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, 2004
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Commission file number 333-106900
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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

Part I - Item 1. Financial Statements

REDWOOD MORTGAGE INVESTORS VIII
(A California Limited Partnership)
CONSOLIDATED BALANCE SHEETS
MARCH 31, 2004 and DECEMBER 31, 2003 (unaudited)
(in thousands)

ASSETS

March 31, December 31,
2004 2003

--------------- ----------------
Cash and cash equivalents $ 6,087 $ 8,921
--------------- ----------------

Loans
Loans secured by deeds of trust 138,220 147,174
Loans, unsecured 34 34
--------------- ----------------
Allowance for loan losses (2,216) (2,649)
--------------- ----------------
Net loans 136,038 144,559
--------------- ----------------

Interest and other receivables
Accrued interest and late fees 4,949 4,735
Advances on loans 289 416

--------------- ----------------
5,238 5,151
--------------- ----------------

Loan origination fees, net 32 44
Real estate held for sale, net of
allowance of $500 3,979 3,979
--------------- ----------------
4,011 4,023
Total assets --------------- ----------------
$151,374 $162,654
=============== ================

LIABILITIES AND PARTNERS' CAPITAL

Liabilities
Line of credit $ 2,000 $ 22,000
Accounts payable 10 224
Payable to affiliate 484 448
--------------- ----------------

Total liabilities 2,494 22,672
--------------- ----------------
Investors in applicant status 1,594 1,210
--------------- ----------------

Partners' capital
Limited partners' capital, subject to
redemption net of unallocatedsyndication
costs of $946 and $875 for March 31, 2004
and December 31, 2003, respectively; and
formation loan receivable of $7,891 and
$7,550 for March 31, 2004 and December 31,
2003, respectively 147,156 138,649

General partners' capital, net of unallocated
syndication costs of $10 and $9 for March 31,
2004 and December 31, 2003,
respectively 130 123
--------------- ----------------

Total partners' capital 147,286 138,772
--------------- ----------------

Total liabilities and partners' capital $151,374 $162,654
=============== ================

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

2

REDWOOD MORTGAGE INVESTORS VIII
(A California Limited Partnership)
CONSOLIDATED STATEMENTS OF INCOME
FOR THE THREE MONTHS ENDED MARCH 31, 2004 AND 2003 (unaudited)
(in thousands, except for per limited partner amounts)

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

2004 2003
--------------- ---------------
Revenues
Interest on loans $ 3,733 $ 2,764
Interest-bank 4 17
Late fees 53 7
Other 60 50
--------------- ---------------
3,850 2,838
--------------- ---------------
Expenses
Mortgage servicing fees 353 206
Interest expense 106 1
Amortization of loan origination fees 12 3
Provisions for losses on loans and real estate 282 112
Asset management fees 141 98
Clerical costs from Redwood Mortgage Corp. 75 70
Professional services 55 45
Broker expense - 81
Amortization of discount on imputed interest 57 49
Other 36 708
--------------- ---------------
1,117 659
--------------- ---------------

Net income $ 2,733 $ 2,130
=============== ===============

Net income: general partners (1%) $ 27 $ 21
limited partners (99%) 2,706 2,109
--------------- ---------------
$ 2,733 $ 2,130
=============== ===============
Net income per $1,000 invested by limited
partners for entire period
-where income is reinvested and compounded $ 18 $ 20
=============== ===============

-where partner receives income in
periodic distributions $ 18 $ 20
=============== ===============

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

3

REDWOOD MORTGAGE INVESTORS VIII
(A California Limited Partnership)
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31, 2004 AND 2003 (unaudited)
(in thousands)

March 31,
-----------------------------------
2004 2003
----------------- ---------------
Cash flows from operating activities
Net income $ 2,733 $ 2,130
Adjustments to reconcile net income to net cash
provided by operating activities
Inputed interest income (57) (49)
Amortization of discount 57 49
Provision for loan and real estate losses 282 112
Change in operating assets and liabilities
Accrued interest and late fees (653) 99
Advances on loans (32) (31)
Other receivables - (161)
Loan origination fees 12 6
Accounts payable (214) 162
Payable to affiliate 36 (4)
Deferred interest - (112)
----------------- ---------------
Net cash provided by operating activities 2,164 2,201
----------------- ---------------

Cash flows from investing activities
Loans originated (12,859) (32,030)
Principal collected on loans 21,695 20,600
Payments for development of real estate - (128)
----------------- ---------------
Net cash provided by (used in) investing activities 8,836 (11,558)
----------------- ---------------

Cash flows from financing activities
Borrowings (repayments) on line of credit, net (20,000) -
Repayments on note payable - (7)
Contributions by partner applicants 8,283 13,145
Partners' withdrawals (1,627) (1,079)
Syndication costs paid (124) (149)
Formation loan lending (570) (938)
Formation loan collections 204 153
----------------- ---------------
Net cash provided by (used in)financing activities (13,834) 11,125
----------------- ---------------

Net increase (decrease)in cash and cash equivalents (2,834) 1,768

Cash and cash equivalents - beginning of year 8,921 7,188
----------------- ---------------

Cash and cash equivalents - end of period $ 6,087 $ 8,956
================= ===============

Supplemental disclosures of cash flow information
Cash paid for interest $ 106 $ 1
================= ===============

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, 2004 (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,
2003 filed with the Securities and Exchange Commission. The results of
operations for the three month period ended March 31, 2004 are not necessarily
indicative of the operating results to be expected for the full year.

