UNITED STATES SECURITIES AND EXCHANGE COMMISSION
                               Washington, D.C.  20549
                                      FORM 10-K

               |X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
                           SECURITIES EXCHANGE ACT OF 1934

                      FOR FISCAL YEAR ENDED: SEPTEMBER 30, 1997

                                          OR

             |_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
                  SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED)

                         For the transition period from to .

Commission File Number:  0-15037

            PAINE WEBBER INCOME PROPERTIES SEVEN LIMITED PARTNERSHIP
            --------------------------------------------------------
             (Exact name of registrant as specified in its charter)

        Delaware                                                 04-2870345
        --------                                                 ----------
(State of organization)                                       (I.R.S. Employer
                                                            Identification  No.)

  265 Franklin Street, Boston, Massachusetts                          02110
--------------------------------------------                        ---------
 (Address of principal executive office)                           (Zip Code)

Registrant's telephone number, including area code              (617) 439-8118
                                                                --------------

             Securities registered pursuant to Section 12(b) of the Act:

                                                       Name of each exchange on
Title of each class                                        which registered
-------------------                                        ----------------
     None                                                          None

             Securities registered pursuant to Section 12(g) of the Act:

                        UNITS OF LIMITED PARTNERSHIP INTEREST
                                   (Title of class)

Indicate by check mark if disclosure of delinquent  filers  pursuant to Item 405
of Regulation  S-K is not contained  herein,  and will not be contained,  to the
best of registrant's  knowledge,  in definitive proxy or information  statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. |X|.

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  such  reports),  and  (2) has  been  subject  to such  filing
requirements for the past 90 days. Yes |X| No |_|

State the aggregate market value of the voting stock held by  non-affiliates  of
the registrant. Not applicable.
                         DOCUMENTS INCORPORATED BY REFERENCE
Documents                                                   Form 10-K Reference
---------                                                   -------------------
Prospectus of the registrant dated                          Part IV
May 14, 1985, as supplemented

Current Report on Form 8-K of registrant dated              Part IV
September 9, 1997

<PAGE>

           PAINE WEBBER INCOME PROPERTIES SEVEN LIMITED PARTNERSHIP
                                1997 FORM 10-K

                               TABLE OF CONTENTS


Part  I                                                                  Page
-------                                                                  ----

Item  1   Business                                                        I-1

Item  2   Properties                                                      I-3

Item  3   Legal Proceedings                                               I-4

Item  4   Submission of Matters to a Vote of Security Holders             I-5

Part II
-------  

Item  5   Market for the Partnership's Limited Partnership Interests     II-1
             and Related Security Holder Matters

Item  6   Selected Financial Data                                        II-1

Item  7   Management's Discussion and Analysis of Financial              II-2
             Condition and Results of Operations

Item  8   Financial Statements and Supplementary Data                    II-9

Item  9   Changes in and Disagreements with Accountants on Accounting
             and Financial Disclosure                                    II-9

Part III
--------

Item  10  Directors and Executive Officers of the Partnership           III-1

Item  11  Executive Compensation                                        III-2

Item  12  Security Ownership of Certain Beneficial Owners and
             Management                                                 III-2

Item  13  Certain Relationships and Related Transactions                III-3

Part IV
-------  

Item  14  Exhibits, Financial Statement Schedules and Reports on
             Form 8-K                                                    IV-1

Signatures                                                               IV-2

Index to Exhibits                                                        IV-3

Financial Statements and Supplementary Data                       F-1 to F-35



<PAGE>


      This Form 10-K contains  forward-looking  statements within the meaning of
Section 27A of the  Securities  Act of 1933 and  Section  21E of the  Securities
Exchange Act of 1934. The  Partnership's  actual results could differ materially
from those set forth in the  forward-looking  statements.  Certain  factors that
might cause such a difference  are  discussed in Item 7 in the section  entitled
"Certain Factors Affecting Future Operating  Results"  beginning on page II-8 of
this Form 10-K.

                                    PART I

Item 1.  Business

      Paine  Webber   Income   Properties   Seven   Limited   Partnership   (the
"Partnership") is a limited partnership formed in January 1985 under the Uniform
Limited Partnership Act of the State of Delaware for the purpose of investing in
a  diversified   portfolio  of   income-producing   real  properties   including
apartments,   shopping  centers  and  office  buildings.  The  Partnership  sold
$37,969,000  in Limited  Partnership  units (the "Units"),  representing  37,969
Units at $1,000  per  Unit,  from May 14,  1985 to May 13,  1986  pursuant  to a
Registration  Statement  on Form S-11  filed  under the  Securities  Act of 1933
(Registration  No.  2-95562).  Limited Partners will not be required to make any
additional capital contributions.

      The  Partnership  originally  invested  the  net  proceeds  of the  public
offering,   through  five  joint  venture   partnerships,   in  seven  operating
properties,  comprised of five multi-family  apartment complexes,  one mixed-use
office and retail property and one shopping center.  As discussed further below,
during  fiscal 1997 three of the  multi-family  properties  were sold.  A fourth
multi-family  property was sold  subsequent  to September 30, 1997. In addition,
the office  portion of the  investment in the mixed-use  Concourse  property was
lost through  foreclosure  proceedings  on December 17,  1992.  The  Partnership
retains an interest in the retail plaza portion of the Concourse  property.  The
two  office  towers  owned  by  the   Concourse   joint  venture  had  comprised
approximately  28% of the Partnership's  original  investment  portfolio.  As of
September 30, 1997, the Partnership owned,  through joint venture  partnerships,
interests in the operating properties set forth in the following table:

Name of Joint Venture                      Date of
Name and Type of Property                  Acquisition
Location                         Size      of Interest    Type of Ownership (1)
--------                         ----      -----------    ---------------------

West Palm Beach Concourse       30,473      7/31/85       Fee ownership  of land
  Associates (2)                gross                     and improvements
The Concourse                   leasable                  (through joint
  Retail Plaza                  sq. ft.                   venture).
West Palm Beach, Florida

Chicago Colony Apartments       783         12/27/85      Fee ownership  of land
  Associates                    units                     and improvements
The Colony Apartments                                     (through joint
Mount Prospect, Illinois                                  venture).

Chicago Colony Square           39,572      12/27/85      Fee ownership of land
  Associates                    gross                     and improvements
Colony Square Shopping Center   leasable                  (through joint
Mount Prospect, Illinois        sq. ft.                   venture).

Daniel Meadows Partnership      200         6/19/86       Fee ownership of land
The Meadows on the Lake         units                     and improvements
  Apartments                                              (through joint 
Birmingham, Alabama                                       venture).

(1) See Notes to the  Consolidated  Financial  Statements filed with this Annual
    Report for a description of the long-term mortgage  indebtedness  secured by
    the Partnership's  operating  property  investments and for a description of
    the agreements  through which the Partnership has acquired these real estate
    investments.

(2) On October 29, 1992,  West Palm Beach  Concourse  Associates  entered into a
    settlement  agreement  with  its  mortgage  lenders  which  resulted  in the
    retention  of  the  ownership  of  the  retail  component  of  the  original
    investment  property  (30,473  square feet) and the  foreclosure  of the two
    office towers (70,000 square feet each) by the first  mortgage  lender.  The
    foreclosure  of the office towers was  completed on December 17, 1992.  West
    Palm Beach Concourse  Associates had been in default of the first and second
    mortgage  loans  secured  by the  venture's  mixed-use,  office  and  retail
    operating properties since May 1991. The inability of the venture to service
    its debt  obligations  resulted from a significant  deterioration in leasing
    levels and  effective  rental rates for the office towers caused by severely
    depressed local market conditions.

(3) Subsequent to year-end, on December 18, 1997 Daniel Meadows Partnership sold
    its operating investment property,  The Meadows on the Lakes Apartments,  to
    an unrelated  party for $9.525  million.  The sale generated net proceeds of
    approximately $4.4 million after repayment of the outstanding first mortgage
    loan of  approximately  $4.7  million  and  closing  costs of  approximately
    $400,000.  The  Partnership  received 100% of the net proceeds in accordance
    with the terms of the joint venture agreement.

      The  Partnership  previously  had an interest in HMF  Associates,  a joint
venture which owned three multi-family  apartment properties.  On June 27, 1997,
HMF Associates sold the properties known as The Hunt Club Apartments  located in
Seattle,  Washington  and The Marina  Club  Apartments  located  in Des  Moines,
Washington to an unrelated third party for  approximately  $5.3 million and $3.1
million,  respectively.  The Partnership  received net proceeds of approximately
$288,000 in connection  with the sale of these two assets in  accordance  with a
discounted mortgage loan payoff agreement reached with the lender in April 1997.
On September 9, 1997,  HMF  Associates  sold the property known as The Enchanted
Woods Apartments located in Federal Way,  Washington to an unrelated third party
for  approximately  $9.2  million.  The  Partnership  received  net  proceeds of
approximately  $261,000  in  connection  with  the sale in  accordance  with the
discounted  mortgage loan payoff agreement.  See Item 7 for a further discussion
of these transactions.

    The Partnership's original investment objectives were to:

    (i)  provide the Limited  Partners with cash  distributions  which,  to some
         extent, would not constitute taxable income;
    (ii) preserve and protect Limited Partners' capital;
    (iii)achieve long-term appreciation in the value of its properties; and
    (iv) provide a build up of equity  through the reduction of mortgage loans
         on its properties.

      Regular  quarterly  distributions of excess operating cash flow, which had
been suspended in 1990, were reinstated  during fiscal 1997.  Through  September
30,  1997,  the Limited  Partners  had received  cumulative  cash  distributions
totalling approximately  $11,816,000,  or approximately $327 per original $1,000
investment for the  Partnership's  earliest  investors.  Of this total,  $40 per
original $1,000 investment represents a distribution made in February 1997 of an
amount of Partnership cash reserves which exceeded expected future requirements,
and $50 per original investment  represents a Special Capital  Distribution made
on August 15, 1997 to unitholders of record as of June 27, 1997. Of this amount,
$7.60 per original  $1,000  investment  represented  net sale  proceeds from the
disposition of The Hunt Club Apartments and The Marina Club  Apartments,  $41.48
per original  $1,000  investment  represented  proceeds from the  settlements of
litigation covering  construction-related  defects at the Hunt Club, Marina Club
and  Enchanted  Woods  properties  and  $0.92  per  original  $1,000  investment
represented an additional  amount of cash reserves that exceeded expected future
requirements.  The remaining distributions have been from operating cash flow. A
substantial portion of these cash distributions to date have been sheltered from
current taxable income.

      As of September 30, 1997, the Partnership  retained an ownership  interest
in four of its seven original operating properties,  although, as noted above, a
major portion of the  investment in The  Concourse  was lost to  foreclosure  in
December  1992. In addtion,  as noted above  subsequent to year end, on December
18, 1997, the Meadows joint venture sold its operating investment property to an
unrelated third party for $9,525,000.  The Partnership  received net proceeds of
approximately  $4.4 million  after paying off the  outstanding  mortgage loan of
approximatley  $4.7 million and closing costs. The Partnership  received 100% of
the net  proceeds  in  accordance  with the  joint  venture  agreement.  The net
proceeds from the sale of The Meadows on the Lake Apartments will be distributed
to the Limited  Partners on February 13, 1998 along with the  proceeds  received
from the sale of the Enchanted Woods property  discussed further above. The loss
of the  Concourse  Office Towers to  foreclosure  in fiscal 1993 and the minimal
proceeds from the sale of the three  properties  owned by HMF  Associates  means
that the  Partnership  will be unable to return the full amount of the  original
invested capital to the Limited Partners.  The two office towers represented 28%
of  the  Partnership's  original  investment  portfolio.   The  three  apartment
complexes  owned  by HMF  Associates  comprised  another  13%  of  the  original
investment  portfolio.  The amount of capital which will be returned will depend
upon  the  proceeds  received  from  the  final  liquidation  of  the  remaining
investments.  The amount of such proceeds will ultimately  depend upon the value
of the underlying  investment properties at the time of their final disposition,
which, for the most part,  cannot  presently be determined.  Of the three assets
remaining  after the sale of the  Meadows  on the Lake  Apartments,  the  Colony
Apartments property has significant equity above the outstanding debt obligation
based on the estimated  current property value,  while the two retail properties
would not be expected to yield  substantial net proceeds after the mortgage debt
if sold under current market conditions. At the present time, real estate values
for retail shopping  centers in certain markets are being adversely  impacted by
the  effects of  overbuilding  and  consolidations  among  retailers  which have
resulted in an oversupply of space. It remains unclear at this time what impact,
if any, this general trend will have on the  operations  and/or market values of
the  Partnership's  two  retail  property  investments.   The  Managing  General
Partner's  strategy is to preserve the Partnership's  remaining equity interests
and to seek  strategic  opportunities  to  enhance  property  values  while  the
respective  local  economies and rental markets  continue to improve in order to
return as much of the invested capital as possible.

      All of the remaining  properties in which the  Partnership has an interest
are located in real estate  markets in which they face  significant  competition
for the revenues they  generate.  The apartment  complex  competes with numerous
projects  of  similar  types  generally  on the  basis of  price,  location  and
amenities. As in all markets, the apartment project also competes with the local
single family home market for prospective tenants. The continued availability of
low  interest  rates on home  mortgage  loans  has  increased  the level of this
competition  in all parts of the country over the past several  years.  However,
the impact of the competition from the single-family home market has been offset
by the  lack  of  significant  new  construction  activity  in the  multi-family
apartment  market over most of this period.  In the past 12 months,  development
activity   for   multi-family   properties   in  many   markets  has   escalated
significantly.  The shopping  center and retail plaza also compete for long-term
commercial tenants with numerous projects of similar type generally on the basis
of location, rental rates, tenant mix and tenant improvement allowances.

      The Partnership has no real estate investments  outside the United States.
The  Partnership  is engaged  solely in the business of real estate  investment,
therefore,   presentation  of  information   about  industry   segments  is  not
applicable.

      The  Partnership  has no  employees;  it  has,  however,  entered  into an
Advisory  Contract with  PaineWebber  Properties  Incorporated  (the "Adviser"),
which is  responsible  for the  day-to-day  operations of the  Partnership.  The
Adviser is a wholly-owned  subsidiary of  PaineWebber  Incorporated  ("PWI"),  a
wholly owned subsidiary of PaineWebber Group, Inc. ("PaineWebber").

      The general  partners of the  Partnership  (the  "General  Partners")  are
Seventh Income  Properties  Fund,  Inc. and  Properties  Associates  1985,  L.P.
Seventh Income Properties Fund, Inc., a wholly-owned  subsidiary of PaineWebber,
is the  Managing  General  Partner of the  Partnership.  The  Associate  General
Partner of the  Partnership  is  Properties  Associates  1985,  L.P., a Virginia
limited partnership,  certain limited partners of which are also officers of the
Adviser  and the  Managing  General  Partner.  Subject to the  Managing  General
Partner's overall  authority,  the business of the Partnership is managed by the
Adviser.

      The terms of  transactions  between the  Partnership and affiliates of the
Managing  General  Partner of the  Partnership  are set forth in Items 11 and 13
below to which  reference  is hereby  made for a  description  of such terms and
transactions.

Item 2. Properties

      As of  September  30,  1997,  the  Partnership  owned  interests  in  four
operating  properties  through  joint  venture  partnerships.  The joint venture
partnerships  and the related  properties  are referred to under Item 1 above to
which reference is made for the name, location and description of each property.

      Occupancy  figures  of each  fiscal  quarter  during  1997,  along with an
average for the year, are presented below for each property.

                                             Percent Occupied At
                              -------------------------------------------------
                                                                       Fiscal
                                                                       1997
                              12/31/96   3/31/97    6/30/97   9/30/97  Average
                              --------   -------    -------   -------  -------

The Concourse Retail Plaza       90%      90%        90%       90%       90%

The Colony Apartments            94%      95%        97%       97%       96%

Colony Square Shopping Center    93%     100%        94%       97%       96%

The Meadows on the Lake 
  Apartments                     93%     89%        94%       94%       93%

Enchanted Woods Apartments (1)   87%      92%        92%      N/A       N/A
 (formerly Forest Ridge
   Apartments)

The Marina Club Apartments (2)   95%      93%       N/A       N/A       N/A

The Hunt Club Apartments (2)     92%      97%       N/A       N/A       N/A

   (1) The Enchanted Woods Apartments was sold in September 1997 (see Item 7).

   (2) The Marina Club Apartments and The Hunt Club Apartments were sold in June
       1997 (see Item 7).

Item 3.  Legal Proceedings

      In November  1994,  a series of  purported  class  actions  (the "New York
Limited Partnership Actions") were filed in the United States District Court for
the Southern District of New York concerning PaineWebber Incorporated's sale and
sponsorship of various limited partnership investments,  including those offered
by the Partnership.  The lawsuits were brought against PaineWebber  Incorporated
and Paine Webber Group Inc. (together "PaineWebber"), among others, by allegedly
dissatisfied  partnership  investors.  In March  1995,  after the  actions  were
consolidated under the title In re PaineWebber Limited  Partnership  Litigation,
the  plaintiffs  amended their  complaint to assert claims  against a variety of
other defendants,  including Seventh Income Properties Fund, Inc. and Properties
Associates  1985,  L.P.  ("PA1985"),  which  are  the  General  Partners  of the
Partnership and affiliates of PaineWebber.  On May 30, 1995, the court certified
class action treatment of the claims asserted in the litigation.

     The amended complaint in the New York Limited  Partnership  Actions alleged
that, in connection with the sale of interests in Paine Webber Income Properties
Seven Limited Partnership, PaineWebber, Seventh Income Properties Fund, Inc. and
PA1985 (1) failed to provide adequate disclosure of the risks involved; (2) made
false and misleading representations about the safety of the investments and the
Partnership's  anticipated  performance;  and (3)  marketed the  Partnership  to
investors for whom such  investments  were not  suitable.  The  plaintiffs,  who
purported  to be suing on behalf of all  persons who  invested  in Paine  Webber
Income  Properties  Seven Limited  Partnership,  also alleged that following the
sale of the partnership interests,  PaineWebber, Seventh Income Properties Fund,
Inc. and PA1985  misrepresented  financial  information  about the  Partnerships
value and performance.  The amended complaint alleged that PaineWebber,  Seventh
Income  Properties  Fund, Inc. and PA1985 violated the Racketeer  Influenced and
Corrupt  Organizations  Act  ("RICO")  and  the  federal  securities  laws.  The
plaintiffs  sought  unspecified  damages,  including  reimbursement for all sums
invested by them in the  partnerships,  as well as  disgorgement of all fees and
other income derived by PaineWebber from the limited partnerships.  In addition,
the plaintiffs also sought treble damages under RICO.

      In January 1996, PaineWebber signed a memorandum of understanding with the
plaintiffs in the New York Limited Partnership Actions outlining the terms under
which the  parties  agreed to settle the case.  Pursuant to that  memorandum  of
understanding,  PaineWebber  irrevocably  deposited  $125 million into an escrow
fund under the  supervision of the United States District Court for the Southern
District of New York to be used to resolve the  litigation in accordance  with a
definitive  settlement  agreement  and plan of  allocation.  On July  17,  1996,
PaineWebber and the class plaintiffs submitted a definitive settlement agreement
which  provides for the  complete  resolution  of the class  action  litigation,
including  releases in favor of the  Partnership and PWPI, and the allocation of
the $125 million settlement fund among investors in the various partnerships and
REITs at issue in the case. As part of the settlement,  PaineWebber  also agreed
to provide class members with certain financial  guarantees  relating to some of
the  partnerships  and REITs.  The details of the  settlement are described in a
notice mailed  directly to class members at the direction of the court.  A final
hearing on the fairness of the proposed  settlement  was held in December  1996,
and in March 1997 the court announced its final approval of the settlement.  The
release of the $125 million of settlement  proceeds had been delayed pending the
resolution  of an appeal of the  settlement  agreement  by two of the  plaintiff
class  members.  In July 1997, the United States Court of Appeals for the Second
Circuit upheld the settlement  over the objections of the two class members.  As
part of the settlement agreement, PaineWebber agreed not to seek indemnification
from the related  partnerships and real estate investment trusts at issue in the
litigation  (including the  Partnership)  for any amounts that it is required to
pay under the settlement.

      In June  1996,  approximately  50  plaintiffs  filed  an  action  entitled
Bandrowski v. PaineWebber Inc. in Sacramento,  California Superior Court against
PaineWebber   Incorporated  and  various  affiliated   entities  concerning  the
plaintiff's purchases of various limited partnership interests,  including those
offered by the  Partnership.  The complaint  alleged,  among other things,  that
PaineWebber and its related entities committed fraud and  misrepresentation  and
breached  fiduciary  duties  allegedly  owed to the  plaintiffs  by  selling  or
promoting  limited   partnership   investments  that  were  unsuitable  for  the
plaintiffs and by overstating the benefits,  understating  the risks and failing
to state  material  facts  concerning  the  investments.  The  complaint  sought
compensatory  damages of $3.4 million plus punitive damages against PaineWebber.
In September  1996, the court  dismissed many of the  plaintiffs'  claims in the
Bandrowski action as barred by applicable  securities  arbitration  regulations.
Mediation with respect to the Bandrowski  action was held in December 1996. As a
result of such mediation,  a settlement  between  PaineWebber and the plaintiffs
was reached which  provided for the complete  resolution  of this matter.  Final
releases and dismissals  with regard to this action were received  during fiscal
1997.

     Based on the  settlement  agreements  discussed  above  covering all of the
outstanding  unitholder  litigation,  management believes that the resolution of
these  matters will not have a material  impact on the  Partnership's  financial
statements, taken as a whole.

      The  Partnership  is not  subject  to any  other  material  pending  legal
proceedings.

Item 4.  Submission of Matters to a Vote of Security Holders

      None.


<PAGE>

                                   PART II

Item 5.  Market  for the  Partnership's  Limited  Partnership  Interests  and
Related Security Holder Matters

      At  September  30,  1997 there were 2,280  record  holders of Units in the
Partnership.  There is no public  market for the resale of Units,  and it is not
anticipated that a public market for the Units will develop. . Upon request, the
Managing  General  Partner  will  endeavor  to assist a  Unitholder  desiring to
transfer his Units and may utilize the services of PWI in this regard. The price
to be paid for the Units will be subject to negotiation by the  Unitholder.  The
Managing General Partner will not redeem or repurchase Units.

      Reference is made to Item 6 below for a  discussion  of the amount of cash
distributions made to the Limited Partners during fiscal 1997.

