REDWOOD MORTGAGE INVESTORS VIII - 10-Q Quarterly Report

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

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

For Quarterly Period Ended March 31, 2003
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Commission file number 333-83882
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REDWOOD MORTGAGE INVESTORS VIII, a California Limited Partnership
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(exact name of registrant as specified in its charter)

CALIFORNIA 94-3158788
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(State or other jurisdiction of I.R.S. Employer
incorporation or organization) Identification No.

900 Veterans Blvd., Suite 500, Redwood City, CA 94063
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(address of principal executive office)

(650) 365-5341
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(Registrant's telephone number, including area code)

NOT APPLICABLE
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(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 XX
---------- ----------- -----------

APPLICABLE ONLY TO CORPORATE ISSUERS:

Indicate the number of shares outstanding of each of the issuer's class of
common stock, as of the latest date.

NOT APPLICABLE

1

REDWOOD MORTGAGE INVESTORS VIII
(A California Limited Partnership)
CONSOLIDATED BALANCE SHEETS
MARCH 31, 2003 and DECEMBER 31, 2002 (unaudited)
(in thousands)

ASSETS

March 31, December 31,
2003 2002
---------------- ---------------
Cash and cash equivalents $ 8,956 $ 7,188
---------------- ---------------
Loans
Loans secured by deeds of trust 95,080 83,650
Allowance for loan losses (3,133) (3,021)
---------------- ---------------
Net loans 91,947 80,629
---------------- ---------------

Interest and other receivables
Accrued interest and late fees 3,814 3,913
Advances on loans 310 279
Other receivables 1,049 888
---------------- ---------------
5,173 5,080
---------------- ---------------

Loan origination fees, net 16 22
Real estate held for sale, net of allowance of $500 9,475 9,286
---------------- ---------------

Total assets $ 115,567 $ 102,205
================ ===============

LIABILITIES AND PARTNERS' CAPITAL

Liabilities
Accounts payable $ 611 $ 449
Payable to affiliate 290 294
Deferred interest - 112
Note payable 1,775 1,782
---------------- ---------------

Total liabilities 2,676 2,637
---------------- ---------------

Minority interest 1,274 1,213
---------------- ---------------
Investors in applicant status 7,368 2,578
---------------- ---------------

Partners' capital
Limited partners' capital, subject to redemption net of unallocated syndication
costs of $693 and $592 for 2003 and 2002 , respectively; and formation loan
receivable of $6,034 and $5,258 for 2003 and 2002, respectively 104,150 95,690

General partners' capital, net of unallocated syndication costs of $7 and $6
for 2003 and 2002, respectively 99 87
---------------- ---------------

Total partners' capital 104,249 95,777
---------------- ---------------

Total liabilities and partners' capital $ 115,567 $ 102,205
================ ===============

The accompanying notes are an integral part of the consolidated financial
statements.

2

REDWOOD MORTGAGE INVESTORS VIII
(A California Limited Partnership)
CONSOLIDATED STATEMENTS OF INCOME
FOR THE THREE MONTHS ENDED MARCH 31, 2003 AND 2002 (unaudited)
(in thousands, except for per limited partner amounts)

THREE MONTHS ENDED
MARCH 31,
---------------------------------------

2003 2002
----------------- -----------------
Revenues
Interest on loans $ 2,764 $ 2,588
Interest-bank 17 1
Late fees 7 13
Other 1 -
----------------- -----------------
2,789 2,602
----------------- -----------------
Expenses
Mortgage servicing fees 206 243
Interest expense 1 135
Amortization of loan origination fees 3 3
Provisions for losses on loans and real estate 112 227
Asset management fees 98 76
Clerical costs from Redwood Mortgage Corp. 70 65
Professional services 45 37
Broker expense 81 -
Other 43 14
----------------- -----------------
659 800
----------------- -----------------

Net income $ 2,130 $ 1,802
================= =================

Net income: general partners (1%) $ 21 $ 18
limited partners (99%) 2,109 1,784
----------------- -----------------
$ 2,130 $ 1,802
================= =================
Net income per $1,000 invested by limited partners for entire period

-where income is reinvested and compounded $ 20 $ 21
================= =================

-where partner receives income in periodic distributions $ 20 $ 21
================= =================

The accompanying notes are an integral part of the consolidated financial
statements.

3

REDWOOD MORTGAGE INVESTORS VIII
(A California Limited Partnership)
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31, 2003 AND 2002 (unaudited)
(in thousands)

March 31,
-------------------------------------

2003 2002
---------------- ----------------
Cash flows from operating activities
Net income $ 2,130 $ 1,802
Adjustments to reconcile net income to net cash provided
by operating activities
Provision for loan and real estate losses 112 226
Change in operating assets and liabilities
Accrued interest and late fees 99 242
Advances on loans (31) 19
Other receivables (161) -
Loan origination fees 6 3
Accounts payable 162 28
Payable to affiliate (4) -
Deferred interest (112) -
---------------- ----------------
Net cash provided by operating activities 2,201 2,320
---------------- ----------------

Cash flows from investing activities
Loans originated (32,030) (13,834)
Principal collected on loans 20,600 11,041
Payments for development of real estate (128) -
Net cash used in investing activities (11,558) (2,793)
---------------- ----------------

Cash flows from financing activities
Borrowings (repayments) on line of credit, net - (1,400)
Repayments on note payable (7) -
Contributions by partner applicants 13,145 5,066
Partners' withdrawals (1,079) (936)
Syndication costs paid (149) (100)
Formation loan lending (938) (365)
Formation loan collections 153 114
---------------- ----------------
Net cash provided by financing activities 11,125 2,379
---------------- ----------------

Net increase in cash and cash equivalents 1,768 1,906

Cash and cash equivalents - beginning of year 7,188 1,917
---------------- ----------------

Cash and cash equivalents - end of period $ 8,956 $ 3,823
================ ================

Supplemental disclosures of cash flow information
Cash paid for interest $ 1 $ 135
================ ================

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

4

REDWOOD MORTGAGE INVESTORS VIII
(A California Limited Partnership)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2003 (unaudited)

NOTE 1 - GENERAL

In the opinion of the management of the Partnership, the accompanying
unaudited consolidated financial statements contain all adjustments, consisting
of normal, recurring adjustments, necessary to present fairly the consolidated
financial information included therein. These consolidated financial statements
should be read in conjunction with the audited consolidated financial statements
included in the Partnership's Form 10-K for the fiscal year ended December 31,
2002 filed with the Securities and Exchange Commission. The results of
operations for the three month period ended March 31, 2003 are not necessarily
indicative of the operating results to be expected for the full year.

Sales commissions - Formation Loans

The following summarizes Formation Loan transactions to March 31, 2003 (in
thousands):

Initial Second Third Fourth
Offering of Offering of Offering of Offering of
$15,000 $30,000 $30,000 $50,000 Total
------------- -------------- ------------- -------------- ------------

Limited partner contributions $ 14,932 $ 29,993 $ 29,999 $ 29,442 $104,366
============= ============== ============= ============== ============

Formation Loan made $ 1,075 $ 2,272 $ 2,218 $ 2,236 $ 7,801
Repayments to date (620) (708) (257) (33) (1,618)
Early withdrawal penalties applied (52) (66) (31) - (149)
------------- -------------- ------------- -------------- ------------

Balance March 31, 2003 $ 430 $ 1,498 $ 1,930 $ 2,203 $ 6,034
============= ============== ============= ============== ============

Percent loaned 7.2% 7.6% 7.4% 7.6% 7.5%
============= ============== ============= ============== ============

The Formation Loan has been deducted from limited partners' capital in the
consolidated balance sheets. As amounts are collected from Redwood Mortgage
Corp., the deduction from capital will be reduced.

