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, 1998

                                       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 or other jurisdiction of                             (I.R.S. Employer
incorporation or organization)                              Identification No.)


265 Franklin Street, Boston, Massachusetts                         02110
------------------------------------------                         -----
(Address of principal executive offices)                           (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 registrant dated                                    Part IV
May 14, 1985, as supplemented

Current Reports on Form 8-K of registrant                         Part IV
dated November 10, 1998 and November 17, 1998

<PAGE>
                 PAINE WEBBER INCOME PROPERTIES SEVEN LIMITED PARTNERSHIP
                                 1998 FORM 10-K

                                TABLE OF CONTENTS


Part   I                                                                 Page

Item    1   Business                                                      I-1

Item    2   Properties                                                    I-4

Item    3   Legal Proceedings                                             I-4

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


Part  II

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

Item    6   Selected Financial Data                                      II-1

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

Item    8   Financial Statements and Supplementary Data                  II-8

Item    9   Changes in and Disagreements with Accountants on
               Accounting and Financial Disclosure                       II-8


Part III

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

Item    11  Executive Compensation                                      III-2

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

Item    13  Certain Relationships and Related Transactions              III-3


Part  IV

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

Signatures                                                               IV-2

Index to Exhibits                                                        IV-3

Financial Statements and Supplementary Data                       F-1 to F-31

<PAGE>


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

                                      PART I

Item 1.  Business

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

      The  Partnership  originally  invested  the  net  proceeds  of the  public
offering,   through  five  joint  venture   partnerships,   in  seven  operating
properties,  comprised of five multi-family  apartment complexes,  one mixed-use
office and retail property and one shopping center.  As discussed further below,
during  fiscal 1997 three of the  multi-family  properties  were sold.  A fourth
multi-family property was sold on December 18, 1997. In addition,  subsequent to
the end of fiscal  1998,  on  November  10,  1998,  the  retail  portion  of the
Concourse  property was sold. The office portion of this mixed-use  property had
been lost through  foreclosure  proceedings  on December 17, 1992.  The shopping
center  property was also sold  subsequent  to  year-end,  on November 17, 1998.
Subsequent to these  transactions,  the  Partnership has only one remaining real
estate  investment,  the  Colony  Apartments.  As of  September  30,  1998,  the
Partnership  owned,  through  joint  venture  partnerships,   interests  in  the
operating properties set forth in the following table:

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

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

West Palm Beach Concourse     30,473      7/31/85      Fee ownership of land
  Associates (2) (3)          gross                    and improvements
The Concourse                 leasable                 through joint venture)
  Retail Plaza                sq. ft.
West Palm Beach, Florida

Chicago Colony Square         39,572      12/27/85     Fee ownership of land
  Associates (4)              gross                    and improvements
Colony Square Shopping Center leasable                 (through joint venture)
Mount Prospect, Illinois      sq. ft.

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

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

(3) Subsequent  to year-end,  on November 10,  1998,  West Palm Beach  Concourse
    Associates  sold its operating  investment  property,  The Concourse  Retail
    Plaza, to an unrelated party for $2 million. The sale generated net proceeds
    of  approximately  $225,000,  after the assumption of the outstanding  first
    mortgage loan of approximately $1,539,000, accrued interest of approximately
    $4,000,  net  closing  proration  adjustments  of  approximately  $2,000 and
    closing costs of approximately  $230,000.  The Partnership  received 100% of
    the  net  proceeds  in  accordance  with  the  terms  of the  joint  venture
    agreement.

(4) Subsequent  to  year-end,  on  November  17,  1998,  Chicago  Colony  Square
    Associates  sold  its  operating  investment  property,  the  Colony  Square
    Shopping Center, to an unrelated party for $2.3 million.  The sale generated
    net  proceeds  of  approximately  $1,014,000,  after  the  repayment  of the
    outstanding first mortgage loan of approximately $864,000,  accrued interest
    of approximately $13,000 (including a prepayment penalty of $9,000), closing
    proration  adjustments  of  approximately  $221,000  and  closing  costs  of
    approximately $188,000. The Partnership received 100% of the net proceeds in
    accordance with the terms of the joint venture agreement.