Item 6.  Selected Financial Data

                 Paine Webber Income Properties Seven Limited Partnership
                            (In thousands except per unit data)
<TABLE>
<CAPTION>

                               1997          1996          1995        1994       1993
                               ----          ----          ----        ----       ----
<S>                             <C>          <C>           <C>         <C>        <C>  

Revenues                      $   808        $   773     $    835     $    561   $    905

Operating loss                $(1,214) (1)   $  (128)    $   (101)    $   (401)  $   (530)

Partnership's share of
  unconsolidated  ventures'
  income (losses)             $    36        $  (276)    $ (1,100)    $ (1,592)  $ (2,484)

Partnership's share of gain on
sale of operating investment
properties                    $ 4,210              -            -            -          -

Loss on transfer of assets
  at foreclosure              $     -              -            -            -   $ (6,468)

Income (loss) before
  extraordinary gain          $ 3,033        $  (404)    $ (1,200)    $ (1,992)  $ (9,479)

Partnership's share of
 extraordinary gain from
 settlement of debt 
 obligations                  $ 7,463              -     $  1,600            -   $  6,405

Net income (loss)             $10,496        $  (404)    $    400     $ (1,992)  $ (3,074)

Per Limited Partnership Unit:
  Income (loss) before
  extraordinary gain          $ 79.04        $(10.53)    $ (31.29)    $ (51.90)  $(247.02)

  Partnership's share of
  extraordinary gain
  from settlement of
  debt obligations            $194.50              -     $  41.72            -   $ 166.91

  Net income (loss)           $273.54        $(10.53)    $  10.43     $ (51.90)  $ (80.11)

  Cash distributions
    from operations           $ 18.25              -           -             -          -

  Cash distribuitons from
    captial transactions      $ 90.00              -           -             -          -

Total assets                  $ 6,789        $ 8,852     $ 7,148      $  6,347   $  5,191

Mortgage notes payable        $ 1,614        $ 1,671     $ 1,723      $  2,499   $  2,523
</TABLE>


     (1)The  Partnership's  operating loss for the year ended September 30, 1997
        includes an impairment  loss of $1,000,000  related to the  consolidated
        Concourse  Retail  Plaza.  See  Note  2 to  the  accompanying  financial
        statements for a further discussion of this writedown.

      The above selected  financial data should be read in conjunction  with the
consolidated  financial  statements and the related notes appearing elsewhere in
this Annual Report.

      The above per  Limited  Partnership  Unit  information  is based  upon the
37,969 Limited Partnership Units outstanding during each year.

Item 7.   Management's  Discussion  and Analysis of Financial  Condition  and
Results of Operations

Information Relating to Forward-Looking Statements
--------------------------------------------------

      The following  discussion of financial condition includes  forward-looking
statements  which  reflect  management's  current  views with  respect to future
events and  financial  performance  of the  Partnership.  These  forward-looking
statements  are  subject to certain  risks and  uncertainties,  including  those
identified below under the heading  "Certain Factors  Affecting Future Operating
Results",  which could cause actual results to differ materially from historical
results or those anticipated.  The words "believe," "expect,"  "anticipate," and
similar expressions identify forward-looking  statements.  Readers are cautioned
not to place undue reliance on these forward-looking statements, which were made
based on facts and conditions as they existed as of the date of this report. The
Partnership   undertakes  no  obligation  to  publicly   update  or  revise  any
forward-looking  statements,  whether  as a result  of new  information,  future
events or otherwise.

Liquidity and Capital Resources
-------------------------------

      The  Partnership  offered  units of limited  partnership  interests to the
public from May 14, 1985 to May 13, 1986  pursuant to a  Registration  Statement
filed under the  Securities  Act of 1933.  Gross  proceeds of  $37,969,000  were
received by the Partnership,  and after deducting  selling expenses and offering
costs, approximately $32,602,000 was invested in five joint venture partnerships
which owned seven operating properties, comprised of five multi-family apartment
complexes,  one mixed-use office and retail property and one shopping center. As
discussed further below, during fiscal 1997 three of the multi-family properties
were sold. A fourth  multi-family  property was sold subsequent to September 30,
1997.  In  addition,  the office  portion  of the  investment  in the  mixed-use
Concourse  property was lost  through  foreclosure  proceedings  on December 17,
1992.  The  Partnership  retains an interest in the retail plaza  portion of the
Concourse property. The Partnership does not have any commitments for additional
investments  but may be called upon to fund its share of  operating  deficits or
capital  needs of its existing  investments  in accordance  with the  respective
joint venture agreements.

      As  previously  reported,  despite  the  successful  lease-up of all three
properties  owned by HMF  Associates  following  the  completion of the required
construction-related  repairs,  the net operating income from the properties was
not  sufficient  to fully cover the interest  accruing on the  outstanding  debt
obligations  which  matured on June 1, 1997 and July 1, 1997.  As a result,  the
total  obligation due to the mortgage lender had continued to increase since the
date of a fiscal 1992 loan modification  agreement.  The balance of the original
mortgage loans on the Hunt Club,  Marina Club and Enchanted Woods  properties at
the time of their fiscal 1987  acquisition  dates  totalled  $13,035,000.  After
advances from the lender to pay for costs to repair the construction  defects of
approximately $4.8 million and interest deferrals  totalling  approximately $6.2
million, the total obligation to the mortgage lender totalled  approximately $24
million  as of the  fiscal  1997  maturity  dates.  As a result,  the  aggregate
estimated fair value of the operating  investment  properties was  substantially
lower than the outstanding  obligations to the first mortgage  holder.  In April
1997,  the lender agreed to another  modification  agreement  which provided the
joint venture with an  opportunity to complete a sale  transaction  prior to the
loan maturity dates.  Under the terms of the agreement,  the Partnership and its
co-venture  partner  could  qualify to receive a nominal  payment from the sales
proceeds  at a  specified  level if a sale was  completed  by June 30,  1997 and
certain other  conditions  were met. In May 1997,  the agreement with the lender
was modified to reflect the terms and  conditions of a sale  involving  only the
Hunt  Club and  Marina  Club  properties.  The joint  venture  also  obtained  a
four-month  extension from the lender of the  discounted  loan pay off agreement
with respect to the Enchanted Woods Apartments.

      On June 27, 1997,  HMF Associates  sold the  properties  known as The Hunt
Club  Apartments and The Marina Club  Apartments to an unrelated third party for
approximately  $5.3  million and $3.1  million,  respectively.  The  Partnership
received net proceeds of  approximately  $288,000 in connection with the sale of
these  two  assets  in  accordance  with the  discounted  mortgage  loan  payoff
agreement reached with the lender in April 1997. The third property owned by the
joint  venture,  the  Enchanted  Woods  Apartments,   located  in  Federal  Way,
Washington,  had been under  contract for sale to the same buyer that  purchased
The Hunt Club and  Marina  Club  properties,  however,  the  buyer  subsequently
withdrew the offer to purchase  Enchanted Woods. A Special Capital  Distribution
of $1,898,450,  or $50 per original  $1,000  investment,  was made on August 15,
1997, to  unitholders  of record as of June 27, 1997. Of this amount,  $7.60 per
original $1,000 investment represented net sale proceeds from the disposition of
The Hunt Club  Apartments  and The Marina Club  Apartments,  $41.48 per original
$1,000  investment  represented  proceeds  from the  settlements  of  litigation
covering  construction-related  defects  at  the  Hunt  Club,  Marina  Club  and
Enchanted Woods  properties as discussed  further below,  and $0.92 per original
$1,000   investment   represented   Partnership   reserves  that  exceed  future
requirements.  On September 9, 1997,  HMF  Associates  sold The Enchanted  Woods
Apartments  to an unrelated  third party for  approximately  $9.2  million.  The
Partnership  received net proceeds of approximately  $261,000 in connection with
the sale in  accordance  with the  discounted  mortgage  loan  payoff  agreement
referred to above.  The net proceeds of this  transaction will be distributed to
the Limited Partners on February 13, 1998.

      As previously  reported,  the  Partnership  received  $1,574,903 in fiscal
years 1994 and 1995 in  connection  with the various  settlements  of litigation
against the developer and subcontractors covering  construction-related  defects
at the Hunt Club,  Marina  Club and  Enchanted  Woods  (formerly  Forest  Ridge)
apartment complexes. This $1,574,903 had been held in the Partnership's reserves
for potential use in an economically  viable workout that the Partnership  tried
to  negotiate  with the lender for these  properties.  Management  had  numerous
discussions  with the mortgage holder for the properties owned by HMF Associates
over the past several  years  regarding a possible  loan  modification  aimed at
preventing  the further  accumulation  of deferred  interest  and  reducing  the
overall  debt  obligations.  Such a plan  would have  required a sizable  equity
infusion by the joint venture. During fiscal 1996, management of the Partnership
evaluated whether an additional  investment in the venture would be economically
prudent in light of the future  appreciation  potential  of the  properties  and
concluded  that it would be unwise to commit the  additional  equity  investment
required to effect the proposed debt  restructuring.  With the Hunt Club, Marina
Club and Enchanted Woods  properties sold pursuant to the discounted loan payoff
agreement in fiscal 1997, as described  above,  the  Partnership no longer had a
need to retain the  litigation  proceeds  and  distributed  them to the  Limited
Partners as part of the August 1997 Special Capital Distribution.

      Notwithstanding  the sales of the  properties  owned by HMF Associates for
net proceeds which were substantially less than the amounts of the Partnership's
original investments,  due to improvements in the Partnership's cash flow during
fiscal  1996  and the  expectation  that it will  continue  in the  future,  the
Partnership  reinstated the payment of regular  quarterly  distributions  at the
annual rate of 2.5% on remaining  invested  capital  effective  with the payment
made on February 14, 1997 for the quarter ended  December 31, 1996.  The payment
of quarterly  distributions  was discontinued in early 1990 primarily due to the
lack of cash flow from  several of the  Partnership's  investments.  The plan to
reinstate quarterly  distributions was the result of the improvement in property
operations  and the lower debt service  costs at the Colony  Apartments  and The
Meadows  on  the  Lake  Apartments,  which  represent  a  combined  48%  of  the
Partnership's original investment portfolio. The Partnership also made a special
distribution  of $40 per  original  $1,000  investment  on February  14, 1997 to
Unitholders  of  record  on  December  31,  1996.  This  amount   represented  a
distribution   of   Partnership   reserves  which   exceeded   expected   future
requirements.  Quarterly cash distributions were increased to an annualized rate
of 2.65% on remaining invested capital for the quarter ended September 30, 1997.

      During fiscal 1997, the Partnership  received cash flow  distributions  of
$774,000 from the Colony  Apartments joint venture and $567,000 from the Meadows
joint  venture.  During the third  quarter of fiscal  1996,  the  Meadows  joint
venture completed the final phase of the repair work on the construction defects
at the property  using the proceeds  from the  insurance  settlement  originally
escrowed  with the lender plus excess cash flow from property  operations.  With
the repair work at The  Meadows on the Lake  Apartments  completed,  the venture
began generating  regular  distributions of excess cash flow to the Partnership.
The Partnership and its co-venture partner had received  unsolicited offers from
prospective  purchasers  to acquire The Meadows on the Lake  Apartments in early
fiscal 1997. After carefully  reviewing the offers,  the Partnership  determined
that the property  should sell at a higher  price and  directed  the  co-venture
partner to market the  property  for sale.  During the fourth  quarter of fiscal
1997, an offer was received from a qualified  buyer which met the  Partnership's
sale  criteria.  Subsequent to year-end,  on December 18, 1997 the Meadows joint
venture sold the operating  investment  property to an unrelated third party for
$9,525,000.  The sale generated net proceeds of approximately $4.4 million after
paying off the  outstanding  mortgage  loan of  approximately  $4.7  million and
closing costs of approximately  $400,000.  The net proceeds from the sale of The
Meadows on the Lake  Apartments  will be distributed to the Limited  Partners on
February 13, 1998. Future distributions from the Colony Apartments joint venture
are expected to be sufficient to fund the Partnership's  operating costs,  allow
for the  payment of  quarterly  distributions  to the  Unitholders  and  provide
adequate  liquidity to fund the capital needs which may exist at the other joint
venture investment properties.

      The  Partnership is focusing on potential  disposition  strategies for the
remaining  investments in its portfolio,  which consist of two retail properties
and one multi-family apartment complex.  Although no assurances can be given, it
is currently contemplated that sales of the Partnership's remaining assets could
be completed  within the next 2 to 3 years. Of the three assets  remaining after
the sale of the Meadows on the Lake Apartments,  the Colony Apartments  property
has  significant  equity  above the  outstanding  debt  obligation  based on the
estimated  current property value,  while the two retail properties would not be
expected to yield substantial net proceeds after the mortgage debt if sold under
current market conditions.

      At Colony  Apartments  the occupancy  level  averaged 96% for fiscal 1997,
down from the average  occupancy  level of 98% for the prior  fiscal  year.  The
slight decline in average occupancy is primarily  attributable to the aggressive
rental rate increases implemented at the property during the year.  Nonetheless,
occupancy  did  improve at Colony  Apartments  during the second  half of fiscal
1997. Part of the improvement during the second half of the year is attributable
to the  efforts  of the  property's  management  and  leasing  team to lease the
available one-bedroom units. During the first quarter of fiscal 1998, management
will focus on the  two-bedroom  units.  The improving  local economy is enabling
tenants who  normally  share  two-bedroom  apartments  with  roommates to afford
one-bedroom  apartments on their own. Asking rental rates on vacant  two-bedroom
units will be monitored  closely by the property's  leasing team and adjusted as
needed in order to maintain an overall  occupancy  level above 95%.  The roofing
portion of the exterior  capital  improvement  program was completed  during the
fourth  quarter of fiscal  1997,  as was the  renovation  of the  tennis  court.
Assuming that the overall market for multi-family  apartment  properties remains
strong, the Partnership may have favorable opportunities to sell its interest in
the Colony Apartments in the near term. The potential to sell this asset,  which
represents the  Partnership's  sole source of liquidity,  on favorable terms may
prompt the accelerated dispositions of the two remaining retail properties.

     Occupancy  levels  at the  Concourse  Retail  Plaza and the  Colony  Square
Shopping Center were 90% and 97%, respectively, as of September 30, 1997. At the
present time, real estate values for retail shopping  centers in certain markets
are being adversely  impacted by the effects of overbuilding and  consolidations
among  retailers  which  have  resulted  in an  oversupply  of space  and by the
generally flat rate of growth in retail sales.  It remains  unclear at this time
what impact,  if any,  this  general  trend will have on the  operations  and/or
market  values  of  the  Partnership's  retail  properties  in  the  near  term.
Management  continues to closely monitor the operating  performance of the three
restaurant  tenants at the Concourse Retail Plaza.  Two of these tenants,  which
occupy  approximately 40% of the property's  leasable space,  reported declining
sales during  fiscal 1996 and fell behind on their rental  payments.  Management
negotiated  agreements with both tenants to cure the rental delinquencies which,
in one of the cases,  involved the  forgiveness of a portion of the  delinquency
and a reduction in the future  monthly rent payment in return for an increase in
the term of the lease obligation.  One of these tenants is currently meeting the
modified  terms of its rental  obligations.  The  Partnership  had pursued legal
action for  eviction  against the other  tenant,  a locally  owned  southwestern
restaurant  which  occupies  28% of the  Plaza,  because of a failure to pay the
modified  rent.  Subsequently,  a  court  judgement  was  entered  against  this
restaurant tenant. This tenant is now experiencing  improved sales and is paying
its rent as modified  under the court  judgement.  However,  the  Partnership is
pursuing  additional  legal  action to obtain a summary  judgement  on the total
rental  arrearage owed. The  Partnership  will continue to collect this tenant's
rent while also looking for a replacement  tenant in the event of a default.  In
addition,  a locally owned and operated far eastern  restaurant,  which occupies
12% of the leasable area, experienced a slow down in sales due to the decline in
tourism during the off-season and fell behind in its rental  obligations  during
the  fourth  quarter  of  fiscal  1997.  This  tenant is  attempting  to pay its
arrearage as its seasonal tourist  business  increases during the winter months.
During the fourth quarter,  the property's leasing team began discussions with a
popular south Florida  Caribbean  restaurant chain on a lease for a 3,953 square
foot vacant  restaurant  space.  The  Partnership  believes  that the  potential
addition of this new restaurant  would add stability to the tenant base and make
the Plaza more appealing to prospective future buyers.

      As noted above,  the  Partnership is currently  reviewing its  disposition
options  for the  Concourse  Retail  Plaza.  For the past four  years 80% of the
Plaza's 30,473 square feet has been leased to restaurant  operators  which,  for
the most part,  have  performed  poorly.  One of the options under review is the
development of a leasing plan that would put an emphasis on a greater mixture of
office and retail uses.  This could involve the  conversion of one of the larger
restaurant out parcel buildings into professional/service  office space. Another
option would be to market the property  for sale after  attempting  to stabilize
the current  tenant base.  However,  the  prospects for  stabilizing  the tenant
roster  are  uncertain  at the  present  time in  light  of the  bleak  economic
conditions which currently exist in the local sub-market. Management is aware of
several  restaurant  tenants in the local market whose businesses have failed in
recent months, and, despite diligent efforts, the Partnership has been unable to
identify  and secure  viable  tenants to  replace  any of the three  financially
troubled  restaurant  tenants  referred  to above.  Another  factor  impacting a
possible near term sale of the Concourse  Retail Plaza is the  property's  first
mortgage loan. The mortgage loan, which is assumable,  contains a prohibition on
prepayment through January 10, 2000. As a result, any sale transaction completed
prior to such date would have to involve an assumption  of this  mortgage  loan.
Management  expects to  formalize  its strategy for  positioning  the  Concourse
property  for  sale  during  fiscal  1998.  In  light  of the  potential  for an
accelerated  disposition  of  the  Concourse  Retail  Plaza  and  the  continued
financial  difficulties of a substantial  portion of the property's tenant base,
management concluded during fiscal 1997 that the carrying value of the Concourse
operating  investment  property was  impaired in  accordance  with  Statement of
Financial  Accounting  Standards  (SFAS 121),  "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of." Accordingly,  an
impairment  loss of $1,000,000  was recognized in the current year to write down
the net carrying value of the Concourse  property to its current  estimated fair
market value of  approximately  $2.3 million,  as  determined by an  independent
appraisal.

      At Colony Square, a lease for a 2,332 square foot martial arts studio,  or
6% of the  Center's  available  space,  was not  renewed by the tenant  upon its
expiration during the third quarter of fiscal 1997.  However,  during the fourth
quarter,  a new three-year  lease was signed with a security  systems company to
occupy this space.  Also during the third  quarter,  a 2,344  square foot liquor
store  renewed its lease for five years.  Subsequent  to the end of fiscal 1997,
the property's  leasing team signed a renewal and expansion lease with a jewelry
repair store that  relocated  from its 600 square foot space into a 1,200 square
foot space. Subsequent to year-end, the Center's grocery store expanded into the
recently vacated jewelry store,  which brought the Center leasing level to 100%.
There are seven  tenants  leasing a total of 10,170  square feet of the Center's
39,572 square foot leasable area that have leases coming up for renewal over the
next 12 months.  The  property's  leasing team expects that most of these leases
will be renewed. Asking rental rates at the Center are up slightly from one year
ago which may  provide an  opportunity  to renew the leases at  slightly  higher
rental rates.  Capital improvements at Colony Square during fiscal 1997 included
the  installation  of a main gas  line and the  conversion  of two  spaces  from
electric to gas heat.

      At September 30, 1997, the  Partnership and its  consolidated  venture had
cash  and cash  equivalents  of  approximately  $2,856,000.  Such  cash and cash
equivalents will be utilized as needed for Partnership  requirements such as the
payment of operating expenses,  distributions to partners,  as discussed further
above,  and the funding of  operating  deficits or capital  improvements  of the
joint  ventures,  in accordance  with the terms of the respective  joint venture
agreements, to the extent economically justified. The source of future liquidity
and distributions to the partners is expected to be from available net cash flow
generated by the operations of the Partnership's  investment properties and from
net proceeds from the sale or  refinancing of such  properties.  Such sources of
liquidity are expected to be sufficient to meet the Partnership's  needs on both
a short-term and long-term basis.


Results of Operations
1997 Compared to 1996
---------------------

            The  Partnership  reported  net income of  $10,496,000  for the year
ended  September 30, 1997, as compared to a net loss of $404,000 in fiscal 1996.
This favorable change in the  Partnership's  net operating  results is primarily
attributable to the gains  recognized by the Partnership on the sale of the Hunt
Club,   Marina  Club  and  the  Enchanted  Woods   Apartments  and  the  related
extraordinary  gains from settlement of debt  obligations,  as discussed further
above.  The  HMF  joint  venture   recognized  gains  from  the  forgiveness  of
indebtedness in connection with the sales of the Enchanted Woods,  Hunt Club and
Marina Club properties in the aggregate  amount of $7,552,000 as a result of the
fiscal  1997  sale  transactions.  The  venture  also  recognized  gains  in the
aggregate amount of $4,291,000 for the amount by which the sales prices,  net of
closing  costs,  exceeded the net carrying  values of the  operating  investment
properties.  The  Partnership's  share  of  such  gains  totalled  approximately
$7,463,000 and $4,210,000,  respectively.  The  Partnership's net loss, prior to
the effect of these gains,  increased  by $773,000 for the year ended  September
30, 1997 mainly as a result of the impairment  loss of $1,000,000  recognized on
the Concourse operating property in fiscal 1997, as discussed further above. The
impact  of  the  impairment  loss  was  partially  offset  as a  result  of  the
Partnership  realizing  income  of  $36,000  from its  share  of  unconsolidated
ventures'  operations  in fiscal 1997 as  compared to losses of $276,000  during
fiscal 1996.

      The  favorable  change  in  the  operations  of the  unconsolidated  joint
ventures  is  primarily  a result of the sale of the HMF  Associates  properties
during  fiscal  1997,  as  discussed  further  above.  HMF  Associates  had been
generating  net  losses  from  operations  prior to the sale  transactions.  The
elimination of the net losses from HMF  Associates  was partially  offset by the
recognition  of a gain on settlement of insurance  proceeds by the Meadows joint
venture during fiscal 1996 of $197,000. This gain was recognized due to a change
in the original  estimate for the completion of required  structural  repairs to
the Meadows on the Lake Apartments.