Syndication costs

The Partnership bears its own syndication costs, other than certain sales
commissions, including legal and accounting expenses, printing costs, selling
expenses, and filing fees. Syndication costs are charged against partners'
capital and are being allocated to the individual partners consistent with the
partnership agreement.

Through March 31, 2003, syndication costs of $2,220,341 had been incurred
by the Partnership with the following distribution (in thousands):

Costs incurred $ 2,220
Early withdrawal penalties applied (74)
Allocated and amortized to date (1,446)
------------
March 31, 2003 balance $ 700
============

Syndication costs attributable to the fourth offering ($50,000,000) will be
limited to the lesser of 10% of the gross proceeds or $2,000,000 with any excess
to be paid by the general partners. As of March 31, 2003, the fourth offering
had incurred syndication costs of $436,220 (1.5% of contributions).

5

REDWOOD MORTGAGE INVESTORS VIII
(A California Limited Partnership)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2003 (unaudited)

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of presentation

The Partnership's consolidated financial statements include the accounts of
its 100%-owned subsidiary, Russian Hill Property Company, LLC ("Russian") and
its 66%-owned subsidiary, Stockton Street Property Company, LLC ("Stockton").
All significant intercompany transactions and balances have been eliminated in
consolidation.

Reclassifications

Certain reclassifications, not affecting previously reported net income or
total partner capital, have been made to the previously issued consolidated
financial statements to conform to the current year classification.

Loans, secured by deeds of trust

At March 31, 2003 and December 31, 2002, loans categorized as impaired by
the Partnership were $0 and $0, respectively. The reduction in the carrying
value of the impaired loans is included in the allowance for loan losses. The
average impaired recorded investment in impaired loans was $355,000 for 2002.

At March 31, 2003, the Partnership had fifteen loans, past due 90 days or
more totaling $17,589,725. The Partnership does not consider these loans to be
impaired because there is sufficient collateral to cover the amount outstanding
to the Partnership and is still accruing interest on these loans.

During 2002, the Partnership restructured three previously impaired loans
into two new loans with a lower interest rate. The amount restructured was
$1,090,000. Had the loans been current in accordance with their original terms
and had been outstanding throughout the entire year, the Partnership would have
recognized gross interest income of $85,000 for the year ended December 31,
2002. The Partnership recognized $61,000 of interest income on the restructured
loans for the year ended December 31, 2002.

Allowance for loan losses

The composition of the allowance for loan losses as of March 31, 2003 and
December 31, 2002 was as follows (in thousands):

March 31, December 31,
2003 2002
---------------- ---------------
Impaired loans $ - $ -
Specified loans 120 120
General 3,013 2,901
Unsecured loans - -
---------------- ---------------
$ 3,133 $ 3,021
================ ===============

6

REDWOOD MORTGAGE INVESTORS VIII
(A California Limited Partnership)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2003 (unaudited)

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

Allowance for loan losses

Activity in the allowance for loan losses is as follows for the three
months through March 31, 2003 and for the year ended December 31, 2002 (in
thousands):

March 31, December 31,
2003 2002
---------------- ---------------
Beginning balance $ 3,021 $ 2,247
Restructured loans - 11
Additions charged to income 112 780
Write-offs - (17)
---------------- ---------------
$ 3,133 $ 3,021
================ ===============

Income taxes

No provision for federal and state income taxes (other than an $800 state
minimum tax) is made in the consolidated financial statements since income taxes
are the obligation of the partners if and when income taxes apply.

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 amounts allocated to
limited partners who held their investment throughout the period and have
elected to either leave their earnings to compound or have elected to receive
periodic 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.

Profits and losses

Profits and losses are allocated among the limited partners according to
their respective capital accounts monthly after 1% of the profits and losses are
allocated to the general partners.

NOTE 3 - GENERAL PARTNERS AND RELATED PARTIES

The following are commissions and/or fees, which are paid to the general
partners.

Mortgage brokerage commissions

For fees in connection with the review, selection, evaluation, negotiation
and extension of loans, the Partnership may collect an amount equivalent to 12%
of the loaned amount until 6 months after the termination date of the offering.
Thereafter, loan brokerage commissions (points) will be limited to an amount not
to exceed 4% of the total Partnership assets per year. The loan brokerage
commissions are paid by the borrowers and thus, are not an expense of the
Partnership. During the three months through March 31, 2003 and 2002, loan
brokerage commissions paid by the borrowers were $573,000 and $253,000,
respectively.

7

REDWOOD MORTGAGE INVESTORS VIII
(A California Limited Partnership)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2003 (unaudited)

NOTE 3 - GENERAL PARTNERS AND RELATED PARTIES (continued)

Mortgage servicing fees

Monthly mortgage servicing fees of up to 1/8 of 1% (1.5% annual) of the
unpaid principal are paid to Redwood Mortgage Corp., based on the unpaid
principal balance of the loan portfolio, or such lesser amount as is reasonable
and customary in the geographic area where the property securing the mortgage is
located. Once a loan is categorized as impaired, mortgage servicing fees are no
longer accrued thereon. Additional service fees are recorded upon the receipt of
any subsequent payments on impaired loans. Mortgage servicing fees of $206,000
and $243,000, were incurred for the quarters ended March 31, 2003 and 2002,
respectively. The Partnership has a payable to Redwood Mortgage Corp. for
servicing fees of $290,000 and $294,000 at March 31, 2003 and December 31, 2002,
respectively.

Asset management fees

The general partners receive monthly fees for managing the Partnership's
loan portfolio and operations up to 1/32 of 1% of the "net asset value" (3/8 of
1% annual). Asset management fees of $98,000 and $76,000 were incurred for the
quarters ended March 31, 2003 and 2002, respectively.

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 the general partners.

Operating expenses

The general partners are reimbursed by the Partnership for all operating
expenses 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. During the three months through
March 31, 2003 and 2002, operating expenses totaling $70,000 and $65,000,
respectively, were reimbursed to the general partners.

NOTE 4 - REAL ESTATE HELD FOR SALE

During 2002, the Partnership contributed its interests in two foreclosed
real properties into two limited liability companies ("LLCs"). The Partnership's
investments in the LLCs are reflected at the lower of cost or fair value,
including estimated costs of property disposition.

The following schedule reflects the cost of the LLCs' properties and
recorded reductions to estimated fair values (in thousands):

March 31, December 31,
2003 2002
---------------- ----------------
Costs of properties $ 9,975 $ 9,786
Reduction in value (500) (500)
---------------- ----------------

Real estate held for sale $ 9,475 $ 9,286
================ ================

8

REDWOOD MORTGAGE INVESTORS VIII
(A California Limited Partnership)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2003 (unaudited)

NOTE 5 - BANK LINE OF CREDIT

The Partnership has a bank line of credit expiring July 10, 2004, of up to
$20,000,000 at prime secured by its loan portfolio. The outstanding balances
were $0 at March 31, 2003 and December 31, 2002. The interest rate was 4.25%
(prime) at March 31, 2003. The line of credit calls for certain financial
covenants. The Partnership was in compliance with these covenants for the three
month period ended March 31, 2003 and for the year ended December 31, 2002.

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

NOTE 6 - NOTE PAYABLE

The Partnership assumed a bank loan of $1,789,000 in connection with the
foreclosure on a property (see Note 4). As of March 31, 2003, $1,775,000 was
outstanding on this note. The loan is secured by the property and bears interest
at 5.52% at March 31, 2003.