      The  Partnership  previously  had an interest in HMF  Associates,  a joint
venture which owned three multi-family  apartment properties and Daniels Meadows
Partnership, a joint venture which owned the Meadows on the Lakes Apartments. On
June 27,  1997,  HMF  Associates  sold  the  properties  known as The Hunt  Club
Apartments located in Seattle, Washington and The Marina Club Apartments located
in Des Moines,  Washington to an unrelated  third party for  approximately  $5.3
million and $3.1 million, respectively. The Partnership received net proceeds of
approximately  $288,000  in  connection  with the sale of these  two  assets  in
accordance  with a discounted  mortgage loan payoff  agreement  reached with the
lender in April 1997.  On September 9, 1997,  HMF  Associates  sold the property
known as The Enchanted Woods Apartments located in Federal Way, Washington to an
unrelated third party for approximately $9.2 million.  The Partnership  received
net proceeds of approximately $261,000 in connection with the sale in accordance
with the discounted mortgage loan payoff agreement. On December 18, 1997, Daniel
Meadows Partnership sold its operating investment  property,  The Meadows on the
Lakes Apartments,  to an unrelated party for $9.525 million.  The sale generated
net proceeds of  approximately  $4.4 million after  repayment of the outstanding
first  mortgage  loan  of  approximately  $4.7  million  and  closing  costs  of
approximately  $310,000.  The  Partnership  received 100% of the net proceeds in
accordance with the terms of the joint venture agreement.

    The Partnership's original investment objectives were to:

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

      Regular  quarterly  distributions of excess operating cash flow, which had
been suspended in 1990, were reinstated  during fiscal 1997.  Through  September
30,  1998,  the Limited  Partners  had received  cumulative  cash  distributions
totalling approximately  $18,928,000,  or approximately $515 per original $1,000
investment for the  Partnership's  earliest  investors.  Of this total,  $40 per
original $1,000 investment represents a distribution made in February 1997 of an
amount of Partnership cash reserves which exceeded expected future requirements,
$50 per original  investment  represents a Special Capital  Distribution made on
August  15,  1997 to  unitholders  of  record  as of June 27,  1997 and $165 per
original investment  represents a special distribution made on February 13, 1998
to  unitholders  of record on December 18, 1997.  Of the August 15, 1997 special
distribution amount,  $7.60 per original $1,000 investment  represented net sale
proceeds from the  disposition  of The Hunt Club  Apartments and The Marina Club
Apartments,  $41.48 per original $1,000 investment represented proceeds from the
settlements  of  litigation  covering  construction-related  defects at the Hunt
Club,  Marina Club and Enchanted Woods  properties and $0.92 per original $1,000
investment  represented  an  additional  amount of cash  reserves  that exceeded
expected  future  requirements.  Of the February  13, 1998 special  distribution
amount, $116.39 per original $1,000 investment represented net proceeds from the
sale  of  The  Meadows  on the  Lake  Apartments,  $13.52  per  original  $1,000
investment  represented  net  proceeds  from  the  sale of the  Enchanted  Woods
Apartments and $35.09 per original  $1,000  investment  represented  Partnership
reserves that exceeded future  requirements.  The remaining  distributions  made
through   September  30,  1998  have  been  from  operating  cash  flow  of  the
Partnership. A substantial portion of such cash distributions has been sheltered
from current taxable income.  Subsequent to year-end,  on December 15, 1998, the
Partnership  distributed  approximately  $1,253,000,  or $33 per original $1,000
investment,  which  included  the net proceeds  from the sales of The  Concourse
Retail Plaza ($5.92 per Unit) and the Colony Square  Shopping Center ($26.69 per
Unit) and an amount of reserves that  exceeded  future  requirements  ($0.39 per
Unit).

      The loss of the Concourse  Office Towers to foreclosure in fiscal 1993 and
the  minimal  proceeds  from  the  sale of the  three  properties  owned  by HMF
Associates  means that the Partnership  will be unable to return the full amount
of the original invested capital to the Limited Partners.  The two office towers
represented 28% of the Partnership's  original investment  portfolio.  The three
apartment  complexes  owned  by  HMF  Associates  comprised  another  13% of the
original investment portfolio. The amount of capital which will be returned will
depend upon the proceeds  received from the final  liquidation  of the remaining
investment. The amount of such proceeds will ultimately depend upon the value of
the underlying  investment property at the time of its final disposition,  which
cannot be determined  with  certainty at the present time.  The  Partnership  is
currently  focusing  on  potential  disposition  strategies  for  the  remaining
investment  in  its  portfolio.  Although  no  assurances  can be  given,  it is
currently  contemplated  that the sale of the  Partnership's  Colony  Apartments
investment  could be completed  during the first half of calendar year 1999. The
sale of the remaining  property  would be followed by an orderly  liquidation of
the Partnership.