      An increase in bad debt expense of the consolidated Concourse Retail Plaza
of $61,000 and an increase in management fee expense of $58,000 also contributed
to the  increase  in the  Partnership's  net loss prior to the effect of the HMF
gains in fiscal 1997. Bad debt expense  increased due to a financially  troubled
tenant at Concourse  defaulting on a previous workout  arrangement during fiscal
1997. Management fee expense increased due to the reinstatement of distributions
during fiscal 1997, upon which  management fees are based.  The increases in bad
debt expense and management fee expense were partially  offset by an increase in
interest  and other  income of  $23,000.  Interest  and other  income  increased
primarily as a result of a larger average  outstanding  balance of cash and cash
equivalents  during fiscal 1997 prior to the distributions of excess reserves to
the Limited Partners, as discussed further above.

1996 Compared to 1995
---------------------

      The  Partnership  reported  a net  loss of  $404,000  for the  year  ended
September 30, 1996,  as compared to net income of $400,000 in fiscal 1995.  This
change in the  Partnership's net operating results was attributable to a $27,000
increase  in the  Partnership's  operating  loss  and an  extraordinary  gain of
$1,600,000  recognized in fiscal 1995 which were partially  offset by a decrease
of $824,000 in the Partnership's  share of unconsolidated  ventures' losses. The
$1,600,000  extraordinary  gain  resulted  from the  discounts  obtained  on the
repayment of the  Concourse  second  mortgage  loan and the  refinancing  of the
Colony  Apartments  first  mortgage  debt  obligation  during  fiscal 1995.  The
consolidated  Concourse  joint  venture  recognized  an  extraordinary  gain  on
settlement  of debt  obligation  of $530,000 in fiscal 1995  resulting  from the
November 1994  discounted  repayment of the second  mortgage note secured by the
Concourse Retail Plaza. In addition,  the unconsolidated Colony Apartments joint
venture  received a  discount  of  $1,070,000  on the  pay-off of the  venture's
wraparound   mortgage  loan  in  connection  with  an  August  1995  refinancing
transaction.  This discount was recorded as an extraordinary  gain on settlement
of debt  obligation and was allocated 100% to the Partnership in accordance with
the joint venture agreement.

      The Partnership's  share of  unconsolidated  ventures' losses decreased by
$824,000 in fiscal 1996,  when compared to fiscal 1995,  partly due to a gain of
$197,000  recognized by the Meadows  joint venture in fiscal 1996,  along with a
$306,000  increase  in  combined  revenues  and a $507,000  decrease in combined
interest  expense.  As of September  30, 1995,  management  of the Meadows joint
venture had estimated that the costs to complete the required structural repairs
to the Meadows on the Lake  Apartments  would  exceed the  insurance  settlement
proceeds by $300,000, and the venture recognized a loss of such amount in fiscal
1995.  During  fiscal  1996,  management  revised its plans for  completing  the
renovations   resulting  in  the  required   repairs  being   accomplished   for
substantially less than the prior estimates. This change in estimate resulted in
a gain of $197,000 for financial  reporting  purposes which was reflected in the
venture's fiscal 1996 income statement.  Combined revenues increased by $306,000
due to a $250,000  increase in rental  revenues and a $56,000  increase in other
income.  Rental  revenues at Colony  Apartments  and Colony Square  increased by
$272,000  and  $43,000,  respectively,  due to  increases  in rental rates while
combined  rental  revenues  from the three  properties  owned by HMF  Associates
decreased  by $63,000 due to declines in average  occupancy  at two of the three
properties.  The  decrease  in  combined  interest  expense  in fiscal  1996 was
primarily  attributable to a $540,000 decrease in interest expense at the Colony
Apartments  joint venture due to the lower interest rate obtained as a result of
the August  1995  refinancing.  The  impact of the  accounting  for the  Meadows
insurance  settlement,  the  increase  in  revenues  and the decline in interest
expense were partially  offset by increases in deprecation and  amortization and
repairs  and  maintenance   expenses  during  fiscal  1996.   Depreciation   and
amortization increased by $119,000 primarily due to the additional  depreciation
associated  with the capital  improvements  completed at the Colony  Apartments,
Meadows  Apartments,  and the properties  owned by HMF Associates  during fiscal
1995 and 1996.  Repairs and  maintenance  expenses  increased by $112,000 due to
higher  expenses  incurred at three of the four  unconsolidated  joint  ventures
during fiscal 1996.

      The  Partnership's  operating  loss  increased by $27,000 when compared to
fiscal 1995 primarily due to a $88,000  decrease in interest income and a slight
increase in the net loss of the consolidated  Concourse joint venture which were
partially offset by a decrease in the Partnership's  general and  administrative
expenses.  The  Partnership's  interest  income  decreased by $88,000 due to the
recognition  in  fiscal  1995 of  $175,000  of  previously  unrecorded  interest
received on an optional loan to a joint venture which was repaid in fiscal 1995.
Interest income without the effect of this optional loan repayment  increased by
$87,000 in fiscal 1996 as a result of higher average  outstanding  cash balances
during fiscal 1996.  General and  administrative  expenses  decreased by $79,000
primarily due additional  professional  fees incurred in fiscal 1995  associated
with an  independent  valuation  of the  Partnership's  portfolio of real estate
assets and legal fees associated with the Concourse refinancing transaction. The
net loss of the  consolidated  Concourse  joint  venture  increased by $6,000 in
fiscal 1996 primarily due to a bad debt of $89,000  recognized in fiscal 1996 in
connection with the rental obligation  forgiveness  discussed further above. The
fiscal  1996 bad debt  expense  was  partially  offset by a $20,000  decrease in
interest expense,  a $16,000 decline in property  operating  expenses,  a $5,000
reduction in real estate taxes and a $10,000  decrease in depreciation  expense.
Interest  expense  decreased  by $20,000 due to the lower  interest  rate on the
venture's first mortgage loan which was refinanced in January 1995.

1995 Compared to 1994
---------------------

      The  Partnership  reported  net  income  of  $400,000  for the year  ended
September 30, 1995, as compared to a net loss of $1,992,000  for the prior year.
This favorable change in the  Partnership's  net operating  results was due to a
substantial  decrease in the  Partnership's  share of  unconsolidated  ventures'
losses,  extraordinary  gains realized from discounts  obtained on the Concourse
second  mortgage loan and the Colony  Apartments  first mortgage debt obligation
and a decrease in the Partnership's operating loss.

      The Partnership's  share of  unconsolidated  ventures' losses decreased by
$492,000  in  fiscal  1995 when  compared  to fiscal  1994  primarily  due to an
increase of  $429,000  in rental  revenues  from the  lease-up of the  renovated
apartment  complexes owned by HMF Associates.  As discussed further in the notes
to the accompanying financial statements, the apartments owned by HMF Associates
had  construction-related  defects that forced  management  to cease its leasing
activities  during the  majority  of the  remediation  period  from  fiscal 1991
through 1993. Average occupancy at the three HMF apartment  complexes  increased
from 83%  during the  re-leasing  phase in fiscal  1994 to 93% for fiscal  1995.
Increases in rental revenues at the Meadows  Apartments,  Colony  Apartments and
Colony Square Shopping  Center also had a positive  impact on the  Partnership's
share of  unconsolidated  ventures'  losses for  fiscal  1995.  Revenues  at the
Meadows  Apartments and Colony  Apartments  increased due to slight increases in
both rental rates and average  occupancy  when  compared to fiscal 1994.  At The
Meadows on the Lake Apartments,  rental revenues improved by $73,000,  or 5%, in
fiscal 1995, when compared to the prior year, while average occupancy  increased
from 97% to 98%.  Rental  revenues  increased by $140,000,  or 3%, at the Colony
Apartments  where average  occupancy  also increased from 97% for fiscal 1994 to
98% for fiscal 1995. In addition,  repairs and maintenance expenses decreased by
$339,000  at the  Colony  Apartments  as a  result  of a shift  in  focus of the
property's  maintenance program from deferred repairs and maintenance  performed
in  fiscal  1994 to  capital  expenditures  incurred  in  fiscal  1995.  Capital
expenditures  of the Colony  Apartments  joint venture  increased by $315,000 in
fiscal 1995. At the Colony Square Shopping Center,  revenues  (including  tenant
reimbursements  of operating  expenses) were up by $41,000 over fiscal 1994 as a
result of the increase in average  occupancy from 91% for fiscal 1994 to 93% for
fiscal 1995. The increases in rental revenues at all of the unconsolidated joint
ventures  and the  decrease  in repairs and  maintenance  expenses at the Colony
Apartments were partially  offset by increases in depreciation  and amortization
expense at the Colony  Apartments  and HMF  Associates  joint ventures and by an
increase  of  $175,000 in real  estate  taxes at HMF  Associates  as a result of
certain  refunds of prior year taxes  received in fiscal 1994.  In  addition,  a
$300,000 loss on insurance settlement recognized by the Meadows joint venture in
fiscal 1995 also offset the favorable change in unconsolidated ventures' losses.

      The consolidated  Concourse joint venture  recognized a gain on settlement
of debt  obligation  of $530,000 in fiscal 1995  resulting  from the  discounted
repayment of the second mortgage note secured by the Concourse  Retail Plaza. In
addition, the unconsolidated Colony Apartments joint venture received a discount
of  $1,070,000  on the  pay-off of the  venture's  wraparound  mortgage  loan in
connection with the venture's fiscal 1995 refinancing transaction. Such discount
was recorded as an  extraordinary  gain on settlement of debt obligation and was
allocated  100%  to  the  Partnership  in  accordance  with  the  joint  venture
agreement.  The  Partnership's  operating  loss for  fiscal  1995  decreased  by
$300,000  when  compared  to fiscal  1994 as a result of an increase in interest
income and decreases in the operating loss of the  consolidated  Concourse joint
venture.  Interest income in fiscal 1995 includes an amount of interest received
on an optional loan to a joint venture which was repaid in fiscal 1995. Interest
income also  increased as a result of higher average  outstanding  cash balances
and an increase in interest  rates in fiscal  1995.  The  operating  loss at the
Concourse  joint venture  decreased by $38,000 in fiscal 1995 primarily due to a
slight increase in rental revenues and a decrease of $31,000 in interest expense
which  resulted from the lower interest rate on the venture's new first mortgage
note.  The increase in rental  revenues of $18,000  resulted from an increase in
the average  occupancy of the Concourse Retail Plaza from 90% for fiscal 1994 to
93% for fiscal 1995.

Certain Factors Affecting Future Operating Results
--------------------------------------------------

      The following factors could cause actual results to differ materially from
historical results or those anticipated:

      Real Estate  Investment  Risks.  Real property  investments are subject to
varying degrees of risk.  Revenues and property values may be adversely affected
by the  general  economic  climate,  the local  economic  climate and local real
estate conditions,  including (i) the perceptions of prospective  tenants of the
attractiveness of the property; (ii) the ability to retain qualified individuals
to provide  adequate  management  and  maintenance  of the  property;  (iii) the
inability  to  collect  rent due to  bankruptcy  or  insolvency  of  tenants  or
otherwise;  and (iv) increased  operating costs.  Real estate values may also be
adversely  affected by such  factors as  applicable  laws,  including  tax laws,
interest rate levels and the availability of financing.

      Effect of Uninsured Loss. The Partnership carries comprehensive liability,
fire,  flood,  extended  coverage and rental loss  insurance with respect to its
properties  with  insured  limits  and  policy  specifications  that  management
believes are customary for similar properties. There are, however, certain types
of  losses  (generally  of  a  catastrophic  nature  such  as  wars,  floods  or
earthquakes) which may be either uninsurable,  or, in management's judgment, not
economically  insurable.  Should an uninsured loss occur, the Partnership  could
lose both its  invested  capital in and  anticipated  profits  from the affected
property.

      Possible Environmental Liabilities. Under various federal, state and local
environmental laws,  ordinances and regulations,  a current or previous owner or
operator of real property may become liable for the costs of the  investigation,
removal and  remediation  of  hazardous or toxic  substances  on,  under,  in or
migrating from such property. Such laws often impose liability without regard to
whether the owner or operator knew of, or was  responsible  for, the presence of
such hazardous or toxic substances.

      The  Partnership is not aware of any  notification by any private party or
governmental  authority  of any  non-compliance,  liability  or  other  claim in
connection  with  environmental  conditions  at any of its  properties  that  it
believes  will  involve  any   expenditure   which  would  be  material  to  the
Partnership,  nor is the Partnership aware of any  environmental  condition with
respect to any of its properties that it believes will involve any such material
expenditure.  However,  there  can  be no  assurance  that  any  non-compliance,
liability, claim or expenditure will not arise in the future.

      Competition. The financial performance of the Partnership's remaining real
estate  investments  will be  significantly  impacted  by the  competition  from
comparable  properties  in their local market areas.  The  occupancy  levels and
rental rates  achievable at the  properties are largely a function of supply and
demand in the markets.  In many markets  across the country,  development of new
multi-family  properties  has  increased  significantly  in the past 12  months.
Existing  apartment  properties  in such markets could be expected to experience
increased vacancy levels, declines in effective rental rates and, in some cases,
declines in estimated  market values as a result of the  increased  competition.
The retail  segment of the real estate  market is  currently  suffering  from an
oversupply of space in many markets  resulting from overbuilding in recent years
and the trend of consolidations and bankruptcies among retailers prompted by the
generally flat rate of growth in overall  retail sales.  There are no assurances
that these competitive pressures will not adversely affect the operations and/or
market values of the Partnership's investment properties in the future.

      Impact  of  Joint  Venture  Structure.  The  ownership  of  the  remaining
investments through joint venture partnerships could adversely impact the timing
of the Partnership's planned dispositions of its remaining assets and the amount
of  proceeds  received  from  such   dispositions.   It  is  possible  that  the
Partnership's  co-venture  partners  could have  economic or business  interests
which are  inconsistent  with those of the  Partnership.  Given the rights which
both parties have under the terms of the joint venture agreements,  any conflict
between the partners  could result in delays in completing a sale of the related
operating  property and could lead to an impairment in the  marketability of the
property to third  parties for purposes of achieving  the highest  possible sale
price.

      Availability of a Pool of Qualified Buyers.  The availability of a pool of
qualified  and  interested  buyers  for the  Partnership's  remaining  assets is
critical  to the  Partnership's  ability to realize  the  estimated  fair market
values of such  properties  at the time of their final  dispositions.  Demand by
buyers of  multi-family  apartment  and retail  properties  is  affected by many
factors, including the size, quality, age, condition and location of the subject
property,  the  quality and  stability  of the tenant  roster,  the terms of any
long-term leases,  potential environmental liability concerns, the existing debt
structure,  the liquidity in the debt and equity markets for asset acquisitions,
the general level of market  interest  rates and the general and local  economic
climates.

Inflation
---------

      The  Partnership  completed  its twelfth full year of operations in fiscal
1997 and the effects of  inflation  and  changes in prices on the  Partnership's
operating results to date have not been significant.

      Inflation in future  periods may increase  revenues,  as well as operating
expenses,  at the Partnership's  operating  investment  properties.  Some of the
existing  leases  with  tenants  at the  Partnership's  retail  plaza and retail
shopping center contain rental escalation and/or expense  reimbursement  clauses
based on increases in tenant sales or property operating  expenses,  which would
tend to rise with inflation.  Tenants at the Partnership's  remaining  apartment
property have short-term leases,  generally of six-to-twelve months in duration.
Rental rates at this  property can be adjusted to keep pace with  inflation,  as
market  conditions  allow,  as the  leases  are  renewed  or turned  over.  Such
increases in rental  income would be expected to at least  partially  offset the
corresponding increases in Partnership and property operating expenses caused by
future inflation.

Item 8.  Financial Statements and Supplementary Data

      The financial statements and supplementary data are included under Item 14
of this Annual Report.

Item 9.  Changes in and  Disagreements  with  Accountants  on Accounting  and
Financial Disclosure

      None.


<PAGE>
    
                                   PART III

Item 10.  Directors and Executive Officers of the Partnership

      The  Managing  General  Partner  of  the  Partnership  is  Seventh  Income
Properties  Fund,  Inc.,  a  Delaware  corporation,   which  is  a  wholly-owned
subsidiary of PaineWebber.  The Associate  General Partner of the Partnership is
Properties  Associates  1985,  L.P.,  a Virginia  limited  partnership,  certain
limited  partners of which are also  officers  of the  Adviser and the  Managing
General  Partner.  The  Managing  General  Partner  has  overall  authority  and
responsibility for the Partnership's operation, however, the day-to-day business
of the Partnership is managed by the Adviser pursuant to an advisory contract.

      (a) and (b) The names and ages of the directors  and  principal  executive
officers of the Managing General Partner of the Partnership are as follows:

                                                                     Date
                                                                     elected
      Name                      Office                      Age      to Office
      ----                      ------                      ---      ---------

Bruce J. Rubin          President and Director              38        8/22/96
Terrence E. Fancher     Director                            44        10/10/96
Walter V. Arnold        Senior Vice President and
                          Chief Financial Officer           50        10/29/85
                         
David F. Brooks         First Vice President and
                          Assistant Treasurer               55        1/15/85 *
Timothy J. Medlock      Vice President and Treasurer        36        6/1/88
Thomas W. Boland        Vice President and Controller       35        12/1/91

*  The date of incorporation of the Managing General Partner.

      (c) There are no other significant  employees in addition to the directors
and executive officers mentioned above.

      (d) There is no family  relationship among any of the foregoing  directors
and executive  officers of the Managing General Partner of the Partnership.  All
of the foregoing  directors  and  executive  officers have been elected to serve
until the annual meeting of the Managing General Partner.

      (e) All of the directors and officers of the Managing General Partner hold
similar  positions in affiliates of the Managing General Partner,  which are the
corporate general partners of other real estate limited  partnerships  sponsored
by PWI,  and for  which  Paine  Webber  Properties  Incorporated  serves  as the
Adviser.  The  business  experience  of  each  of the  directors  and  principal
executive officers of the Managing General Partner is as follows:

      Bruce  J.  Rubin is  President  and  Director  of the  Managing  General
Partner.  Mr. Rubin was named  President and Chief  Executive  Officer of PWPI
in August 1996. Mr. Rubin joined  PaineWebber Real Estate  Investment  Banking
in November  1995 as a Senior Vice  President.  Prior to joining  PaineWebber,
Mr.  Rubin was  employed  by Kidder,  Peabody and served as  President  for KP
Realty Advisers,  Inc. Prior to his association  with Kidder,  Mr. Rubin was a
Senior Vice  President  and  Director of Direct  Investments  at Smith  Barney
Shearson.  Prior  thereto,  Mr.  Rubin was a First Vice  President  and a real
estate  workout  specialist  at  Shearson  Lehman  Brothers.  Prior to joining
Shearson  Lehman  Brothers in 1989, Mr. Rubin practiced law in the Real Estate
Group at  Willkie  Farr &  Gallagher.  Mr.  Rubin is a  graduate  of  Stanford
University and Stanford Law School.

      Terrence E.  Fancher was  appointed a Director of the  Managing  General
Partner in October  1996.  Mr.  Fancher is the Managing  Director in charge of
PaineWebber's  Real Estate Investment  Banking Group. He joined PaineWebber as
a result  of the  firm's  acquisition  of  Kidder,  Peabody.  Mr.  Fancher  is
responsible  for the origination  and execution of all of  PaineWebber's  REIT
transactions,  advisory assignments for real estate clients and certain of the
firm's real estate debt and principal  activities.  He joined Kidder,  Peabody
in 1985 and,  beginning in 1989, was one of the senior executives  responsible
for  building   Kidder,   Peabody's  real  estate   department.   Mr.  Fancher
previously  worked for a major law firm in New York City.  He has a J.D.  from
Harvard  Law  School,  an M.B.A.  from  Harvard  Graduate  School of  Business
Administration and an A.B. from Harvard College.

      Walter V. Arnold is a Senior Vice President and Chief Financial Officer of
the Managing  General  Partner and a Senior Vice  President and Chief  Financial
Officer of the Adviser which he joined in October 1985. Mr. Arnold joined PWI in
1983 with the  acquisition  of Rotan  Mosle,  Inc.  where he had been First Vice
President and Controller  since 1978,  and where he continued  until joining the
Adviser. He began his career in 1974 with Arthur Young & Company in Houston. Mr.
Arnold is a Certified Public Accountant licensed in the state of Texas.

      David F. Brooks is a First Vice  President and Assistant  Treasurer of the
Managing  General Partner and a First Vice President and an Assistant  Treasurer
of the Adviser.  Mr. Brooks joined the Adviser in March 1980. From 1972 to 1980,
Mr. Brooks was an Assistant  Treasurer of Property  Capital  Advisors,  Inc. and
also,  from March 1974 to February 1980, the Assistant  Treasurer of Capital for
Real  Estate,  which  provided  real estate  investment,  asset  management  and
consulting services.

      Timothy J.  Medlock is a Vice  President  and  Treasurer  of the  Managing
General  Partner and a Vice  President  and  Treasurer  of the Adviser  which he
joined  in 1986.  From  June  1988 to August  1989,  Mr.  Medlock  served as the
Controller of the Managing  General Partner and the Adviser.  From 1983 to 1986,
Mr. Medlock was associated with Deloitte Haskins & Sells. Mr. Medlock  graduated
from Colgate  University in 1983 and received his Masters in Accounting from New
York University in 1985.

      Thomas W. Boland is a Vice  President  and  Controller  of the  Managing
General  Partner and a Vice  President and  Controller of the Adviser which he
joined in 1988.  From 1984 to 1987,  Mr.  Boland was  associated  with  Arthur
Young & Company.  Mr. Boland is a Certified Public Accountant  licensed in the
state of  Massachusetts.  He holds a B.S. in Accounting from Merrimack College
and an M.B.A. from Boston University.

      (f) None of the directors and officers were involved in legal  proceedings
which are  material to an  evaluation  of his or her ability or  integrity  as a
director or officer.

      (g)  Compliance  With  Exchange Act Filing  Requirements:  The  Securities
Exchange Act of 1934 requires the officers and directors of the Managing General
Partner, and persons who own more than ten percent of the Partnership's  limited
partnership units, to file certain reports of ownership and changes in ownership
with the Securities and Exchange Commission. Officers, directors and ten-percent
beneficial  holders are required by SEC  regulations to furnish the  Partnership
with copies of all Section 16(a) forms they file.

