $198,200

     The cash  balance at  September  30, 1996 of $728,482 was in two banks with
interest  bearing  balances  totalling  $658,484.  The  balances  exceeded  FDIC
insurance limits (up to $100,000 per bank) by $558,484.
<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 totalled  $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, 1996, Partners Capital totalled $14,188,983.

     The Partnership began funding mortgage investments on December 27, 1989 and
as of September  30, 1996 had credited the Partners  accounts  with income at an
average annualized (compounded) yield of 8.22%.

     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  Partnerships,  and  current
reserve requirements,  the General Partners anticipate that the annualized yield
this 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 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 repaid the
borrowed amount in full. This facility could increase as the Partnership capital
increases. This added source of funds helped in maximizing the Partnership yield
because 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.  As a result,  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, 1996,
the Partnership is current with its interest payments on the line of credit.

     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  nineteen  years.
Borrowers 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
notes and pay-off on notes.  Currently,  cash flow exceeds Partnership  expenses
and earnings payout requirements.  As mortgage investments  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.

     Its now clear 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  was  strong  in the  first  half of  1996,  and the  State is well -
positioned for fast growth in the second half of the year.  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 our lending activity.
<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,
1996. 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   Loan servicing fees for servicing loans               $97,268
                   ($55,079 waived by the General Partners.)

General Partners
 &/or Affiliates   Asset Management Fee for managing assets              $  0.00
                   ($40,193 waived by the General Partners).

General Partners  1% interest in profits, losses and distributions
                     of cash available for distribution                  $ 6,476
                    Less allocation for Syndication Costs                $   138
                                                                        --------
                                                                         $ 6,338
                                                                     -----------
                                                                          
     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   Loan  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.                 $196,065

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            $  3,615


     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, 1996

                                              Partnership Highlights

Mortgage Investment to Value Ratios

First Trust Deeds                                              $3,667,840.16
Appraised Value of Properties *                                 7,620,197.00
   Total Investment as a % of Appraisal                               48.13%

First Trust Deed Mortgage Investments                           3,667,840.16
Second Trust Deed Mortgage Investments                          6,207,236.60
Third Trust Deed Mortgage Investments                             723,359.51
Fourth Trust Deed Mortgage Investments  **                        197,560.33
                                                            -----------------
                                                              $10,795,996.60

First Trust Deeds due other Lenders                            21,375,602.00
Second Trust Deeds due other Lenders                              979,402.00
Third Trust Deeds due other Lenders                               142,858.00
                                                            -----------------

Total Debt                                                    $33,293,858.60

   Appraised Property Value *                                  51,304,829.00
   Total Investment as a % of Appraisal                               64.89%

Number of Mortgage Investments Outstanding                                65

Average Investment                                               $166,092.26
Average Investment as a % of Net Assets                                1.17%
Largest Investment Outstanding                                   $955,000.00
Largest Investment as a % of Net Assets                                6.73%

Loans as a Percentage of Total Mortgage Investments

First Trust Deed Mortgage Investments                                 33.97%
Second Trust Deed Mortgage Investments                                57.50%
Third Trust Deed Mortgage Investments                                  6.70%
Fourth Trust Deed Mortgage Investments                                 1.83%
                                                             ----------------
Total                                                                100.00%

Mortgage Investments by Type of
Property                               Amount                    Percent

Owner Occupied Homes                  $1,772,718.08                   16.42%
Non Owner Occupied Homes                 395,294.88                    3.66%
Apartments                             1,629,449.77                   15.09%
Commercial                             6,998,533.87                   64.83%
                                                             ----------------
                                  ------------------
Total                                $10,795,996.60                  100.00%

Statement of Conditions of Mortgage Investments
         Number of Mortgage Investments in Foreclosure                 2

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

Diversification by County

County                                         Total Loans          Percent

Santa Clara                                  $2,859,138.30           26.48%
San Francisco                                 2,103,047.70           19.48%
San Mateo                                     1,512,456.21           14.01%
Contra Costa                                  1,146,135.35           10.62%
Alameda                                         890,157.08            8.25%
Stanislaus                                      830,031.39            7.69%
Sonoma                                          401,238.37            3.72%
El Dorado                                       274,178.59            2.54%
Sacramento                                      206,893.59            1.91%
Santa Barbara                                   122,863.11            1.14%
Solano                                          104,796.30            0.97%
Monterey                                         79,619.05            0.74%
Marin                                            62,950.08            0.58%
Santa Cruz                                       53,951.23            0.50%
Miscellaneous                                   148,540.25            1.37%
                                        -------------------      -----------

Total                                       $10,795,996.60          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.

*** Tuolume, Shasta
<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, 1996.
<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  8th day of
November 1996.

REDWOOD MORTGAGE INVESTORS VII


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


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


By:      Gymno Corporation, General Partner


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


         By:
                 ---------------------------------------------
                 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 8th day of November, 1996.

Signature                          Title                             Date



-----------------------
D. Russell Burwell            General Partner                   November 8, 1996



-----------------------
Michael R. Burwell            General Partner                   November 8, 1996




----------------------
D. Russell Burwell       President of Gymno Corporation,        November 8, 1996
                         (Principal Executive Officer);
                          Director of Gymno Corporation



---------------------
Michael R. Burwell      Secretary/Treasurer of Gymno            November 8, 1996
                        Corporation (Principal Financial
                         and Accounting Officer);
                        Director of Gymno Corporation

<PAGE>