Future maturities on the note payable are as follows (in thousands):

2003 $ 15
2004 23
2005 24
2006 26
2007 27
Thereafter 1,660
----------------
$ 1,775
================

NOTE 7 - FAIR VALUE OF FINANCIAL INSTRUMENTS

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

Secured loans carrying value was $95,080,000 and $83,650,000 at March 31,
2003 and December 31, 2002, respectively. The fair value of these loans of
$96,057,000 and $84,976,000, respectively, was estimated based upon projected
cash flows discounted at the estimated current interest rates at which similar
loans would be made. The applicable amount of the allowance for loan losses
along with accrued interest and advances related thereto should also considered
in evaluating the fair value versus the carrying value.

9

REDWOOD MORTGAGE INVESTORS VIII
(A California Limited Partnership)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2003 (unaudited)

NOTE 8 - ASSET CONCENTRATIONS AND CHARACTERISTICS (in thousands)

Most loans are secured by recorded deeds of trust. At March 31, 2003 and
December 31, 2002 there were 70 and 70 secured loans outstanding, respectively,
with the following characteristics:

March 31 December 31,
2003 2002
---------------- ----------------
Number of secured loans outstanding 70 70
Total secured loans outstanding $ 95,080 $ 83,650

Average secured loan outstanding $ 1,358 $ 1,195
Average secured loan as percent of total 1.43% 1.43%
Average secured loan as percent of partners' capital 1.30% 1.25%

Largest secured loan outstanding $ 10,440 $ 4,943
Largest secured loan as percent of total 10.98% 5.91%
Largest secured loan as percent of partners' capital 10.00% 5.16%

Number of counties where security is located (all California) 16 15
Largest percentage of secured loans in one county 24.94% 27.22%
Average secured loan to appraised value of security
at time loan was consummated 60.00% 60.61%

Number of secured loans in foreclosure status 6 6
Amount of secured loans in foreclosure $ 4,029 $ 4,029

The following loan categories were held at March 31, 2003, and December 31,
2002:

March 31, December 31,
2003 2002
---------------- ----------------
First Trust Deeds $ 52,809 $ 46,117
Second Trust Deeds 39,060 30,930
Third Trust Deeds 3,211 6,603
---------------- ----------------
Total loans 95,080 83,650
Prior liens due other lenders 79,423 79,846
---------------- ----------------
Total debt $ 174,503 $ 163,496
---------------- ----------------

Appraised property value at time of loan $ 290,841 $ 269,773
---------------- ----------------

Total investment as a percent of appraisals 60.00% 60.61%
---------------- ----------------

Investments by type of property
Owner occupied homes $ 11,540 $ 12,854
Non-owner occupied homes 21,482 23,720
Apartments 15,990 6,572
Commercial 46,068 40,504
---------------- ----------------
$ 95,080 $ 83,650
================ ================

10

REDWOOD MORTGAGE INVESTORS VIII
(A California Limited Partnership)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2003 (unaudited)

NOTE 8 - ASSET CONCENTRATIONS AND CHARACTERISTICS (in thousands) (continued)

The interest rates on the loans range from 7.50% to 18.00% at March 31,
2003.

Scheduled maturity dates of loans as of March 31, 2003 are as follows:

Year Ending
December 31, Amount
----------------- ---------------
2003 $ 27,639
2004 23,444
2005 28,900
2006 3,066
2007 8,188
Thereafter 3,843
---------------
$ 95,080
===============

The remaining scheduled maturities for 2003 include fifteen loans totaling
$14,555,482, which are past maturity at March 31, 2003. Interest payments on
twelve of these loans were 90 days or more delinquent.

Cash deposits at March 31, 2003 of $9,565,585 were in one bank. The
balances exceeded FDIC insurance limits (up to $100,000 per bank) by $9,465,585.
This bank is the same financial institution that has provided the Partnership
with the $20,000,000 limit line of credit (LOC). As and when deposits in the
Partnership's bank accounts increase significantly beyond the insured limit, the
funds are typically either placed on new loans or used to pay-down the line of
credit balance.

NOTE 9 - COMMITMENTS & CONTINGENCIES

Construction Loans

The Partnership has construction loans, which are at various stages of
completion of the construction process at March 31, 2003. The Partnership has
approved the borrowers up to a maximum loan balance; however, disbursements are
made during completion phases throughout the construction process. At March 31,
2003, there were $3,522,991 of undistributed loans which will be funded by a
combination of borrower monthly mortgage payments, line of credit draw-downs,
retirement of principal on current loans, cash and capital contributions from
investors.

Workout Agreements

The Partnership has negotiated various contractual workout agreements with
borrowers whose loans are past maturity or who are delinquent in making
payments. The Partnership is not obligated to fund additional money on these
loans as of March 31, 2003. There are approximately 6 loans totaling $5,427,590
in workout agreements as of March 31, 2003.

Legal proceedings

The Partnership is involved in various legal actions arising in the normal
course of business. In the opinion of management, such matters will not have a
material effect upon the financial position of the Partnership.

11

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION OF THE PARTNERSHIP

Critical Accounting Policies.

In preparing the consolidated 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. Such estimates
relate principally to the determination of (1) the allowance for loan losses
(i.e. the amount of allowance established against loans receivable as an
estimate of potential loan losses) including the accrued interest and advances
that are estimated to be unrecoverable based on estimates of amounts to be
collected plus estimates of the value of the property as collateral and (2) the
valuation of real estate acquired through foreclosure. At March 31, 2003, there
were two real estate properties owned by the Partnership.

Loans and related accrued interest, fees, and advances are analyzed on a
continuous basis for recoverability. Delinquencies are identified and followed
as part of the loan system. Provisions are made to adjust the allowance for loan
losses and real estate to an amount considered by management to be adequate,
with due consideration to collateral values and to provide for unrecoverable
accounts receivable, including impaired loans, other loans, accrued interest,
late fees and advances on loans, and other accounts receivable (unsecured).

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

Statement of Financial Accounting Standards Nos. 114 and 118 provide that
if the probable ultimate recovery of the carrying amount of a loan, with due
consideration for the fair value of collateral, is less than amounts due
according to the contractual terms of the loan agreement and the shortfall in
the amounts due are not insignificant, the carrying amount of the investment
shall be reduced to the present value of future cash flows discounted at the
loan's effective interest rate. If a loan is collateral dependent, it is valued
at the estimated fair value of the related collateral.

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

Forward Looking Statements.

Some of the information in the Form 10-Q may contain forward looking
statements. Uses of words such as "will", "may", "anticipate", "estimate",
"continue" or other forward looking words, discuss future expectations or
predictions. The foregoing analysis of 2003 includes forward looking statements
and predictions about the possible future events, results of operations and
financial condition. As such, this analysis may prove to be inaccurate because
of assumptions made by the general partners or the actual development of the
future events. No assurance can be given that any of these statements or
predictions will ultimately prove to be correct or substantially correct.

Related Parties.

The general partners of the Partnership are Redwood Mortgage Corp., Gymno
Corporation and Michael R. Burwell. Most Partnership business is conducted
through Redwood Mortgage Corp. which arranges, services and maintains the loan
portfolio for the benefit of the Partnership. The following is a list of various
Partnership activities for which related parties are compensated.

o Mortgage Brokerage Commissions For fees in connection with the review,
selection, evaluation, negotiation and extension of loans, the Partnership may
collect an amount equivalent to 12% of the loaned amount until 6 months after
the termination date of the offering. Thereafter, the loan brokerage commissions
(points) will be limited to an amount not to exceed 4% of the total Partnership
assets per year. The loan brokerage commissions are paid by the borrowers, and
thus, are not an expense of the Partnership. For the three months ended March
31, 2003 and 2002, loan brokerage commissions paid by the borrowers were
$573,000 and $253,000, respectively.