      Based solely on its review of the copies of such forms received by it, the
Partnership  believes that, during the year ended September 30, 1997, all filing
requirements  applicable to the officers and  directors of the Managing  General
Partner and ten-percent beneficial holders were complied with.

Item 11.  Executive Compensation

      The directors and officers of the  Partnership's  Managing General Partner
receive no direct remuneration from the Partnership. The Partnership is required
to pay certain  fees to the  Adviser,  and the General  Partners are entitled to
receive a share of  Partnership  cash  distributions  and a share of profits and
losses. These items are described under Item 13.

      Regular  quarterly  distributions  to the  Partnership's  Unitholders were
suspended from fiscal 1990 through fiscal 1996. Distributions were reinstated at
an annual rate of 2.5% on remaining  invested  capital  effective  for the first
quarter of fiscal 1997.  Distributions were increased to an annual rate of 2.65%
for the fourth  quarter of fiscal  1997.  However,  the  Partnership's  Units of
Limited Partnership  Interest are not actively traded on any organized exchange,
and no  efficient  secondary  market  exists.  Accordingly,  no  accurate  price
information  is  available  for  these  Units.   Therefore,  a  presentation  of
historical Unitholder total returns would not be meaningful.

Item 12.  Security Ownership of Certain Beneficial Owners and Management

      (a) The  Partnership  is a limited  partnership  issuing  Units of limited
partnership  interest,  not voting securities.  All the outstanding stock of the
Managing  General  Partner,  Seventh Income  Properties  Fund,  Inc. is owned by
PaineWebber. Properties Associates 1985, L.P., the Associate General Partner, is
a Virginia  limited  partnership,  certain  limited  partners  of which are also
officers of the Adviser and the Managing General Partner.  No Limited Partner is
known by the  Partnership to own  beneficially  more than 5% of the  outstanding
interests of the Partnership.

      (b) The  directors  and  officers of the Managing  General  Partner do not
directly own any Units of limited  partnership  interest of the Partnership.  No
director or officer of the Managing General Partner,  nor any limited partner of
the Associate General Partner, possesses a right to acquire beneficial ownership
of Units of limited partnership interest of the Partnership.

      (c) There exists no arrangement,  known to the Partnership,  the operation
of which  may,  at a  subsequent  date,  result  in a change in  control  of the
Partnership.

Item 13.  Certain Relationships and Related Transactions

      The General  Partners of the  Partnership  are Seventh  Income  Properties
Fund,  Inc. (the  "Managing  General  Partner"),  a  wholly-owned  subsidiary of
PaineWebber  Group, Inc.  ("PaineWebber")  and Properties  Associates 1985, L.P.
(the "Associate  General  Partner"),  a Virginia  limited  partnership,  certain
limited  partners of which are also officers of the Managing General Partner and
PaineWebber Properties  Incorporated.  Subject to the Managing General Partner's
overall  authority,  the business of the  Partnership  is managed by PaineWebber
Properties  Incorporated (the "Adviser")  pursuant to an advisory contract.  The
Adviser is a wholly-owned subsidiary of PaineWebber Incorporated ("PWI").

      The General  Partners,  the Adviser and PWI receive fees and compensation,
determined  on an  agreed-upon  basis,  in  consideration  for various  services
performed  in  connection  with the sale of the  Units,  the  management  of the
Partnership  and the  acquisition,  management,  financing  and  disposition  of
Partnership investments.

      In connection  with the  acquisition of properties,  the Adviser  received
acquisition fees in an amount equal to 5% of the gross proceeds from the sale of
the Partnership Units. In connection with the sale of each property, the Adviser
may  receive a  disposition  fee in an amount  equal to the  lesser of 1% of the
aggregate  sales  price  of  the  property  or 50%  of  the  standard  brokerage
commissions,  subordinated  to the  payment  of certain  amounts to the  Limited
Partners.

      Under the terms of the  Partnership  Agreement,  as  amended,  any taxable
income or tax loss (other than from a Capital  Transaction)  of the  Partnership
will be allocated  98.94802625%  to the Limited  Partners and 1.05197375% to the
General Partners.  Taxable income or tax loss arising from a sale or refinancing
of  investment  properties  will be  allocated  to the Limited  Partners and the
General Partners in proportion to the amounts of sale or refinancing proceeds to
which they are entitled;  provided, however, that the General Partners shall not
be allocated  aggregate gain as a result of all sales or  refinancings in excess
of the  aggregate  net losses  previously  allocated  to them and the total cash
distributed to them; provided further,  however, that the General Partners shall
be allocated at least 1% of taxable income  arising from a sale or  refinancing.
If there are no sale or refinancing proceeds,  taxable income or tax loss from a
sale or refinancing  will be allocated  98.94802625% to the Limited Partners and
1.05197375%  to the General  Partners.  Notwithstanding  this,  the  Partnership
Agreement  provides that the allocation of taxable income and tax losses arising
from the sale of a property which leads to the  dissolution  of the  Partnership
shall be adjusted to the extent  feasible so that neither the General or Limited
Partners  recognize  any gain or loss as a result of having either a positive or
negative balance remaining in their capital accounts upon the dissolution of the
Partnership.  If the General  Partner  has a negative  capital  account  balance
subsequent  to the sale of a  property  which  leads to the  dissolution  of the
Partnership,  the General  Partner may be obligated to restore a portion of such
negative capital account balance as determined in accordance with the provisions
of  the  Partnership  Agreement.  Allocations  of the  Partnership's  operations
between the General Partners and the Limited  Partners for financial  accounting
purposes have been made in conformity  with the allocations of taxable income or
tax loss.

      All  distributable  cash,  as  defined,  for  each  fiscal  year  shall be
distributed quarterly in the ratio of 95% to the Limited Partners,  1.01% to the
General Partners and 3.99% to the Adviser, as an asset management fee. Under the
advisory  contract,  the Adviser has specific  management  responsibilities:  to
administer day-to-day operations of the Partnership,  and to report periodically
the performance of the Partnership to the Managing General Partner.  The Adviser
will be paid a basic management fee (3% of adjusted cash flow, as defined in the
Partnership Agreement) and an incentive management fee (2% of adjusted cash flow
subordinated to a noncumulative  annual return to the Limited  Partners equal to
6% based upon their adjusted  capital  contributions),  in addition to the asset
management  fee  described  above,  for  services  rendered.   Basic  and  asset
management fees totalling  $58,000 were earned by the Adviser for the year ended
September 30, 1997.

      An affiliate of the Managing General Partner performs certain  accounting,
tax  preparation,  securities  law compliance  and investor  communications  and
relations  services  for the  Partnership.  The  total  costs  incurred  by this
affiliate in providing  such  services are  allocated  among  several  entities,
including the Partnership.  Included in general and administrative  expenses for
the year ended  September 30, 1997 is $86,000,  representing  reimbursements  to
this affiliate for providing such services to the Partnership.

      The  Partnership  uses the  services  of Mitchell  Hutchins  Institutional
Investors,  Inc. ("Mitchell Hutchins") for the managing of cash assets. Mitchell
Hutchins is a  subsidiary  of  Mitchell  Hutchins  Asset  Management,  Inc.,  an
independently operated subsidiary of PaineWebber.  Mitchell Hutchins earned fees
of $17,000  (included in general and  administrative  expenses) for managing the
Partnership's cash assets during the year ended September 30, 1997. Fees charged
by Mitchell  Hutchins are based on a percentage of invested cash reserves  which
varies  based on the total  amount of  invested  cash  which  Mitchell  Hutchins
manages on behalf of PWPI.



<PAGE>





                                   PART IV


Item 14.  Exhibits, Financial Statement Schedules and Reports on Form 8-K

    (a) The following documents are filed as part of this report:

         (1) and (2)    Financial Statements and Schedules:

                The  response  to this  portion  of Item  14 is  submitted  as a
                separate  section  of  this  report.   See  Index  to  Financial
                Statements and Financial Statement Schedules at page F-1.

         (3)  Exhibits:

                The  exhibits  listed on the  accompanying  Index to Exhibits at
                Page IV-3 are filed as part of this Report.

    (b)  A Current  Report on Form 8-K dated  September 9, 1997 was filed during
         the last  quarter of fiscal  1997 to report  the sale of The  Enchanted
         Woods Apartments and is hereby incorporated by reference.

    (c)  Exhibits

         See (a)(3) above.

    (d)  Financial Statement Schedules

               The  response  to  this  portion  of Item  14 is  submitted  as a
               separate   section  of  this  report.   See  Index  to  Financial
               Statements and Financial Statement Schedules at page F-1.


                                  


<PAGE>



                                  SIGNATURES

      Pursuant  to the  requirements  of Section  13 or 15(d) of the  Securities
Exchange Act of 1934, the  Partnership  has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.

                                  PAINE WEBBER INCOME PROPERTIES SEVEN
                                        LIMITED PARTNERSHIP


                                  By:  Seventh Income Properties Fund, Inc.
                                       Managing General Partner



                                  By: /s/ Bruce J. Rubin
                                      -------------------
                                      Bruce J. Rubin
                                      President and Chief Executive Officer



                                  By: /s/ Walter V. Arnold
                                      --------------------
                                      Walter V. Arnold
                                      Senior Vice President and
                                      Chief Financial Officer



                                  By: /s/ Thomas W. Boland
                                      --------------------
                                      Thomas W. Boland
                                      Vice President and Controller

Dated:   January 13, 1998

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  Partnership in
the capacity and on the dates indicated.




By:/s/ Bruce J. Rubin                           Date: January 13, 1998
   ------------------------                           ----------------
   Bruce J. Rubin
   Director





By:/s/ Terrence E. Fancher                      Date: January 13, 1998
   ------------------------                           ----------------
   Terrence E. Fancher
   Director

                             


<PAGE>


                          ANNUAL REPORT ON FORM 10-K
                                Item 14(a)(3)

           PAINE WEBBER INCOME PROPERTIES SEVEN LIMITED PARTNERSHIP


                              INDEX TO EXHIBITS

<TABLE>
<CAPTION> 

                                                      Page Number in the Report
Exhibit No. Description of Document                   or Other Reference
----------- ------------------------                  --------------------------
<S>         <C>                                        <C>  

(3) and (4) Prospectus of the Registrant              Filed with  the Commission
            dated May 14, 1985, supplemented,         pursuant to Rule 424(c)
            with particular reference to the          and incorporated  herein by
            Restated Certificate and Agreement        reference.
            Limited Partnership.


(10)        Material contracts previously filed as    Filed with the Commission
            exhibits to registration statements and   pursuant to Section 13 or 15(d)
            amendments thereto of the registrant      of the Securities Exchange Act
            together with all such contracts filed    of 1934 and incorporated
            as exhibits of previously filed Forms     herein by reference.
            8-K and Forms 10-K are hereby
            incorporated herein by reference.


(13)        Annual Reports to Limited Partners        No Annual Report for the year
                                                      ended September 30, 1997 has  
                                                      been    sent    to   the
                                                      Limited Partners.  An Annual
                                                      Report will be sent to
                                                      the   Limited   Partners
                                                      subsequent to this filing.


(21)        List of Subsidiaries                      Included in Item  1 of Part I of this
                                                      Annual  Report Page I-1, to which
                                                      Reference is hereby made.


(27)        Financial Data Schedule                   Filed  as  last  page of EDGAR
                                                      submission following the Financial
                                                      Statements  and Financial
                                                      Statement Schedule required by
                                                      Item 14.

</TABLE>


<PAGE>


                          ANNUAL REPORT ON FORM 10-K
                       Item 14(a) (1) and (2) and 14(d)

           PAINE WEBBER INCOME PROPERTIES SEVEN LIMITED PARTNERSHIP
       INDEX TO FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES


                                                                    Reference
                                                                    ---------

Paine Webber Income Properties Seven Limited Partnership:

      Report of independent auditors                                     F-2

      Consolidated balance sheets as of September 30, 1997 and 1996      F-3

      Consolidated statements of operations for the years ended
        September 30, 1997, 1996 and 1995                                F-4

      Consolidated statements of changes in partners' capital 
        (deficit) for the years ended September 30, 1997, 1996 
         and 1995                                                        F-5

      Consolidated statements of cash flows for the years ended
         September 30, 1997, 1996 and 1995                               F-6

      Notes to consolidated financial statements                         F-7

      Schedule III - Real estate and accumulated depreciation           F-22

Combined Joint Ventures of Paine Webber Income Properties Seven Limited
Partnership:

      Report of  independent auditors                                   F-23

      Combined balance sheets as of September 30, 1997 and 1996         F-24

      Combined  statements of operations and changes in venturers'
        capital (deficit) for the years ended September 30, 1997, 
        1996 and 1995                                                   F-25

      Combined statements of cash flows for the years ended
         September 30, 1997, 1996 and 1995                              F-26

      Notes to combined financial statements                            F-27

      Schedule III - Real estate and accumulated depreciation           F-35


      Other  schedules  have been omitted since the required  information is not
present or not  present  in amounts  sufficient  to  require  submission  of the
schedule,  or because the information  required is included in the  consolidated
financial statements, including the notes thereto.


<PAGE>


                        REPORT OF INDEPENDENT AUDITORS






The Partners of
Paine Webber Income Properties Seven Limited Partnership:

      We have  audited the  accompanying  consolidated  balance  sheets of Paine
Webber Income Properties Seven Limited  Partnership as of September 30, 1997 and
1996,  and  the  related  consolidated  statements  of  operations,  changes  in
partners' capital  (deficit),  and cash flows for each of the three years in the
period  ended  September  30,  1997.  Our audits  also  included  the  financial
statement schedule listed in the Index at Item 14(a). These financial statements
and  schedule  are  the  responsibility  of the  Partnership's  management.  Our
responsibility  is to  express  an opinion  on these  financial  statements  and
schedule based on our audits.

      We conducted our audits in accordance  with  generally  accepted  auditing
standards.  Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement.  An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements.  An audit also includes
assessing the  accounting  principles  used and  significant  estimates  made by
management,  as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

      In our opinion,  the consolidated  financial  statements referred to above
present fairly, in all material respects, the consolidated financial position of
Paine Webber Income  Properties Seven Limited  Partnership at September 30, 1997
and 1996, and the consolidated  results of its operations and its cash flows for
each of the three years in the period ended  September  30, 1997,  in conformity
with generally accepted accounting principles. Also, in our opinion, the related
financial statement schedule, when considered in relation to the basic financial
statements  taken as a whole,  presents  fairly  in all  material  respects  the
information set forth therein.





                                           /s/ Ernst & Young LLP
                                           ---------------------
                                           ERNST & YOUNG LLP


Boston, Massachusetts
January 9, 1998



<PAGE>


                     PAINE WEBBER INCOME PROPERTIES SEVEN
                             LIMITED PARTNERSHIP

                         CONSOLIDATED BALANCE SHEETS
                         September 30, 1997 and 1996
                   (In thousands, except per Unit amounts)

                                    ASSETS
                                                            1997         1996
                                                            ----         ----
Operating investment property:
   Land                                                 $     486   $     698
   Buildings and improvements                               2,990       4,294
   Equipment and fixtures                                      75         107
                                                        ---------   ---------
                                                            3,551       5,099
   Less accumulated depreciation                           (1,257)     (1,651)
                                                        ---------   ---------
                                                            2,294       3,448

Investments in unconsolidated ventures, at equity           1,406           -
Cash and cash equivalents                                   2,856       5,067
Escrowed funds                                                 72          74
Accounts receivable, net                                       26         107
Accounts receivable - affiliates                                -           2
Deferred expenses, net of accumulated amortization
   of $75 ($56 in 1996)                                       103         122
Other assets                                                   32          32
                                                        ---------   ----------
                                                        $   6,789   $   8,852
                                                        =========   =========

                 LIABILITIES AND PARTNERS' CAPITAL (DEFICIT)

Losses from  unconsolidated joint ventures in excess
   of investments and advances                          $       -   $   8,413
Mortgage note payable                                       1,614       1,671
Accounts payable and accrued expenses                          84          61
Accounts payable - affiliates                                   7           -
Accrued interest payable                                       15          15
Accrued real estate taxes                                      58          59
Other liabilities                                               9          10
                                                        ---------   ---------
      Total liabilities                                     1,787      10,229

Partners' capital (deficit):
  General Partners:
   Capital contributions                                        1           1
   Cumulative net loss                                       (365)       (475)
   Cumulative cash distributions                             (289)       (282)

  Limited Partners ($1,000 per Unit; 37,969 Units issued):
   Capital contributions, net of offering costs            33,529      33,529
   Cumulative net loss                                    (16,058)    (26,444)
   Cumulative cash distributions                          (11,816)     (7,706)
                                                        ---------   ---------
      Total partners' capital (deficit)                     5,002      (1,377)
                                                        ---------   ---------
                                                        $   6,789   $   8,852
                                                        =========   =========




                           See accompanying notes.


<PAGE>


                      PAINE WEBBER INCOME PROPERTIES SEVEN
                               LIMITED PARTNERSHIP

                      CONSOLIDATED STATEMENTS OF OPERATIONS
              For the years ended September 30, 1997, 1996 and 1995
                     (In thousands, except per Unit amounts)

                                                 1997        1996       1995
                                                 ----        ----       ----
Revenues:
   Rental income and expense recoveries       $   535     $   523      $  497
   Interest and other income                      273         250         338
                                              -------     -------      ------
                                                  808         773         835

Expenses:
   Loss on impairment of operating 
     investment property                        1,000           -           -
   Mortgage interest                              188         195         215
   Property operating expenses                     92         103         119
   Depreciation expense                           154         139         149
   Real estate taxes                               80          77          82
   General and administrative                     287         285         364
   Bad debt expense                               150          89           -
   Management fee expense                          58           -           -
   Amortization expense                            13          13           7
                                              -------     -------      ------
                                                2,022         901         936
                                              -------     -------      ------
Operating loss                                 (1,214)       (128)       (101)

Partnership's share of unconsolidated
   ventures' income (losses)                       36        (276)     (1,100)

Partnership's share of gain on sale of 
   operating investment properties              4,210           -           -

Venture partner's share of consolidated
   venture's operations                             1           -           1
                                              -------     -------      ------

Income (loss) before extraordinary gain         3,033        (404)     (1,200)

Partnership's share of extraordinary gain
   from settlement of debt obligations          7,463           -       1,600
                                              -------     -------      ------
Net income (loss)                             $10,496     $  (404)     $  400
                                              =======     =======      ======

Net income (loss) per Limited 
  Partnership Unit:
   Income (loss) before extraordinary gain    $ 79.04     $(10.53)    $(31.29)
   Partnership's share of extraordinary gain
     from settlement of debt obligations       194.50           -       41.72
                                              -------     -------     -------
   Net income (loss)                          $273.54     $(10.53)    $ 10.43
                                              =======     =======     =======

Cash distributions per Limited 
  Partnership Unit                            $108.25     $     -     $     -
                                              =======     =======     =======

      The above per  Limited  Partnership  Unit  information  is based  upon the
37,969 Limited Partnership Units outstanding during each year.


                           See accompanying notes.


<PAGE>

                      PAINE WEBBER INCOME PROPERTIES SEVEN
                               LIMITED PARTNERSHIP

        CONSOLIDATED STATEMENTS OF CHANGES IN PARTNERS' CAPITAL (DEFICIT)
              For the years ended September 30, 1997, 1996 and 1995
                                 (In thousands)

                                         General     Limited
                                         Partners    Partners     Total
                                         --------    --------     -----


Balance at September 30, 1994            $ (756)    $    (617)    $ (1,373)

Net income                                    4           396          400
                                         ------     ---------     --------

Balance at September 30, 1995              (752)         (221)        (973)

Net loss                                     (4)         (400)        (404)
                                         ------     ---------     --------
Balance at September 30, 1996              (756)         (621)      (1,377)

Net income                                  110        10,386       10,496

Cash distributions                           (7)       (4,110)      (4,117)
                                         ------     ---------     --------

Balance at September 30, 1997            $ (653)    $   5,655     $  5,002
                                         ======     =========     ========




























                           See accompanying notes.


<PAGE>


                      PAINE WEBBER INCOME PROPERTIES SEVEN
                               LIMITED PARTNERSHIP

                      CONSOLIDATED STATEMENTS OF CASH FLOWS
              For the years ended September 30, 1997, 1996 and 1995
                Increase (Decrease) in Cash and Cash Equivalents
                                 (In thousands)
<TABLE>
<CAPTION>


                                                        1997        1996        1995
                                                        ----        ----        ----
<S>                                                     <C>         <C>         <C>  

Cash flows from operating activities:
  Net income (loss)                                    $  10,496    $   (404)   $    400
  Adjustments to reconcile net income (loss) to
   net cash provided by operating activities:
   Loss on impairment of operating investment
     property                                              1,000           -           -
   Depreciation and amortization                             167         152         156
   Amortization of deferred financing costs                    6           6           6
   Partnership's share of unconsolidated 
     ventures' income (losses)                               (36)        276       1,100
   Venture partner's share of consolidated 
     venture's operations                                     (1)          -          (1)
   Partnership's share of gain on sale
     of operating investment properties                    (4,210)         -           -
   Partnership's share of extraordinary gain
       from settlement of debt obligations                 (7,463)          -     (1,600)
   Changes in assets and liabilities:
     Escrowed funds                                             2           1          2
     Accounts receivable                                       81         (23)       (34)
     Accounts receivable - affiliates                           2           -          -
     Deferred expenses                                          -           -         (8)
     Other assets                                               -           -        (27)
     Accounts payable - affiliates                              7           -          -
     Accounts payable and accrued expenses                     23          24          7
     Accrued interest payable                                   -          (1)         7
     Accrued real estate taxes                                 (1)         (1)         3
                                                       ----------   ---------   --------
        Total adjustments                                 (10,423)        434       (389)
                                                       ----------   ---------   --------
        Net cash provided by operating activities              73          30         11
                                                       ----------   ---------   --------

Cash flows from investing activities:
  Additions to operating investment property                    -         (25)      (132)
  Distributions from unconsolidated joint ventures          1,890       1,862      1,211
                                                       ----------   ---------   --------
        Net cash provided by investing activities           1,890       1,837      1,079
                                                       ----------   ---------   --------

Cash flows from financing activities:
  Repayment of mortgage notes payable                         (57)        (52)    (2,077)
  Proceeds from issuance of long-term debt                      -           -      1,751
  Deferred loan costs                                           -           -        (83)
  Distributions to partners                                (4,117)          -          -
                                                       ----------   ---------   --------
        Net cash used in financing activities              (4,174)       (52)      (409)
                                                       ----------   ---------   --------
Net (decrease) increase in cash and cash
  equivalents                                              (2,211)      1,815        681

Cash and cash equivalents, beginning of year                5,067       3,252      2,571
                                                       ----------   ---------   --------

Cash and cash equivalents, end of year                 $   2,856    $   5,067   $  3,252
                                                       =========    =========   ========

Cash paid during the year for interest                 $     182    $     190   $    202
                                                       =========    =========   ========
</TABLE>

                           See accompanying notes.