Formation Loans

The following summarizes Formation Loan transactions to March 31, 2004 (in
thousands):

Offering
-------------------------------------------------------------------------------------------

1st 2nd 3rd 4th 5th Total
----------- ------------ ----------- ----------- ------------ -----------
Limited partner
contributions $14,932 $29,993 $29,999 $49,985 14,635 $139,544
=========== ============ =========== =========== ============ ===========

Formation loan made $1,075 $2,272 $2,218 $3,777 $1,023 $10,365
Discount on imputed
interest (42) (410) (350) (748) (97) (1,647)

----------- ------------ ----------- ----------- ------------ -----------
Formation loan, net 1,033 1,862 1,868 3,029 926 8,718
Repayments to date (712) (877) (423) (222) (11) (2,245)
Early withdrawal
penalties applied (68) (98) (63) - - (229)

----------- ------------ ----------- ----------- ------------ -----------
Formation loan, net 253 887 1,382 2,807 915 6,244
Unamortized discount
on imputed interest 42 410 350 748 97 1,647
----------- ------------ ----------- ----------- ------------ -----------
Balance, March 31, 2004 $295 $1,297 $1,732 $3,555 $1,012 $7,891
=========== ============ =========== =========== ============ ===========

Percent loaned 7.2% 7.6% 7.4% 7.6% 7.0% 7.4%
=========== ============ =========== =========== ============ ===========

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. Interest has been imputed at
the market rate of interest in effect at the date of the offerings' close.
During the three months ended March 31, 2004 and 2003, amortization expense of
$57,000 and $49,000 was recorded related to the discount on the imputed
interest.

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.

5

REDWOOD MORTGAGE INVESTORS VIII
(A California Limited Partnership)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2004 (unaudited)

Through March 31, 2004, syndication costs of $2,677,000 had been incurred by the
Partnership with the following distribution (in thousands):

Costs incurred $ 2,677
Early withdrawal penalties applied (95)
Allocated and amortized to date (1,626)
------------
March 31, 2004 balance $ 956
============

Syndication costs attributable to the fifth offering ($75,000,000) will be
limited to the lesser of 10% of the gross proceeds or $3,000,000 with any excess
to be paid by the general partners. As of March 31, 2004, the fifth offering had
incurred syndication costs of $208,000 (1.4% of contributions).

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 presentation.

Loans, secured by deeds of trust

At March 31, 2004 and December 31, 2003, the Partnership had fourteen and
sixteen loans past due 90 days or more, totaling $23,819,000 and $27,182,000,
respectively. 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. At March 31, 2004 and
December 31, 2003, loans categorized as impaired by the Partnership were $0.

Allowance for loan losses

The composition of the allowance for loan losses as of March 31, 2004 and
December 31, 2003 was as follows (in thousands):

March 31, December 31,
2004 2003
---------------- -----------------

Specified loans $ 49 $ 49
General 2,167 2,600

---------------- -----------------
$ 2,216 $ 2,649
================ =================

6

REDWOOD MORTGAGE INVESTORS VIII
(A California Limited Partnership)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2004 (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, 2004 and for the year ended December 31, 2003 (in
thousands):

March 31, December 31,
2004 2003
---------------- ---------------
Beginning balance $ 2,649 $ 3,021
Restructured loans
Additions charged to income 282 782
Write-offs (715) (1,154)
---------------- ---------------
$ 2,216 $ 2,649
================ ===============

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.

Management Estimates

The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions about the reported amounts of
assets and liabilities and disclosures of contingent assets and liabilities, at
the date of the financial statements and the reported amounts of revenues and
expenses during the reported periods. Such estimates relate principally to the
determination of the allowance for loan losses, including the valuation of
impaired loans and the valuation of real estate held for sale. Actual results
could differ significantly from these estimates.

7

REDWOOD MORTGAGE INVESTORS VIII
(A California Limited Partnership)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2004 (unaudited)

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, Redwood Mortgage Corp. may collect an amount equivalent
to 12% of the loaned amount until 6 months after the termination date of the
offering. Thereafter, loan brokerage commissions (points) will be limited to an
amount not to exceed 4% of the total Partnership assets per year. The loan
brokerage commissions are paid by the borrowers and thus, are not an expense of
the Partnership.

Mortgage servicing fees

Monthly mortgage servicing fees of up to 1/8 of 1% (1.5% annual) of the
unpaid principal are paid to Redwood Mortgage Corp., based on the unpaid
principal balance of the loan portfolio, or such lesser amount as is reasonable
and customary in the geographic area where the property securing the mortgage is
located. Once a loan is categorized as impaired, mortgage servicing fees are no
longer accrued thereon. Additional service fees are recorded upon the receipt of
any subsequent payments on impaired loans.