      Colony  Apartments  is located in a real  estate  market in which it faces
significant competition for the revenues it generates. It competes with numerous
projects  of  similar  types  generally  on the  basis of  price,  location  and
amenities  as well as 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. Over the past 2 years,  development activity for multi-family properties
in many markets has escalated significantly.

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

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

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

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

Item 2. Properties

      As of  September  30,  1998,  the  Partnership  owned  interests  in three
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  1998,  along with an
average for the year, are presented below for each property.

                                           Percent Occupied At
                              -------------------------------------------------
                                                                       Fiscal
                                                                       1998
                              12/31/97   3/31/98    6/30/98   9/30/98  Average
                              --------   -------    -------   -------  -------

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

The Concourse Retail Plaza       90%      90%        34%       34%       62%

Colony Square Shopping Center   100%      92%        92%       92%       94%

Item 3.  Legal Proceedings

      The Partnership is not subject to any 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,  1998 there were 2,228  record  holders of Units in the
Partnership.  There is no public  market for the resale of Units,  and it is not
anticipated that a public market for the Units will develop.  Upon request,  the
Managing  General  Partner  will  endeavor  to assist a  Unitholder  desiring to
transfer his Units and may utilize the services of PWI in this regard. The price
to be paid for the Units will be subject to negotiation by the  Unitholder.  The
Managing General Partner will not redeem or repurchase Units.

      Reference is made to Item 6 below for a  discussion  of the amount of cash
distributions made to the Limited Partners during fiscal 1998.

Item 6.  Selected Financial Data
                 Paine Webber Income Properties Seven Limited Partnership
                            (In thousands except per unit data)
<TABLE>
<CAPTION>

                                   1998           1997            1996        1995        1994
                                   ----           ----            ----        ----        ----
<S>                                <C>            <C>             <C>         <C>         <C>

Revenues                           $   968        $    808        $   773     $   835     $   561

Operating loss                     $  (514) (2)   $ (1,214) (1)   $  (128)    $  (101)    $  (401)

Partnership's share of
  unconsolidated  ventures'
  income (losses)                  $   966        $     36        $  (276)    $(1,100)    $(1,592)

Partnership's share of gains on
  sale of operating investment
  properties                       $ 4,591        $  4,210              -           -           -

Income (loss) before
  extraordinary gain               $ 5,048        $  3,033        $  (404)    $(1,200)    $(1,992)

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

Net income (loss)                  $ 5,048        $ 10,496        $  (404)    $   400     $(1,992)

Per Limited Partnership Unit:
  Income (loss) before
  extraordinary gain               $131.57        $  79.04        $(10.53)    $(31.29)    $(51.90)

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

  Net income (loss)                $131.57        $ 273.54        $(10.53)    $ 10.43     $(51.90)

  Cash distributions
    from operations                $ 22.30        $  18.25              -           -           -

  Cash distributions from
    capital transactions           $165.00        $  90.00              -           -           -

Total assets                       $ 4,656        $  6,789       $  8,852     $ 7,148     $ 6,347

Mortgage notes payable             $ 1,550        $  1,614       $  1,671     $ 1,723     $ 2,499
</TABLE>


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

(2)     The  Partnership's  operating loss for the year ended September 30, 1998
        includes  an  impairment  loss of $418,000  related to the  consolidated
        Concourse  Retail  Plaza.  See  Note  2 to  the  accompanying  financial
        statements for a further discussion of this writedown.