<PAGE>


                     PAINE WEBBER INCOME PROPERTIES SEVEN
                             LIMITED PARTNERSHIP
                  Notes to Consolidated Financial Statements

1.  Organization and Nature of Operations
    -------------------------------------

      Paine  Webber   Income   Properties   Seven   Limited   Partnership   (the
"Partnership") is a limited  partnership  organized  pursuant to the laws of the
State of Delaware in January 1985 for the purpose of investing in a  diversified
portfolio  of  income-producing   properties.  The  Partnership  authorized  the
issuance of Partnership units (the "Units"), at $1,000 per Unit, of which 37,969
were subscribed and issued between May 14, 1985 and May 13, 1986.

      The  Partnership  originally  invested  the  net  proceeds  of the  public
offering,   through  five  joint  venture   partnerships,   in  seven  operating
properties,  comprised of five multi-family  apartment complexes,  one mixed-use
office and retail property and one shopping center. During fiscal 1997, three of
the multi-family  properties were sold. A fourth multi-family  property was sold
subsequent  to  September  30,  1997.  In  addition,  the office  portion of the
investment  in the  mixed-use  Concourse  property was lost through  foreclosure
proceedings  on December 17, 1992.  The  Partnership  retains an interest in the
retail plaza portion of the Concourse  property.  The two office towers owned by
the Concourse joint venture had comprised approximately 28% of the Partnership's
original  investment  portfolio.  See Notes 4 and 5 for a  description  of these
transactions and of the remaining real estate investments.

2.  Use of Estimates and Summary of Significant Accounting Policies
    ---------------------------------------------------------------

      The accompanying  consolidated  financial statements have been prepared on
the accrual basis of accounting in accordance with generally accepted accounting
principles  which require  management to make  estimates  and  assumptions  that
affect the  reported  amounts  of assets  and  liabilities  and  disclosures  of
contingent assets and liabilities as of September 30, 1997 and 1996 and revenues
and expenses for each of the three years in the period ended September 30, 1997.
Actual results could differ from the estimates and assumptions used.

      The   accompanying   consolidated   financial   statements   include   the
Partnership's  investments  in five joint venture  partnerships  which own seven
operating  properties.  Except as described below, the Partnership  accounts for
its  investments in joint venture  partnerships  using the equity method because
the Partnership does not have a voting control  interest in the ventures.  Under
the equity method, the venture is carried at cost adjusted for the Partnership's
share of the venture's  earnings or losses and  distributions.  See Note 5 for a
description of these unconsolidated joint venture partnerships.

      As further  discussed in Note 4, on September  14,  1990,  the  co-venture
partner  of West  Palm  Beach  Concourse  Associates  assigned  its 15%  general
partnership  interest to Seventh  Income  Properties  Fund,  Inc.,  the Managing
General  Partner  of the  Partnership  (see  Note 3).  The  assignment  gave the
Partnership  control over the affairs of the joint  venture.  Accordingly,  this
joint  venture,  which had been  accounted  for under the equity method in years
prior to fiscal 1990, is presented on a consolidated  basis in the  accompanying
financial  statements.  All  transactions  between the Partnership and the joint
venture have been eliminated in consolidation.

      The operating  investment property owned by the consolidated joint venture
is carried at cost,  net of  accumulated  depreciation  and  certain  guaranteed
payments, or an amount less than cost if indicators of impairment are present in
accordance  with  Statement of Financial  Accounting  Standards  (SFAS) No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
Be Disposed Of," which was adopted in fiscal 1997. SFAS 121 requires  impairment
losses to be recorded on long-lived assets used in operations when indicators of
impairment are present and the undiscounted cash flows estimated to be generated
by those  assets are less than the  assets'  carrying  amount.  The  Partnership
generally assesses indicators of impairment by a review of independent appraisal
reports on the operating  investment  property.  Such  appraisals  make use of a
combination of certain generally accepted valuation techniques, including direct
capitalization,  discounted  cash flows and comparable  sales  analysis.  During
fiscal 1997, the  independent  appraisal of the Concourse  operating  investment
property indicated that certain operating assets,  consisting of land, buildings
and improvements,  and equipment and fixtures were impaired.  In accordance with
SFAS No. 121, the  consolidated  Concourse joint venture recorded a reduction in
the net carrying  value of such assets  amounting to $1,000,000  relating to the
land ($212,000), buildings and improvements ($1,304,000), equipment and fixtures
($32,000) and accumulated depreciation ($548,000).

      Depreciation  expense on the  operating  investment  property  is computed
using the straight-line method over an estimated useful life of thirty years for
the  buildings and  improvements  and five years for the equipment and fixtures.
Acquisition  fees  have been  capitalized  and are  included  in the cost of the
operating investment property.

      Deferred   expenses  at  September  30,  1997  and  1996  include  leasing
commissions and deferred refinancing cost related to the Concourse Retail Plaza.
The leasing  commissions are being  amortized on a straight-line  basis over the
terms of the related leases. The deferred  refinancing costs are being amortized
on a straight-line  basis over the term of the new loan, which  approximates the
effective  interest  method.  Amortization  of  deferred  refinancing  costs  is
included in interest expense on the accompanying statements of operations.

      The  consolidated  joint  venture  leases  retail  space at the  operating
investment  property under  short-term and long-term  operating  leases.  Rental
revenues are recognized on a straight-line basis over the term of the respective
leases.

      For the  purposes  of  reporting  cash  flows,  cash and cash  equivalents
include all highly liquid debt instruments which have original  maturities of 90
days or less.

      The  cash  and  cash  equivalents  and  escrowed  funds  appearing  on the
accompanying  balance sheets  represent  financial  instruments  for purposes of
Statement of Financial  Accounting  Standards No. 107,  "Disclosures  about Fair
Value  of  Financial   Instruments."   The  carrying   amount  of  these  assets
approximates  their  fair  value as of  September  30,  1997 and 1996 due to the
short-term maturities of these instruments.  The mortgage note payable is also a
financial  instrument  for  purposes of SFAS 107. The fair value of the mortgage
note payable is  estimated  using  discounted  cash flow  analysis  based on the
current market rate for a similar type of borrowing arrangement (see Note 6).

      No provision for income taxes has been made in the accompanying  financial
statements as the liability  for such taxes is that of the  individual  partners
rather  than the  Partnership.  Upon sale or  disposition  of the  Partnership's
investments,  the taxable gain or the tax loss incurred will be allocated  among
the partners.  In cases where the  disposition  of the  investment  involves the
lender  foreclosing  on the  investment,  taxable  income  could  occur  without
distribution of cash. This income would represent passive income to the partners
which could be offset by each partners'  existing passive losses,  including any
passive loss carryovers from prior years.

3.  The Partnership Agreement and Related Party Transactions
    --------------------------------------------------------

      The General  Partners of the  Partnership  are Seventh  Income  Properties
Fund,  Inc. (the  "Managing  General  Partner"),  a  wholly-owned  subsidiary of
PaineWebber  Group, Inc.  ("PaineWebber")  and Properties  Associates 1985, L.P.
(the "Associate  General  Partner"),  a Virginia  limited  partnership,  certain
limited  partners of which are also officers of the Managing General Partner and
PaineWebber Properties  Incorporated.  Subject to the Managing General Partner's
overall  authority,  the business of the  Partnership  is managed by PaineWebber
Properties  Incorporated (the "Adviser")  pursuant to an advisory contract.  The
Adviser is a wholly-owned  subsidiary of PaineWebber  Incorporated  ("PWI"). The
General Partners, the Adviser and PWI receive fees and compensation,  determined
on an agreed-upon  basis, in  consideration  for various  services  performed in
connection with the sale of the Units, the management of the Partnership and the
acquisition, management, financing and disposition of Partnership investments.

      In connection  with the  acquisition of properties,  the Adviser  received
acquisition fees in an amount equal to 5% of the gross proceeds from the sale of
the Partnership Units. In connection with the sale of each property, the Adviser
may  receive a  disposition  fee in an amount  equal to the  lesser of 1% of the
aggregate  sales  price  of  the  property  or 50%  of  the  standard  brokerage
commissions,  subordinated  to the  payment  of certain  amounts to the  Limited
Partners.

      Under the terms of the  Partnership  Agreement,  as  amended,  any taxable
income or tax loss (other than from a Capital  Transaction)  of the  Partnership
will be allocated  98.94802625%  to the Limited  Partners and 1.05197375% to the
General Partners.  Taxable income or tax loss arising from a sale or refinancing
of  investment  properties  will be  allocated  to the Limited  Partners and the
General Partners in proportion to the amounts of sale or refinancing proceeds to
which they are entitled;  provided, however, that the General Partners shall not
be allocated  aggregate gain as a result of all sales or  refinancings in excess
of the  aggregate  net losses  previously  allocated  to them and the total cash
distributed to them; provided further,  however, that the General Partners shall
be allocated at least 1% of taxable income  arising from a sale or  refinancing.
If there are no sale or refinancing proceeds,  taxable income or tax loss from a
sale or refinancing  will be allocated  98.94802625% to the Limited Partners and
1.05197375%  to the General  Partners.  Notwithstanding  this,  the  Partnership
Agreement  provides that the allocation of taxable income and tax losses arising
from the sale of a property which leads to the  dissolution  of the  Partnership
shall be adjusted to the extent  feasible so that neither the General or Limited
Partners  recognize  any gain or loss as a result of having either a positive or
negative balance remaining in their capital accounts upon the dissolution of the
Partnership.  If the General  Partner  has a negative  capital  account  balance
subsequent  to the sale of a  property  which  leads to the  dissolution  of the
Partnership,  the General  Partner may be obligated to restore a portion of such
negative capital account balance as determined in accordance with the provisions
of  the  Partnership  Agreement.  Allocations  of the  Partnership's  operations
between the General Partners and the Limited  Partners for financial  accounting
purposes have been made in conformity  with the allocations of taxable income or
tax loss.

      All  distributable  cash,  as  defined,  for  each  fiscal  year  shall be
distributed quarterly in the ratio of 95% to the Limited Partners,  1.01% to the
General  Partners  and 3.99% to the  Adviser,  as an asset  management  fee. The
Partnership  reinstated its quarterly distribution payments in fiscal 1997. Such
distributions  had been suspended since 1990. Under the advisory  contract,  the
Adviser has  specific  management  responsibilities:  to  administer  day-to-day
operations of the Partnership, and to report periodically the performance of the
Partnership to the Managing  General  Partner.  The Adviser will be paid a basic
management  fee  (3% of  adjusted  cash  flow,  as  defined  in the  Partnership
Agreement)   and  an  incentive   management  fee  (2%  of  adjusted  cash  flow
subordinated to a noncumulative  annual return to the Limited  Partners equal to
6% based upon their adjusted  capital  contributions),  in addition to the asset
management fee described above, for services rendered.  The Adviser earned basic
and asset  management  fees totalling  $58,000 for the year ended  September 30,
1997. No basic or asset management fees were earned by the Adviser for the years
ended September 30, 1996 and 1995. No incentive management fees have been earned
to date.

      Included  in  general  and  administrative  expenses  for the years  ended
September 30, 1997, 1996 and 1995 is $86,000, $81,000 and $86,000, respectively,
representing  reimbursements to an affiliate of the Managing General Partner for
providing certain financial,  accounting and investor  communication services to
the Partnership.

      The  Partnership  uses the  services  of Mitchell  Hutchins  Institutional
Investors,  Inc. ("Mitchell Hutchins") for the managing of cash assets. Mitchell
Hutchins is a  subsidiary  of  Mitchell  Hutchins  Asset  Management,  Inc.,  an
independently operated subsidiary of PaineWebber.  Mitchell Hutchins earned fees
of $17,000, $13,000 and $4,000 (included in general and administrative expenses)
for managing the  Partnership's  cash assets during fiscal 1997,  1996 and 1995,
respectively.

4.  Operating Investment Property
    -----------------------------

      Operating  investment  property at September 30, 1997 and 1996  represents
the fixed assets of West Palm Beach  Concourse  Associates,  a joint  venture in
which the Partnership has a controlling  interest.  The Partnership  acquired an
interest  in West Palm Beach  Concourse  Associates  (the  "Joint  Venture"),  a
Florida  general  partnership  organized on July 31, 1985 in  accordance  with a
joint venture  agreement  between the Partnership and Palm Beach Lake Associates
(co-venturer), to own and operate The Concourse Towers I and II and Retail Plaza
(the  "Properties").  The Properties  originally  consisted of two office towers
with 140,000  square feet of rentable  space and a 30,473  rentable  square foot
retail plaza located in West Palm Beach,  Florida.  On September  14, 1990,  the
co-venture partner of West Palm Beach Concourse  Associates assigned its general
partnership  interest to Seventh Income  Properties  Fund,  Inc.  ("SIPF"),  the
Managing  General Partner of the  Partnership,  in return for a release from any
further  obligations  or duties  called for under the terms of the joint venture
agreement.  As a result, the Partnership assumed control over the affairs of the
joint venture.

      The aggregate cash  investment  made by the  Partnership  for its original
interest in West Palm Beach Concourse  Associates was approximately  $11,325,000
(including an acquisition fee of $663,000 paid to the Adviser). At September 30,
1992,  the  Properties  were  encumbered  by three  separate  nonrecourse  first
mortgage loans and a nonrecourse  second mortgage loan with an aggregate balance
of approximately $12,873,000.  The Concourse joint venture suspended payments to
the second  mortgage  lender in May of 1991 and suspended  payments to the first
mortgage  lender  in  January  of 1992  due to the  continued  deterioration  of
operating results that reduced the venture's net cash flow below levels required
to cover the scheduled mortgage loan payments.  The venture's cash flow problems
resulted from a significant  decline in market rental rates,  as a result of the
oversupply of competing office space in the West Palm Beach, Florida market. The
venture's net cash flow dropped  dramatically upon the expiration,  in August of
1991,  of a master lease which had covered all of Tower II. Upon  expiration  of
the  master  lease,  which had been in effect  since the time of the  property's
acquisition,  several  sub-lessees decided to vacate the building and the leased
percentage  of the  Tower  II  space  fell  from  100% to less  than  50%.  Upon
suspending debt service payments,  management  requested certain concessions and
modifications  from the lenders  necessary for the venture to be able to compete
effectively  in the  marketplace  for tenants and service its debt  obligations.
After  protracted  negotiations,   the  first  mortgage  lender  was  ultimately
unwilling  or unable  to grant the  sought-after  modifications  and filed  suit
against the venture to  foreclose  on the entire  mixed-use  complex,  under the
cross-collateralization provisions of the three first mortgage loans.

      On October 29, 1992, the  Partnership  consummated a settlement  agreement
with the first mortgage lender regarding the foreclosure  suits on the Concourse
office towers and retail plaza whereby the foreclosure action against the retail
plaza was  dismissed  and the first  mortgage  loan on the retail  property  was
reinstated.  In return for this  reinstatement,  the  Partnership  agreed not to
contest  a  stipulated  order  of  foreclosure  on the two  office  towers.  The
foreclosure  of the two office  towers was  completed on December  17, 1992.  In
conjunction  with this  settlement  agreement,  the second mortgage  lender,  in
return for a payment of  $100,000  from the  venture,  agreed to release the two
office towers from the second mortgage lien, to reduce the principal  balance on
the second mortgage on the retail plaza to $750,000,  and to extend the maturity
date of this loan to July 1997.  As  described  in Note 6, this second  mortgage
loan was repaid in fiscal 1995.

      Effective  January 1, 1991, SIPF assigned to the Partnership  that portion
of its venture  interest  which is equal to 14% of the interests in the venture.
In connection  with the  assignment,  the venture  partners  agreed to amend and
restate  the  entire  Joint  Venture  Agreement.  The terms of the  Amended  and
Restated Joint Venture Agreement are summarized below.

      The Amended and Restated  Joint Venture  Agreement  provides that net cash
flow (as defined) shall be distributed in the following  order of priority:  (i)
First,  to the  Partnership  until the  Partnership  has  received a  cumulative
non-compounded  return  of 10% on its net  investment  of  $10,450,000  plus any
additional  contributions  made subsequent to January 1, 1991; (ii) Second,  any
remaining  net cash flow shall be  distributed  to the partners in proportion to
their venture interests (99% to the Partnership and 1% to SIPF).

      Under the terms of the  Amended  and  Restated  Joint  Venture  Agreement,
taxable  income from  operations  in each year shall be  allocated  first to the
Partnership  until the  Partnership  has been allocated an amount equal to a 10%
cumulative  non-compounded  return on the  Partnership's net investment plus any
additional contributions. Any remaining taxable income shall be allocated 99% to
the  Partnership  and 1% to  SIPF.  All tax  losses  from  operations  shall  be
allocated 99% to the Partnership  and 1% to SIPF.  Allocations of income or loss
for  financial  accounting  purposes  have  been  made in  accordance  with  the
allocations of taxable income or tax loss.

      Net  profits  and  losses  arising  from a  capital  transaction  shall be
allocated  among the  venture  partners  under the  specific  provisions  of the
Amended and Restated Joint Venture Agreement.  Any net proceeds available to the
venture,  arising  from  the  sale,  refinancing  or  other  disposition  of the
property,  after the payment of all obligations to the mortgage  lenders and the
repayment of certain  advances from the Partnership  shall be distributed to the
venture  partners in proportion to their positive capital account balances after
the allocation of all gains or losses.

      If  additional  cash is required in  connection  with the operation of the
Joint  Venture,  the venture  partners shall  contribute  such required funds in
proportionate amounts as may be determined by the venture partners at such time.

      The  following is a summary of property  operating  expenses for the years
ended September 30, 1997, 1996 and 1995 (in thousands):

                                                 1997         1996       1995
                                                 ----         ----       ----

     Property operating expenses:
       Repairs and maintenance                 $   50        $ 59      $   55
       Utilities                                    5           5           4
       Insurance                                    6           6           6
       General and administrative                  16          18          42
       Management fees                             15          15          12
                                               ------        ----      ------
                                               $   92        $103      $  119
                                               ======        ====      ======

5.  Investments in Unconsolidated Joint Venture Partnerships
    --------------------------------------------------------

      At  September  30,  1997,  the   Partnership   had  investments  in  three
unconsolidated  joint  ventures  (four at September  30, 1996) which owned three
operating  properties  (six at September  30,  1996).  HMF  Associates,  a joint
venture in which the  Partnership  had an  interest,  owned  three  multi-family
apartment properties located in the Seattle,  Washington area. On June 27, 1997,
HMF  Associates  sold the properties  known as The Hunt Club  Apartments and The
Marina Club Apartments,  and then, on September 9, 1997, HMF Associates sold the
remaining  property known as The Enchanted Woods  Apartments.  Subsequent to the
sale of Enchanted Woods, HMF Associates was liquidated.  See below for a further
discussion of these sale  transactions.  The  unconsolidated  joint ventures are
accounted for on the equity method in the Partnership's financial statements.
<PAGE>

      Condensed combined financial statements of these joint ventures follow:

                      Condensed Combined Balance Sheets
                         September 30, 1997 and 1996
                                (in thousands)
                                    Assets
                                                             1997        1996
                                                             ----        ----

   Current assets                                         $ 3,445     $ 3,162
   Operating investment properties, net                    22,481      36,019
   Other assets, net                                          238         327
                                                          -------     -------
                                                          $26,164     $39,508
                                                          =======     =======

                 Liabilities and Partners' Capital (Deficit)

   Current liabilities                                    $ 3,069     $25,832
   Long-term debt, less current portion                    22,185      22,602
   Loans from venturers                                         -         366
   Partnership's share of combined capital (deficit)        1,167      (8,531)
   Co-venturers' share of combined capital (deficit)         (257)       (761)
                                                          -------     -------
                                                          $26,164     $39,508
                                                          =======     =======

                  Reconciliation of Partnership's Investment

                                                             1997        1996
                                                             ----        ----

   Partnership's share of combined capital 
     (deficit), as shown above                            $  1,167   $ (8,531)
   Prepaid distributions to Partnership                        (76)      (234)
   Partnership's share of current liabilities
     and long-term debt                                        168        168
   Excess basis due to investment in ventures, net (1)         147        184
                                                          --------   --------
     Investment in unconsolidated ventures, at equity     $  1,406   $ (8,413)
                                                          ========   ========

    (1) At September 30, 1997 and 1996, the  Partnership's  investment  exceeded
        its  share  of the  joint  venture  partnerships'  capital  accounts  by
        approximately  $147,000 and $184,000,  respectively.  This amount, which
        relates to certain  expenses  incurred by the  Partnership in connection
        with acquiring its joint venture  investments,  is being  amortized over
        the estimated  useful life of the  investment  properties.  As discussed
        further  below,  the Meadows joint venture was  liquidated  subsquent to
        year-end upon the sale of its operating investment property. Included in
        the net excess basis as of September 30, 1997 is $129,000 related to the
        Meadows  joint venture which will be written off in the first quarter of
        fiscal 1998 as a result of this sale transaction.
<PAGE>

                    Condensed Combined Summary of Operations
              For the years ended September 30, 1997, 1996 and 1995
                                 (in thousands)

                                               1997         1996        1995
                                               ----         ----        ----

   Rental revenues and expense recoveries   $  10,391    $ 10,372    $ 10,122
   Interest and other income                      466         521         465
                                            ---------    --------    --------
                                               10,857      10,893      10,587

   Mortgage interest                            3,652       3,892       4,468
   Property operating expenses                  5,539       5,609       5,285
   Depreciation and amortization                1,649       1,849       1,661
   (Gain) loss on insurance settlement              -        (197)        300
                                            ---------    --------    --------
                                               10,840      11,153      11,714
                                            ---------    --------    --------
   Operating income (loss)                         17        (260)     (1,127)

   Gain on sale of operating investment
     properties                                 4,291           -           -
                                            ---------    --------    --------
   Income (loss) before extraordinary gain      4,308        (260)     (1,127)

   Extraordinary gain from settlement of
    debt obligations                            7,552           -       1,070
                                            ---------    --------    --------
    
   Net income (loss)                        $  11,860   $    (260)   $    (57)
                                            =========   =========    ========

   Net income (loss):
     Partnership's share of combined net
       income (loss)                        $  11,746   $    (269)   $    (23)
     Co-venturers' share of combined
       net income (loss)                          114           9         (34)
                                            ---------   ---------    --------
                                            $  11,860   $    (260)   $    (57)
                                            =========   =========    ========

             Reconciliation of Partnership's Share of Operations
                                (in thousands)

                                                1997      1996         1995
                                                ----      ----         ----

   Partnership's share of combined net income
    (loss), as shown above                    $11,746   $  (269)    $   (23)
   Amortization of excess basis                   (37)       (7)         (7)
                                              -------   -------     --------
   Partnership's share of unconsolidated
    ventures' net income (losses)             $11,709   $  (276)    $    (30)
                                              =======   =======     ========
<PAGE>

      The  Partnership's  share  of  the  unconsolidated  ventures'  net  income
(losses) is presented as follows in the  consolidated  statements  of operations
(in thousands):

   Partnership's share of unconsolidated
     ventures' income (losses)               $    36    $  (276)   $ (1,100)
   Partnership's share of gain on sale
     of operating investment properties        4,210          -           -
   Partnership's share of extraordinary
     gain on settlement of debt obligations    7,463          -       1,070
                                             -------    -------    --------
                                             $11,709    $  (276)   $    (30)
                                             =======    =======    ========

      The  unconsolidated  joint ventures are subject to partnership  agreements
which  determine the  distribution  of available  funds,  the disposition of the
ventures' assets and the rights of the partners, regardless of the Partnership's
percentage  ownership  interest  in  the  venture.   Substantially  all  of  the
Partnership's  investments in these unconsolidated joint ventures are restricted
as to distributions.