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) which is the partnership's total assets less its total liabilities.

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

Redwood Mortgage Corp., a general partner is reimbursed by the Partnership
for all operating expenses incurred on behalf of the Partnership, including
without limitation, out-of-pocket general and administration expenses of the
Partnership, accounting and audit fees, legal fees and expenses, postage and
preparation of reports to limited partners.

NOTE 4 - REAL ESTATE HELD FOR SALE

During 2002, a single-family residence that secured a Partnership loan
totaling $4,402,000, including accrued interest and advances, was transferred
via a statutory warranty deed to a new entity named Russian Hill Property
Company, LLC ("Russian"). Russian was formed by the Partnership to complete the
development and sale of the property. The assets, liabilities and operating
results of Russian have been consolidated into the accompanying consolidated
financial statements of the Partnership. Costs related to the sale of this
property were capitalized during 2003. Commencing January 2004, costs related to
sales and maintenance of the property are being expensed. As of March 31, 2004
and December 31, 2003, the Partnership had advanced approximately $0 and
$94,000, respectively, to Russian for sales costs. At March 31, 2004 and
December 31, 2003, the Partnership's total investment in Russian was $3,979,000,
net of a valuation allowance of $500,000.

8

REDWOOD MORTGAGE INVESTORS VIII
(A California Limited Partnership)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2004 (unaudited)

NOTE 5 - BANK LINE OF CREDIT

The Partnership has a bank line of credit expiring November 25, 2005, of up
to $22,000,000 at prime secured by its loan portfolio. The outstanding balances
were $2,000,000 and $22,000,000at March 31, 2004 and December 31, 2003,
respectively. The interest rate was 4.00% (prime) at March 31, 2004. 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, 2004 and for the
year ended December 31, 2003.

NOTE 6 - 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 $138,220,000 and $147,174,000 at March 31,
2004 and December 31, 2003, respectively. The fair value of these loans of
$140,867,994 and $148,748,000, 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.

NOTE 7 - ASSET CONCENTRATIONS AND CHARACTERISTICS (in thousands)

Most loans are secured by recorded deeds of trust. At March 31, 2004 and
December 31, 2003 there were 79 and 81 secured loans outstanding, respectively,
with the following characteristics:

March 31, December 31,
2004 2003
-------------- ------------- ----
Number of secured loans outstandi 79 81
Total secured loans outstanding $ 138,220 $ 147,174

Average secured loan outstanding $ 1,749 $ 1,817
Average secured loan as percent of total 1.27% 1.23%
Average secured loan as percent of partners'
capital 1.19% 1.31%

Largest secured loan outstanding $ 16,010 $ 16,010
Largest secured loan as percent of total 11.58% 10.88%
Largest secured loan as percent of
partnership assets 10.57% * 9.84% *

Number of counties where security is located
(all California) 19 20
Largest percentage of secured loans in
one county 24.07% 26.47%
Average secured loan to appraised value of
security based on appraised values and prior
liens at time loan was consummated 58.40% 53.97%
Number of secured loans in foreclosure status 3 3
Amount of secured loans in foreclosure $ 2,931 $ 2,931

* 9.84% of Partnership assets at inception

Over time, loans may increase above 10% of the secured loan portfolio or
Partnership assests as the loan portfolio and assets of the Partnership decrease
due to limited partner withdrawals and/or loan payoffs.

9

REDWOOD MORTGAGE INVESTORS VIII
(A California Limited Partnership)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2004 (unaudited)

NOTE 7 - ASSET CONCENTRATIONS AND CHARACTERISTICS (in thousands)(continued)

The following secured loan categories were held at March 31, 2004, and
December 31, 2003:

March 31, December 31,
2004 2003
----------------- ----------------
First Trust Deeds $ 83,195 $ 84,437
Second Trust Deeds 52,604 61,247
Third Trust Deeds 2,421 1,490
----------------- ----------------
Total secured loans 138,220 147,174
Prior liens due other lenders 128,207 116,870
----------------- ----------------
Total debt $ 266,427 $ 264,044
----------------- ----------------

Appraised property value at time of loan $ 456,173 $ 489,219
----------------- ----------------

Total secured loans as a percent of appraisals 58.40% 53.97%
----------------- ----------------

Secured loans by type of property
Owner occupied homes $ 15,477 $ 13,656
Non-owner occupied homes 43,143 52,975
Apartments 23,621 22,649
Commercial 50,587 52,502
Land 5,392 5,392
----------------- ----------------
$ 138,220 $ 147,174
================= ================

Scheduled maturity dates of loans as of March 31, 2004 are as follows:

Year Ending
December 31, Amount
------------------------ ----------------
2004 $ 37,866
2005 47,494
2006 32,909
2007 13,456
2008 1,945
Thereafter 4,550
----------------
$ 138,220
================

The scheduled maturities for 2004 include eleven loans totaling
$14,264,000, and representing 10.32%% of the portfolio, past maturity at March
31, 2004. Several borrowers are in process of selling the properties or
refinancing their loans through other institutions, as this is an opportune time
for them to do so and/or take advantage of lower interest rates. The partnership
allows borrowers to occasionally continue to make the payments on debt past
maturity for periods of time. Interest payments on eight of these loans were
delinquent. Of these past maturity loans, the partnership has begun foreclosure
on two with principal balances totaling $2,535,000. These two foreclosures are
included in the total number of foreclosures begun by the partnership, which
total three.

