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, 1996

                                      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





<PAGE>

           PAINE WEBBER INCOME PROPERTIES SEVEN LIMITED PARTNERSHIP
                                1996 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-7

Item  9   Changes in and Disagreements with Accountants on Accounting
             and Financial Disclosure                                    II-7

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-3

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-37



<PAGE>


                                    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.  As
discussed  further below,  although the  Partnership  retains an interest in its
five  joint  venture  partnerships,  a major  portion of the  investment  in the
Concourse joint venture was lost through foreclosure proceedings in fiscal 1993.
As  of  September  30,  1996,  the  Partnership  owned,  through  joint  venture
partnerships,  interests in the operating  properties set forth in the following
table:

<TABLE>
Name of Joint Venture                        Date of
Name and Type of Property                    Acquisition
Location                            Size     of Interest     Type of Ownership (1)
--------                            ----     -----------     ---------------------
<S>                                 <C>      <C>              <C>
West Palm Beach Concourse           30,473    7/31/85         Fee  ownership  of land
  Associates (2)                    gross                     and improvements
The Concourse                       leasable                  (through joint venture)
  Retail Plaza                      sq. ft.
West Palm Beach, Florida

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

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

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

HMF Associates (a joint venture                                Fee ownership of land
which owns the following three                                 and improvements
properties):                                                   (through  joint venture)

  Enchanted Woods Apartments       217        5/29/87
  (formerly Forest Ridge           units
  Apartments)
  Seattle, Washington

  The Marina Club Apartments       77         6/29/87
  Seattle, Washington              Units

  The Hunt Club Apartments         130        6/29/87
  Seattle, Washington              units
</TABLE>

(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.

    The Partnership's original investment objectives were to:

    (i)  provide the Limited Partners with cash  distributions  which, to some
         extent, will 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 were suspended
in  1990.  Through  September  30,  1996,  the  Limited  Partners  had  received
cumulative   cash   distributions   from  operations   totalling   approximately
$7,706,000,  or  approximately  $219  per  original  $1,000  investment  for the
Partnership's   earliest   investors.   A   substantial   portion  of  the  cash
distributions  to date have been sheltered  from current  taxable  income.  As a
result of recent improvement in the operating performances of The Meadows on the
Lake Apartments and the Colony Apartments,  the Partnership expects to reinstate
the payment of regular  quarterly cash  distributions  effective for the quarter
ended  December  31, 1996 at an  annualized  rate of 2.5% on  original  invested
capital. In addition,  the Partnership retains an ownership interest in its five
original joint venture investments, although, as noted above, a major portion of
the  investment in The Concourse was lost to  foreclosure  in December 1992. The
foreclosure of the Concourse office towers, which represented  approximately 28%
of the Partnership's original investment portfolio, will result in the inability
of the Partnership to return the full amount of the original capital contributed
by the  Limited  Partners.  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.  As discussed further
in Item 7, the  Partnership  does not  currently  expect to receive any proceeds
from the  disposition of the three  apartment  complexes owned by HMF Associates
because the mortgage debt  obligations  secured by the properties  significantly
exceed the estimated fair market values of the  properties.  These mortgage debt
obligations  are  scheduled  to mature in fiscal  1997,  at which time all three
operating properties could be lost to foreclosure.  In addition,  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,
within the constraints of the Partnership's limited capital resources, 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 properties  securing the Partnership's  investments are located
in real  estate  markets  in which  they face  significant  competition  for the
revenues they generate.  The apartment  complexes compete with numerous projects
of similar type generally on the basis of price,  location and amenities.  As in
all markets,  the  apartment  projects also compete 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.
<PAGE>
Item 2. Properties

    As of September 30, 1996, the Partnership owned interests in seven 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 1996, along with an average
for the year, are presented below for each property.

                                      Percent Occupied At
                              -----------------------------------------------
                                                                       Fiscal
                                                                       1996
                              12/31/95   3/31/96    6/30/96   9/30/96  Average
                              --------   -------    -------   -------  -------

The Concourse Retail Plaza      100%     100%        90%       90%       95%

The Colony Apartments            97%      98%        97%       98%       98%

Colony Square Shopping Center    91%      91%        95%       97%       94%

The Meadows on the Lake
  Apartments                     95%     95%        96%       98%       96%

Enchanted Woods Apartments       91%      87%        87%       84%       87%
 (formerly Forest Ridge
 Apartments)

The Marina Club Apartments       94%      95%        89%       86%       91%

The Hunt Club Apartments         92%      92%        88%       91%       91%

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  Partner  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 PaineWebber  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  PaineWebber
Income Properties Seven Limited Partnership, also allege that following the sale
of the partnership interests,  PaineWebber, Seventh Income Properties Fund, Inc.
and PA1985  misrepresented  financial  information about the Partnership's 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 have 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 has been preliminarily approved by the court and provides for the complete
resolution of the class action  litigation,  including  releases in favor of the
Partnership  and the General  Partners,  and the  allocation of the $125 million
settlement  fund among  investors  in the various  partnerships  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.
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 a ruling by the court as a
result of this final hearing is currently pending.

     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 $15 million plus punitive damages against PaineWebber.

     Mediation with respect to the Bandrowski action described above was held in
December 1996. As a result of such  mediation,  a tentative  settlement  between
PaineWebber  and the  plaintiffs  was reached which would provide for a complete
resolution of the action.  PaineWebber  anticipates that releases and dismissals
with regard to this action will be received by February 1997.

      Under certain limited circumstances, pursuant to the Partnership Agreement
and other contractual  obligations,  PaineWebber affiliates could be entitled to
indemnification  for expenses and  liabilities in connection with the litigation
described above. However, PaineWebber has agreed not to seek indemnification for
any amounts it is required to pay in connection  with the  settlement of the New
York Limited  Partnership  Actions.  At the present time,  the General  Partners
cannot estimate the impact, if any, of the potential  indemnification  claims on
the  Partnership's  financial  statements,  taken  as a whole.  Accordingly,  no
provision  for any  liability  which could result from the  eventual  outcome of
these  matters has been made in the  accompanying  financial  statements  of the
Partnership.

      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,  1996  there were  2,345  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.  The  Managing
General Partner will not redeem or repurchase Units.

    There were no cash  distributions made to the Limited Partners during fiscal
1996.  Because of  improvements  in cash flow and the  expectation  that it will
continue in the future,  the  Partnership  expects to  reinstate  the payment of
regular quarterly distributions at the annual rate of 2.5% on an original $1,000
investment. The first payment of $6.25 per original $1,000 Unit would be made on
February 14, 1997,  for the quarter ending  December 31, 1996. In addition,  the
Partnership  expects to make a special  distribution  of $40 per original $1,000
investment on February 14, 1997, to unit holders of record on December 31, 1996.
This amount  represents a  distribution  of  Partnership  reserves  which exceed
expected future  requirements.  Until this  information  concerning the expected
reinstatement of regular quarterly distributions and the special distribution is
fully  disseminated,  share  trading in the informal  secondary  market has been
temporarily suspended. Secondary share trading is scheduled to resume on January
16, 1997.