      Investments in  unconsolidated  joint ventures,  at equity, on the balance
sheet  is  comprised  of  the  following   equity  method  carrying  values  (in
thousands):
                                                            1997         1996
                                                            ----         ----

   Chicago Colony Apartments Associates                  $     77    $   (241)
   Chicago Colony Square Associates                         1,256       1,138
   Daniel Meadows Partnership                                  73         506
   HMF Associates                                               -      (9,816)
                                                         --------    --------
                                                         $  1,406    $ (8,413)
                                                         ========    ========

      The Partnership  received cash distributions from the unconsolidated joint
ventures during fiscal 1997, 1996 and 1995 as set forth below (in thousands):

                                                1997        1996       1995
                                                ----        ----       ----

   Chicago Colony Apartments Associates      $    774     $ 1,517     $   797
   Daniel Meadows Partnership                     567         345          14
   HMF Associates                                 549           -         400
                                             --------     -------     -------
                                             $  1,890     $ 1,862     $ 1,211
                                             ========     =======     =======
<PAGE>

      A  description  of the  ventures'  properties  and the  terms of the joint
venture agreements are summarized as follows:

      a.  Chicago Colony Apartments Associates
          ------------------------------------

      On December  27,  1985,  the  Partnership  acquired a general  partnership
interest in Chicago  Colony  Apartments  Associates  (the "Joint  Venture"),  an
Illinois general  partnership that purchased and operates The Colony Apartments;
a  783-unit  apartment  complex  located  in  Mount  Prospect,   Illinois.   The
Partnership's co-venture partner is an affiliate of the Paragon Group.

      The  aggregate  cash  investment by the  Partnership  for its interest was
approximately  $11,848,000 (including an acquisition fee of $687,500 paid to the
Adviser). On August 1, 1995, the $16.75 million non-recourse wraparound mortgage
note secured by the Colony  Apartments  property was refinanced with a new $17.4
million  non-recourse  mortgage note at a fixed interest rate of 7.6% per annum.
The joint venture received a discount of approximately $1,070,000 on the pay-off
of the  wraparound  mortgage loan under the terms of the loan  agreement and did
not  require  any  contributions  from the  venture  partners  to  complete  the
refinancing  transaction.  The  discount  was  recorded  by  the  venture  as an
extraordinary  gain  on  settlement  of debt  obligation.  The  Partnership  was
allocated 100% of such  extraordinary  gain. As a condition of the new loan, the
Colony  Apartments  joint venture was required to establish an escrow account in
the amount of $685,000 for the  completion of agreed upon repairs,  $156,600 for
capital replacement reserves and $600,000 for real estate taxes. The outstanding
balance of the first mortgage loan, which is scheduled to mature in August 2002,
was $16,873,000 as of September 30, 1997.

      The Joint  Venture  Agreement  provides  that cash flow for any year shall
first be  distributed to the  Partnership  in the amount of $1,100,000,  payable
monthly (the Partnership preference return). The Partnership's preference return
is cumulative  monthly but not annually.  The next $317,500  thereafter  will be
distributed  to  the  co-venturer  on  a  noncumulative  annual  basis,  payable
quarterly.  Any cash flow not  previously  distributed at the end of each fiscal
year will be applied in the following order of priority: first to the payment of
all unpaid accrued interest on all outstanding operating notes, if any, the next
$425,000 of cash flow in any year will be distributed 80% to the Partnership and
20% to the  co-venturer,  the next  $425,000  of cash  flow in any year  will be
distributed 70% to the Partnership and 30% to the co-venturer, and any remaining
balance will be distributed 65% to the  Partnership and 35% to the  co-venturer.
After the end of each  month  during the year in which the  Partnership  has not
received its cumulative  preference  return, the co-venturer shall distribute to
the  Partnership  the  lesser  of (a)  the  excess,  if any,  of the  cumulative
Partnership  preference  return  over the  aggregate  amount  of net  cash  flow
previously  distributed to the  Partnership  during the year or (b) any net cash
flow distributed to the co-venturer during the year.

      The Joint Venture  Agreement further provides that net sale or refinancing
proceeds  shall be  distributed  (after  payment  of  mortgage  debt  and  other
indebtedness  of the Joint  Venture)  as follows and in the  following  order of
priority:  (1) the Partnership and the co-venturer shall receive amounts due for
operating  loans or  additional  cash  contributions,  if any, made to the Joint
Venture,  (2)  the  amount  of  any  undistributed  preference  payments  to the
Partnership,  (3) the  Partnership  shall  receive  $12,680,281,  (4)  the  next
$3,619,500 of such proceeds  shall be distributed  to the  co-venturer,  (5) the
Manager of the apartment complex shall receive any subordinated  management fees
not  previously  paid,  (6) the  next  $8,750,000  of  such  proceeds  shall  be
distributed 80% to the Partnership and 20% to the co-venturer, (7) any remaining
balance  shall  then  be  distributed  85% to  the  Partnership  and  15% to the
co-venturer  until the  Partnership  receives an amount  equal to the sum of net
losses allocated to the Partnership through 1989 times a percentage equal to 50%
less the weighted average maximum Federal income tax rate for individuals plus a
simple rate of return  equal to 8% per annum;  (8) the next  $4,000,000  of such
proceeds shall be distributed 70% to the Partnership and 30% to the co-venturer,
and (9) the balance of such proceeds,  if any,  shall be distributed  65% to the
Partnership and 35% to the co-venturer.

      Taxable  income  and tax  losses  from  operations  in each year  shall be
allocated  to the  Partnership  and the  co-venturer  in any  year  in the  same
proportions  as actual cash  distributions,  except that,  through  December 31,
1987, all net losses shall be allocated to the Partnership,  and thereafter,  in
no event, shall the co-venturer be allocated less than 10% of the taxable income
or losses nor shall the  co-venturer  be  allocated  income  without a like cash
distribution.  Allocations of income and loss for financial  accounting purposes
have been made in conformity  with the actual  allocations  of taxable income or
tax loss.

      If additional cash is required for any reason in connection with the Joint
Venture after December 31, 1988, it will be provided 80% by the  Partnership and
20% by the co-venturer as interest-bearing loans to the Joint Venture.

      The Joint Venture has entered into a property  management contract with an
affiliate of the co-venturer,  cancellable at the option of the Partnership upon
the  occurrence of certain  events.  The  management fee is 5% of gross receipts
collected from the property (excluding interest on certain Joint Venture reserve
funds),  and 40% of such fee was  subordinated to the receipt by the Partnership
and the  co-venturer  of their  preferred  returns  during  the  period  through
December 31, 1988. Cumulative subordinated management fees at September 30, 1997
totalled approximately $275,000.

      b.  Chicago Colony Square Associates
          --------------------------------

      On December 27, 1985, the Partnership also acquired a general  partnership
interest in Chicago Colony Square  Associates (the "Joint  Venture") an Illinois
general partnership that purchased and operates Colony Square Shopping Center; a
shopping center  consisting of two one-story  buildings with 39,572 net rentable
square feet, located in Mount Prospect,  Illinois. The Partnership's  co-venture
partner is an affiliate of the Paragon Group.

      The aggregate cash  investment by the  Partnership  for its investment was
approximately  $1,416,000  (including an acquisition  fee of $81,250 paid to the
Adviser).  The shopping  center is encumbered by a nonrecourse  assumable  first
mortgage loan with a balance of approximately  $1,011,000 at September 30, 1997.
This mortgage loan is scheduled to mature in November 2006.

      The Joint  Venture  Agreement  provides  that cash flow for any year shall
first be  distributed  to the  Partnership  in the amount of  $130,000,  payable
monthly (the Partnership preference return). The Partnership's preference return
is cumulative  monthly but not  annually.  The next $22,900  thereafter  will be
distributed  to  the  co-venturer  on  a  noncumulative  annual  basis,  payable
quarterly  (the  co-venturer  preference  return).  Any cash flow not previously
distributed  at the end of each  fiscal  year will be applied  in the  following
order:  first to the payment of all unpaid accrued  interest on all  outstanding
operating  notes,  if  any,  the  next  $50,000  of  annual  cash  flow  will be
distributed 80% to the Partnership and 20% to the co-venturer,  the next $50,000
of annual cash flow will be distributed  70% to the  Partnership  and 30% to the
co-venturer and any remaining balance will be distributed 60% to the Partnership
and 40% to the co-venturer. After the end of each month during the year in which
the  Partnership  has  not  received  its  cumulative   preference  return,  the
co-venturer shall distribute to the Partnership the lesser of (a) the excess, if
any, of the cumulative  Partnership  preference return over the aggregate amount
of the net cash flow previously  distributed to the Partnership  during the year
or (b) any net cash flow distributed to the co-venturer during the year.

      The Joint Venture  Agreement  further  provides  that sale or  refinancing
proceeds  shall be  distributed  (after  payment  of  mortgage  debt  and  other
indebtedness  of the Joint  Venture)  as follows and in the  following  order of
priority:  (1) the Partnership and the co-venturer shall receive amounts due for
operating loans and accrued interest or additional cash  contributions,  if any,
made to the  Joint  Venture,  (2) the  amount  of any  undistributed  preference
payments not previously collected by the Partnership shall then be paid, (3) the
Partnership  shall  receive  $1,508,127,  (4) the next $261,060 of such proceeds
shall be distributed to the co-venturer,  (5) the Manager of the Shopping Center
shall receive any subordinated management fees not previously paid, (6) the next
$1,000,000 of such proceeds shall be distributed  80% to the Partnership and 20%
to the co-venturer,  (7) any remaining  balance shall then be distributed 85% to
the  Partnership and 15% to the  co-venturer  until the Partnership  receives an
amount equal to the sum of net losses allocated to the Partnership  through 1989
times a percentage equal to 50% less the weighted average maximum Federal income
tax rate for individuals plus a simple rate of return equal to 8% per annum, (8)
the next $450,000 of such proceeds shall be distributed  70% to the  Partnership
and 30% to the co-venturer,  and (9) the balance of such proceeds, if any, shall
be distributed 60% to the Partnership and 40% to the co-venturer.

      Taxable  income  and tax  losses  from  operations  in each  year  will be
allocated  to the  Partnership  and the  co-venturer  in any  year  in the  same
proportions  as actual cash  distributions,  except that,  through  December 31,
1987, all net losses were allocated to the  Partnership,  and thereafter,  in no
event,  will the  co-venturer  ever be  allocated  less than 10% of the  taxable
income or tax losses nor will the co-venturer be allocated income without a like
cash  distribution.  Allocations  of income  and loss for  financial  accounting
purposes have been made in  conformity  with the actual  allocations  of taxable
income or tax loss.

      If additional cash is required for any reason in connection with the Joint
Venture,  it will be provided 80% by the  Partnership and 20% by the co-venturer
as interest-bearing loans to the Joint Venture.

      The Joint  Venture  entered into a property  management  contract  with an
affiliate of the co-venturer,  cancellable at the option of the Partnership upon
the  occurrence  of  certain  events.  The  management  fee  will be 5% of gross
receipts collected  (excluding interest on certain Joint Venture reserve funds),
and 40% of such fee was  subordinated  to the receipt by of the  Partnership and
the  co-venturer of their preferred  returns during the period through  December
31, 1988. Cumulative subordinated management fees at September 30, 1997 totalled
approximately $27,000.

      c.  Daniel Meadows Partnership
          --------------------------

      On June 19, 1986, the Partnership  acquired a general partnership interest
in  Daniel  Meadows  Partnership  (the  "Joint  Venture"),  a  Virginia  general
partnership which has been formed to develop, own and operate The Meadows on the
Lake Apartments,  a 200-unit  apartment complex located in Birmingham,  Alabama.
The Partnership's  co-venture partner was an affiliate of Daniel Realty Company.
The  aggregate  cash   investment  by  the  Partnership  for  its  interest  was
approximately  $3,807,000  (including an acquisition fee of $207,000 paid to the
Adviser). The apartment complex was encumbered by a mortgage note with a balance
of  approximately  $4,719,000 at September 30, 1997.  The mortgage  debt, in the
initial  principal  amount of  $4,850,000,  bore  interest at a variable rate of
2.25% over the 30-day LIBOR rate (equivalent to a rate of approximately 7.90625%
per annum as of September 30,  1997).  The loan  required  monthly  interest and
principal payments based on a 25-year amortization schedule and was scheduled to
mature on February 5, 2000.

      Subsequent  to year-end,  on December 18, 1997 the Joint  Venture sold the
operating  investment  property to an unrelated third party for $9,525,000.  The
Partnership received net proceeds of approximately $4.4 million after paying off
the outstanding mortgage loan of approximately $4.7 million and closing costs of
approximately  $400,000.  The  Partnership  received 100% of the net proceeds in
accordance with the terms of the Joint Venture Agreement.  The net proceeds from
the sale of The Meadows  property will be distributed to the Limited Partners on
February 13, 1998.

      During fiscal 1991, the Partnership discovered that certain materials used
to construct The Meadows on the Lake Apartments  were installed  incorrectly and
would require substantial repairs. During fiscal 1992, the Meadows joint venture
engaged local legal  counsel to seek  recoveries  from the  venture's  insurance
carrier, as well as various  contractors and suppliers,  for the venture's claim
of damages,  which were  estimated at  approximately  $1 million,  not including
legal fees and other incidental costs. During fiscal 1993, the insurance carrier
deposited  approximately  $38,000  into  an  escrow  account  controlled  by the
venture's  mortgage  lender  in  settlement  of the  undisputed  portion  of the
venture's  claim.   During  fiscal  1994,  the  insurer  agreed  to  enter  into
non-binding mediation towards settlement of the disputed claims out of court. On
October 3, 1994,  the joint  venture  agreed to settle  its claims  against  the
insurance carrier, architect,  general contractor and the surety/completion bond
insurer for $1,076,000,  which was in addition to the $38,000 previously paid by
the insurance carrier. These settlement proceeds were escrowed with the mortgage
holder, which agreed to release such funds as needed for structural renovations.
The venture's  mortgage  loan  described  above was to be fully  recourse to the
joint  venture and to the partners of the joint  venture  until the repairs were
completed,  at which time the entire obligation  becomes  non-recourse.  Through
September  30, 1996, a total of $103,000 in excess of the  available  settlement
proceeds had been spent for the renovations,  which were completed during fiscal
1996.  The venture had recognized a loss of $300,000 in fiscal 1995 equal to the
amount by which the total repair costs,  including  estimated costs to complete,
exceeded the total settlement proceeds.  During fiscal 1996,  management revised
its plans for completing the renovations resulting in the required repairs being
accomplished for  substantially  less than the prior  estimates.  This change in
estimate resulted in a gain of $197,000 for financial  reporting  purposes which
is reflected in the venture's fiscal 1996 income statement.

      The Joint Venture Agreement  provided that from available cash flow, after
the repayment of any optional loans made by the partners,  the Partnership would
receive  an 8% per annum  cumulative  preferred  return on  $3,600,000,  payable
monthly  through June 30, 1989;  9% per annum  through June 30, 1991 and 10% per
annum thereafter.  The General Partners of the co-venturer personally guaranteed
payment of the Partnership's  preferred return through June 30, 1988. Any excess
cash remaining,  after payment to the Partnership of its preferred distribution,
was to be  distributed  60%  to  the  Partnership  and  40% to the  co-venturer,
respectively.  In  addition,  the  Partnership  was  entitled to receive  $2,500
annually  as  an  investor   servicing  fee.  As  of  September  30,  1997,  the
Partnership's  unpaid  cumulative  preference  return amounted to  approximately
$2,175,000.  Such amount was payable  only from  available  sale or  refinancing
proceeds.  Accordingly,  the unpaid cumulative preference return was not accrued
in the venture's financial statements as of September 30, 1997.

      The Joint Venture Agreement provided that Net Proceeds, as defined, (other
than refinancing  proceeds,  which were to be distributed 60% to the Partnership
and 40% to the  co-venturer)  were to be distributed,  after payment of mortgage
debt  and  other  indebtedness  of the  Joint  Venture,  as  follows  and in the
following  order of priority:  (1) to repay accrued  interest and principal,  in
that order,  on any optional loans made by the partners,  (2) to the Partnership
until the Partnership had received the cumulative annual preferred distributions
following the guaranty period specified  above, (3) to the Partnership  until it
had received  cumulative  distributions of $4,140,000,  and (4) thereafter,  the
balance, if any, 60% to the Partnership and 40% to the co-venturer.

      Taxable  income from  operations  in each year was to be  allocated to the
Partnership and the co-venturer in accordance with distributions of cash, to the
extent of such  distributions,  and then 60% to the  Partnership  and 40% to the
co-venturer,  respectively.  Until the date upon which the  Partnership had been
allocated  cumulative  tax losses  equal to  $3,600,000,  tax losses  were to be
allocated  98% to the  Partnership  and  2% to  the  co-venturer,  respectively.
Thereafter,  tax losses were to be allocated 60% to the  Partnership  and 40% to
the co-venturer. Allocations of income or loss for financial accounting purposes
have been made in conformity with the allocations of taxable income or tax loss.

      Generally, gains and losses arising from a sale of the property were to be
allocated  first on the basis of the  partner's  capital  balances;  thereafter,
remaining  gains and losses were to be allocated 60% to the  Partnership and 40%
to the co-venturer.

      The Joint  Venture  entered into a property  management  contract  with an
affiliate of the co-venturer,  cancellable at the option of the Partnership upon
the occurrence of certain  events.  The management fee was 5% of rents and other
income collected from the property, as defined in the management agreement.

      d.  HMF Associates
          --------------

      On March 5, 1987,  the  Partnership  formed a joint  venture  with Pacific
Union  Investment  Corporation  (the  co-venturer)  pursuant to a joint  venture
agreement.  The joint venture was formed as a California general partnership and
purchased and operated the Enchanted  Woods (formerly  Forest Ridge),  Hunt Club
and Marina Club  apartment  complexes,  all of which are located in the Seattle,
Washington  area. The Enchanted  Woods property is a 217-unit  garden  apartment
complex and contains  approximately  212,463 net rentable  square feet. The Hunt
Club property is a 130-unit garden apartment complex and contains  approximately
101,912 net  rentable  square  feet,  and the Marina Club  property is a 77-unit
garden court apartment  complex and contains  approximately  60,331 net rentable
square feet. The original  aggregate cash  investment by the Partnership for its
interest was approximately  $4,206,000 (including an acquisition fee of $259,700
paid to the Adviser).

      Construction-related  defects  were  discovered  at  all  three  apartment
complexes  prior to fiscal 1991.  During 1991, HMF Associates  participated as a
plaintiff in a lawsuit filed against the developer,  which also involved certain
other properties constructed by the developer. The joint venture's claim against
the developer was settled  during  fiscal 1991 for  $4,189,000.  Such funds were
received in December of 1991 and were  recorded by the venture as a reduction to
the basis of the operating  properties.  Of the settlement proceeds,  $1,397,000
was paid to legal counsel in connection  with the litigation and was capitalized
as an addition to the carrying value of the operating investment properties.  In
addition  to the  cash  received  at the  time of the  settlement,  the  venture
received a note of  approximately  $584,000 from the developer  which was due in
1994.  During fiscal 1993, the venture agreed to accept a discounted  payment of
approximately  $409,000 in full  satisfaction of the note if payment was made by
December 31, 1993. The developer made this discounted  payment to the venture in
the first  quarter of fiscal 1994.  In addition,  during fiscal 1994 the venture
received additional settlement proceeds totalling approximately  $1,270,000 from
its pursuit of claims against certain  subcontractors of the development company
and  other  responsible  parties.   Additional   settlement  proceeds  totalling
approximately  $1,444,000 were collected during fiscal 1995. As of September 30,
1995, all claims had been settled and no additional  proceeds were  anticipated.
Per the  terms  of the  joint  venture  agreement,  as  amended,  available  net
litigation proceeds,  after payment of all associated expenses, were distributed
90% to the  Partnership  and 10% to the  co-venturer.  During  fiscal 1994,  the
Partnership  received  a  distribution  of  $1,000,000  from the joint  venture,
representing its share of the available settlement proceeds. During fiscal 1995,
the  Partnership  received  a  repayment  of  a  $400,000  optional  loan,  plus
approximately  $175,000 in accrued  interest on such loan, from its share of the
additional  settlement  proceeds.   The  repairs  to  the  operating  investment
properties,  which were completed during fiscal 1994, net of insurance proceeds,
were  capitalized  or expensed in  accordance  with the joint  venture's  normal
accounting policy for such items.