12

o Mortgage Servicing Fees Monthly mortgage servicing fees of up to 1/8 of
1% (1.5% on an annual basis) of the unpaid principal of the Partnership's loans
is paid to Redwood Mortgage Corp., or such lesser amount as is reasonable and
customary in the geographic area where the property securing the mortgage is
located. Mortgage servicing fees of $206,000 and $243,000 were incurred for the
three months ended March 31, 2003 and 2002, respectively.

o Asset Management Fees The general partners receive monthly fees for
managing the Partnership's portfolio and operations up to 1/32 of 1% of the `net
asset value' (3/8 of 1% on an annual basis). Management fees to the general
partners of $98,000 and $76,000 were incurred by the Partnership for three
months ended March 31, 2003 and 2002, respectively.

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

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

o Operating Expenses The general partners are is 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.

o Contributed Capital The general partners jointly and severally were to
contribute 1/10 of 1% in cash contributions as proceeds from the offerings are
received from the limited partners. As of March 31, 2003 and December 31, 2002,
a general partner, Gymno Corporation, had contributed $105,000 and $92,000,
respectively, as capital in accordance with Section 4.02(a) of the partnership
agreement.

o Sales Commission - "Formation Loan" to Redwood Mortgage Corp. Sales
commissions relating to the capital contributions by limited partners are not
paid directly by the Partnership out of the offering proceeds. Instead, the
Partnership loans to Redwood Mortgage Corp., a general partner, amounts
necessary to pay all sales commissions and amounts payable in connection with
unsolicited orders. The loan is referred to as the "Formation Loan". It is
unsecured and non-interest bearing and is applied to reduce limited partners
capital in the balance sheets. The sales commissions range between 0 (for units
sold by the general partners) and 9%. It is estimated that the total amount of
the formation loan will approximate 7.6% based on the assumption that 65% of the
investors will reinvest earnings, which qualify for the higher commission
percentage.

The following summarizes aggregate formation loan transactions through
March 31, 2003 (in thousands):

Limited partner contributions $ 104,366
==============

Formation loans made to Redwood Mortgage Corp. 7,801
Principal payments to date (1,618)
Reduction of formation loan due to early withdrawal penalties (149)
--------------
Balance at March 31, 2003 $ 6,034
==============

The amount of the annual installments paid by Redwood Mortgage Corp. are
determined at annual installment of one-tenth of the principal balance of the
formation loan at December 31 of each year until the offering period is closed.
Thereafter, the remaining formation loan is paid in ten equal amortizing
payments.

On October 30, 2002 the Partnership's fourth offering of $50,000,000 in
Units became effective, and as of March 31, 2003, the fourth offering of
$50,000,000 had not been fully subscribed. Contributed capital equaled
$14,932,000 for the first offering, $29,993,000 for the second offering,
$29,999,000 for the third offering, and $29,442,000 for the fourth offering as
of March 31, 2003, totaling an aggregate of $104,365,000 as of March 31, 2003.
Of this amount, $7,368,000 remained in applicant status.

13

Results of Operations - For the three months ended March 31, 2003 and 2002

The net income increase of $328,000 (18%) for the three months ended March
31, 2003 versus the three months period ended March 31, 2002 was due primarily
to an increase in interest earned on loans of $176,000 and reduced interest
costs of $134,000 on the Partnership's debt. In addition, significant expense
increases or (decreases) for the three months ended March 31, 2003 versus March
31, 2002 included a reduction in mortgage servicing fees of ($37,000), change in
the provision for losses on loans and real estate acquired through foreclosure
of ($114,000), increased asset management fees of $22,000, and an increase in
brokerage fees of $81,000.

The increase in interest on loans of $176,000 (7%) for the three months
ended March 31, 2003 versus March 31, 2002 was due primarily to the increased
size of the Partnership secured loan portfolio at March 31, 2003 as compared to
March 31, 2002 of $95,080,000 and $85,644,000, and due to collection of
"additional interest" of $81,000 derived from one of the Partnership's loans.

The decrease in interest expense of $134,000 for the three months ended
March 31, 2003 versus March 31, 2002 is due to almost no usage of the line of
credit during the first quarter of 2003. This low credit line usage was due
primarily to loan payoffs and high number of Partnership Unit sales in the
fourth offering, offset by good loan production volume but insufficient to
absorb the total cash inflows. In addition, interest on the note payable
relating to real estate held for sale is being capitalized.

The decrease in mortgage servicing fees of $37,000 (15%) for the three
months ended March 31, 2003 versus March 31, 2002 is primarily due to additional
mortgage servicing fee earned on impaired loans during the first quarter of
2002, offset slightly by the larger loan portfolio, which existed during the
first quarter of 2003.

The decrease of $114,000 (50%) in provision for losses on loans and real
estate acquired through foreclosure for the three months ended March 31, 2003
versus the respective three months ended March 31, 2002 indicates the general
partners' expectation on loan losses. Despite the fact that the Partnership's
loan portfolio has increased, and the Partnership acquired two properties
through borrower defaults in the third quarter of 2002, the general partners
considered that the amount of provision was reasonable. At March 31, 2003, total
allowance for losses on loans and real estate acquired through foreclosure
equaled $3,633,000, which the general partners consider to be adequate. See
additional discussions below.

The increase in the asset management fees of $22,000 (29%) for the three
months ended March 31, 2003 versus the respective period ended March 31, 2002 is
due to an increase in the partners' capital under management at March 31, 2003
and 2002 of $111,013,000 and $90,110,000, respectively.

The increase in professional fees of $8,000 (22%) for the three months
ended March 31, 2003 versus March 31, 2002 is due to the increased expense due
to the larger Partnership size and timing differences in 2003 than in 2002 in
relation to its audit and tax return processing.

The increase in brokerage fees of $81,000 for the three months ended March
31, 2003 versus March 31, 2002 is due to the Partnership incurring an obligation
to pay one-half of the "additional interest" collected on one of its loans to a
non-affiliated real estate broker. No "additional interest" was collected during
the first quarter of 2002, therefore there was no expense during the first
quarter of 2002.

Partnership capital continued to increase as the Partnership received new
limited partner capital contributions of $13,126,000 and retained the earnings
of limited partners that have chosen to do so of $1,377,000 for the three months
ended March 31, 2003, as compared to $5,066,000 and $1,131,000 for the three
months ended March 31, 2002. The increased Partnership capital helped increase
loans outstanding to $95,080,000 at March 31, 2003, as compared to $85,644,000
at March 31, 2002. The limited partner contributions of $13,126,000 versus
$5,066,000, is due to the completion of the third offering in April 2002, and
the beginning of the fourth offering, effective October 30, 2002, of
$50,000,000, which brought about exceptional sales of Units.

14

The Partnership did not utilize its bank line of credit during the first
quarter of 2003 compared to 2002. Cash generated from interest earnings, late
charges, amortization of principal, loan payoffs and capital contributions by
limited partners was utilized to fund new loans and meet distributions and
capital liquidations to limited partners.

At March 31, 2003, outstanding foreclosures remained at six ($4,029,000)
from the six ($5,192,000) that existed at March 31, 2002. During the three
months ended March 31, 2003, the outstanding principal subject to foreclosure
decreased $1,163,000 from $5,192,000 at March 31, 2002. This was a decrease in
foreclosure amount of 22%. Of the foreclosures at March 31, 2003, four have
entered into workout agreements, which require regular monthly payments. These
foreclosures are a reflection of the difficult economic times that existed at
March 31, 2003 and March 31, 2002, yet are not unusual in the general partners'
experience.