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

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

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

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

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

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

      The  Partnership  offered  units of limited  partnership  interests to the
public from May 14, 1985 to May 13, 1986  pursuant to a  Registration  Statement
filed under the  Securities  Act of 1933.  Gross  proceeds of  $37,969,000  were
received by the Partnership,  and after deducting  selling expenses and offering
costs, approximately $32,602,000 was invested in five joint venture partnerships
which owned seven operating properties, comprised of five multi-family apartment
complexes,  one mixed-use  office and retail  property and one shopping  center.
During  fiscal 1997 three of the  multi-family  properties  were sold.  A fourth
multi-family property was sold on December 18, 1997. In addition,  subsequent to
year-end, on November 10, 1998, the retail portion of the Concourse property was
sold. As previously reported,  the office portion of this mixed-use property had
been lost through foreclosure proceedings on December 17, 1992. In addition, the
Colony Square Shopping Center property was sold on November 17, 1998. Subsequent
to these  transactions,  the  Partnership  has only one  remaining  real  estate
investment, the Colony Apartments. 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  investment  in  accordance  with the
joint venture agreement.

      As  previously  reported,  in early  fiscal 1997 the  Partnership  and its
co-venture partner had received  unsolicited offers from prospective  purchasers
to acquire The Meadows on the Lake Apartments,  located in Birmingham,  Alabama.
After  carefully  reviewing  the offers,  the  Partnership  determined  that the
property  should sell at a higher price and directed the  co-venture  partner to
market the property for sale. During the fourth quarter of fiscal 1997,  several
offers were received. One of these offers was from a qualified buyer and met the
Partnership's sale criteria.  This offer was accepted by the Partnership and its
co-venture  partner;  however, a sale agreement could not be finalized with this
prospective  buyer.  Negotiations  were  then  undertaken  with one of the other
potential buyers, resulting in a purchase and sale agreement which was signed on
November 12, 1997. On December 18, 1997, The Meadows on the Lake  Apartments was
sold to an unrelated  third party for $9.525  million.  The sale  generated  net
proceeds of approximately $4.4 million, after repayment of the outstanding first
mortgage loan of  approximately  $4.7 million and closing costs of approximately
$310,000.  The Partnership  received 100% of the net proceeds in accordance with
the  terms of the  joint  venture  agreement.  The  Partnership  made a  special
distribution to the Limited Partners totalling approximately $6,265,000, or $165
per original $1,000  investment,  on February 13, 1998. Of this amount,  $116.39
per original $1,000 investment represented the net proceeds from the sale of The
Meadows  on  the  Lake  Apartments,   $13.52  per  original  $1,000   investment
represented net proceeds from the disposition of the Enchanted Woods Apartments,
which was sold on September 9, 1997, and $35.09 per original  $1,000  investment
represented Partnership reserves that exceeded expected future requirements.

      As previously  reported,  the Partnership had reviewed its options for The
Concourse  Retail Plaza at the beginning of fiscal 1998 and  determined  that it
was the  appropriate  time to market the property for sale. For the past several
years,  80% of the Plaza's 30,473 square feet has been leased to four restaurant
operators  which have  performed  poorly.  One of these  restaurant  tenants was
paying  rent on  space  that  was  vacated  in 1996  under a lease  that  can be
terminated  in July 1999.  Two other of these  restaurant  tenants  closed their
operations  at the property  during the quarter  ended  September  30, 1998 as a
result of poor  sales.  One of the options  reviewed  for the  property  was the
development of a leasing plan that would put an emphasis on a greater mixture of
office and retail uses. This would have involved the likely conversion of one of
the larger  restaurant  out parcel  buildings into  professional/service  office
space.  Another option was to market the property for sale  currently,  with the
net proceeds from any such potential sale transaction being carefully  evaluated
in  comparison  to  the  risks  of  holding  the  property  and  completing  the
conversion. The Partnership decided on the second option and began marketing the
property for sale.  During the second  quarter of fiscal 1998,  the  Partnership
initiated discussions with area real estate firms concerning potential marketing
strategies  for selling The  Concourse and solicited  marketing  proposals  from
several  of  these  firms.  After  reviewing  their  respective   proposals  and
conducting  interviews to determine  their expertise and track record in selling
properties  similar to The Concourse,  the Partnership  selected a Florida-based
firm.  During  the  third  quarter,   a  marketing  package  was  finalized  and
comprehensive  sale  efforts  began in early May. On August 14, 1998, a purchase
and sale  agreement  was signed with an  unrelated  third party.  Subsequent  to
year-end,  on November 10, 1998, West Palm Beach  Concourse  Associates sold The
Concourse Retail Plaza property to this unrelated party for $2 million. The sale
generated net proceeds of  approximately  $225,000,  after the assumption of the
outstanding first mortgage loan of approximately $1,539,000, accrued interest of
approximately  $4,000, net closing proration adjustments of approximately $2,000
and closing costs of approximately  $231,000.  The Partnership  received 100% of
the net proceeds in accordance  with the terms of the joint  venture  agreement.
The mortgage  loan,  which was  assumable,  contains a prohibition on prepayment
through January 10, 2000. As a result,  any sale transaction  completed prior to
such date had to involve an  assumption  of this  mortgage loan which carries an
interest rate of 11.12% per annum. The sale price was discounted to reflect this
above-market interest rate.  Nonetheless,  the Managing General Partner believed
that a  current  sale was in the best  interests  of the  Limited  Partners.  As
discussed further below, the Partnership has recorded an impairment writedown of
$418,000  in fiscal  1998 to reflect  the net  proceeds  received  from the sale
subsequent to year-end.