Cash deposits at March 31, 2004 of $5,709,000 were in two banks. The
balances exceeded FDIC insurance limits (up to $100,000 per bank) by $5,509,000.
This bank is the same financial institution that has provided the Partnership
with the $22,000,000 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 when available, or used to
pay-down the line of credit balance to the extent of borrowings or held as cash.

10

REDWOOD MORTGAGE INVESTORS VIII
(A California Limited Partnership)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2004 (unaudited)

NOTE 8 - COMMITMENTS & CONTINGENCIES

Construction Loans

The Partnership has construction loans, which are at various stages of
completion of the construction process at March 31, 2004. 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,
2004, there were $19,360,000 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, 2004. There are 6 loans totaling $4,225,000 in workout
agreements as of March 31, 2004.

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.

Part I - Item 2 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 and revenue and
expenses for the reporting periods. Such estimates relate principally to the
determination of (1) the allowance for loan losses (i.e. the amount of allowance
established against loans receivable as an estimate of potential loan losses)
including the accrued interest and advances that are estimated to be
unrecoverable based on estimates of amounts to be collected plus estimates of
the value of the property as collateral and (2) the valuation of real estate
acquired through foreclosure. At March 31, 2004, there was one real estate
property 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.
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 loan is
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

11

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 2004 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, 2004 and 2003, loan brokerage commissions paid by the borrowers were
$448,000 and $573,000, respectively.

o Mortgage Servicing Fees Monthly mortgage servicing fees of up to 1/8 of
1% (1.5% on an annual basis) of the unpaid principal of the Partnership's loans
is paid to Redwood Mortgage Corp., or such lesser amount as is reasonable and
customary in the geographic area where the property securing the mortgage is
located. Mortgage servicing fees of $353,000 and $206,000 were incurred for the
three months ended March 31, 2004 and 2003, respectively.

o Asset Management Fees The general partners receive monthly fees for
managing the Partnership's portfolio and operations up to 1/32 of 1% of the `net
asset value' (3/8 of 1% on an annual basis). Management fees to the general
partners of $141,000 and $98,000 were incurred by the Partnership for three
months ended March 31, 2004 and 2003, respectively.

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

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

o Operating Expenses Redwood Mortgage Corp. is reimbursed by the
Partnership for all operating expenses actually incurred 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, 2004 and December 31, 2003,
a general partner, Gymno Corporation, had contributed $141,000 and $133,000,
respectively, as capital in accordance with Section 4.02(a) of the partnership
agreement.

12

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 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.

Results of Operations - For the three months ended March 31, 2004 and 2003

The net income increase of $603,000 (28%) for the three months ended March
31, 2004 versus the three months period ended March 31, 2003 was due primarily
to an increase in interest earned on loans of $969,000, increases in late fees
of $46,000, and other income of $10,000, and reductions in brokerage fees of
$81,000, and other expenses of $7,000. In addition, significant expense
increases for the three months ended March 31, 2004 versus March 31, 2003
included increases in mortgage servicing fees of $147,000, interest expense of
$105,000, amortization of loan fees of $9,000, amortization of discount on
imputed interest of $8,000, provision for losses on loans and real estate owned
through foreclosure of $170,000, asset management fees of $43,000, clerical
costs from Redwood Mortgage Corp. of $5,000, and professional services of
$10,000.

The increase in interest on loans of $969,000 (35%) for the three months
ended March 31, 2004 versus March 31, 2003 was due primarily to the increased
size of the Partnership secured loan portfolio at March 31, 2004 as compared to
March 31, 2003 of $138,220,000 and $95,080,000.

The increase in interest expense of $105,000 for the three months ended
March 31, 2004 versus March 31, 2003 is due to the larger average outstanding
balance of the line of credit during the first quarter of 2004. This credit line
usage was due primarily to a substantial demand for loans in the fourth quarter
of 2003 when the credit line was used to its maximum of $22,000,000. During the
first quarter of 2004, this credit line was largely reduced through loan payoffs
and Partnership Unit sales.

The increase in mortgage servicing fees of $147,000 (71%) for the three
months ended March 31, 2004 versus March 31, 2003 is primarily due to an
increase in the size of the loan portfolio from $95,080,000 as of March 31, 2003
versus $138,220,000 as of March 31, 2004.

The increase of $170,000 (152%) in provision for losses on loans and real
estate owned for the three months ended March 31, 2004 versus the respective
three months ended March 31, 2003 is due to an increase in the overall portfolio
size. The portfolio, when comparing March 31, 2004 to March 31, 2003, increased
in size from $95,080,000 in 2003 to $138,220,000 in 2004. A loss was absorbed by
the allowance for loan losses during the first quarter due to the short sale of
one of the properties securing a Partnership loan. At March 31, 2004, total
allowance for losses on loans and real estate owned through foreclosure equaled
$2,716,000, which the general partners consider to be adequate.