      As part of the initial  settlement,  the venture  also  negotiated  a loan
modification  agreement  which  provided the remainder of the funds  required to
complete the repairs of the operating investment properties.  Under the terms of
the HMF Associates  loan  modification  executed in fiscal 1992, all accrued and
unpaid interest outstanding as of March 31, 1992 was converted to principal. The
loans and additional  advances bore interest at a rate of 9% per annum.  Monthly
payments were made in an amount equal to the "net operating income', as defined,
for the prior month.  Unpaid interest was added to the principal  balance of the
indebtedness on a monthly basis.  The final maturity date of the loan secured by
the Enchanted Woods  Apartments was June 1, 1997, while the maturity date of the
loans secured by the Hunt Club and Marina Club  properties  was July 1, 1997, at
which time all unpaid  principal,  interest and advances  were due.  Despite the
successful  lease-up of all three properties  owned by HMF Associates  following
the completion of the  construction-related  repairs,  the net operating  income
from the properties  was not sufficient to fully cover the interest  accruing on
the outstanding debt obligations.  As a result,  the total obligation due to the
mortgage lender had continued to increase since the date of the fiscal 1992 loan
modification  agreement.  The balance of the original mortgage loans on the Hunt
Club,  Marina Club and  Enchanted  Woods  properties at the time of their fiscal
1987 acquisition dates totalled  $13,035,000.  After advances from the lender to
pay for costs to repair the construction  defects of approximately  $4.8 million
and  interest  deferrals  totalling   approximately  $6.2  million,   the  total
obligation to the mortgage lender totalled  approximately  $24 million as of the
fiscal 1997 maturity dates. As a result,  the aggregate  estimated fair value of
the operating investment properties was substantially lower than the outstanding
obligations  to the first mortgage  holder.  In April 1997, the lender agreed to
another  modification  agreement  which  provided  the  joint  venture  with  an
opportunity  to complete a sale  transaction  prior to the loan maturity  dates.
Under the terms of the agreement,  the  Partnership  and the co-venture  partner
could  qualify  to  receive  a nominal  payment  from the  sales  proceeds  at a
specified  level if a sale was  completed  by June 30,  1997 and  certain  other
conditions  were met. In May 1997, the agreement with the lender was modified to
reflect  the terms and  conditions  of a sale  involving  only the Hunt Club and
Marina Club  properties.  On June 27, 1997,  HMF  Associates  sold The Hunt Club
Apartments  and The Marina  Club  Apartments  to an  unrelated  third  party for
approximately  $5.3  million and $3.1  million,  respectively.  The  Partnership
received net proceeds of  approximately  $288,000 in connection with the sale of
these  two  assets  in  accordance  with the  discounted  mortgage  loan  payoff
agreement.  The joint  venture  also  obtained a four-month  extension  from the
lender of the  discounted  loan pay off agreement  with respect to the Enchanted
Woods  Apartments,  and, in July 1997,  entered into an  agreement  with another
third-party  buyer for the sale of this  remaining  asset for $9.2 million.  The
sale,  which closed on September 9, 1997,  satisfied the  conditions in the loan
modification  agreement  which  allowed  the  Partnership  to  share  in the net
proceeds  from the sale  transaction  even  though  the sale price was below the
amount  of the  debt  obligation.  The  Partnership  received  net  proceeds  of
approximately  $261,000 from the sale of Enchanted  Woods.  As a result of these
sale  transactions,  the  Partnership  no  longer  has  any  interest  in  these
properties.

      The joint venture recognized gains from the forgiveness of indebtedness in
connection  with the sales of the  Enchanted  Woods,  Hunt Club and Marina  Club
properties in the aggregate  amount of $7,552,000 as a result of the fiscal 1997
sale transactions.  The venture also recognized gains in the aggregate amount of
$4,291,000  for the  amount by which the sales  prices,  net of  closing  costs,
exceeded the net carrying  values of the operating  investment  properties.  The
Partnership's  share  of  such  gains  totalled  approximately   $7,463,000  and
$4,210,000, respectively.

      Taxable income from  operations was to be allocated in accordance with the
allocation of net cash flow  distributions  called for in the venture agreement.
Tax losses from operations,  after  consideration of certain priority items, was
to be allocated between the Partnership and the co-venturer in proportion to net
cash flow actually distributed or distributable during any fiscal year. Interest
expense on loans from the venture  partners were  specifically  allocated to the
respective  venture  partners.  Capital profits were to be allocated as follows:
First, to the partners to relieve their capital accounts of any negative balance
and second, to the partners in the manner that capital proceeds are distributed.
Capital losses were to be allocated to partners with positive capital  accounts,
then 80% to the  Partnership and 20% to the  co-venturer.  Allocations of income
and loss for financial accounting purposes have been made in conformity with the
allocations of taxable income or tax loss.

      The joint venture originally entered into a property management  agreement
with an  affiliate of the  co-venturer  for property  management  services.  The
management fee was equal to the greater of 5% of gross  receipts,  as defined in
the  agreement,  or $9,000 a month.  The  co-venturer  was also  reimbursed  for
certain  accounting  expenses.  In  addition,  under an  amendment  to the joint
venture agreement and as consideration for services provided in conjunction with
the litigation discussed above, the venture paid the co-venturer fees of $96,000
during fiscal 1995.

6.  Mortgage note payable
    ---------------------

      Mortgage note payable on the  consolidated  balance  sheets relates to the
Partnership's  consolidated joint venture, West Palm Beach Concourse Associates,
and is secured by the venture's operating investment property.  At September 30,
1997 and 1996, mortgage note payable consists of the
following (in thousands):

                                                            1997       1996
                                                            ----       ----

     11.12% first  mortgage,  payable in
installments of $20 per month, including
interest,  through  January 1, 2005. The
fair   value   of  this   note   payable
approximated  its  carrying  value as of
September 30, 1997 and 1996.                               $ 1,614    $ 1,671
                                                           =======    =======

      During  fiscal  1994,  the venture  reached an  agreement  with the second
mortgage  lender to fully  extinguish  a $750,000  second  mortgage  lien on the
Concourse  operating  property  in return for a cash  payment of  $300,000.  The
Partnership advanced the funds required to complete this transaction in November
1994. The  transaction  resulted in an  extraordinary  gain recognized in fiscal
1995 of $530,000.

      In  accordance  with  the  Concourse  mortgage  loan  agreements,  certain
insurance  premiums and real estate taxes are required to be held in escrow. The
balance of escrowed  funds on the  accompanying  balance sheets at September 30,
1997 and 1996 consist of such escrowed  insurance premiums and real estate taxes
in the aggregate amounts of $72,000 and $74,000, respectively.

      Scheduled  maturities  of  long-term  debt are  summarized  as follows (in
thousands):

            1998              $      64
            1999                     71
            2000                     80
            2001                     89
            2002                    100
            Thereafter            1,210
                              ---------
                              $   1,614
                              =========

7.  Leases
    ------

      The Partnership's  consolidated  joint venture,  West Palm Beach Concourse
Associates,  derives its revenues  from non  cancelable  operating  leases.  The
initial terms of the leases range from 1 to 40 years with the majority of leases
providing for the pass through of certain property expenses to the tenants.

      Approximate  minimum  future  rentals due to be  received on existing  non
cancelable leases of the retail plaza owned by the consolidated  venture for the
next  five  years  ending  September  30  and  thereafter  are  as  follows  (in
thousands):

            1998       $   398
            1999           334
            2000           298
            2001           184
            2002           134
            Thereafter   1,247
                       -------
                       $ 2,595
                       =======

      The  above   amounts  do  not   include   contingent   rentals   based  on
cost-of-living  increases and rentals which may be received under certain leases
on the  basis of a  percentage  of  sales  in  excess  of  stipulated  minimums.
Percentage  rents received  during fiscal 1995 was $2,000.  No percentage  rents
were received during fiscal 1997 and 1996.

8.  Subsequent event
    ----------------

      On November 14, 1997, the Partnership  distributed $229,000 to the Limited
Partners,  $2,000 to the General Partners and $10,000 to the Adviser as an asset
management fee for the quarter ended September 30, 1997.

      As  discussed  further in Note 5, on December  18, 1997 the joint  venture
which owned the Meadows on the Lake Apartments sold the operating  property to a
third party and distributed the net proceeds to the Partnership.



<PAGE>


Schedule III - Real Estate and Accumulated Depreciation
            PAINE WEBBER INCOME PROPERTIES SEVEN LIMITED PARTNERSHIP

              SCHEDULE OF REAL ESTATE AND ACCUMULATED DEPRECIATION
                               September 30, 1997
                                 (In thousands)
<TABLE>
<CAPTION>


                          Initial Cost to                     Gross Amount at Which Carried at                         Life on Which
                             Partnership      Costs          Close of period                                           Depreciation
                              Buildings     Capitalized          Buildings,                                            in Latest
                               Improvements (Removed)            Improvements                                          Income
                               & Personal   Subsequent to        & Personal       Accumulated  Date of      Date       Statement
Description Encumbrances Land  Property     Acquisition    Land  Property   Total Depreciation Construction Acquired   is Computed
----------- ------------ -----  --------    -----------    ----  --------   ----- ------------ ------------ --------   -----------

<S>         <C>          <C>    <C>         <C>            <C>    <C>      <C>         <C>       <C>         <C>          <C>

Retail Plaza
West Palm 
Beach,
 FL         $1,614       $ 742   $4,518     $(1,709)       $486   $3,065    $3,551     $ 1,257   1979-80    7/31/85       5-30 yrs

Notes
(A) The  aggregate  cost of real estate owned at September  30, 1997 for Federal income tax purposes is approximately $5,416,000.
(B) See Notes 4 and 6 of Notes to Financial  Statements. 
(C)  Reconciliation of real estate owned:
                                                  1997           1996           1995
                                                  ----           ----           ----

      Balance at beginning of year            $  5,099       $  5,074       $  4,942
      Acquisitions and improvements                  -             25            132
      Write off due to permanent 
         impairment (see Note 2)                (1,548)             -              -
                                              --------       --------       --------
      Balance at end of year                  $  3,551       $  5,099       $  5,074
                                              ========       ========       ========

(D) Reconciliation of accumulated depreciation:

      Balance at beginning of year            $  1,651       $  1,512       $  1,363
      Depreciation expense                         154            139            149
      Write off due to permanent
         impairment (see Note 2)                  (548)             -              -
                                              --------  -    --------       --------
      Balance at end of year                  $  1,257       $  1,651       $  1,512
                                              ========       ========       ========
</TABLE>

(E)Costs removed  subsequent  to  acquisition  include an  impairment  writedown
   recognized  in  fiscal  1997  (see  Note 2),  as well as  certain  guaranteed
   payments received from the co-venturer of the consolidated joint venture (see
   Note 4).



<PAGE>



                         REPORT OF INDEPENDENT AUDITORS




The Partners of
Paine Webber Income Properties Seven Limited Partnership:

      We have audited the  accompanying  combined balance sheets of the Combined
Joint Ventures of Paine Webber Income Properties Seven Limited Partnership as of
September 30, 1997 and 1996, and the related  combined  statements of operations
and  changes in  venturers'  capital  (deficit),  and cash flows for each of the
three years in the period ended September 30, 1997. Our audits also included the
financial  statement schedule listed in the Index at Item 14(a). These financial
statements and schedule are the responsibility of the Partnership's  management.
Our  responsibility  is to express an opinion on these financial  statements and
schedule based on our audits.

      We conducted our audits in accordance  with  generally  accepted  auditing
standards.  Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement.  An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements.  An audit also includes
assessing the  accounting  principles  used and  significant  estimates  made by
management,  as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

      In our  opinion,  the  combined  financial  statements  referred  to above
present fairly, in all material respects, the combined financial position of the
Combined  Joint  Ventures  of  Paine  Webber  Income  Properties  Seven  Limited
Partnership  at September 30, 1997 and 1996,  and the combined  results of their
operations  and their cash flows for each of the three years in the period ended
September 30, 1997, in conformity with generally accepted accounting principles.
Also, in our opinion, the related financial statement schedule,  when considered
in relation to the basic financial statements taken as a whole,  presents fairly
in all material respects the information set forth therein.






                                         /s/ Ernst & Young LLP
                                         ---------------------
                                         ERNST & YOUNG LLP




Boston, Massachusetts
November 20, 1997


<PAGE>


                           COMBINED JOINT VENTURES OF
            PAINE WEBBER INCOME PROPERTIES SEVEN LIMITED PARTNERSHIP

                             COMBINED BALANCE SHEETS
                           September 30, 1997 and 1996
                                 (In thousands)

                                     Assets
                                                           1997        1996
                                                           ----        ----

Current assets:
   Cash and cash equivalents                             $  1,844    $  1,958
   Escrow deposits                                          1,302         896
   Prepaid distributions to venturer                            -         234
   Other current assets                                       299          74
                                                         --------    --------
      Total current assets                                  3,445       3,162

Operating investment properties
   Land                                                     4,563       6,472
   Buildings, improvements and equipment                   35,763      51,632
                                                         --------    --------
                                                           40,326      58,104
   Less accumulated depreciation                          (17,845)    (22,085)
                                                         --------    --------
      Net operating investment properties                  22,481      36,019

Deferred expenses, net of accumulated amortization
   of $120 ($345 in 1996)                                     173         238
Other assets                                                   65          89
                                                         --------    --------
                                                         $ 26,164    $ 39,508
                                                         ========    ========

                  Liabilities and Venturers' Capital (Deficit)

Current liabilities:
   Current portion of long-term debt                    $     418    $ 23,691
   Real estate taxes payable                                1,872       1,181
   Accounts payable and accrued liabilities                   144         263
   Accounts payable - affiliates                                3          30
   Accrued interest                                           143         142
   Tenant security deposits                                   273         309
   Distributions payable to venturers                         216         216
                                                         --------    --------
      Total current liabilities                             3,069      25,832

Loans from venturers                                            -         366

Long-term debt                                             22,185      22,602

Venturers' capital (deficit)                                  910      (9,292)
                                                         --------    --------
                                                         $ 26,164    $ 39,508
                                                         ========    ========






                             See accompanying notes.


<PAGE>

                           COMBINED JOINT VENTURES OF
            PAINE WEBBER INCOME PROPERTIES SEVEN LIMITED PARTNERSHIP

  COMBINED STATEMENTS OF OPERATIONS AND CHANGES IN VENTURERS' CAPITAL (DEFICIT)
             For the years ended September 30, 1997, 1996 and 1995
                                 (In thousands)

                                                1997        1996        1995
                                                ----        ----        ----

Revenues:
   Rental revenues and expense recoveries    $ 10,391    $ 10,372    $ 10,122
   Interest and other income                      466         521         465
                                             --------    --------    --------
                                               10,857      10,893      10,587

Expenses:
   Interest expense                             3,652       3,961       4,468
   Depreciation expense                         1,635       1,766       1,651
   Real estate taxes                            1,835       1,830       1,799
   Repairs and maintenance                        741         780         668
   Management fees                                537         541         534
   Utilities                                      607         620         598
   Salaries and related expenses                1,026         979         914
   General and administrative                     793         859         772
   Amortization expense                            14          14          10
   (Gain) loss on insurance settlement              -        (197)        300
                                             --------    --------    --------
                                               10,840      11,153      11,714
                                             --------    --------    --------
Operating income (loss)                            17        (260)     (1,127)

Gain on sale of operating investment
   properties                                   4,291           -            -
                                             --------    --------    --------

Income (loss) before extraordinary gain         4,308        (260)     (1,127)

Extraordinary gain from settlement of
   debt obligations                             7,552           -       1,070
                                              --------    --------    --------
Net income (loss)                              11,860        (260)        (57)

Distributions to venturers                     (2,049)     (1,254)     (1,085)

Contributions from partners                       391           -           -

Venturers' deficit, beginning of year          (9,292)     (7,778)     (6,636)
                                             --------    --------    --------

Venturers' capital (deficit), end of year    $    910    $ (9,292)    $(7,778)
                                             ========    ========     =======











                             See accompanying notes.


<PAGE>


                           COMBINED JOINT VENTURES OF
            PAINE WEBBER INCOME PROPERTIES SEVEN LIMITED PARTNERSHIP
                    COMBINED STATEMENTS OF CASH FLOWS For the
                  years ended September 30, 1997, 1996 and 1995
                Increase (Decrease) in Cash and Cash Equivalents
                                 (In thousands)
<TABLE>
<CAPTION>

                                                          1997        1996            1995
                                                          ----        ----            ----
<S>                                                        <C>        <C>             <C>  

Cash flows from operating activities:
  Net income (loss)                                     $   11,860    $      (260)   $      (57)
  Adjustments to reconcile net income (loss) to
    net cash provided by operating activities:
   Gain on sale of operating investment propertie           (4,291)             -             -
   Extraordinary gain from settlement of debt
     obligations                                            (7,552)             -             -
   Depreciation and amortization                             1,649          1,780         1,661
   Amortization of deferred financing costs                     46             69            45
   Interest added to long-term debt principal                  770          2,053         1,976
   Interest on loans from venturers                             25             17            28
   Changes in assets and liabilities:
     Escrow deposits                                          (406)         1,129          (372)
     Accounts receivable                                        10              -           (83)
     Prepaid distribution to venturer                            7              -             -
     Other current assets                                       14             70           (12)
     Deferred expenses                                           -            (13)          (16)
     Other assets                                              (17)            25          (105)
     Accounts payable and accrued liabilities                  (87)          (194)          101
     Accounts payable - affiliates                             (30)            28           (12)
     Real estate taxes payable                                 690           (753)          872
     Accrued interest                                            1             (5)          (20)
     Tenant security deposits                                  (36)            10            (8)
     Other current liabilities                                 (30)             -             -
                                                        ----------    -----------    ----------
        Total adjustments                                   (9,237)         4,216         4,055
                                                        ----------    -----------    ----------
        Net cash provided by operating activities            2,623          3,956         3,998

Cash flows from investment activities:
  Additions to operating investment properties               (800)         (1,188)       (1,624)
  Proceeds from sale of operating investment
    properties                                             17,013               -             -
  Proceeds from insurance settlements                           -               -         2,520
                                                        ----------    -----------    ----------
        Net cash provided by (used in)
          investing activities                             16,213          (1,188)          896
                                                        ----------    -----------    ----------

Cash flows from financing activities:
  Loan proceeds                                                 -               -        22,250
  Escrow deposits funded from refinancing proceeds              -               -        (1,442)
  Increase in deferred financing costs                          -             (37)         (204)
  Repayment of long-term debt                             (16,909)         (1,412)      (22,842)
  Repayment of loans to venturers                               -            (100)         (805)
  Distributions to venturers                              (2,041)          (1,750)         (931)
                                                        ----------    -----------    ----------
        Net cash used in financing activities            (18,950)          (3,299)       (3,974)
                                                        ----------    -----------    ----------
Net (decrease) increase in cash and cash
   equivalents                                              (114)            (531)          920
Cash and cash equivalents, beginning of year                1,958            2,489        1,569
                                                        ---------     -----------    ----------
Cash and cash equivalents, end of year                  $   1,844     $     1,958    $    2,489
                                                        =========     ===========    ==========
Cash paid during the year for interest                  $   2,798     $     1,827    $    2,438
                                                        =========     ===========    ==========
 </TABLE>
                                          See accompanying notes.


<PAGE>
                           COMBINED JOINT VENTURES OF
                      PAINE WEBBER INCOME PROPERTIES SEVEN
                               LIMITED PARTNERSHIP
                     Notes to Combined Financial Statements


1.  Organization and Nature of Operations
    -------------------------------------

      The  accompanying  financial  statements of the Combined Joint Ventures of
Paine Webber Income  Properties  Seven Limited  Partnership (the "Combined Joint
Ventures")  include the accounts of Chicago  Colony  Apartments  Associates,  an
Illinois  general  partnership;  Chicago Colony Square  Associates,  an Illinois
general partnership; Daniel Meadows Partnership, a Virginia general partnership;
and HMF Associates,  a California general partnership.  The financial statements
of the Combined  Joint  Ventures are  presented  in combined  form,  rather than
individually, due to the nature of the relationship between the co-venturers and
Paine Webber Income Properties Seven Limited Partnership  ("PWIP7") which owns a
majority  financial  interest  but does not have  voting  control  in each joint
venture.

      The dates of PWIP7's acquisition of interests in the joint ventures are as
follows:

                                               Date of Acquisition
                 Joint Venture                    of Interest
                 -------------                    -----------

         Chicago Colony Apartments Associates      12/27/85
         Chicago Colony Square Associates          12/27/85
         Daniel Meadows Partnership                6/19/86
         HMF Associates                            5/29/87

      On June 27, 1997,  HMF Associates  sold the  properties  known as The Hunt
Club  Apartments  located in Seattle,  Washington and The Marina Club Apartments
located in Des Moines,  Washington to an unrelated third party for approximately
$5.3  million and $3.1  million,  respectively.  PWIP 7 received net proceeds of
approximately  $288,000  in  connection  with the sale of these  two  assets  in
accordance  with a discounted  mortgage loan payoff  agreement  reached with the
lender in April 1997. On September 9, 1997,  HMF  Associates  sold its remaining
asset, the property known as The Enchanted Woods  Apartments  located in Federal
Way,  Washington,  to an unrelated third party for  approximately  $9.2 million.
PWIP 7 received net proceeds of  approximately  $261,000 in connection  with the
sale in accordance with the discounted mortgage loan payoff agreement.  See Note
5 for a further  discussion of these  transactions.  Subsequent to year-end,  on
December 18, 1997,  Daniel  Meadows  Partnership  sold its operating  investment
property, The Meadows on the Lakes Apartments,  located in Birmingham,  Alabama,
to an unrelated  party for $9.525  million.  The sale  generated net proceeds of
approximately  $4.4 million after  repayment of the  outstanding  first mortgage
loan of approximately $4.7 million and closing costs of approximately  $400,000.
PWIP 7 received  100% of the net  proceeds in  accordance  with the terms of the
joint venture agreement.

2.  Use of Estimates and Summary of Significant Accounting Policies
    ---------------------------------------------------------------

      The  accompanying  financial  statements have been prepared on the accrual
basis of accounting in accordance with generally accepted accounting  principles
which require  management  to make  estimates  and  assumptions  that affect the
reported amounts of assets and liabilities and disclosures of contingent  assets
and  liabilities as of September 30, 1997 and 1996 and revenues and expenses for
each of the three years in the period ended  September 30, 1997.  Actual results
could differ from the estimates and assumptions used.

      Basis of presentation
      ---------------------

      Generally,  the records of the Combined  Joint  Ventures are maintained on
the income tax basis of accounting and adjusted to generally accepted accounting
principles for financial reporting purposes, principally for depreciation.