Item 6.  Selected Financial Data
                 Paine Webber Income Properties Seven Limited Partnership
          For the years ended  September  30, 1996,  1995,  1994, 1993 and 1992
                            (In thousands except per unit data)

                       1996        1995       1994       1993(1)      1992
                       ----        ----       ----       -------      ----

Revenues             $   773      $   835     $   561   $     905     $ 1,656

Operating loss       $  (128)     $  (101)    $  (401)  $    (530)    $(1,756)

Provision for 
 investment loss           -           -           -            -     $(2,148)

Partnership's share
  of unconsolidated  
  ventures' losses  $  (276)     $(1,100)     $(1,592)  $ (2,484)     $(1,713)

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

Loss before
  extraordinary 
  gains             $  (404)   $(1,200)      $(1,992)   $  (9,479)   $ (5,601)

Extraordinary gains from
  settlement of debt
  obligations             -    $  1,600           -     $   6,405           -

Net income (loss)   $   (404)  $    400     $(1,992)    $  (3,074)   $ (5,601)

Per Limited Partnership Unit:
  Loss before
  extraordinary
  gains             $  (10.53) $(31.29)    $(51.90)     $(247.02)    ($145.97)

  Extraordinary gains
  from settlement of
  debt obligations          -  $ 41.72           -      $  166.91          -

  Net income (loss) $ (10.53)  $ 10.43     $(51.90)     $ (80.11)    $(145.97)

Total assets        $ 8,852    $ 7,148     $ 6,347      $  5,191     $ 18,484

Mortgage notes 
 payable            $1,671     $ 1,723     $2,499       $  2,523     $  2,557

(1)  The significant  decline in total assets as of September 30, 1993 and the
     decline in revenues  in fiscal 1993  resulted  from the  foreclosure,  in
     December  1992,  of two office  towers owned by a joint  venture in which
     the Partnership owns a majority and controlling  interest.  As more fully
     explained  in  Note  4  to  the   accompanying   consolidated   financial
     statements,   at  September  30,  1992  certain  assets  and  liabilities
     associated   with  these   properties   were  segregated  and  separately
     classified on the  Partnership's  balance sheet as assets and liabilities
     of operating investment  properties subject to foreclosure.  In 1993, the
     assets and liabilities of the office towers were written off.

    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

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.
Although the  Partnership  retains an interest in all five of its original joint
ventures,  the  office  portion of the  investment  in the  mixed-use  Concourse
property was lost through  foreclosure  proceedings by the first mortgage lender
on December 17, 1992.  The  Partnership  retains an interest in the retail plaza
portion of the Concourse property.  In addition, as discussed further below, the
Partnership  does  not  currently  expect  to  receive  any  proceeds  from  the
disposition of the three Seattle,  Washington area apartment properties owned by
HMF Associates  because the mortgage debt obligations  secured by the properties
significantly  exceed the estimated  fair market values of the  properties as of
September 30, 1996.  These mortgage debt  obligations are scheduled to mature in
fiscal  1997,  at which  time all three  operating  properties  could be lost to
foreclosure.  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.

    The loss of the Concourse  Office Towers to  foreclosure  in fiscal 1993 and
the expected loss 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 comprise another 13% of the original investment portfolio.  Of
the four remaining assets, the two multi-family properties both have significant
equity  above  the  outstanding  debt  obligations  based on  estimated  current
property values,  while the two retail properties would not be expected to yield
substantial  net proceeds  after the mortgage debt if sold under current  market
conditions.  Nonetheless,  as  discussed  in the  Special  Report  mailed to the
Unitholders in December 1996, due to improvements in the Partnership's cash flow
and the expectation that it will continue in the future, the Partnership expects
to reinstate the payment of regular  quarterly  distributions at the annual rate
of 2.5% on an  original  $1,000  investment.  The  first  payment  of $6.25  per
original  $1,000 Unit would be 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  is
attributable  to the  improvement  in  property  operations,  combined  with the
recently  completed  refinancings  at attractive  interest  rates, 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
expects to make a special  distribution of $40 per original $1,000 investment on
February 14, 1997 to  Unitholders  of record on December  31, 1996.  This amount
represents a distribution  of Partnership  reserves which exceed expected future
requirements.  Trading of the Partnership's Units has been temporarily suspended
until the above  information  concerning the expected  reinstatement  of regular
quarterly  distributions  and the special  distribution  is fully  disseminated.
Trading is scheduled to resume on January 16, 1997.

    As previously  reported,  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 new note requires  monthly  principal and
interest payments of approximately $130,000 until maturity on August 1, 2002. 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 decreased by only $28,000 due
to the higher principal balance and the monthly principal  amortization required
under the new loan agreement.  The Colony  Apartments joint venture continues to
generate  significant  excess cash flow which,  over the past several years, has
represented  the  Partnership's   only  consistent  source  of  liquidity.   The
Partnership  received  cash flow  distributions  of  $1,517,000  from the Colony
Apartments  joint venture  during fiscal 1996, a  significant  improvement  from
distributions  of $797,000  received  during  fiscal 1995.  In fiscal 1996,  the
Partnership  also  received  distributions  of $345,000  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.  There was
minimal  disruption to the property's  tenants during this repair  process,  and
there has been no apparent  adverse effect on the market value of the investment
property  as a  result  of this  situation.  Occupancy  levels  remained  in the
mid-to-high  90% range  throughout  fiscal 1996,  and the  property's  effective
rental rates are comparable to other  apartment  communities in its  sub-market.
With the  repair  work at The  Meadows  on the Lake  Apartments  completed,  the
venture has begun  generating  regular  distributions of excess cash flow to the
Partnership.  Future  distributions from the Colony Apartments and Meadows joint
ventures  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.

    Assuming  that the  overall  market for  multi-family  apartment  properties
remains strong,  the Partnership  may have favorable  opportunities  to sell its
interests in the Colony Apartments and The Meadows on the Lake Apartments in the
near term. Sales of these two assets,  which, as discussed above,  represent the
Partnership's  sole sources of liquidity,  would likely  prompt the  accelerated
dispositions of the remaining investment  properties.  Under such circumstances,
the Partnership could be positioned for a possible  liquidation  within the next
2-to-3 years. However, there are no assurances that the Partnership will be able
to complete the disposition of its remaining investments within this time frame.

    Occupancy  levels  at the  Concourse  Retail  Plaza  and the  Colony  Square
Shopping Center were 90% and 97%, respectively, as of September 30, 1996. 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  retail properties in the
near term. Occupancy at the Concourse Retail Plaza declined in the third quarter
of fiscal 1996 when a tenant occupying  approximately  4,000 square feet vacated
its space in early May.  Although  this tenant  vacated  its space,  it is still
obligated to pay rent until a suitable  sublessor can be found for the remainder
of its  lease  term  which can be  terminated  with six  months  notice in 1999.
Management  continues  to  closely  monitor  the  operating  performance  of the
property's  other  three  restaurant  tenants.  Two of  these  tenants  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.  Both tenants are currently
meeting the  modified  terms of their  rental  obligations,  although one of the
tenants  continues  to  report  operational  difficulties.   At  Colony  Square,
occupancy  increased  in the third and fourth  quarters  of fiscal 1996 as three
existing  tenants  expanded  their space in  conjunction  with renewals of their
lease  obligations.  Subsequent  to these  renewals,  only one 1,200 square foot
space  remains   unleased  at  Colony  Square.   Despite  the  positive  leasing
developments,  the Colony Square joint venture still does not produce any excess
net cash flow after its debt service payments.

      As  previously  reported,  under  the  terms  of the HMF  Associates  loan
modification   executed  in  fiscal  1992,  all  accrued  and  unpaid   interest
outstanding  as of June 30, 1992 was converted to  principal.  Subject to lender
approval,  the  Partnership  was  entitled to obtain  additional  advances up to
$9,100,000  to fund certain  operating  expenses of the joint venture and to the
cure construction defects in the operating investment properties.  The loans and
any additional advances bear interest at a rate of 9% per annum. As of September
30, 1996,  additional lender advances totalling  approximately $4.8 million have
been made,  and the total debt  obligation of the joint venture  totalled  $23.3
million.  Monthly  payments  are made in an amount  equal to the "net  operating
income",  as  defined,  for the prior  month.  Unpaid  interest  is added to the
principal  balance of the  indebtedness on a monthly basis. The maturity date of
the loan secured by the Enchanted  Woods  Apartments is June 1, 1997,  while the
maturity date of the loans  secured by the Hunt Club and Marina Club  properties
is July 1, 1997, at which time all unpaid  principal,  interest and advances are
due.  Despite the  successful  remediation of the  construction  defects and the
subsequent lease-up of the properties,  the venture's net operating income level
is not sufficient to fully cover the interest  accruing on the outstanding  debt
obligation.  As a result,  the total  obligation due to the mortgage lender will
continue to increase  through the  scheduled  maturity  date.  Furthermore,  the
current aggregate estimated value of the investment  properties is substantially
less than the venture's  outstanding  debt  obligation as of September 30, 1996.
Accordingly, it is unlikely that the venture will be able to settle or refinance
the  debt at the  time of the  fiscal  1997  maturity.  The  result  could  be a
foreclosure of all three of the operating investment properties. The Partnership
has a large  negative  carrying value for its investment in HMF Associates as of
September 30, 1996 because  prior year equity  method  losses and  distributions
have exceeded the Partnership's  investments in the venture.  Consequently,  the
Partnership  would  recognize  a gain for both  book and tax  purposes  upon the
foreclosure  of  the  operating  investment  properties.   During  fiscal  1995,
management  had  preliminary  discussions  with  the  mortgage  holder  for  the
properties owned by HMF Associates  regarding a possible loan modification aimed
at preventing the further accumulation of the deferred interest and reducing the
overall debt  obligation.  Such a plan would have  involved a prepayment  of the
existing  mortgage  indebtedness at a discount and would have required an equity
infusion by the venture of between  approximately  $1 million and $1.5  million.
Management of the Partnership evaluated whether an additional investment of this
magnitude 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.  Management  continues  to  examine  alternative  value  creation
scenarios, however, it appears unlikely at the present time that the Partnership
will realize any future proceeds from the ultimate  disposition of its interests
in these three properties.