The increase in the asset management fees of $43,000 (44%) for the three
months ended March 31, 2004 versus the respective period ended March 31, 2003 is
due to an increase in the partners' capital under management at March 31, 2004
and 2003 of $155,993,000 and $110,877,000, respectively.

The increase in professional fees of $10,000 (22%) for the three months
ended March 31, 2004 versus March 31, 2003 is due to the increased expense due
to the larger Partnership size in 2004 than in 2003 in relation to its audit and
tax return services.

The decrease in brokerage fees of $81,000 for the three months ended March
31, 2004 versus March 31, 2003 is due to all brokerage fee obligations being
paid in 2003.

13

The increase in loan origination fees of $9,000 is due to a revision of fee
rates on the increased line of credit of $22,000,000 with a new banking
institution.

The increase in other income of $10,000 during the quarter ended March 31,
2004 versus the quarter ended March 31, 2003 is made up of $2,000 in
miscellaneous income and $8,000 in imputed interest on the formation loan. The
corresponding effect of this income is the increase of $8,000 in amortization of
discount on imputed interest expenses during the two quarters under review. The
increase in imputed interest is the result of increases in the formation loan
due to additional limited partnership investments.

Partnership capital continued to increase at a slower rate for the quarter
ended March 31, 2004 than for the quarter ended March 31, 2003. The Partnership
received new limited partner capital contributions of $8,274,000 and retained
the earnings of limited partners that have chosen to do so of $1,656,000 for the
three months ended March 31, 2004, as compared to $13,126,000 and $1,377,000 for
the three months ended March 31, 2003. The increased overall Partnership capital
helped increase loans outstanding to $138,220,000 at March 31, 2004, as compared
to $95,080,000 at March 31, 2003. The limited partner contributions of
$8,274,000 for the quarter ended March 31, 2004 relate to the fifth offering
while the $13,126,000 for the period ended March 31, 2003 related to the fourth
offering. Proceeds from loan payoffs and from the sale of Units were used to pay
down the Partnership's line of credit from $22,000,000 as of December 31, 2003
to $2,000,000 as of March 31, 2004. 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. Loans outstanding declined in the
first quarter of 2004 by $8,954,000 as cash flows exceeded new loan placements.
The general partners anticipate that loan originations will balance with cash
flows for 2004.

At March 31, 2004, outstanding foreclosures were reduced to three
($2,931,000) from the six ($4,029,000) that existed at March 31, 2003. During
the three months ended March 31, 2004, the outstanding principal subject to
foreclosure decreased $1,098,000 from $4,029,000 at March 31, 2003. Of the
foreclosures at March 31, 2004, all have entered into workout agreements. The
number of foreclosures and principal amounts in foreclosure are not unusual in
the general partners' experience.

The general partners received Mortgage Brokerage Commissions from the loan
borrowers of $448,000 for the three months ended March 31, 2004 as compared to
$573,000 for the three months ended March 31, 2003. The decrease is due to fewer
loans written in the three months ended March 31, 2004 than the three months
during the corresponding period of 2003.

Since January, 2001, and through March 31, 2004, the Federal Reserve
reduced interest rates significantly by cutting the Federal Funds Rate to 1.00%.
The effect of the previous cuts has greatly reduced short-term interest rates
and to a lesser extent reduced long-term interest rates. New loans will be
originated at then existing interest rates. In the future the general partners
anticipate that 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 anticipate that new loans will be
placed during 2004 at rates similar to those that prevailed in 2003. 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% over
the year 2004. 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 7.00% and 7.50% in 2004.

Allowance for Losses.

The general partners regularly review the loan portfolio, examining the
status of delinquencies, the underlying collateral securing these loans,
borrowers' payment records, etc. Based upon this information and other data, the
allowance for loan losses is increased or decreased. Borrower foreclosures are a
normal aspect of partnership operations. The partnership is not a credit based
lender and hence while it reviews the credit history and income of borrowers,
and if applicable, the income from income producing properties, the general
partners expect that we will on occasion take back real estate security. During
14

2001, the Northern California real estate market slowed and the national and
local economies slipped into recession. During 2002 and 2003, the economy has
stabilized, but is still stagnant. At March 31, 2004 the partnership had 14
loans past due 90 days or more totaling $23,819,000. Included in these 90 day or
more delinquent loans are three notices of default beginning the process of
foreclosing three of our loans. The principal amounts of the three foreclosed
loans total $2,931,000 or 2.12% of the secured loan portfolio.