      Operating investment properties
      -------------------------------

      The operating investment  properties are carried at cost, less accumulated
depreciation,  certain  guaranteed  payments  from  partners  (see  Note  3) and
insurance proceeds,  or an amount less than cost if indicators of impairment are
present in accordance with Statement of Financial  Accounting  Standards  (SFAS)
No. 121 "Accounting  for the Impairment of Long-Lived  Assets and for Long-Lived
Assets to Be  Disposed  Of,"  which was  adopted  in fiscal  1997.  SFAS No. 121
requires  impairment  losses  to  be  recorded  on  long-lived  assets  used  in
operations when indicators of impairment are present and the  undiscounted  cash
flows  estimated  to be  generated  by those  assets  are less than the  assets'
carrying amount.  Management  generally  assesses  indicators of impairment by a
review of independent  appraisal reports on each operating  investment property.
Such  appraisals  make  use  of a  combination  of  certain  generally  accepted
valuation techniques, including direct capitalization, discounted cash flows and
comparable sales analysis.  Depreciation  expense is computed on a straight-line
basis  over the  estimated  useful  lives  of the  buildings,  improvements  and
equipment, generally five to thirty years. Professional fees, including deferred
acquisition  fees paid to an  affiliate  of PWIP7 (see Note 4), and other  costs
incurred  in  connection  with  the  acquisition  of the  properties  have  been
capitalized and are included in the cost of the land and buildings.

      Deferred expenses
      -----------------

      Deferred  expenses  consist  primarily  of  loans  fees  which  are  being
amortized on a straight-line  basis,  which  approximates the effective interest
method, over the  terms of the  related  loans.  Such  amortization  expense  is
included in interest expense on the accompanying statements of operations.

      Revenue Recognition
      -------------------

      The  Combined  Joint  Ventures  lease  space at the  operating  investment
properties under short-term and long-term operating leases.  Rental revenues are
recognized  on a  straight-line  basis as  earned  pursuant  to the terms of the
leases.

      Reclassifications
      -----------------

      Certain  prior  year  balances  have been  reclassified  to conform to the
current year presentation.

      Income tax matters
      ------------------

      The  Combined  Joint  Ventures  are  comprised  of entities  which are not
taxable and accordingly, the results of their operations are included on the tax
returns  of the  various  partners.  Accordingly,  no income  tax  provision  is
reflected in the accompanying combined financial statements.

      Cash and Cash Equivalents
      -------------------------

      For purposes of the statement of cash flows,  the Combined  Joint Ventures
consider all short-term  investments with original  maturity dates of 90 days or
less to be cash equivalents.

      Escrow deposits
      ---------------

      In  accordance  with the mortgage loan  agreements  of the Combined  Joint
Ventures,  certain  building  repair  reserves,  capital  improvement  reserves,
insurance  premiums and real estate taxes are required to be held in escrow. The
escrow  deposit  amounts on the balance sheet at September 30, 1997 and 1996 are
principally comprised of such escrowed amounts.

      Fair Value of Financial Instruments
      -----------------------------------

      The  carrying  amounts of cash and cash  equivalents  and escrow  deposits
approximate  their  fair  values as of  September  30,  1997 and 1996 due to the
short-term maturities of these instruments. It is not practicable for management
to  estimate  the fair  value of the  loans  from  venturers  without  incurring
excessive  costs  because the  obligations  were  provided in  non-arm's  length
transactions  without  regard to fixed  maturities,  collateral  issues or other
traditional  conditions  and  covenants.  The fair  value of  long-term  debt is
estimated,  where applicable,  using discounted cash flow analyses, based on the
current market rate for similar types of borrowing arrangements (see Note 6).

3.  Joint Ventures
    --------------

      See Note 5 to the financial  statements  of PWIP7  included in this Annual
Report  for a more  detailed  description  of the  joint  venture  partnerships.
Descriptions of the ventures' properties are summarized below:

      a.  Chicago Colony Apartments Associates
          ------------------------------------

      The joint  venture  owns and operates  The Colony  Apartments,  a 783-unit
apartment complex located in Mount Prospect, Illinois.

      b.  Chicago Colony Square Associates
          --------------------------------

      The joint  venture owns and operates  Colony  Square  Shopping  Center,  a
39,572 gross leasable  square foot shopping  center,  located in Mount Prospect,
Illinois.

      c.  Daniel Meadows Partnership
          --------------------------

      The joint venture owned and operated The Meadows on the Lake Apartments, a
200-unit apartment complex, located in Birmingham, Alabama. As discussed in Note
1,  subsequent  to  year-end,  on December  18, 1997 the joint  venture sold its
operating investment property and distributed the net proceeds to PWIP7.

      During fiscal 1991, the venture had discovered that certain materials used
to construct the operating property were installed incorrectly and would require
substantial repairs. During fiscal 1992, the Meadows joint venture engaged local
legal counsel to seek recoveries from the venture's  insurance carrier,  as well
as various contractors and suppliers,  for the venture's claim of damages, which
were estimated at approximately  $1 million,  not including legal fees and other
incidental   costs.   During  fiscal  1993,  the  insurance   carrier  deposited
approximately  $38,000  into  an  escrow  account  controlled  by the  venture's
mortgage lender in settlement of the undisputed  portion of the venture's claim.
During  fiscal  1994,  the insurer  agreed to enter into  non-binding  mediation
towards  settlement of the disputed claims out of court. On October 3, 1994, the
joint  venture  verbally  agreed to settle  its  claims  against  the  insurance
carrier,  architect,  general contractor and the surety/completion  bond insurer
for  $1,076,000,  which was in addition to the  $38,000  previously  paid by the
insurance  carrier.  These  settlement  proceeds were escrowed with the mortgage
holder, which agreed to release such funds as needed for structural renovations.
The loan was to be fully  recourse to the joint  venture and to the  partners of
the joint  venture  until the repairs were  completed,  at which time the entire
obligation becomes  non-recourse.  As of September 30, 1996, a total of $103,000
in  excess  of  the  available  settlement  proceeds  had  been  spent  for  the
renovations, which were completed during fiscal 1996. The venture had recognized
a loss of $300,000 in fiscal 1995 equal to the amount by which the total  repair
costs,  including  estimated  costs to complete,  exceeded the total  settlement
proceeds.  During fiscal 1996,  management  revised its plans for completing the
renovations   resulting  in  the  required   repairs  being   accomplished   for
substantially less than the prior estimates. This change in estimate resulted in
a gain of $197,000 for financial  reporting  purposes  which is reflected in the
accompanying fiscal 1996 statement of operations.

      d.  HMF Associates
          --------------

      The joint venture owned and operated  three  properties,  Enchanted  Woods
(formerly Forest Ridge) Apartments,  a 217-unit  apartment  complex,  The Marina
Club Apartments,  a 77-unit apartment complex,  and The Hunt Club Apartments,  a
130-unit  apartment  complex,  all located in the Seattle,  Washington  area. As
discussed in Note 1, during  fiscal 1997 the joint venture sold all three of its
operating investment  properties and distributed the net proceeds to the venture
partners  in  accordance  with a  discounted  loan  payoff  agreement  which  is
described  further  in Note 5.  The  joint  venture  recognized  gains  from the
forgiveness of indebtedness in connection with the sales of the Enchanted Woods,
Hunt Club and Marina Club properties in the aggregate  amount of $7,552,000 as a
result of the fiscal 1997 sale  transactions.  The venture also recognized gains
in the aggregate  amount of $4,291,000 for the amount by which the sales prices,
net of  closing  costs,  exceeded  the  net  carrying  values  of the  operating
investment  properties.  PWIP7's  share  of such  gains  totalled  approximately
$7,463,000 and $4,210,000, respectively.

      Construction-related  defects had been  discovered at all three  apartment
complexes  owned by HMF  Associates  prior to  fiscal  1991.  During  1991,  HMF
Associates participated as a plaintiff in a lawsuit filed against the developer,
which also involved certain other properties  constructed by the developer.  The
joint  venture's  claim against the developer was settled during fiscal 1991 for
$4,189,000.  Such funds were  received in December of 1991 and were  recorded by
the  venture as a reduction  to the basis of the  operating  properties.  Of the
settlement proceeds, $1,397,000 was paid to legal counsel in connection with the
litigation  and was  capitalized  as an  addition to the  carrying  value of the
operating investment properties. In addition to the cash received at the time of
the settlement,  the venture received a note of approximately  $584,000 from the
developer  which was due in 1994.  During  fiscal  1993,  the venture  agreed to
accept a discounted  payment of approximately  $409,000 in full  satisfaction of
the note if payment was made by  December  31,  1993.  The  developer  made this
discounted  payment to the  venture  in the first  quarter  of fiscal  1994.  In
addition, during fiscal 1995 and 1994 the venture received additional settlement
proceeds totalling approximately  $1,444,000 and $1,270,000  respectively,  from
its pursuit of claims against certain  subcontractors of the development company
and other responsible parties. As of September 30, 1995, the venture had settled
all of the outstanding  litigation  related to the  construction  defects and no
additional  litigation  proceeds  were  expected.  The repairs to the  operating
investment properties, which were completed during fiscal 1994, net of insurance
proceeds,  were  capitalized or expensed in accordance  with the joint venture's
normal  accounting  policy for such  items.  Per the terms of the joint  venture
agreement, as amended,  available net litigation proceeds,  after payment of all
associated  expenses,  were  distributed  90% to the  Partnership and 10% to the
co-venturer.

      The following description of the joint venture agreements provides certain
general information.

      Allocations of net income and loss
      ----------------------------------

      The agreements generally provide that taxable income and tax losses (other
than those  resulting from sales or other  dispositions of the projects) will be
allocated  between PWIP7 and the  co-venturers  in the same  proportions as cash
flow distributed or distributable  for such year, except for certain items which
are  specifically  allocated to the  partners as set forth in the joint  venture
agreements. Internal Revenue Service regulations require partnership allocations
of income and loss to the  respective  partners  to have  "substantial  economic
effect".  For certain of the joint ventures this  requirement  resulted in joint
venture  losses for the years  ended  September  30,  1997,  1996 and 1995 being
allocated  in a  manner  different  from  that  provided  in the  joint  venture
agreements. Allocations of income and loss for financial reporting purposes have
been made in accordance  with the actual  allocations  of taxable income and tax
loss.

      Gains or losses resulting from sales or other dispositions of the projects
shall be allocated as specified in the joint venture agreements.

      Distributions
      -------------

      Subsequent to the Guaranty Periods,  distributable funds will generally be
distributed  first,  to repay accrued  interest and principal on certain  loans;
second,  to pay specified  amounts to PWIP7;  third, to pay specified amounts to
the co-venturers;  and fourth, to distribute the balance in proportions  ranging
from 80% to 60% to PWIP7 and 20% to 40% to the co-venturers, as set forth in the
joint venture agreements.

      Distributions of net proceeds upon the sale or disposition of the projects
shall  be made  in  accordance  with  formulas  provided  in the  joint  venture
agreements.

      Guaranty Periods
      ----------------

      The joint venture  agreements  generally provided that during the Guaranty
Periods (as defined in the joint venture agreements), in the event that net cash
flow was  insufficient to fund  operations  including  amounts  necessary to pay
PWIP7 preferred  distributions,  the co-venturers  were required to fund amounts
equal to such  deficiencies.  The  co-venturers  obligation to fund such amounts
pursuant  to  their  guarantees  was  generally  to be in the  form  of  capital
contributions to the joint ventures.

4.  Related party transactions
    --------------------------

      The Combined Joint Ventures  originally  entered into property  management
agreements  with  affiliates  of the  co-venturers,  cancellable  at  the  joint
ventures' option upon the occurrence of certain events.  The management fees are
generally equal to 5% of gross receipts, as defined in the agreements.  Pursuant
to an amendment to the joint venture agreement and as consideration for services
provided relating to the litigation discussed in Note 6, HMF Associates paid the
property  manager fees of $96,000 during fiscal 1995. Such fees were capitalized
as part of the basis of the property.

      The Meadows joint venture was required to pay a yearly investor  servicing
fee to PWIP7 of $2,500.

      Accounts  payable -  affiliates  at  September  30, 1997 and 1996  consist
primarily of management fees and reimbursements owed to the property managers of
the operating properties. Loans from venturers at September 30, 1996 of $366,000
represented  loans plus  accrued  interest  payable to the  partners  of the HMF
Associates  joint  venture.  Included  in  interest  expense for the years ended
September 30, 1997, 1996 and 1995 is $25,000, $17,000 and $36,000, respectively,
of interest on such loans which were converted to capital  contributions  during
fiscal 1997 in connection with the  liquidation of the joint venture  subsequent
to the sale of the venture's operating properties (see Note 3).

5.  Long-term debt
    --------------

      Long-term  debt at September  30, 1997 and 1996  consists of the following
(in thousands):

                                                         1997          1996
                                                         ----          ----

     7.6% mortgage loan,  secured by the
Colony Apartments  property,  payable in
monthly     installments,      including
principal  and  interest of $130 through
August 1, 2002,  at which time the final
principal  installment  of $15,277  plus
any accrued  interest  is due.  The fair
value of this note payable  approximated
its carrying  value as of September  30,
1997 and 1996.                                         $ 16,873       $17,136

     9-1/2%  mortgage  loan,  secured by
the  Colony   Square   Shopping   Center
property,     payable     in     monthly
installments  of $14 through  October 1,
2006   with   the   remaining    balance
($10,581) due and payable on November 1,
2006.   The  fair  value  of  this  note
payable  approximated its carrying value
as of September 30, 1997 and  1996.                       1,011         1,078

     First mortgage loan, secured by the
Meadows on the Lake Apartments property.
Monthly installments of principal, based
on a 25-year amortization  schedule, and
interest,  based  on  LIBOR  plus  2.25%
(7.90625% at September 30,  1996),  were
due  through  maturity  on  February  5,
2000.   The  fair  value  of  this  note
payable  approximated its carrying value
as of September 30, 1997 and 1996.  This
loan was  repaid in full  subsequent  to
year  end in  connection  with a sale of
the operating  investment  property (see
Note 1).                                                  4,719          4,773

     First  mortgage  loans  made to the
HMF  Associates  joint  venture,   which
loans  were  secured  by first  deeds of
trust   on  the   operating   investment
properties  owned by the joint  venture.
The  original  loans  were  modified  on
March 31, 1992 (see discussion below).                        -          23,306
                                                         22,603          46,293

      Less current portion                                 (418)        (23,691)
                                                       --------       ---------
                                                       $ 22,185       $  22,602
                                                       ========       =========

      On August 1, 1995, a $16.75 million non-recourse  wraparound mortgage note
secured  by the  Colony  Apartments  property  was  refinanced  with a new $17.4
million  non-recourse  mortgage note at a fixed interest rate of 7.6% per annum.
The joint venture received a discount of approximately $1,070,000 on the pay-off
of the  wraparound  mortgage loan under the terms of the loan  agreement and did
not  require  any  contributions  from the  venture  partners  to  complete  the
refinancing  transaction.  The  discount  was  recorded  by  the  venture  as an
extraordinary gain on settlement of debt obligation. PWIP7 was allocated 100% of
such  extraordinary  gain. As a condition of the new loan, the Colony Apartments
joint  venture was  required  to  establish  an escrow  account in the amount of
$685,000  for the  completion  of agreed  upon  repairs,  $156,600  for  capital
replacement reserves and $600,000 for real estate taxes. Despite the significant
decrease in the interest rate on the mortgage loan,  the venture's  monthly debt
service will only decrease by approximately  $28,000 due to the higher principal
balance  and the  monthly  principal  amortization  required  under the new loan
agreement.

      On March 31, 1992 the loans secured by the apartment  properties  owned by
HMF  Associates  were  modified  whereby  all accrued  and unpaid  interest  was
converted to  principal.  Subject to lender  approval,  the joint  venture could
obtain additional  advances up to $9,100,000 to fund certain operating  expenses
of the Partnership and to cure construction  damages in the operating investment
properties  (see Note 3). The loans and  additional  advances bore interest at a
rate of 9% per annum.  Monthly payments were made in an amount equal to the "net
operating income", as defined, for the prior month. Unpaid interest was added to
the principal balance of the indebtedness on a monthly basis. The final maturity
date of the loan secured by the  Enchanted  Woods  Apartments  was June 1, 1997,
while the  maturity  date of the loans  secured by the Hunt Club and Marina Club
properties  was July 1, 1997, at which time all unpaid  principal,  interest and
advances were due. Despite the successful lease-up of all three properties owned
by HMF Associates following the completion of the construction-related  repairs,
the net operating  income from the  properties was not sufficient to fully cover
the interest  accruing on the outstanding  debt  obligations.  As a result,  the
total  obligation due to the mortgage lender had continued to increase since the
date of a fiscal 1992 loan modification  agreement.  The balance of the original
mortgage loans on the Hunt Club,  Marina Club and Enchanted Woods  properties at
the time of their fiscal 1987  acquisition  dates  totalled  $13,035,000.  After
advances from the lender to pay for costs to repair the construction  defects of
approximately $4.8 million and interest deferrals  totalling  approximately $6.2
million, the total obligation to the mortgage lender totalled  approximately $24
million  as of the  fiscal  1997  maturity  dates.  As a result,  the  aggregate
estimated fair value of the operating  investment  properties was  substantially
lower than the outstanding  obligations to the first mortgage  holder.  In April
1997,  the lender agreed to another  modification  agreement  which provided the
joint venture with an  opportunity to complete a sale  transaction  prior to the
loan maturity dates. Under the terms of the agreement, PWIP 7 and the co-venture
partner could qualify to receive a nominal  payment from the sales proceeds at a
specified  level if a sale was  completed  by June 30,  1997 and  certain  other
conditions  were met. In May 1997, the agreement with the lender was modified to
reflect  the terms and  conditions  of a sale  involving  only the Hunt Club and
Marina Club  properties.  On June 27, 1997,  HMF  Associates  sold The Hunt Club
Apartments  and The Marina  Club  Apartments  to an  unrelated  third  party for
approximately  $5.3 million and $3.1 million,  respectively.  PWIP7 received net
proceeds  of  approximately  $288,000 in  connection  with the sale of these two
assets in accordance  with the discounted  mortgage loan payoff  agreement.  The
joint  venture  also  obtained  a  four-month  extension  from the lender of the
discounted loan payoff agreement with respect to the Enchanted Woods Apartments,
and, in July 1997, entered into an agreement with another  third-party buyer for
the sale of this  remaining  asset for $9.2 million.  The sale,  which closed on
September 9, 1997,  satisfied the conditions in the loan modification  agreement
which allowed PWIP7 to share in the net proceeds from the sale  transaction even
though  the sale  price  was  below the  amount  of the debt  obligation.  PWIP7
received  net  proceeds of  approximately  $261,000  from the sale of  Enchanted
Woods.

      Scheduled maturities of long-term debt for each of the next five years and
thereafter are as follows (in thousands):

                  1998         $    418
                  1999              454
                  2000            5,012
                  2001              455
                  2002           15,704
                  Thereafter        560
                              ---------
                              $  22,603
                              =========

6.  Leases
    ------

      Chicago Colony Square  Associates  leases  shopping center space to retail
tenants  under  operating  leases.  Lease  effective  dates range from 12 to 192
months.  Approximate  future  minimum  payments to the joint  venture  under non
cancelable operating lease agreements are as follows (in thousands):

                    1998          $    342
                    1999               269
                    2000               214
                    2001               186
                    2002                61
                                  --------
                                  $  1,072
                                  ========


<PAGE>
<TABLE>

Schedule III - Real Estate and Accumulated Depreciation
                           COMBINED JOINT VENTURES OF
            PAINE WEBBER INCOME PROPERTIES SEVEN LIMITED PARTNERSHIP
              SCHEDULE OF REAL ESTATE AND ACCUMULATED DEPRECIATION
                               September 30, 1997
                                 (In thousands)

<CAPTION>


                          Initial Cost to                     Gross Amount at Which Carried at                         Life on Which
                             Partnership      Costs                    Close of period                                 Depreciation
                              Buildings     Capitalized          Buildings,                                            in Latest
                               Improvements (Removed)            Improvements                                          Income
                               & Personal   Subsequent to        & Personal       Accumulated  Date of      Date       Statement
Description Encumbrances Land  Property     Acquisition    Land  Property   Total Depreciation Construction Acquired   is Computed
----------- ------------ -----  --------    -----------    ----  --------   ----- ------------ ------------ --------   -----------

<S>         <C>          <C>       <C>         <C>         <C>      <C>       <C>         <C>       <C>       <C>        <C>

COMBINED JOINT VENTURES:

Apartment Complex
Mount 
 Prospect, 
 IL         $16,873      $ 3,132   $25,378     $  309      $ 2,875  $25,944   $28,819     $12,847    1975     12/27/85    5-30 yrs.

Shopping Center
Mount 
 Prospect, 
 IL           1,011        1,014     1,883         31          985    1,943     2,928         734    1978     12/27/85    5-30 yrs.

Apartment Complex
Birmingham, 
 AL           4,719          480     7,497        602          703    7,876     8,579       4,264    1985-86  6/19/86     5-30 yrs.
             ------     --------  --------     ------      -------  -------   -------     ------- 
            $22,603     $ 4,626   $34,758      $  942      $ 4,563  $35,763   $40,326     $17,845
            =======     =======   =======     =======      =======  =======   =======     =======
Notes:
(A) The  aggregate  cost of real estate owned at September  30, 1997 for Federal income tax  purposes is approximately $42,839,000. 
(B) See Note 5 to Combined Financial  Statements for a description of the terms of the debt encumbering the properties.
(C) Reconciliation of real estate owned:
                                                           1997           1996         1995
                                                           ----           ----         ----

      Balance at beginning of year                     $ 58,104        $56,916       $57,812
      Acquisitions and improvements                         800          1,188         1,624
      Reductions due to dispositions                    (18,578)             -             -
      Reductions due to receipt of insurance
         settlement proceeds                                  -              -       (2,520)
                                                       --------        -------       ------
      Balance at end of year                           $ 40,326        $58,104       $56,916
                                                       ========        =======       =======

(D) Reconciliation of accumulated depreciation:

      Balance at beginning of year                     $ 22,085        $20,319       $18,668
      Depreciation expense                                1,635          1,766         1,651
      Decreases due to dispositions                      (5,875)             -             -
                                                       --------        -------       -------
      Balance at end of year                           $ 17,845        $22,085       $20,319
                                                       ========        =======       =======
</TABLE>