    At September 30, 1996 the Partnership and its consolidated  venture had cash
and cash equivalents of approximately $5,067,000. 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.

Results of Operations
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 is 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 the August 1995 refinancing  transaction,  as discussed  further
above. 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 is 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 is
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  discussed  further  above.  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 over the past two years.  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 the  current  year.  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 current  year 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 further  discussed  above, 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.

1994 Compared to 1993
---------------------

    The Partnership  reported a net loss of $1,992,000 for the fiscal year ended
September 30, 1994, a decrease of $1,082,000  when compared with the net loss of
$3,074,000 in fiscal 1993. This favorable change in net operating results can be
primarily  attributed to a decrease in the  Partnership's  share of consolidated
ventures' losses of $892,000 and a decrease in the Partnership's  operating loss
of $129,000.

    The  Partnership's  share  of  unconsolidated   ventures'  losses  decreased
primarily  due to increases in revenues of  $1,139,000  from the lease-up of the
renovated  apartment  complexes  owned by HMF Associates.  As discussed  further
above and in Note 5 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.  A net  increase  in  total  expenses  at HMF
Associates of $379,000 partially offset the increase in revenues in fiscal 1994.
Expenses  at this joint  venture  increased  in fiscal 1994 mainly due to higher
mortgage  interest expense resulting from advances from the mortgage lender used
for construction repairs, as well as deferred debt service payments added to the
principal  balance  of  the  venture's  debt.  The  three  other  unconsolidated
ventures, Chicago Colony Apartments Associates, Chicago Colony Square Associates
and Daniel Meadows Partnership,  also contributed to the favorable change in the
Partnership's  net operating  results with each venture posting modest increases
in rental revenues and net operating results.

    The Partnership's operating loss for fiscal 1994 decreased mainly due to the
inclusion in fiscal 1993 of a partial year of operations associated with the two
office towers owned by the  consolidated  Concourse joint venture prior to their
foreclosure in December  1992.  The operations of the office towers,  after debt
service,   had  been   generating   sizable  losses  prior  to  the  foreclosure
transaction.  The decrease in operating loss  resulting from the  foreclosure of
the Concourse  office towers was partially  offset by an increase in Partnership
general and  administrative  expenses in fiscal 1994. General and administrative
expenses  increased  mainly  as a result  of  additional  expenditures  incurred
related to an independent  valuation of the Partnership's  operating  properties
which was commissioned in fiscal 1994 in conjunction with  management's  ongoing
refinancing and portfolio management responsibilities.

Inflation
---------

    The  Partnership  completed  its eleventh  full year of operations in fiscal
1996 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  apartment properties
have short-term leases,  generally of six-to-twelve  months in duration.  Rental
rates at these properties 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              37        8/22/96
Terrence E. Fancher     Director                            43        10/10/96
Walter V. Arnold        Senior Vice President and 
                          Chief Financial Officer           49        10/29/85
James A. Snyder         Senior Vice President               51        7/6/92
David F. Brooks         First Vice President and 
                          Assistant Treasurer               54        1/15/85 *
Timothy J. Medlock      Vice President and Treasurer        35        6/1/88
Thomas W. Boland        Vice President                      34        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.

      James A. Snyder is a Senior Vice President of the Managing General Partner
and a Senior Vice President of the Adviser.  Mr. Snyder re-joined the Adviser in
July 1992  having  served  previously  as an  officer  of PWPI from July 1980 to
August 1987.  From January 1991 to July 1992, Mr. Snyder was with the Resolution
Trust  Corporation where he served as the Vice President of Asset Sales prior to
re-joining  PWPI. From February 1989 to October 1990, he was President of Kan Am
Investors, Inc., a real estate investment company. During the period August 1987
to February 1989,  Mr. Snyder was Executive  Vice President and Chief  Financial
Officer  of  Southeast  Regional  Management  Inc.,  a real  estate  development
company.

      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  of the Managing  General  Partner
and a Vice  President and Manager of Financial  Reporting 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, 1996, 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 are expected to be
reinstated at an annual rate of 2.5% on original  invested capital effective for
the  first  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. As of September 30,
1996,  PaineWebber  and its  affiliates  owned 132 Units of limited  partnership
interests 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.
<PAGE>
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.
No management  fees were earned by the Adviser for the year ended  September 30,
1996.

      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, 1996 is $81,000,  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 $13,000  (included in general and  administrative  expenses) for managing the
Partnership's cash assets during the year ended September 30, 1996. 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) No Current  Reports on Form 8-K were  filed  during the last  quarter of
        fiscal 1996.

    (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

Dated:   January 10, 1997

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 10, 1997
   ----------------------                             ----------------
   Bruce J. Rubin
   Director





By:/s/ Terrence E. Fancher                      Date: January 10, 1997
   ----------------------                             ----------------
   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>
                                                      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, 1996 has
                                                      been  sent  to   the Limited Partners. 
                                                      An  Annual  Report  will be sent to 
                                                      the   Limited   Partners
                                                      subsequent to this filing.


(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, 1996 and 1995         F-3

   Consolidated statements of operations for the years ended
     September 30, 1996, 1995 and 1994                                   F-4

   Consolidated statements of changes in partners' capital
     (deficit) for the years  ended September 30, 1996, 1995 and 1994    F-5

   Consolidated statements of cash flows for the years ended 
     September 30, 1996, 1995 and 1994                                   F-6

   Notes to consolidated financial statements                            F-7

   Schedule III - Real estate and accumulated depreciation              F-24

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

   Report of  independent auditors                                      F-25

   Combined balance sheets as of September 30, 1996 and 1995            F-26

   Combined statements of operations and changes in venturers'          F-27
    deficit for the years ended September 30, 1996, 1995 and 1994

   Combined statements of cash flows for the years ended 
     September 30, 1996, 1995 and 1994                                  F-28

   Notes to combined financial statements                               F-29

   Schedule III - Real estate and accumulated depreciation              F-37


   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, 1996 and 1995,
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, 1996.  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, 1996
and 1995, and the consolidated  results of its operations and its cash flows for
each of the three years in the period ended  September  30, 1996,  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 8, 1997



<PAGE>


                     PAINE WEBBER INCOME PROPERTIES SEVEN
                             LIMITED PARTNERSHIP

                         CONSOLIDATED BALANCE SHEETS
                         September 30, 1996 and 1995
                   (In thousands, except per Unit amounts)

                                    ASSETS
                                                            1996       1995
                                                            ----       ----
Operating investment property:
   Land                                                 $     698  $      698
   Buildings and improvements                               4,294       4,269
   Equipment and fixtures                                     107         107
                                                        ---------  ----------
                                                            5,099       5,074
   Less accumulated depreciation                           (1,651)     (1,512)
                                                        ---------   ---------
                                                            3,448       3,562

Cash and cash equivalents                                   5,067       3,252
Escrowed funds                                                 74          75
Accounts receivable                                           107          84
Accounts receivable - affiliates                                2           2
Deferred expenses, net of accumulated amortization
   of $56 ($37 in 1995)                                       122         141
Other assets                                                   32          32
                                                        ---------  ----------
                                                        $   8,852  $    7,148
                                                        =========  ==========

                      LIABILITIES AND PARTNERS' DEFICIT

Equity in losses from  unconsolidated joint 
   ventures in excess
   of investments and advances                          $  8,413   $    6,275
Mortgage note payable                                       1,671       1,723
Accounts payable and accrued expenses                          61          37
Accrued interest payable                                       15          16
Accrued real estate taxes                                      59          60
Other liabilities                                              10          10
                                                        ---------  ----------
      Total liabilities                                    10,229       8,121

Partners' deficit:
  General Partners:
   Capital contributions                                        1           1
   Cumulative net loss                                       (475)       (471)
   Cumulative cash distributions                             (282)       (282)

  Limited Partners ($1,000 per Unit; 37,969 Units issued):
   Capital contributions, net of offering costs            33,529      33,529
   Cumulative net loss                                    (26,444)    (26,044)
   Cumulative cash distributions                           (7,706)     (7,706)
                                                        ---------  ----------
      Total partners' deficit                              (1,377)       (973)
                                                        ---------  ----------
                                                        $   8,852  $    7,148
                                                        =========  ==========




                           See accompanying notes.