In addition to the three workout agreements with borrowers in foreclosure,
the partnership also entered into workout agreements with borrowers who are past
maturity or delinquent in their regular payments. The total number of
partnership workout agreements with borrowers is six, inclusive of matured,
foreclosed or 90-day delinquent loans. 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, 2004, 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. In 2004, we may initiate foreclosure on delinquent
borrowers or borrowers who become delinquent during the year. We may take back
additional real estate through the foreclosure process in 2004. Borrower
foreclosures are a normal aspect of partnership operations and the general
partners anticipate that they will not have a material effect on liquidity. As a
prudent guard against potential losses, the general partners have made
provisions for losses on loans and real estate owned through foreclosure of
$2,716,000 through March 31, 2004. These provisions for losses were made to
guard against collection losses. The total cumulative provision for losses as of
March 31, 2004 is considered by the general partners to be adequate. Because of
the number of variables involved, the magnitude of the swings possible and the
general partners inability to control many of these factors, actual results may
and do sometimes differ significantly from estimates made by the general
partners.

PORTFOLIO REVIEW - For the three months ended March 31, 2004 and 2003.

Loan Portfolio.

The Partnership's loan portfolio consists primarily of short-term (one to
five years), fixed rate loans secured by real estate. As of March 31, 2004 and
2003 the Partnership's loans secured by real property collateral in the six San
Francisco Bay Area counties (San Francisco, San Mateo, Santa Clara, Alameda,
Contra Costa, and Marin) represented $99,435,000 (71.94%) and $69,061,000
(72.63%) of the outstanding loan portfolio. The remainder of the portfolio
represented loans secured by real estate located primarily in Northern
California.

As of March 31, 2004 and March 31,2003, the Partnership held 79 secured
loans in the following categories (in thousands)

March 31, March 31,
2004 2003
---------------------------- ----------------------------

Single family residence
(1-4 units) $ 58,620 42.41% $ 33,023 34.73%
Multiple family dwellings
(5+ units) 23,621 17.09% 15,990 16.82%
Commercial 50,587 36.60% 37,653 39.60%
Land 5,392 3.90% 8,414 8.85%
-------------- ---------- -------------- ----------

Total $ 138,220 100.0% $ 95,080 100.0%
============== ========== ============== ==========

As of March 31, 2004, the Partnership held 79 secured 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, 2004.

15

PRIORITIES, ASSET CONCENTRATIONS AND MATURITIES OF LOANS
As of March 31, 2004 (in thousands)

# of Secured
Loans Amount Percent
-------------- ------------- ------------
1st Mortgages 43 $ 83,195 60.19%
2nd Mortgages 32 52,604 38.06%
3rd Mortgages 4 2,421 1.75%
================ ============= ============
Total 79 $ 138,220 100.00%

Maturing 12/31/04 and prior 19 $ 37,866 27.40%
Maturing prior to 12/31/05 18 47,494 34.36%
Maturing prior to 12/31/06 18 32,909 23.81%
Maturing after 12/31/06 24 19,951 14.43%
================ ============= ============
Total 79 $ 138,220 100.00%

Average Loan $ 1,749 1.27%
Largest Loan $ 16,010 11.58%
Smallest Loan $ 40 0.03%
Average Loan-to-Value, based
upon appraisals and prior liens
at date of loan 58.40%

Over time, loans may increase above 10% of the secured loan portfolio or
Partnership assests as the loan portfolio and assets of the Partnership decrease
due to limited partner withdrawals and/or loan payoffs.

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.

16

During the three months ended March 31, 2004 and 2003, 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,
-----------------------------------

2004 2003
--------------- ----------------
Compounding $1,656,000 $1,347,000
Distributing $1,005,000 $ 718,000

As of March 31, 2004 and March 31, 2003, limited partners electing to
receive cash distributions of earnings represented 38% and 34%, 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.

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, 2004, many limited partners may not as yet availed themselves of this
provision for liquidation. Earnings and capital liquidations including early
withdrawals during the three months ended March 31, 2004 and 2003 were:

Three months ended March 31,
---------------------------------
2004 2003
-------------- ---------------
Cash distributions $1,005,000 $ 718,000
Capital liquidation* $ 627,000 $ 351,000
-------------- ---------------

Total $1,632,000 $ 1,069,000
============== ===============

* 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, 2004 and 2003, capital liquidated subject to the 10%
penalty for early withdrawal was:

Three months ended March 31,
-----------------------------------
2004 2003
-------------- --------------
$ 328,000 $ 113,000

This represents 0.21% and 0.11% of the limited partners' ending capital as
of March 31, 2004 and 2003, respectively. These withdrawals are within the
normally anticipated range and represent a small percentage of limited partner
capital.

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.

17

The number of reporting units provided will be calculated based upon the limited
partner's capital account value divided by $1.00. Each investor's capital
account balance is set forth periodically on the partnership account statement
provided to investors. The reporting units are solely for Broker Dealers
requiring such information for their software programs and do not reflect actual
units owned by a limited partner or the limited partners' right or interest in
cash flow or any other economic benefit in the partnership. Each investor's
capital account balance is set forth periodically on the partnership account
statement provided to investors. The amount of partnership earnings each
investor is entitled to receive is determined by the ratio that each investor's
capital account bears to the total amount of all investor capital accounts then
outstanding. The capital account balance of each investor should be included on
any NASD member client account statement in providing a per unit estimated value
of the client's investment in the partnership in accordance with NASD Rule 2340.

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

Current Economic Conditions.