      As previously  reported,  the Partnership  and its co-venture  partner had
begun  exploring  potential  opportunities  for the  sale of the  Colony  Square
property in early fiscal 1998. As part of that plan,  discussions were held with
real estate brokerage firms with a specialty in small retail centers like Colony
Square.  During  the third  quarter  of fiscal  1998,  the  Partnership  and its
co-venture partner selected a real estate brokerage firm to begin marketing this
asset for sale.  Subsequently,  an offer was  received  to  purchase  the Colony
Square  Shopping  Center  from a  prospective  third-party  buyer  that  met the
Partnership's  and  co-venture  partner's  sale  criteria.  A purchase  and sale
agreement was signed on July 9, 1998 with this  prospective  buyer.  On November
17, 1998,  Chicago  Colony Square  Associates  sold the Colony  Square  Shopping
Center to this unrelated party for $2.3 million. The sale generated net proceeds
of  approximately  $1,014,000,  after the  repayment  of the  outstanding  first
mortgage  loan of  approximately  $864,000,  accrued  interest of  approximately
$13,000   (including  a  prepayment   penalty  of  $9,000),   closing  proration
adjustments  of  approximately  $221,000  and  closing  costs  of  approximately
$188,000.  The Partnership  received 100% of the net proceeds in accordance with
the  terms of the  joint  venture  agreement.  As a result  of the  sales of The
Concourse Retail Plaza and Colony Square Shopping Center, a Special Distribution
of approximately $1,253,000, or $33 per original $1,000 investment,  was made on
December 15, 1998. Of this total,  $5.92  represented net proceeds from the sale
of The Concourse Retail Plaza,  $26.69 represented net proceeds from the sale of
Colony Square Shopping Center and $0.39  represented  Partnership  reserves that
exceeded future requirements.

      With the sales of The Concourse and Colony Square, the Partnership now has
one remaining real estate investment,  the Colony Apartments, a 783-unit complex
located in Mount Prospect,  Illinois.  The occupancy level at Colony  Apartments
averaged 97% for fiscal 1998, up from the average occupancy level of 96% for the
prior fiscal year. In addition,  the average  monthly  rental rate per apartment
unit has increased by  approximately  4% over the past twelve  months.  With the
improvements  in the apartment  segment of the real estate market and the strong
local job market in this  northwest  Chicago  suburb,  the  Partnership  and its
co-venture  partner decided to market the Colony  Apartments for sale during the
third quarter of fiscal 1998. A national real estate firm was selected to market
the property and  comprehensive  sale efforts began in late June. As a result of
these sale efforts, ten offers were received.  As part of the Partnership's sale
efforts  to reduce  the  prospective  buyers'  due  diligence  work and the time
required  to  complete  it,  updated  operating  reports  as  well  as  building
evaluation  and  environmental  information of the property were provided to the
top six prospective  buyers,  who were asked to submit best and final offers and
did so.  Subsequent to year-end,  the  Partnership  and its  co-venture  partner
selected an offer and are currently  negotiating a purchase and sale  agreement.
The Partnership  currently  expects to have a signed purchase and sale agreement
by January 31,  1999 and to close on the sale  transaction  shortly  thereafter.
This should allow the  Partnership to complete a liquidation of the  Partnership
by March 31, 1999.  However,  since the sale of the Colony  Apartments  property
remains  contingent upon, among other things,  negotiation of a definitive sales
agreement and satisfactory completion of the buyer's due diligence, there are no
assurances  that  the  sale  of the  final  asset  and  the  liquidation  of the
Partnership will be completed within this time frame.