<PAGE>


                      PAINE WEBBER INCOME PROPERTIES SEVEN
                               LIMITED PARTNERSHIP

                      CONSOLIDATED STATEMENTS OF OPERATIONS
              For the years ended September 30, 1996, 1995 and 1994
                     (In thousands, except per Unit amounts)

                                                 1996        1995      1994
                                                 ----        ----      ----
Revenues:
   Rental income and expense recoveries       $   523      $  497    $    479
   Interest and other income                      250         338          82
                                              -------      ------    --------
                                                  773         835         561

Expenses:
   Mortgage interest                              195         215         246
   Property operating expenses                    103         119         112
   Depreciation expense                           139         149         145
   Real estate taxes                               77          82          76
   General and administrative                     285         364         373
   Bad debt expense                                89           -           2
   Amortization expense                            13           7           8
                                              -------     -------    --------
                                                  901         936         962
                                              -------     -------    --------
Operating loss                                   (128)       (101)       (401)

Partnership's share of unconsolidated
   ventures' losses                              (276)     (1,100)     (1,592)

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

Loss before extraordinary gains                  (404)     (1,200)     (1,992)

Extraordinary gains from settlement 
 of debt obligations                                -       1,600           -
                                              -------    --------    --------
       

Net income (loss)                             $  (404)  $     400     $(1,992)
                                              =======   =========     =======

Net income (loss) per Limited Partnership Unit:
   Loss before extraordinary gains             $(10.53)    $(31.29)   $ (51.90)
   Extraordinary gains from settlement
    of debt obligations                              -       41.72           -
                                               -------     -------    --------
   Net income (loss)                           $(10.53)    $ 10.43    $ (51.90)
                                               =======     =======    ========


   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, 1996, 1995 and 1994
                                 (In thousands)

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

Balance at September 30, 1993          $ (735)      $ 1,354    $     619

Net loss                                  (21)       (1,971)      (1,992)
                                       ------       -------    ---------

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)
                                       ======       =======    ========































                           See accompanying notes.


<PAGE>


                      PAINE WEBBER INCOME PROPERTIES SEVEN
                               LIMITED PARTNERSHIP

                      CONSOLIDATED STATEMENTS OF CASH FLOWS
              For the years ended September 30, 1996, 1995 and 1994
                Increase (Decrease) in Cash and Cash Equivalents
                                 (In thousands)

                                                1996        1995        1994
                                                ----        ----        ----
Cash flows from operating activities:
  Net income (loss)                            $ (404)    $   400     $(1,992)
  Adjustments to reconcile net income
   (loss) to net cash provided by 
   (used in) operating activities:
   Depreciation and amortization                  152         156         153
   Amortization of deferred financing costs         6           6           -
   Partnership's share of unconsolidated
      ventures' losses                            276       1,100       1,592
   Venture partner's share of 
      consolidated venture's operations             -          (1)         (1)
   Extraordinary gains from settlement of debt
     obligations                                    -      (1,600)          -
   Changes in assets and liabilities:
     Escrowed funds                                 1           2          (2)
     Accounts receivable                          (23)        (34)        (10)
     Deferred expenses                              -          (8)         (1)
     Other assets                                   -         (27)         (1)
     Accounts payable - affiliates                  -           -         (20)
     Accounts payable and accrued expenses         24           7         (10)
     Accrued interest payable                      (1)          7          (3)
     Accrued real estate taxes                     (1)          3          (3)
                                              -------     -------     -------
        Total adjustments                         434        (389)      1,694
                                              -------     -------     -------
        Net cash provided by (used in)
          operating activities                     30          11        (298)

Cash flows from investing activities:
  Additions to operating investment property      (25)       (132)          -
  Additional investments in unconsolidated
   joint ventures                                   -           -         (14)
  Distributions from unconsolidated
   joint ventures                                1,862      1,211       1,632
                                              --------    -------      ------
        Net cash provided by investing
         activities                              1,837      1,079       1,618
                                              --------    -------      ------

Cash flows from financing activities:
  Proceeds from issuance of long-term debt          -       1,751           -
  Repayment of mortgage notes payable             (52)     (2,077)        (23)
  Deferred loan costs                               -         (83)        (25)
                                              --------    -------     -------
        Net cash used in financing activities     (52)      (409)         (48)
                                              --------    -------     -------

Net increase in cash and cash equivalents       1,815         681       1,272
Cash and cash equivalents, beginning of year    3,252       2,571       1,299
                                             ---------   --------    --------
Cash and cash equivalents, end of year       $  5,067    $  3,252    $  2,571
                                             ========    ========    ========

Cash paid during the year for interest       $    190    $    202    $    250
                                             ========    ========    ========


                           See accompanying notes.


<PAGE>


                     PAINE WEBBER INCOME PROPERTIES SEVEN
                             LIMITED PARTNERSHIP
                        Notes to 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.  As  discussed  further  in Note 4,
although the  Partnership  retains an interest in all five of its original joint
ventures,  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.
In addition,  as discussed further in Note 5, the Partnership does not currently
expect to receive any proceeds from the disposition of three Seattle, Washington
area  apartment  properties  owned  by one of its  joint  ventures  because  the
mortgage debt  obligation  secured by the properties  significantly  exceeds the
estimated fair market value of the properties.  This mortgage debt obligation is
scheduled to mature in fiscal 1997, at which time the operating properties could
be lost to foreclosure.

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, 1996 and 1995 and revenues
and expenses for each of the three years in the period ended September 30, 1996.
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
(the  Concourse  Retail  Plaza)  is  carried  at the lower of cost,  reduced  by
previously  received guaranteed  payments and accumulated  depreciation,  or net
realizable  value.  The net  realizable  value of a property  held for long-term
investment  purposes  is  measured by the  recoverability  of the  Partnership's
investment  through expected future cash flows on an undiscounted  basis,  which
may exceed the property's  market value.  The net realizable value of a property
held for sale  approximates its current market value.  The operating  investment
property is not considered to be held for sale as of September 30, 1996 or 1995.

      The Partnership  has reviewed FAS No. 121,  "Accounting for the Impairment
of  Long-Lived  Assets and for  Long-Lived  Assets To Be Disposed  Of," which is
effective for financial  statements for years beginning after December 15, 1995,
and  believes  this new  pronouncement  will not have a  material  effect on the
Partnership's financial statements.

      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,  1996  and  1995  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. 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,  escrowed  funds,  accounts  receivable,
accounts payable and accrued liabilities  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 and liabilities  approximates
their fair value as of September  30, 1996 due to the  short-term  maturities of
these instruments.  The mortgage note payable is also a financial instrument for
purposes of FAS 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 suspended its quarterly distribution payments in 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.
No basic or  asset  management  fees  were  earned  by the  Adviser  during  the
three-year  period ended  September 30, 1996. No incentive  management fees have
been earned to date.