The Partnership makes loans primarily in Northern California. As of March
31, 2004, approximately 71.94% 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.

Recently the national and the Northern California economies seem to be
improving. Job creation remains a concern, as little job creation seems to be
evident. The partnership makes loans primarily in Northern California and real
estate values of residential, commercial, multi-family properties and land are
of particular interest to the partnership. Real estate is the primary security
for the partnership's loans.

The residential real estate market in California continues to appreciate.
The San Francisco Business Times of March 19, 2004 states "Robust February for
Bay Area home sales." "Bay Area home prices rose at their fastest rate in nearly
three years and sales were at near-record levels last month, the result of
continued demand and an accommodating mortgage finance environment, according to
DataQuick Information Systems of La Jolla, a real estate information service. A
total of 7,412 new and resale houses and condos were sold in the nine-county
region in February. That was up 4.4 percent from 7,102 the month before and 10.6
percent from 6,704 for February last year, according to DataQuick". "Last month
was the second strongest February DataQuick has in its records, which go back to
1988." "The median price paid for a Bay Area home was $457,000 last month, near
December's record $458,000. Last month's median was up 3.2 percent from $443,000
in January and up 13.4 percent from $403,000 for February last year. The
year-over-year increase was the highest since March 2001 when the median was
$386,000, up 17.3 percent from $329,000 a year earlier. Santa Clara County had
the lion's share of home sales --25%-- with 1,865 homes sold in February
compared to 1,450 in February 2003, according to DataQuick, which compiles its
figures from public records of all sales. The Median Price in the county,
according to DataQuick, was $490,000, up 7.5% in a year's time." "Indicators of
market distress are still largely absent, in DataQuick's opinion. It said
foreclosure rates are low, flipping rates are low, down payment sizes are stable
and there have been no significant shifts in market mix."

On the commercial scene, the SF Business Times of March 26-April 1, 2004
stated "City's real estate market creeps toward recovery." "San Francisco's
commercial real estate industry clawed forward in the first quarter, as office
vacancy moved downward, rents remained flat or moved up slightly, and sales
surged. Colliers International reported 221,347 square feet of downtown office
absorption, while preliminary numbers from Grubb & Ellis indicated around
140,000 square feet of absorption. The firms put the office vacancy rate at 16.9
percent and 22 percent, respectively. "We're trending back toward a favorable
market," said Scott Harper, managing director of Collier's San Francisco office.
"It's the third consecutive quarter, and fourth of the last five quarters, of
positive absorption." The pace of absorption did slow from the fourth quarter,
however. Collier's reported 360,631 square feet of positive absorption during
the final three months of 2003, while Grubb saw 365,000 square feet. "As
recovery starts, the pace usually picks up initially and then starts to
moderate," said Colin Yasukochi, regional manager of research and client
services for California at Grubb & Ellis. "We've always projected that
performance will be uneven in the first year of the recovery." "Also on the plus

18

side, sublease space is steadily decreasing. After hitting a peak of around 8
million square feet in 2002, total San Francisco sublease space is now around 4
million square feet, Grubb & Ellis reported."

A strong, appreciating residential market is good for primarily equity
based lenders as it allows borrowers to sell or refinance if they become unable
to make their mortgage payments. Appreciation assists lenders if they must take
back the real estate security on a loan mitigating potential loan losses.

Recovering commercial vacancies and stable to increasing rental rates will
assist landlords in debt service coverage, cash flow, and property values. All
are good for the real estate collateral securing the Partnership's commercial
loans.

For Partnership loans outstanding, as of March 31, 2004, the Partnership
had an average loan to value ratio based upon appraisals and prior liens as of
the date the loan was made of 58.40%. 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.

Part I - Item 3. 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 on our line of
credit as of March 31, 2004. The presentation, for each category of information,
aggregates the assets and liabilities by their maturity dates for maturities
occurring in each of the years 2004 through 2008 and separately aggregates the
information for all maturities arising after 2008. The carrying values of these
assets and liabilities approximate their fair market values as of March 31, 2004
(in thousands):

2004 2005 2006 2007 2008 Thereafter Total
---------- ----------- ---------- ----------- ----------- ------------- -----------
Interest earning assets:
Money market accounts $ 3,983 $ 3,983
Average interest rate 1.00% 1.00%
Loans secured by deeds of trust 37,866 47,494 32,909 13,456 1,945 4,550 $138,220
Average interest rate 11.18% 10.45% 10.09% 10.40% 9.81% 9.43% 10.52%
Line of credit $ 2,000 $ 2,000
Average interest rate 4% 4%

Market Risk.

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

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, 2004) earn interest at fixed rates. Changes in interest rates may also
affect the value of the Partnership's investment in mortgage loans and the rates
at which the Partnership reinvests funds obtained from loan repayments and new
capital contributions from limited partners. If interest rates increase, the
interest rates the Partnership obtains from reinvested funds will generally
increase, but the value of the Partnership's existing loans at fixed rates will
generally tend to decrease. The risk is mitigated by the fact that the
Partnership does not intend to sell its loan portfolio, rather such loans are
held until they are paid off. If interest rates decrease, the amounts becoming
available to the Partnership for investment due to repayment of Partnership
loans may be reinvested at lower rates than the Partnership had been able to
obtain in prior investments, or than the rates on the repaid loans. In addition,
interest rate decreases may encourage borrowers to refinance their loans with
the Partnership at a time where the Partnership is unable to reinvest in loans
of comparable value.