      At September 30, 1998, the  Partnership and its  consolidated  venture had
cash  and cash  equivalents  of  approximately  $1,530,000.  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
remaining  joint  venture,  in  accordance  with the terms of the joint  venture
agreement.  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  property and from the net  proceeds  from the sale or
refinancing  of such  property.  Such  sources of  liquidity  are expected to be
sufficient to meet the  Partnership's  needs on both a short-term  and long-term
basis.

      As noted above,  the  Partnership  expects to be  liquidated by the end of
calendar year 1999.  Notwithstanding  this, the Partnership believes that it has
made all necessary  modifications to its existing systems to make them year 2000
compliant and does not expect that  additional  costs  associated with year 2000
compliance,  if any, will be material to the Partnership's results of operations
or financial position.

Results of Operations
1998 Compared to 1997
---------------------

      The  Partnership  reported  net  income of  $5,048,000  for the year ended
September 30, 1998, as compared to net income of $10,496,000 for the prior year.
This unfavorable  change in the Partnership's net operating results is primarily
attributable  to the gains  recognized by the  Partnership in fiscal 1997 on the
sales of the Hunt Club,  Marina Club and the Enchanted Woods  Apartments and the
related extraordinary gains from settlement of debt obligations. The Partnership
recognized  gains from the  forgiveness of  indebtedness  in connection with the
sales of the  Enchanted  Woods,  Hunt Club and  Marina  Club  properties  in the
aggregate amount of $7,463,000 as a result of the fiscal 1997 sale  transactions
and the  discounted  loan payoff  agreement  with the lender.  The venture  also
recognized  gains in the aggregate  amount of $4,210,000 for the amount by which
the sales prices, net of closing costs,  exceeded the net carrying values of the
operating investment properties.  During fiscal 1998, the Partnership recognized
a gain of $4,591,000 on the sale of the Meadows on the Lake Apartments.

     The impact of the fiscal 1997 extraordinary  gains from forgiveness of debt
was partially offset by an increase in the Partnership's share of unconsolidated
ventures' income of $930,000 and a decrease in the Partnership's  operating loss
of $700,000 in fiscal 1998. The favorable change in the  Partnership's  share of
unconsolidated  ventures'  income is primarily  attributable  to the sale of the
properties  owned by the HMF joint venture during the third and fourth  quarters
of fiscal 1997.  The HMF joint  venture had been  generating  sizable  operating
losses prior to the sales of its assets.  In addition,  net income  increased by
$349,000 at the Colony  Apartments joint venture for the current year mainly due
to an increase in rental income as a result of the improved occupancy and rental
rates discussed further above.

      The  decrease  in  the   Partnership's   operating   loss  was   primarily
attributable  to a $582,000  decrease in the impairment  loss  recognized by the
consolidated  Concourse  Retail  Plaza  in the  current  year.  The  Partnership
recognized an impairment  loss of $418,000  during fiscal 1998 in order to write
down the net carrying value of the Concourse  property to  $1,769,000,  which is
equal to the $2 million  sales price for the  property on November 10, 1998 less
selling costs of $231,000. An impairment loss of $1,000,000 had been recorded by
the  consolidated  venture  in  fiscal  1997  to  write  down  the  property  to
management's  estimate of its then current market value. An increase in interest
and other  income of $158,000 as well as a decrease in  depreciation  expense of
$47,000 also  contributed to the reduction in the  Partnership's  operating loss
for fiscal 1998. The increase in interest and other income was  attributable  to
the  receipt  of a  residual  cash  distribution  from the HMF joint  venture of
$272,000 in the current year in  connection  with the final  liquidation  of the
joint venture.  The reduction in  depreciation  expense was  attributable to the
decrease in the asset value of the consolidated operating investment property as
a result of the impairment  write down  recognized at the end of fiscal 1997. An
increase of $64,000 in  interest  expense in fiscal  1998  partially  offset the
favorable changes in the Partnership's  operating loss. The increase in interest
expense  was the  result of the  write-off  of the  unamortized  balance  of the
deferred financing costs related to the consolidated  Concourse joint venture in
the current year due to the subsequent sale of the venture's operating property.