      Included  in  general  and  administrative  expenses  for the years  ended
September 30, 1996, 1995 and 1994 is $81,000, $86,000 and $96,000, 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 $13,000, $4,000 and $5,000 (included in general and administrative  expenses)
for managing the  Partnership's  cash assets during fiscal 1996,  1995 and 1994,
respectively.


<PAGE>


4.  Operating Investment Property

      Operating  investment  property at September 30, 1996 and 1995  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  (see Note 6).  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, 1996, 1995 and 1994 (in thousands):

                                                 1996        1995       1994
                                                 ----        ----       ----

     Property operating expenses:
       Repairs and maintenance                  $  59      $   55      $   56
       Utilities                                    5           4           5
       Insurance, net of refund of $6 in 1994       6           6          (1)
       General and administrative                  18          42          40
       Management fees                             15          12          12
                                                 ----      ------       -----
                                                 $103      $  119       $ 112
                                                 ====      ======       =====

5.  Investments in Unconsolidated Joint Venture Partnerships

      At September 30, 1996 and 1995, the  Partnership  has  investments in four
unconsolidated   joint  ventures  which  own  six  operating   properties.   The
unconsolidated  joint  ventures are  accounted  for on the equity  method in the
Partnership's financial statements.

      Condensed combined financial statements of these joint ventures follow.


<PAGE>


                      Condensed Combined Balance Sheets
                         September 30, 1996 and 1995
                                (in thousands)
                                    Assets
                                                            1996        1995
                                                            ----        ----

   Current assets                                         $ 3,162     $ 4,658
   Operating investment property, net                      36,019      36,597
   Other assets, net                                          327         385
                                                          -------     -------
                                                          $39,508     $41,640
                                                          =======     =======

                      Liabilities and Partners' Deficit

   Current liabilities                                    $25,832    $  3,670
   Long-term debt, less current portion                    22,602      45,299
   Loans from venturers                                       366         449
   Partnership's share of combined deficit                 (8,531)     (7,007)
   Co-venturers' share of combined deficit                   (761)       (771)
                                                          -------     -------
                                                          $39,508     $41,640
                                                          =======     =======

                  Reconciliation of Partnership's Investment
                                                             1996        1995

   Partnership's share of combined deficit, 
     as shown above                                       $(8,531)   $ (7,007)
   Prepaid distributions to Partnership                      (234)          -
   Partnership's share of current liabilities
     and long-term debt                                       168         541
   Excess basis due to investment in ventures, net (1)        184         191
                                                         --------    --------
   Investment in unconsolidated ventures, at equity      $ (8,413)   $ (6,275)
                                                         ========    ========

    (1) At September 30, 1996 and 1995, the  Partnership's  investment  exceeded
        its  share  of the  joint  venture  partnerships'  capital  accounts  by
        approximately  $184,000 and $191,000,  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.


<PAGE>


                    Condensed Combined Summary of Operations
              For the years ended September 30, 1996, 1995 and 1994
                                 (in thousands)

                                               1996          1995        1994
                                               ----          ----        ----

   Rental revenues and expense recoveries    $ 10,372    $ 10,122     $ 9,441
   Interest and other income                      521         465         423
                                             --------    --------     -------
                                               10,893      10,587       9,864

   Mortgage interest                            3,892       4,468       4,349
   Property operating expenses                  5,609       5,285       5,567
   Depreciation and amortization                1,849       1,661       1,566
   (Gain) loss on insurance settlement           (197)        300           -
                                            ---------    --------     -------
                                               11,153      11,714      11,482
                                            ---------    --------    --------

   Loss before extraordinary gain                (260)     (1,127)     (1,618)
   Extraordinary gain from settlement
      of debt obligation                            -       1,070           -
                                            ---------    --------     --------
           
   Net loss                                 $    (260)   $    (57)    $(1,618)
                                            =========    ========     =======

   Net income (loss):
     Partnership's share of combined
        net income (loss)                   $    (269)   $    (23)    $(1,585)
     Co-venturers' share of combined
         net income (loss)                          9         (34)        (33)
                                            ---------    --------     -------
                                            $    (260)   $    (57)    $(1,618)
                                            =========    ========     =======

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

                                                1996        1995         1994
                                                ----        ----         ----

   Partnership's share of combined net
    loss, as shown above                    $    (269)  $     (23)    $(1,585)
   Amortization of excess basis                    (7)         (7)         (7)
                                            ----------  ---------     -------
   Partnership's share of unconsolidated
    ventures' net losses                    $    (276)  $     (30)    $(1,592)
                                            =========   =========     =======

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

   Partnership's share of unconsolidated
      ventures' losses                      $   (276)   $ (1,100)     $(1,592)
   Partnership's share of extraordinary
      gain on settlement of debt 
      obligation                                   -       1,070            -
                                            --------    --------      --------
                                            $   (276)   $    (30)     $(1,592)
                                            ========    ========      =======

      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.


<PAGE>


      Investments in  unconsolidated  joint ventures,  at equity, on the balance
sheet  is  comprised  of  the  following   equity  method  carrying  values  (in
thousands):
                                                            1996        1995
                                                            ----        ----

   Chicago Colony Apartments Associates                 $    (241)  $     273
   Chicago Colony Square Associates                         1,138       1,078
   Daniel Meadows Partnership                                 506         584
   HMF Associates                                          (9,816)     (8,210)
                                                        ---------   ---------
                                                        $  (8,413)  $  (6,275)
                                                        =========   =========

      The Partnership  received cash distributions from the unconsolidated joint
ventures during fiscal 1996, 1995 and 1994 as set forth below (in thousands):

                                                1996        1995         1994
                                                ----        ----         ----

   Chicago Colony Apartments Associates       $ 1,517     $   797     $   632
   Daniel Meadows Partnership                     345          14           -
   HMF Associates                                   -         400       1,000
                                              -------     -------     -------
                                              $ 1,862     $ 1,211     $ 1,632
                                              =======     =======     =======

      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 $17,136,000 as of September 30, 1996.

      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.  During  fiscal  1996,
distributions to the Partnership  exceeded  available net cash flow by $234,000,
which is reflected as prepaid  distributions  to venturer on the Joint Venture's
financial statements.

      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, 1996
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  $1,078,000 at September 30, 1996.
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, 1996 totalled
approximately $27,000.


<PAGE>


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 is 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 is encumbered by a mortgage note with a balance
of  approximately  $4,773,000 at September 30, 1996.  The mortgage  debt, in the
initial  principal  amount of  $4,850,000,  bears interest at a variable rate of
2.25% over the 30-day LIBOR rate (equivalent to a rate of approximately  7.6875%
per annum as of September 30,  1996).  The loan  requires  monthly  interest and
principal payments based on a 25-year amortization  schedule and is scheduled to
mature on February 5, 2000.

      During fiscal 1991, the Partnership discovered that certain materials used
to construct  The Meadows  Apartments,  in  Birmingham,  Alabama 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.  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 venture's  fiscal 1996
income statement.

      The Joint Venture Agreement  provides that from available cash flow, after
the repayment of any optional loans made by the partners,  the Partnership  will
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,
will  be  distributed  60%  to the  Partnership  and  40%  to  the  co-venturer,
respectively.  In  addition,  the  Partnership  is  entitled  to receive  $2,500
annually  as  an  investor   servicing  fee.  As  of  September  30,  1996,  the
Partnership's  unpaid  cumulative  preference  return amounted to  approximately
$2,382,000.   Such  amount  is  payable  only  from  available  future  sale  or
refinancing  proceeds.  Accordingly,  the unpaid cumulative preference return is
not accrued in the venture's financial statements.

      The Joint Venture  Agreement  generally  provides  that Net  Proceeds,  as
defined, (other than refinancing proceeds, which shall be distributed 60% to the
Partnership and 40% to the co-venturer)  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) to repay accrued  interest and principal,  in
that order,  on any optional loans made by the partners,  (2) to the Partnership
until the Partnership has received the cumulative annual preferred distributions
following the guarantee period specified above, (3) to the Partnership  until it
has 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 shall 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 has been
allocated  cumulative  tax  losses  equal  to  $3,600,000,  tax  losses  will be
allocated  98% to the  Partnership  and  2% to  the  co-venturer,  respectively.
Thereafter,  tax  losses are  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  are
allocated  first on the basis of the  partner's  capital  balances;  thereafter,
remaining  gains and losses are allocated 60% to the  Partnership and 40% to the
co-venturer.