The general partners received Mortgage Brokerage Commissions from the loan
borrowers of $573,273 for the three months ended March 31, 2003 as compared to
$253,099 for the three months ended March 31, 2002. The increase is due to more
loans written in the three months ended March 31, 2003 than the three months
during the corresponding period of 2002.

Between 2001, and March 31, 2003, the Federal Reserve reduced interest
rates by cutting the Federal Funds Rate twelve times to 1.25%. The effect of the
previous cuts has greatly reduced short-term interest rates and to a lesser
extent reduced long-term interest rates. The general partners anticipate that
new loans will be placed at rates approximately 1% to 1.50% lower than similar
loans during 2002. The lowering of interest rates has encouraged those borrowers
that have mortgages with higher interest rates than those currently available to
seek refinancing of their obligations. The Partnership may face prepayments in
the existing portfolio from borrowers taking advantage of these lower rates.
However, demand for loans from qualified borrowers continues to be strong and as
prepayments occur, the general partners expect to replace paid off loans with
loans at somewhat lower interest rates. At this time, the general partners
believe that the average loan portfolio interest rate will decline approximately
..50% to .75% over the year 2003. Nevertheless, based upon the rates payable in
connection with the existing loans, and anticipated interest rates to be charged
by the Partnership and the general partners' experience, the general partners
anticipate that the annualized yield will range between 7.5% and 8.25% in 2003.

Allowance for Losses.

The general partners regularly review the loan portfolio, examining the
status of delinquencies, the underlying collateral securing these loans,
borrowers' payment records, etc. Based upon this information and other data, the
allowance for loan losses is increased or decreased. Borrower foreclosures are a
normal aspect of Partnership operations. The Partnership is not a credit based
lender and hence while it reviews the credit history and income of borrowers,
and if applicable, the income from income producing properties, the general
partners expect that we will on occasion take back real estate security. During
2001, and continuing in 2002 and 2003, the Northern California real estate
market slowed and the national and local economies have slipped into recession.
As of March 31, 2003, six notices of default are currently filed beginning the
process of foreclosing six of our loans. The principal amounts of the six
foreclosed loans total $4,028,888 or 4.24% of the loan portfolio. Four of these
borrowers have entered into workout agreements, with the borrowers making
regular monthly payments.

The Partnership has also entered into workout agreements with borrowers who
are past maturity or delinquent in their regular payments. The Partnership had
workout agreements on approximately 6 loans totaling $5,427,590 as of March 31,
2003. Typically, a workout agreement allows the borrower to extend the maturity
date of the balloon payment and/or allows the borrower to make current monthly
payments while deferring for periods of time, past due payments, and allows time
to pay the loan in full. These workout agreements and foreclosures generally
exist within our loan portfolio to greater or lesser degrees, depending
primarily on the health of the economy. The number of foreclosures and workout
agreements will rise during difficult economic times and conversely fall during
good economic times. The number and amount of foreclosures existing at March 31,
2003, in management's opinion, does not have a material effect on our results of
operations or liquidity. These workouts and foreclosures have been considered
when management arrived at appropriate loan loss reserves and based on our
experience, are reflective of our loan marketplace segment. The Partnership did
not acquire any properties through foreclosure during the first quarter of 2003.
During 2002, the Partnership completed foreclosure of two loans resulting in the
acquisition of two real estate properties. The Partnership's principal balances
were $6,565,000 after excluding an affiliated Partnership's interest in one of

15

the properties. In 2003, the Partnership may acquire additional real estate
through the foreclosure process. Borrower foreclosures are a normal aspect of
Partnership operations and the general partners anticipate that they will not
have a material effect on liquidity. As a prudent guard against potential
losses, the general partners have made provisions for losses on loans and real
estate acquired through foreclosure of $3,633,000 at March 31, 2003. These
provisions for losses were made to guard against collection losses. The total
provision for losses as of March 31, 2003, is considered by the general partners
to be adequate. Because of the number of variables involved, the magnitude of
the swings possible and the general partners inability to control many of these
factors, actual results may and do sometimes differ significantly from estimates
made by the general partners.

PORTFOLIO REVIEW - For the three months ended March 31, 2003 and 2002.

Loan Portfolio.

The Partnership's loan portfolio consists primarily of short-term (one to
five years), fixed rate loans secured by real estate. As of March 31, 2003 and
2002 the Partnership's loans secured by real property collateral in the six San
Francisco Bay Area counties (San Francisco, San Mateo, Santa Clara, Alameda,
Contra Costa, and Marin) represented $69,061,000 (72.63%) and $68,436,000
(79.91%) of the outstanding loan portfolio. The remainder of the portfolio
represented loans secured by real estate located primarily in Northern
California. No Partnership loan equals or exceeds 10% of the Partnership's
assets.

As of March 31, 2003, approximately 34.73% ($33,023,000), was invested in
loans secured by single family homes (1-4 units), approximately 16.82%
($15,990,000), was invested in loans secured by multifamily dwellings
(apartments over 4 units), approximately 39.60% ($37,654,000), was invested in
loans secured by commercial properties, and approximately 8.85% ($8,414,000) was
invested in loans secured by land. As of March 31, 2002, approximately, 51.95%
($44,494,000), was invested in loans secured by single family homes (1-4 units),
approximately 8.74% ($7,482,000) was invested in loans secured by multifamily
dwellings (apartments over 4 units), approximately 31.94% ($27,355,000) was
invested in loans secured by commercial properties, and approximately 7.37%
($6,313,000) was invested in loans secured by land.

As of March 31, 2003, the Partnership held 70 loans secured by deeds of
trust. The following table sets forth the priorities, asset concentrations and
maturities of the loans held by the Partnership as of March 31, 2003.

PRIORITIES, ASSET CONCENTRATIONS AND MATURITIES OF LOANS
As of March 31, 2003 (in thousands)

# of Loans Amount Percent
------------ ------------ -----------
1st Mortgages 32 $ 52,809 56.00%
2nd Mortgages 32 39,060 41.00%
3rd Mortgages 6 3,211 3.00%
============ ============ ===========
Total 70 $ 95,080 100.00%

Maturing 12/31/03 and prior 23 $ 27,639 29.06%
Maturing prior to 12/31/04 13 23,444 24.66%
Maturing prior to 12/31/05 11 28,900 30.40%
Maturing after 12/31/05 23 15,097 15.88%
============ ============ ===========
Total 70 $ 95,080 100.00%

Average Loan $ 1,358 1.43%
Largest Loan 10,440 10.98%
Smallest Loan 27 0.03%
Average Loan-to-Value 60.00%

16

Borrower Liquidity and Capital Resources.