19

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

ASSET QUALITY

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

The conclusion that a loan may become uncollectible, in whole or in part,
is a matter of judgment. Although institutional lenders are subject to
requirements and regulations that, among other things, require them to perform
ongoing analyses of their portfolios, loan-to-value ratios, reserves, etc., and
to obtain and maintain current information regarding their borrowers and the
securing properties, the Partnership is not subject to these regulations and has
not adopted certain of these practices. Rather, the general partners, in
connection with the periodic closing of the accounting records of the
Partnership and the preparation of the financial statements, determine whether
the allowance for loan losses is adequate to cover potential loan losses of the
Partnership. As of March 31, 2004 the general partners have determined that the
allowance for loan losses and real estate owned of $2,716,000 (1.84% 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, 2004, 14 loans were
delinquent over 90 days amounting to $23,820,000. Of these, $3,297,000
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.

The Partnership also makes loans requiring periodic disbursements of funds.
As of March 31, 2004, there were thirteen such loans. These loans include ground
up construction of buildings and loans for rehabilitation of existing
structures. Interest on these loans is computed using a simple interest method
and only on the amounts disbursed on a daily basis.

A summary of the status of the Partnership's loans which are periodically
disbursed, as of March 31, 2004, is set forth below (in thousands):

Complete construction Rehabilitation
-------------------------- -------------------------

Disbursed funds $ 15,665 $ 30,441
Undisbursed funds $ 9,775 $ 9,585

Part I - Item 4. CONTROLS AND PROCEDURES

As of March 31, 2004, the general partners 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 the 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 on the other factors that could significantly affect these
controls subsequent to the date of their evaluation.

20

Part II - 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, Form S-11 and subsequent amendments related to the offering of
Partnership interests dated October 7, 2003, 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, 2004.
All such compensation is in compliance with the guidelines and limitations set
forth in the Prospectus.

Entity Receiving Description of Compensation
Compensation and Services Rendered Amount
- ------------------- ------------------------------------------------- ---------
I. Redwood Mortgage
Corp. Loan Servicing Fee for servicing loans............ $353,000

General Partners
&/or Affiliates
Asset Management Fee for managing assets.......... $141,000

General Partners 1% interest in profits.......................... $27,000
Less allocation of syndication costs ............. 0
--------------
$27,000
Redwood Mortgage
Corp. Portion of early withdrawal penalties applied
to reduce Formation Loan ......................... $25,000

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

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.................................. $448,000

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

Gymno Corporation Reconveyance Fee................................. $6,801

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 . . . . . . . . . . . . . . . . . . . . . . . . . . $75,000

21

PART 2
OTHER INFORMATION

Item 1..... Legal Proceedings

Refer to notes to financial statements No. 8 discussed earlier

Item 2..... Changes in the Securities
S-11, effective October 7, 2003 and any subsequent
amendments thereto

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

22

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 14th day of May
2004.

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

23

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 14th day of May 2004.

Signature Title Date

/S/ Michael R. Burwell
- --------------------------
Michael R. Burwell General Partner May 14, 2004

/S/ Michael R. Burwell
- --------------------------
Michael R. Burwell President of Gymno Corporation, May 14, 2004
(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 14, 2004
of Redwood Mortgage Corp.
(Principal Financial and
Accounting Officer); Director
of Redwood Mortgage Corp.

24

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 March 31, 2004 (the "Evaluation Date"); and

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

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

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

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

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

/s/ Michael R. Burwell
- -----------------------------
Michael R. Burwell, General Partner
May 14, 2004

25

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, 2004 as filed
with the Securities and Exchange Commission on the date hereof (the "Report"),
pursuant to 18 U.S.C. (S) 1350, as adopted pursuant to (S) 906 of the
Sarbanes-Oxley Act of 2002, I, Michael R. Burwell, General Partner of the
Partnership, certify, that to the best of my knowledge:

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

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

/s/ Michael R. Burwell
- -----------------------------
Michael R. Burwell, General Partner
May 14, 2004

26

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 March 31, 2004 (the "Evaluation Date"); and

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

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

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

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

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

/s/ Michael R. Burwell
- ---------------------------------
Michael R. Burwell, President and Chief
Financial Officer of Gymno Corporation,
General Partner, and Redwood Mortgage
Corp., General Partner
May 14, 2004

27

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, 2004 as filed
with the Securities and Exchange Commission on the date hereof (the "Report"),
pursuant to 18 U.S.C. (S) 1350, as adopted pursuant to (S) 906 of the
Sarbanes-Oxley Act of 2002, I, Michael R. Burwell, President,
Secretary/Treasurer & Chief Financial Officer of Gymno Corporation, General
Partner of the Partnership, 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 14, 2004

28