      If additional working capital is required in connection with the operating
property,  it  may  be  provided  as  additional  capital  contributions  by the
Partnership and the co-venturer in the proportion of 60% and 40%, respectively.

      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 is 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 operates 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. The deficiencies and damages included
lack of  adequate  fire  blocking  materials  in the walls  and other  areas and
insufficient  structural  support,  as required by the  Uniform  Building  Code.
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 suit  alleged,  among other  things,  that the developer
failed  to  construct   the   buildings  in   accordance   with  the  plans  and
specifications, as warranted, used substandard materials and provided inadequate
workmanship.  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.
Subject to lender approval the Partnership may obtain additional  advances up to
$9,100,000 to fund certain  operating  expenses of the joint venture and to cure
construction damages in the operating investment  properties.  The loans and any
additional advances bear interest at a rate of 9% per annum. As of September 30,
1996, additional lender advances totalling  approximately $4.8 million have been
made, and the total debt obligation of the joint venture totalled $23.3 million.
Monthly payments are made in an amount equal to the "net operating  income",  as
defined,  for the prior month. Unpaid interest is added to the principal balance
of the indebtedness on a monthly basis. The maturity date of the loan secured by
the Enchanted Woods  Apartments is June 1, 1997,  while the maturity date of the
loans  secured by the Hunt Club and Marina Club  properties  is July 1, 1997, at
which time all unpaid  principal,  interest and  advances  are due.  Despite the
successful  lease-up of the properties  following the completion of the required
repairs,  the venture's net  operating  income level is not  sufficient to fully
cover the interest accruing on the outstanding debt obligation. As a result, the
total  obligation due to the mortgage  lender will continue to increase  through
the scheduled maturity date.  Furthermore,  the current aggregate estimated fair
value of the operating  investment  properties is  substantially  lower than the
outstanding  obligation to the first  mortgage  holder as of September 30, 1996.
Accordingly, it is unlikely that the venture will be able to settle or refinance
the  debt at the  time of the  fiscal  1997  maturity.  The  result  could  be a
foreclosure of the operating investment properties.  The Partnership has a large
negative carrying value for its investment in HMF Associates as of September 30,
1996 because prior year equity method losses and distributions have exceeded the
Partnership's  investments in the venture.  Consequently,  the Partnership would
recognize a gain upon the foreclosure of the operating investment properties.

      The Joint Venture  Agreement  currently  provides for the  distribution of
available cash flow between the Partnership and the co-venturer. However, due to
the  terms of the debt  modification,  which  requires  all net cash  flow  from
property  operations to be paid to the lender as debt service,  there will be no
distributable  cash flow available for payment to the venture partners until the
existing mortgage debt is repaid or refinanced.

      Taxable income from  operations  shall 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, shall
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  are  specifically  allocated to the
respective  venture  partners.  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  Agreement  provides that capital  proceeds,  after debt
obligations are paid, shall be distributed as follows: First, to the Partnership
to pay the aggregate amount of its preference not therefore paid  (approximately
$2,601,000  at  September  30,  1996).   Second,  to  the  Partnership  and  the
co-venturer to repay advances and guaranty  period capital loans.  Third, to the
Partnership  until it receives its net investment plus $585,000.  Fourth, to the
co-venturer to repay guaranty period  preference and operating loans.  Fifth, to
the Manager to repay any subordinated management fees. Sixth and thereafter, 80%
to the Partnership and 20% to the co-venturer.

      Capital  profits shall 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
shall be allocated to partners with positive capital  accounts,  then 80% to the
Partnership and 20% to the co-venturer.

      The joint venture originally entered into a property management  agreement
with an  affiliate of the  co-venturer  for property  management  services.  The
management  fee is equal to the greater of 5% of gross  receipts,  as defined in
the agreement, or $9,000 a month. The co-venturer is 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 and
$76,000 during fiscal 1995 and 1994, respectively.

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,
1996 and 1995, mortgage note payable consists of the
following (in thousands):

                                                             1996       1995
                                                             ----       ----

    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, 1996.                        $ 1,671    $ 1,723

    Less amount due within one year                            (57)       (51)
                                                           -------    -------
                                                           $ 1,614    $ 1,672
                                                           =======    =======

      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,
1996 and September 30, 1995 consist of such escrowed insurance premiums and real
estate taxes in the aggregate amounts of $74,000 and $75,000, respectively.
<PAGE>

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

            1997         $  57
            1998            64
            1999            71
            2000            80
            2001            89
            Thereafter   1,310
                        ------
                        $1,671
                        ====== 

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):

            1997       $   406
            1998           361
            1999           311
            2000           270
            2001           174
            Thereafter   1,382
                       -------
                       $ 2,904
                       =======

      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 and 1994 were $2,000 and $8,000,
respectively. No percentage rents were received during fiscal 1996.

8.    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  Partner  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 PaineWebber  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  PaineWebber
Income Properties Seven Limited Partnership, also allege that following the sale
of the partnership interests,  PaineWebber, Seventh Income Properties Fund, Inc.
and PA1985  misrepresented  financial  information about the Partnership's 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 have 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 has been preliminarily approved by the court and provides for the complete
resolution of the class action  litigation,  including  releases in favor of the
Partnership  and the General  Partners,  and the  allocation of the $125 million
settlement  fund among  investors  in the various  partnerships  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.
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 a ruling by the court as a
result of this final hearing is currently pending.

     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 $15 million plus punitive damages against PaineWebber.

     Mediation with respect to the Bandrowski action described above was held in
December 1996. As a result of such  mediation,  a tentative  settlement  between
PaineWebber  and the  plaintiffs  was reached which would provide for a complete
resolution of the action.  PaineWebber  anticipates that releases and dismissals
with regard to this action will be received by February 1997.

      Under certain limited circumstances, pursuant to the Partnership Agreement
and other contractual  obligations,  PaineWebber affiliates could be entitled to
indemnification  for expenses and  liabilities in connection with the litigation
described above. However, PaineWebber has agreed not to seek indemnification for
any amounts it is required to pay in connection  with the  settlement of the New
York Limited  Partnership  Actions.  At the present time,  the General  Partners
cannot estimate the impact, if any, of the potential  indemnification  claims on
the  Partnership's  financial  statements,  taken  as a whole.  Accordingly,  no
provision  for any  liability  which could result from the  eventual  outcome of
these matters has been made in the accompanying financial statements.


<PAGE>



9. Subsequent Event

      Subsequent to September 30, 1996, the Partnership  announced that it plans
to reinstate the payment of regular quarterly  distributions at a annual rate of
2.5% on an original $1,000  investment.  The first payment of $6.25 per original
$1,000 Unit would be made on February 14, 1997, for the quarter ending  December
31, 1996. In addition, the Partnership expects to make a special distribution of
$40 per original $1,000 investment on February 14, 1997 to Unitholders of record
on December 31, 1996,  which  represents a distribution of Partnership  reserves
which exceed expected future requirements.




<PAGE>



<TABLE>

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

              SCHEDULE OF REAL ESTATE AND ACCUMULATED DEPRECIATION
                               September 30, 1996
                                 (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>

Retail Plaza
West Palm Beach,
 FL            $1,671        $ 742    $4,518    $(161)       $698    $4,401     $5,099    $ 1,651   1979-80     7/31/85  5-30 yrs.