1997 Compared to 1996
---------------------

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

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

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

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

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

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

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

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

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

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

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

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

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

      Competition. The financial performance of the Partnership's remaining real
estate  investment  will  be  significantly  impacted  by the  competition  from
comparable  properties in its local market area. The occupancy levels and rental
rates  achievable at the property are largely a function of supply and demand in
the market. In many markets across the country,  development of new multi-family
properties has increased significantly over the past 2 years. Existing apartment
properties  in such markets could be expected to  experience  increased  vacancy
levels,  declines in  effective  rental  rates and,  in some cases,  declines in
estimated market values as a result of the increased  competition.  There are no
assurances  that  these  competitive  pressures  will not  adversely  affect the
operations  and/or  market  value  of  the  Partnership's  remaining  investment
property in the future.

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

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

Inflation
---------

      The Partnership completed its thirteenth full year of operations in fiscal
1998 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.  Tenants at the
Partnership's remaining apartment property have short-term leases,  generally of
six-to-twelve months in duration.  Rental rates at this property can be adjusted
to keep pace with  inflation,  as market  conditions  allow,  as the  leases are
renewed or turned over.  Such increases in rental income would be expected to at
least partially offset the  corresponding  increases in Partnership and property
operating expenses caused by future inflation.

Item 8.  Financial Statements and Supplementary Data

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

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

      None.


<PAGE>

                                    PART III

Item 10.  Directors and Executive Officers of the Partnership

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

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

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

Bruce J. Rubin          President and Director              39        8/22/96
Terrence E. Fancher     Director                            45        10/10/96
Walter V. Arnold        Senior Vice President and
                          Chief Financial Officer           51        10/29/85
David F. Brooks         First Vice President and
                          Assistant Treasurer               56        1/15/85*
Timothy J. Medlock      Vice President and Treasurer        37        6/1/88
Thomas W. Boland        Vice President and Controller       36        12/1/91

*  The date of incorporation of the Managing General Partner.

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

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

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

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

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

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

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

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

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

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

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

      Based solely on its review of the copies of such forms received by it, the
Partnership  believes that, during the year ended September 30, 1998, all filing
requirements  applicable to the officers and  directors of the Managing  General
Partner and ten-percent beneficial holders were complied with.

Item 11.  Executive Compensation

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

      Regular  quarterly  distributions  to the  Partnership's  Unitholders were
suspended from fiscal 1990 through fiscal 1996. Distributions were reinstated at
an annual rate of 2.5% on remaining  invested  capital  effective  for the first
quarter of fiscal 1997.  Distributions were increased to an annual rate of 2.65%
for the fourth  quarter of fiscal 1997 and increased  again to an annual rate of
2.75%   effective  for  the  second  quarter  of  fiscal  1998.   However,   the
Partnership's Units of Limited  Partnership  Interest are not actively traded on
any organized exchange,  and no efficient secondary market exists.  Accordingly,
no accurate  price  information  is  available  for these  Units.  Therefore,  a
presentation of historical Unitholder total returns would not be meaningful.

Item 12.  Security Ownership of Certain Beneficial Owners and Management

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

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

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

Item 13.  Certain Relationships and Related Transactions

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

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

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

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

      All  distributable  cash,  as  defined,  for  each  fiscal  year  shall be
distributed quarterly in the ratio of 95% to the Limited Partners,  1.01% to the
General Partners and 3.99% to the Adviser, as an asset management fee. Under the
advisory  contract,  the Adviser has specific  management  responsibilities:  to
administer day-to-day operations of the Partnership,  and to report periodically
the performance of the Partnership to the Managing General Partner.  The Adviser
will be paid a basic management fee (3% of adjusted cash flow, as defined in the
Partnership Agreement) and an incentive management fee (2% of adjusted cash flow
subordinated to a noncumulative  annual return to the Limited  Partners equal to
6% based upon their adjusted  capital  contributions),  in addition to the asset
management  fee  described  above,  for  services  rendered.   Basic  and  asset
management fees totalling  $61,000 were earned by the Adviser for the year ended
September 30, 1998.

      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, 1998 is $88,000,  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 $8,000  (included in general and  administrative  expenses)  for managing the
Partnership's cash assets during the year ended September 30, 1998. 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 1998.  Current  Reports on Form 8-K dated  November 10, 1998 and
         November 17, 1998 were filed subsequent to year-end to report the sales
         of The Concourse  Retail Plaza and the Colony Square  Shopping  Center,
         respectively, and are hereby incorporated herein by reference.