The Partnership relies upon purchases of Units, loan payoffs, borrowers'
mortgage payments, and, to a lesser degree, its line of credit for the source of
funds for loans. Recently, mortgage interest rates have decreased somewhat from
those available at the inception of the Partnership. If interest rates were to
increase substantially, the yield of the Partnership's loans may provide lower
yields than other comparable debt-related investments. As such, additional
limited partner Unit purchases could decline, which would reduce the overall
liquidity of the Partnership. Additionally, since the Partnership has made
primarily fixed rate loans, if interest rates were to rise, the likely result
would be a slower prepayment rate for the Partnership. This could cause a lower
degree of liquidity as well as a slowdown in the ability of the Partnership to
invest in loans at the then current interest rates. Conversely, in the event
interest rates were to decline, the Partnership could see both or either of a
surge of Unit purchases by prospective limited partners, and significant
borrower prepayments, which, if the Partnership can only obtain the then
existing lower rates of interest may cause a dilution of the Partnership's yield
on loans, thereby lowering the Partnership's overall yield to the limited
partners. The Partnership to a lesser degree relies upon its line of credit to
fund loans. Generally, the Partnership's loans are fixed rate, whereas the
credit line is a variable rate loan. In the event of a significant increase in
overall interest rates, the credit line rate of interest could increase to a
rate above the average portfolio rate of interest. Should such an event occur,
the general partners would desire to pay off the line of credit. Retirement of
the line of credit would reduce the overall liquidity of the Partnership. Cash
is constantly being generated from borrower payments of interest, principal and
loan payoffs. Currently, cash flow greatly exceeds Partnership expenses and
earnings requirements. Excess cash flow is invested in new loan opportunities,
when available, and is used to reduce the Partnership credit line or for other
Partnership business.

At the time of subscription to the Partnership, limited partners must elect
either to receive monthly, quarterly or annual cash distributions from the
Partnership, or to compound earnings in their capital account. If you initially
elect to receive monthly, quarterly or annual distributions, such election, once
made, is irrevocable. If the investor initially elects to compound earnings in
his/her capital account, in lieu of cash distributions, the investor may, after
three (3) years, change the election and receive monthly, quarterly or annual
cash distributions. Earnings allocable to limited partners who elect to compound
earnings in their capital account, will be retained by the Partnership for
making further loans or for other proper Partnership purposes, and such amounts
will be added to such limited partners' capital accounts.

During the three months period ended March 31, 2003 and 2002, the
Partnership, after allocation of syndication costs, made the following
allocation of earnings both to the limited partners who elected to compound
their earnings, and those that chose to distribute:

Three months ended March 31,
------------------------------------

2003 2002
--------------- ---------------
Compounding $1,347,000 $1,131,000
Distributing $ 718,000 $ 609,000

As of March 31, 2003 and March 31, 2002, limited partners electing to
receive cash distributions of earnings represented 34% and 35%, respectively of
the limited partners' outstanding capital accounts. These percentages have
remained relatively stable. The general partners anticipate that after all
capital has been raised, the percentage of limited partners electing to withdraw
earnings will decrease due to the dilution effect which occurs when compounding
limited partners' capital accounts grow through earnings reinvestment.

17

The Partnership also allows the limited partners to withdraw their capital
account subject to certain limitations and penalties (see "Withdrawal From
Partnership" in the Limited Partnership Agreement). Once a limited partner's
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 five years after a limited partner's
investment has the effect of providing limited partner liquidity and the general
partners expect a portion of the limited partners to avail themselves of this
liquidity. This has the anticipated effect of increasing the net capital of the
Partnership, primarily through retained earnings during the offering period. The
general partners expect to see increasing numbers of limited partner withdrawals
during a limited partner's 5th through 10th anniversary, at which time the bulk
of those limited partners who have sought withdrawal have been liquidated. Since
the five-year hold period for many limited partners has yet to expire, as of
March 31, 2003, many limited partners may not as yet avail themselves of this
provision for liquidation. Earnings and capital liquidations including early
withdrawals during the three months ended March 31, 2003 and 2002 were:

Three months ended March 31,
----------------------------------

Cash distributions $ 718,000 $ 609,000
Capital liquidation* $ 351,000 $ 321,000
-------------- ---------------

Total $ 1,069,000 $ 930,000
============== ===============

* These amounts represent gross of early withdrawal penalties.

Additionally, limited partners may liquidate their investment over a
one-year period subject to certain limitations and penalties. During the three
months ended March 31, 2003 and 2002, capital liquidated subject to the 10%
penalty for early withdrawal was:

Three months ended March 31,
-----------------------------------

2003 2002
-------------- ---------------
$ 113,000 $ 117,000

This represents 0.11% and 0.15% of the limited partners' ending capital as
of March 31, 2003 and 2002, respectively. These withdrawals are within the
normally anticipated range and represent a small percentage of limited partner
capital.

Current Economic Conditions.

The Partnership makes loans primarily in Northern California. As of March
31, 2003, approximately 72.63% of the loans held were in the six San Francisco
Bay Area Counties. The remainder of the loans held were secured primarily by
Northern California real estate outside the San Francisco Bay Area. Like the
rest of the nation, the San Francisco Bay Area has also felt the recession and
accompanying slow down in economic growth and increasing unemployment. The
technology companies of Silicon Valley, the airline industry, the tourism
industry and other industries are feeling the effects of the overall United
States recession, which includes lower earnings, losses and layoffs.

As contained in a collection of real estate statistics listed in the San
Francisco Chronicle dated February 21, 2003, Bay Area home sales slowed in
January but prices rose. The article stated, "The torrid pace of home sales in
the Bay Area cooled slightly in January, but the median price year-over-year
rose nearly 9 %, a real estate information firm said Thursday. The median price
of a house in the nine-county Bay Area was $404,000 in January, up 8.9% from the
year-ago median of $371,000, but down 2.9% from the December median of $416,000.
Last summer, the Bay Area median reached an all-time high of $417,000. The
median is the midpoint; half of the sales prices in the month were below and
half were above $404,000. A total of 6,944 houses and condos sold last month in
the nine counties, down 0.7% from the 6,990 sold in January 2002. Sales dropped
19% in Napa, 2.1% in San Francisco and 7.6% in Santa Clara.

18

Researchers at DataQuick in La Jolla (San Diego County) said the drop
reflects stronger-than-expected sales in January 2002, when buyers who had fled
the market after September 11 terrorist attacks returned, prompted largely by
falling interest rates. The January 2002 sales figure was the highest for that
month in a decade. `Everyone put things on hold (after Sept. 11), and several
months later, people jumped back in,' said John Karevoll, DataQuick researcher.
Although sales fell 19% in Napa County, the median price there jumped 31.1% to
$405,000 - though Karevoll pointed out the county routinely has the fewest sales
per month. In San Francisco, the median price rose 8.5% to $539,000. Santa
Clara, hit hard by the dot-com bust, saw the smallest rise in median home price
- - up 4.9% to $447,000. Economists are keeping a close eye on the housing market,
one of the few bright sectors in an otherwise stormy economy. To some pundits,
the Bay Area market, in particular, has raised red flags because home prices
have continued to rise despite widespread layoffs and a beleaguered technology
sector."

January Home Sales
- ----------------------------------------------------------------------------------------------------------------

Sold* Sold* Pct. Median Median Pct.
Jan. 02 Jan. 03 Change Jan. 02 Jan. 03 Change
---------- ---------- ------------ ----------- ----------- ----------
Alameda 1,478 1,471 -0.5% $358,000 $392,000 9.5%
Contra Costa 1,319 1,392 5.5 309,000 355,000 14.9
Marin 259 269 3.9 502,000 535,000 6.6
Napa 163 132 -19.0 309,000 405,000 31.1
San Francisco 375 367 -2.1 497,000 539,000 8.5
San Mateo 581 541 -6.9 478,000 507,000 6.1
Santa Clara 1,635 1,510 -7.6 426,000 447,000 4.9
Solano 601 658 9.5 238,000 276,000 16.0
Sonoma 579 604 4.3 297,000 343,000 15.5
Bay Area 6,990 6,944 -0.7 371,000 404,000 8.9

*Sales include new and existing houses and condos.
Source: DataQuick Information Systems, www.dqnews.com

In spite of the slowing economy, commercial lending opportunities exist
which the Partnership may advantage itself of.