Notes
(A) The  aggregate  cost of real estate owned at  September  30, 1996 for Federal  income tax purposes is  approximately $5,391.
(B) See Notes 4 and 6 of Notes to Financial  Statements. 
(C)  Reconciliation of real estate owned:
                                                         1996           1995           1994
                                                         ----           ----           ----

      Balance at beginning of year                     $  5,074       $  4,942       $  4,942
      Acquisitions and improvements                          25            132              -
      Reductions in basis due to foreclosure (1)              -              -              -
                                                       --------       --------       --------
      Balance at end of year                           $  5,099       $  5,074       $  4,942
                                                       ========       ========       ========

(D) Reconciliation of accumulated depreciation:

      Balance at beginning of year                     $  1,512       $  1,363       $  1,218
      Removal of accumulated depreciation 
        at foreclosure (1)                                    -              -              -
      Depreciation expense                                  139            149            145
                                                       --------       --------       --------
      Balance at end of year                           $  1,651       $  1,512       $  1,363
                                                       ========       ========       ========


</TABLE>


<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, 1996 and 1995, and the related  combined  statements of operations
and changes in venturers' deficit, and cash flows for each of the three years in
the period ended  September  30, 1996.  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, 1996 and 1995,  and the combined  results of their
operations  and their cash flows for each of the three years in the period ended
September 30, 1996, 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 15, 1996


<PAGE>


                           COMBINED JOINT VENTURES OF
            PAINE WEBBER INCOME PROPERTIES SEVEN LIMITED PARTNERSHIP

                             COMBINED BALANCE SHEETS
                           September 30, 1996 and 1995
                                 (In thousands)

                                     Assets
                                                           1996        1995
                                                           ----        ----

Current assets:
   Cash and cash equivalents                             $  1,958    $  2,489
   Escrow deposits                                            896       2,025
   Prepaid distributions to venturer                          234           -
   Other current assets                                        74         144
                                                         --------    --------
         Total current assets                               3,162       4,658

Operating investment properties
   Land                                                     6,472       6,449
   Buildings, improvements and equipment                   51,632      50,467
                                                         --------    --------
                                                           58,104      56,916
   Less accumulated depreciation                          (22,085)    (20,319)
                                                         --------    --------
         Net operating investment properties               36,019      36,597

Deferred expenses, net of accumulated amortization
   of $345 ($262 in 1995)                                     238         271
Other assets                                                   89         114
                                                         --------    --------
                                                         $ 39,508    $ 41,640
                                                         ========    ========

                       Liabilities and Venturers' Deficit

Current liabilities:
   Current portion of long-term debt                     $ 23,691    $    353
   Real estate taxes payable                                1,181       1,934
   Accounts payable and accrued liabilities                   263         457
   Accounts payable - affiliates                               30           2
   Accrued interest                                           142         147
   Tenant security deposits                                   309         299
   Distributions payable to venturers                         216         478
                                                         --------    --------
         Total current liabilities                         25,832       3,670

Loans from venturers                                          366         449

Long-term debt                                             22,602      45,299

Venturers' deficit                                         (9,292)     (7,778)
                                                         --------    --------
                                                         $ 39,508    $ 41,640
                                                         ========    ========




                             See accompanying notes.


<PAGE>


                           COMBINED JOINT VENTURES OF
            PAINE WEBBER INCOME PROPERTIES SEVEN LIMITED PARTNERSHIP

       COMBINED STATEMENTS OF OPERATIONS AND CHANGES IN VENTURERS' DEFICIT
              For the years ended September 30, 1996, 1995 and 1994
                                 (In thousands)

                                                1996        1995        1994
                                                ----        ----        ----

Revenues:
   Rental revenues and expense recoveries    $ 10,372    $ 10,122     $ 9,441
   Interest and other income                      521         465         423
                                             --------    --------     -------
                                               10,893      10,587       9,864

Expenses:
   Interest expense                             3,961       4,468       4,349
   Depreciation expense                         1,766       1,651       1,529
   Real estate taxes                            1,830       1,799       1,536
   Repairs and maintenance                        780         668       1,079
   Management fees                                541         534         507
   Utilities                                      620         598         547
   Salaries and related expenses                  979         914         913
   General and administrative                     859         772         985
   Amortization expense                            14          10          37
   Gain (loss) on insurance settlement           (197)        300           -
                                             --------    --------     -------
                                               11,153      11,714      11,482

Loss before extraordinary gain                   (260)     (1,127)     (1,618)

Extraordinary gain from settlement 
  of debt obligation                                -       1,070           -
                                             --------    --------      ------

Net loss                                         (260)        (57)     (1,618)

Distributions to venturers                     (1,254)     (1,085)     (1,818)

Contributions from partners                         -           -          24

Venturers' deficit, beginning of year          (7,778)     (6,636)     (3,224)
                                             --------     -------     -------

Venturers' deficit, end of year              $ (9,292)    $(7,778)    $(6,636)
                                             ========     =======     =======














                             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, 1996, 1995 and 1994
                Increase (Decrease) in Cash and Cash Equivalents
                                 (In thousands)

                                                1996      1995          1994
                                                ----      ----          ----
Cash flows from operating activities:
  Net loss                                     $ (260)    $  (57)    $(1,618)
  Adjustments to reconcile net loss to
    net cash provided by operating activities:
   Depreciation and amortization                1,780       1,661       1,566
   Amortization of deferred financing costs        69          45           -
   Interest added to long-term debt principal   2,053       1,976       1,890
   Interest on loans from venturers                17          28          78
   Changes in assets and liabilities:
     Escrow deposits                            1,129        (372)         20
     Accounts receivable                            -         (83)        200
     Accounts receivable - affiliates               -           -          27
     Other current assets                          70         (12)         (4)
     Deferred expenses                            (13)        (16)         (8)
     Other assets                                  25        (105)         20
     Accounts payable and accrued liabilities    (194)        101        (297)
     Accounts payable - affiliates                 28         (12)        (31)
     Real estate taxes payable                   (753)        872          40
     Accrued interest                              (5)        (20)          -
     Tenant security deposits                      10          (8)          8
                                               ------     -------      ------
        Total adjustments                       4,216       4,055       3,509
                                               ------     -------      ------
        Net cash provided by 
          operating activities                  3,956       3,998       1,891
                                               ------     -------      ------

Cash flows from investment activities:
  Additions to operating 
   investment properties                      (1,188)     (1,624)     (1,495)
  Proceeds from insurance settlements              -       2,520       1,679
                                             -------     --------     ------
        Net cash (used in) provided by 
          investing activities               (1,188)         896         184
                                             ------      --------     ------

Cash flows from financing activities:
  Loan proceeds                                     -      22,250         648
  Escrow deposits funded from 
     refinancing proceeds                           -      (1,442)          -
  Increase in deferred financing costs            (37)       (204)          -
  Repayment of long-term debt                  (1,412)    (22,842)       (931)
  Repayment of loans to venturers                (100)       (805)          -
  Capital contributions                             -           -          24
  Distributions to venturers                   (1,750)       (931)     (1,632)
                                              -------      ------     -------
        Net cash used in financing
           activities                          (3,299)     (3,974)     (1,891)
                                             --------      ------     -------

Net (decrease) increase in cash 
  and cash equivalents                           (531)        920         184
Cash and cash equivalents, beginning of year     2,489      1,569       1,385
                                            ---------   ---------    --------
Cash and cash equivalents, end of year      $   1,958   $   2,489    $  1,569
                                            =========   =========    ========

Cash paid during the year for interest      $   1,827   $   2,438    $  2,495
                                            =========   =========    ========

                             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

      The  accompanying  combined  financial  statements have been prepared on a
going  concern  basis,   which   contemplates  the  realization  of  assets  and
satisfaction  of  liabilities  in the normal course of business.  The four joint
ventures described above own six operating investment properties,  which consist
of five  multi-family  apartment  complexes and one retail shopping center.  The
first mortgage debt of HMF Associates, amounting to $23,305,490 at September 30,
1996, is due July 1, 1997.  Based on a review of the cash operating  budgets for
fiscal year 1997,  the projected cash flow of HMF  Associates,  which owns three
apartment complexes, will not be sufficient to meet the debt service obligation.
Also, due to the under  performance of the properties,  it is uncertain  whether
HMF  Associates  will be able to settle or refinance  the debt at maturity.  The
partners have represented  that they do not intend to make  contributions to HMF
Associates  to the extent  necessary to fund any negative cash flow of the joint
venture.  These factors as well as others  indicate that HMF  Associates  may be
unable to continue as a going concern  unless it is able to generate  sufficient
cash flows to meet its  obligations  as they come due and sustain its operations
sufficient to recover its investment in real estate. The accompanying  financial
statements  do not include any  adjustments  to reflect  the  classification  of
assets or the amounts and  classification  of liabilities that might result from
the possible inability of HMF Associates to continue as a going concern.

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, 1996 and 1995 and revenues and expenses for
each of the three years in the period ended  September 30, 1996.  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 the lower of cost, less
accumulated depreciation, certain guaranteed payments from partners (see Note 3)
and insurance  proceeds,  or net realizable value. The net realizable value of a
property   held  for   long-term   investment   purposes   is  measured  by  the
recoverability of the venture's investment through expected future cash flows on
an undiscounted  basis,  which may exceed the property's  market value.  The net
realizable  value of a property held for sale  approximates  its current  market
value. None of the operating  investment  properties owned by the Combined Joint
Ventures  were  considered to be held for sale as of September 30, 1996 or 1995.
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.

      In March 1995, the Financial  Accounting  Standards Board issued Statement
No. 121,  "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets To Be Disposed Of" ("Statement 121"), which 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.  Statement 121 also
addresses the accounting for long-lived  assets that are expected to be disposed
of.  Statement  121 is effective for financial  statements  for years  beginning
after December 15, 1995. The Combined Joint Ventures will adopt Statement 121 in
fiscal 1997 and, based on current circumstances, management does not believe the
adoption  will have a  material  effect on results of  operations  or  financial
position.

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

      Deferred  expenses  consist  primarily  of  loans  fees  which  are  being
amortized  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.


<PAGE>


      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, 1996 and 1995 are
principally comprised of such escrowed amounts.

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

      The  carrying  amounts  of cash and  cash  equivalents,  escrow  deposits,
accounts  payable and accrued  liabilities  approximate  their fair values as of
September 30, 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  owns  and  operates  The  Meadows  on  the  Lake
      Apartments, a 200-unit apartment complex, located in Birmingham,  Alabama.
      During fiscal 1991, the venture  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 owns and operates 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  Seattle,
      Washington.  Construction-related defects had been discovered at all three
      apartment  complexes  owned by HMF  Associates  prior to fiscal 1991.  The
      deficiencies and damages included lack of adequate fire blocking materials
      in the walls  and other  areas and  insufficient  structural  support,  as
      required  by the  Uniform  Building  Code.  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 suit  alleged,  among  other  things,  that the  developer  failed  to
      construct the buildings in accordance  with the plans and  specifications,
      as  warranted,   used  substandard   materials  and  provided   inadequate
      workmanship.  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,  1996,  1995 and 1994 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.

      The Guaranty  Periods of the joint ventures  generally began from the date
PWIP7 purchased its interest in each joint venture for a period of 2 to 5 years.
The Guaranty Periods for the Combined Joint Ventures expired as follows:
<PAGE>
                                          Guaranty Period
                                          ---------------

      Chicago Colony Apartments
        Associates                        December 31, 1988
      Chicago Colony Square Associates    December 31, 1988
      Daniel Meadows Partnership          June 30, 1988
      HMF Associates                      May 31, 1990

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  and  $76,000  during  fiscal  1995 and 1994,
respectively. Such fees were capitalized as part of the basis of the property.

      One of the joint ventures is required to pay a yearly  investor  servicing
fee to PWIP7 of $2,500.

      Accounts  payable -  affiliates  at  September  30, 1996 and 1995  consist
primarily of management fees and reimbursements owed to the property managers of
the operating properties. Loans from venturers at September 30, 1996 and 1995 of
$366,000 and  $449,000,  respectively,  represent  loans plus  accrued  interest
payable  to the  partners  of the HMF  Associates  joint  venture.  Included  in
interest  expense  for the years  ended  September  30,  1996,  1995 and 1994 is
$17,000, $36,000 and $78,000, respectively, of interest on such loans.

5.    Long-term debt

      Long-term  debt at September  30, 1996 and 1995  consists of the following
(in thousands):

                                                             1996       1995
                                                             ----       ----

     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  was
     approximately    $16,972    as   of
     September   30,  1996.                                 $17,136   $ 17,380

     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 was approximately
     $1,116 as of  September  30,  1996.
     1,078 1,139

     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%
     (7.6875% at  September  30,  1996),
     through  maturity  on  February  5,
     2000.  The fair  value of this note
     payable  approximated  its carrying
     value  as of  September  30,  1996.                      4,773     4,822
<PAGE>
     First  mortgage  loans  made to the
     HMF Associates joint venture, which
     loans are 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 22,311
                                                           46,293      45,652

      Less current portion                                (23,691)       (353)
                                                         --------     -------
                                                         $ 22,602     $45,299
                                                         ========     =======


      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. 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 may obtain
additional advances up to $9,100,000 ($4,320,000 remaining at September 30, 1996
and 1995,  respectively) 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  bear  interest at a rate of 9% per
annum.  Monthly  payments  are made in an  amount  equal  to the "net  operating
income",  as  defined,  for the prior  month.  Unpaid  interest  is 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  is June 1, 1997,
while the  maturity  date of the loans  secured by the Hunt Club and Marina Club
properties  is July 1, 1997,  at which time all unpaid  principal,  interest and
advances are due.  Despite the successful  lease-up of the properties  following
the completion of the required repairs, the venture's net operating income level
is not sufficient to fully cover the interest  accruing on the outstanding  debt
obligation.  As a result,  the total  obligation due to the mortgage lender will
continue to increase  through the  scheduled  maturity  date.  Furthermore,  the
current aggregate estimated fair value of the operating  investment  properties,
while higher than their net carrying  values,  is  substantially  lower that the
outstanding  obligation to the first  mortgage  holder as of September 30, 1996.
Accordingly,  it is  unlikely  that  the  venture  will  be able  to  settle  or
refinancing  the debt at the time of the fiscal 1997 maturity.  The result could
be a  foreclosure  of all three of the  operating  investment  properties.  As a
result of these circumstances,  it is not practicable for management to estimate
the fair value of the mortgage debt obligation as of September 30, 1996.

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

              1997              $  23,691
              1998                    418
              1999                    454
              2000                  5,012
              2001                    455
        Thereafter                 16,263
                                ---------
                                $  46,293
                                =========
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):

              1997                $   346
              1998                    154
              1999                     86
              2000                     56
              2001                     37
                                  -------
                                  $   679
                                  =======


<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, 1996
                                 (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                $17,136    $ 3,132   $25,378    $(393)      $ 2,875  $25,242   $28,117   $12,002    1975      12/27/85 5-30 yrs.

Shopping Center
Mount Prospect, 
IL                   1,078      1,014     1,883      (12)          985    1,900     2,885       668    1978      12/27/85 5-30 yrs.

Apartment Complex
Birmingham, AL       4,773        480     7,497      547           506    8,018     8,524     4,087    1985-86   6/19/86  5-30 yrs.

Apartment Complexes:
Enchanted Woods, Hunt
Club and Marina Club                                                                                  5/29/87 &
Seattle, WA        23,306      2,106     14,150    2,322         2,106   16,472    18,578     5,328    1987      6/29/87  5-27.5 yrs
                   -------    ------    -------   ------        -------  ------   -------    ------

                  $46,293    $ 6,732    $48,908   $2,464       $ 6,472  $51,632   $58,104   $22,085
                  =======    =======    =======   ======        ======  =======   =======   =======
Notes
(A) The  aggregate  cost of real estate owned at September  30, 1996 for Federal income  tax  purposes  is  approximately  $61,421.
(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:
                                                         1996           1995         1994
                                                         ----           ----         ----

      Balance at beginning of year                      $56,916        $57,812       $57,996
      Acquisitions and improvements                       1,188          1,624         1,495
      Reductions due to receipt of insurance 
         settlement proceeds                                  -        (2,520)        (1,679)
                                                        ------         -------       -------
      Balance at end of year                            $58,104        $56,916       $57,812
                                                        =======        =======       =======

(D) Reconciliation of accumulated depreciation:

      Balance at beginning of year                      $20,319        $18,668       $17,139
      Depreciation expense                                1,766          1,651         1,529
                                                        -------        -------       -------
      Balance at end of year                            $22,085        $20,319       $18,668
                                                        =======        =======       =======

</TABLE>