According to the San Francisco Business Times of the week of January 3,
2003, the real estate market took its first steps on the long road back. The
article states, "After back-to-back terrible years, the mere fact that 2003 is
not likely to be worse counts as good news. The market seems to be at the bottom
of the bottom and it may see a slight improvement in 2003. None of real estate's
highly paid crystal ballers, including University of California, Berkeley's Ken
Rosen, is predicting major improvement in 2003 because they don't see
significant job creation. The uncertainty of war in the Middle East and
continuing problems in high tech and travel, meanwhile, conspire to keep the lid
on chances for a major recovery in 2003. That doesn't mean that there won't be
major lease deals. Orrick Herrington & Sutcliffe will likely sign a
150,000-square-foot lease in San Francisco at either Foundry Square or 400
Sansome Street that will have more value than any lease signed throughout 2002
anywhere in the region.

Commercial vacancy in San Francisco hovers around 20% while down on the
harder hit Peninsula it is closer to 25%. Nobody dares calculate shadow space -
those canyons of empty cubicles that corporations aren't using or subleasing.
That space has to fill before companies absorb new space, a factor likely to
further delay any recovery. New office building, which tends to lag a recovery
in the leasing market, is still several years away, barring some plans by
government agencies. `It will be another lean year with some pockets of activity
in non-cyclical areas such as the nonprofits,' said Dave Klein, senior vice
president of BT Commercial. `Education and nonprofits will suck up a lot of
space, but demand from the big corporate office users will still be soft. We're
at the bottom of the bottom now and after 10 consecutive quarters of negative
absorption we could see some slight positive absorption by the end of the first
quarter.'

Major foreclosures have been noticeably absent thus far in the downturn
thanks to microscopic interest rates. If landlords continue to have to carry
empty buildings, bankruptcy courts could see more activity this year.

19

To the Partnership, stabilizing vacancy rates may mean that we are at the
vacancy rate bottom. High levels of space exist, and as tenant leases expire
they may be able to negotiate lower rental rates. This could lower cash flows
for owners, which may mean we could experience higher foreclosures or
delinquencies.

For Partnership loans outstanding, as of March 31, 2003, the Partnership
had an average loan to value ratio computed as of the date the loan was made of
60.00%. This percentage does not account for any increases or decreases in
property values since the date the loan was made, nor does it include any
reductions in principal through amortization of payments after the loan was
made. This low loan to value ratio will assist the Partnership in weathering
loan delinquencies and foreclosures should they eventuate.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The following table contains information about the cash held in money
market accounts, loans held in the partnership's portfolio and a note payable on
our line of credit as of March 31, 2003. The presentation, for each category of
information, aggregates the assets and liabilities by their maturity dates for
maturities occurring in each of the years 2003 through 2007 and separately
aggregates the information for all maturities arising after 2007. The carrying
values of these assets and liabilities approximate their fair market values as
of March 31, 2003 (in thousands):

2003 2004 2005 2006 2007 Thereafter Total
----------- ----------- ----------- ----------- ----------- ------------ -----------
Interest earning assets:
Money market accounts $ 8,587 $ 8,587
Average interest rate 1.05% 1.05%
Loans secured by deeds of trust $ 27,639 23,444 28,900 3,066 8,188 3,843 $ 95,080
Average interest rate 12.27% 10.43% 10.90% 10.64% 10.45% 9.94% 11.10%

Interest bearing liabilities:
Line of credit $ 0 $ 0
Average interest rate 4.25% 4.25%
Note-payable $ 15 23 24 26 27 1,660 $ 1,775
Average interest rate 5.52% 5.52%

Market Risk.

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

The Partnership's primary market risk in terms of its profitability is the
exposure to fluctuations in earnings resulting from fluctuations in general
interest rates. The majority of the Partnership's mortgage loans, (100% as of
March 31, 2003) earn interest at fixed rates. Changes in interest rates may also
affect the value of the Partnership's investment in mortgage loans and the rates
at which the Partnership reinvests funds obtained from loan repayments and new
capital contributions from limited partners. If interest rates increase, the
interest rates the Partnership obtains from reinvested funds will generally
increase, but the value of the Partnership's existing loans at fixed rates will
generally tend to decrease. The risk is mitigated by the fact that the
Partnership does not intend to sell its loan portfolio, rather such loans are
held until they are paid off. If interest rates decrease, the amounts becoming
available to the Partnership for investment due to repayment of Partnership
loans may be reinvested at lower rates than the Partnership had been able to
obtain in prior investments, or than the rates on the repaid loans. In addition,
interest rate decreases may encourage borrowers to refinance their loans with
the Partnership at a time where the Partnership is unable to reinvest in loans
of comparable value.

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

20

Controls and Procedures.

Within the 90 days prior to the date of this report, the General Partner of
the Partnership carried out an evaluation, under the supervision and with the
participation of the General Partner's management, including the General
Partner's President and Chief Financial Officer, of the effectiveness of the
design and operation of the Partnership's disclosure controls and procedures
pursuant to Exchange Act Rule 13a-14. Based upon that evaluation, the President
and Chief Financial Officer of the General Partner concluded that the
Partnership's disclosure controls and procedures are effective. There were no
significant changes in the Partnership's internal controls or in other factors
that could significantly affect these controls subsequent to the date of their
evaluation.

In some cases in order to satisfy Broker Dealers and other reporting
requirements, the general partners have valued the limited partners' interest in
the Partnership on a basis which utilizes a per unit system of calculation,
rather than based upon the investors' capital account. This information has been
reported in this manner in order to allow the Partnership to integrate with
certain software used by the Broker Dealers and other reporting entities. In
those cases, the Partnership will report to Broker Dealers, Trust Companies and
others a "reporting" number of Units based upon a $1.00 per unit calculation.
The number of reporting units provided will be calculated based upon the limited
partner's capital account value divided by $1.00. Each investor's capital
account balance is set forth periodically on the Partnership account statement
provided to investors. The reporting units are solely for Broker Dealers
requiring such information for their software programs and do not reflect actual
Units owned by a limited partner or the limited partners' right or interest in
cash flow or any other economic benefit in the Partnership. Each investor's
capital account balance is set forth periodically on the Partnership account
statement provided to investors. The amount of Partnership earnings each
investor is entitled to receive is determined by the ratio that each investor's
capital account bears to the total amount of all investor capital accounts then
outstanding. The capital account balance of each investor should be included on
any NASD member client account statement in providing a per Unit estimated value
of the client's investment in the Partnership in accordance with NASD Rule 2340.

While the general partners have set an estimated value for the Partnership
Units, such determination may not be representative of the ultimate price
realized by an investor for such Units upon sale. No public trading market
exists for the Partnership Units and none is likely to develop. Thus, there is
no certainty that the Units can be sold at a price equal to the stated value of
the capital account. Furthermore, the ability of an investor to liquidate his or
her investment is limited subject to certain liquidation rights provided by the
Partnership, which may include early withdrawal penalties (See the section of
the prospectus entitled "Risk Factors - Purchase of Units is a Long Term
Investment").

ASSET QUALITY

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

The conclusion that a loan may become uncollectible, in whole or in part,
is a matter of judgment. Although institutional lenders are subject to
requirements and regulations that, among other things, require them to perform
ongoing analyses of their portfolios, loan-to-value ratios, reserves, etc., and
to obtain and maintain current information regarding their borrowers and the
securing properties, the Partnership is not subject to these regulations and has
not adopted these practices. Rather, the general partners, in connection with
the periodic closing of the accounting records of the Partnership and the
preparation of the financial statements, determine whether the allowance for
loan losses is adequate to cover potential loan losses of the Partnership. As of
March 31, 2003 the general partners have determined that the allowance for loan
losses and real estate owned of $3,633,000 (3.48% of net assets) is adequate in
amount. Because of the number of variables involved, the magnitude of the swings
possible and the general partners' inability to control many of these factors,
actual results may and do sometimes differ significantly from estimates made by
the general partners. As of March 31, 2003, 15 loans were delinquent over 90
days amounting to $17,590,000. Of these, $1,325,000 delinquent loans were
subject to workout agreements, which require the borrower to make regular
monthly loan payments and/or payments plus additional catch up amounts.

21

COMPENSATION OF THE GENERAL PARTNERS AND AFFILIATES BY PARTNERSHIP

The Partnership has no officers or directors. The Partnership is managed by
the General Partners. There are certain fees and other items paid to management
and related parties.

A more complete description of management compensation is found in the
Prospectus part of Form S-11 and subsequent amendments related to the offering
of Partnership interests dated October 30, 2002, page 5, under the section
"Compensation of the General Partners and the Affiliates," which is incorporated
by reference. Such compensation is summarized below.

The following compensation has been paid to the General Partners and
Affiliates for services rendered during the three months ended March 31, 2003.
All such compensation is in compliance with the guidelines and limitations set
forth in the Prospectus.

Description of Compensation
Entity Receiving Compensation and Services Rendered Amount
- --------------------------------------------------------------------------------------------------------------
I. Redwood Mortgage Corp. Loan Servicing Fee for servicing loans................................$206,000

General Partners
&/or Affiliates Asset Management Fee for managing assets...............................$98,000

General Partners 1% interest in profits.................................................$22,000
Less allocation of syndication costs....................................$1,000
-----------
$21,000
Redwood Mortgage Corp. Portion of early withdrawal penalties applied to reduce
Formation Loan..........................................................$9,000

General Partners Organization and Offering Expenses..........................................$0
&/or Affiliates

II. FEES PAID BY BORROWERS ON MORTGAGE LOANS PLACED BY COMPANIES RELATED TO
THE GENERAL PARTNERS WITH THE PARTNERSHIP (EXPENSES OF BORROWERS NOT OF THE
PARTNERSHIP)

Redwood Mortgage Corp. Mortgage Brokerage Commissions for services in connection with
the review, selection, evaluation, negotiation, and extension
of the loans paid by the borrowers and not by the Partnership.........$573,000

Redwood Mortgage Corp. Processing and Escrow Fees for services in connection with
notary, document preparation, investigation, and escrow fees
fees payable by the borrowers and not by the Partnership................$6,000

Gymno Corporation Reconveyance Fee..........................................................$650

Redwood Mortgage Corp. Assumption or Extension Fees................................................$0

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 . . . . . . . . . . . . . . . . . . . . . . . . . . $70,000

22

PART 2
OTHER INFORMATION

Item 1. Legal Proceedings

Refer to notes to financial statements No. 9 discussed earlier

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

None

Item 6. Exhibits and Reports on Form 8-K.

(a) Exhibits

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

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

(b) Form 8-K

Not Applicable

23

SIGNATURES

Pursuant to the requirements of Section 13 or 15 (d) of the Securities
Exchange Act of 1934 the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereto duly authorized on the 15th day of May
2003.

REDWOOD MORTGAGE INVESTORS VIII

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

By: Gymno Corporation, General Partner

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

By: Redwood Mortgage Corp.

By: /S/ Michael R. Burwell
--------------------------------
Michael R. Burwell,
President, Secretary/Treasurer

24

Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacity indicated on the 15th day of May 2003.

Signature Title Date

/S/ Michael R. Burwell
- -----------------------
Michael R. Burwell General Partner May 15, 2003

/S/ Michael R. Burwell
- -----------------------
Michael R. Burwell President of Gymno Corporation, May 15, 2003
(Principal Executive Officer);
Director of Gymno Corporation;
Secretary/Treasurer of Gymno
Corporation (Principal Financial
and Accounting Officer)

/S/ Michael R. Burwell
- ------------------------
Michael R. Burwell President, Secretary/Treasurer May 15, 2003
of Redwood Mortgage Corp.
(Principal Financial and
Accounting Officer); Director
of Redwood Mortgage Corp.

25

Exhibit 99.1

GENERAL PARTNER CERTIFICATION

I, Michael R. Burwell, General Partner, certify that:

1. I have reviewed this quarterly report on Form 10-Q of Redwood Mortgage
Investors VIII, a California Limited Partnership (the "Registrant");

2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;

3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
Registrant as of, and for, the periods presented in this quarterly report;

4. The Registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the Registrant and we have:

(a) designed such disclosure controls and procedures to ensure that
material information relating to the Registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly
during the period in which this quarterly report is being prepared;

(b) evaluated the effectiveness of the Registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and

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

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

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

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

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

/s/ Michael R. Burwell
- -----------------------------------
Michael R. Burwell, General Partner
May 15, 2003

26

Exhibit 99.1

CERTIFICATION PURSUANT TO
18 U.S.C SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report of Redwood Mortgage Investors VIII
(the "Partnership") on Form 10-Q for the period ending March 31, 2003 as filed
with the Securities and Exchange Commission on the date hereof (the "Report"),
pursuant to 18 U.S.C. (S) 1350, as adopted pursuant to (S) 906 of the
Sarbanes-Oxley Act of 2002, I, Michael R. Burwell, General Partner of the
Partnership, certify, that to the best of my knowledge:

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

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

/s/ Michael R. Burwell
- -----------------------------------
Michael R. Burwell, General Partner
May 15, 2003

27

Exhibit 99.2

PRESIDENT AND CHIEF FINANCIAL OFFICER CERTIFICATION

I, Michael R. Burwell, President and Chief Financial Officer of Gymno
Corporation, General Partner, and Redwood Mortgage Corp., General Partner,
certify that:

1. I have reviewed this quarterly report on Form 10-Q of Redwood Mortgage
Investors VIII, a California Limited Partnership (the "Registrant");

2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;

3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
Registrant as of, and for, the periods presented in this quarterly report;

4. The Registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the Registrant and we have:

(a) designed such disclosure controls and procedures to ensure that
material information relating to the Registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly
during the period in which this quarterly report is being prepared;

(b) evaluated the effectiveness of the Registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and

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

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

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

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

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

/s/ Michael R. Burwell
- ---------------------------------------
Michael R. Burwell, President and Chief
Financial Officer of Gymno Corporation,
General Partner, and Redwood Mortgage
Corp., General Partner
May 15, 2003

28

Exhibit 99.2

CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report of Redwood Mortgage Investors VIII
(the "Partnership") on Form 10-Q for the period ending March 31, 2003 as filed
with the Securities and Exchange Commission on the date hereof (the "Report"),
pursuant to 18 U.S.C. (S) 1350, as adopted pursuant to (S) 906 of the
Sarbanes-Oxley Act of 2002, I, Michael R. Burwell, President,
Secretary/Treasurer & Chief Financial Officer of Gymno Corporation, General
Partner of the Partnership, and Redwood Mortgage Corp., General Partner of the
Partnership, certify that to the best of my knowledge:

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

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

/s/ Michael R. Burwell
- ---------------------------------------------
Michael R. Burwell, President,
Secretary/Treasurer & Chief Financial
Officer of Gymno Corporation, General Partner,
and Redwood Mortgage Corp., General Partner
May 15, 2003

29