    (c)  Exhibits

         See (a)(3) above.

    (d)  Financial Statement Schedules

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




<PAGE>

                                   SIGNATURES

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

                      PAINE WEBBER INCOME PROPERTIES SEVEN
                               LIMITED PARTNERSHIP


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



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



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



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

Dated:   January 13, 1999

Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following  persons on behalf of the  Partnership in
the capacity and on the dates indicated.




By:/s/ Bruce J. Rubin                           Date:  January 13, 1999
   -----------------------                             ----------------
   Bruce J. Rubin
   Director





By:/s/ Terrence E. Fancher                      Date:  January 13, 1999
   -----------------------                             ----------------
   Terrence E. Fancher
   Director


<PAGE>


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

            PAINE WEBBER INCOME PROPERTIES SEVEN LIMITED PARTNERSHIP


                                INDEX TO EXHIBITS
<TABLE>
<CAPTION>


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

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



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


(13)                Annual Reports to Limited Partners        No Annual Report for the year
                                                              ended September 30, 1998 has
                                                              been sent to the Limited Partners.
                                                              An Annual Report will be sent to
                                                              the Limited Partners subsequent to
                                                              this filing.

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

(27)                Financial Data Schedule                   Filed as last page of EDGAR
                                                              submission following the Financial
                                                              Statements and Financial Statement
                                                              Schedule as 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, 1998 and 1997      F-3

      Consolidated statements of operations for the years ended
        September 30, 1998, 1997 and 1996                                F-4

      Consolidated statements of changes in partners' capital (deficit)
        for the years ended September 30, 1998, 1997 and 1996            F-5

      Consolidated statements of cash flows for the years ended
         September 30, 1998, 1997 and 1996                               F-6

      Notes to consolidated financial statements                         F-7

      Schedule III - Real estate and accumulated depreciation            F-19

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

      Report of  independent auditors                                    F-20

      Combined balance sheets as of September 30, 1998 and 1997          F-21

      Combined  statements of operations and changes in venturers'
        capital (deficit) for the years ended September 30, 1998,
        1997 and 1996                                                    F-22

      Combined statements of cash flows for the years ended September
        30, 1998, 1997 and 1996                                          F-23

      Notes to combined financial statements                             F-24

      Schedule III - Real estate and accumulated depreciation            F-31


      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, 1998 and
1997,  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,  1998.  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, 1998
and 1997, and the consolidated  results of its operations and its cash flows for
each of the three years in the period ended  September  30, 1998,  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
December 18, 1998



<PAGE>


                      PAINE WEBBER INCOME PROPERTIES SEVEN
                               LIMITED PARTNERSHIP

                           CONSOLIDATED BALANCE SHEETS
                           September 30, 1998 and 1997
                     (In thousands, except per Unit amounts)

                                     ASSETS
                                                            1998         1997
                                                            ----         ----
Operating investment property:
   Land                                                  $    391    $    486
   Buildings and improvements                               2,421       2,990
   Equipment and fixtures                                      61          75
                                                         --------    --------
                                                            2,873       3,551
   Less accumulated depreciation                           (1,104)     (1,257)
                                                         --------    --------
                                                            1,769       2,294

Investments in unconsolidated ventures, at equity           1,239       1,406
Cash and cash equivalents                                   1,530       2,856
Escrowed funds                                                 76          72
Accounts receivable, net                                        8          26
Deferred expenses, net of accumulated amortization
   of $75 in 1997                                               -         103
Other assets                                                   34          32
                                                          -------    --------
                                                          $ 4,656    $  6,789
                                                          =======    ========

                        LIABILITIES AND PARTNERS' CAPITAL

Mortgage note payable                                     $ 1,550    $  1,614
Accounts payable and accrued expenses                          90          84
Accounts payable - affiliates                                   7           7
Accrued interest payable                                       14          15
Accrued real estate taxes                                      62          58
Other liabilities                                               4           9
                                                          --------    --------
      Total liabilities                                     1,727       1,787

Partners' capital:
  General Partners:
   Capital contributions                                        1           1
   Cumulative net loss                                       (312)       (365)
   Cumulative cash distributions                             (298)       (289)

  Limited Partners ($1,000 per Unit;
     37,969 Units issued):
   Capital contributions, net of offering costs            33,529      33,529
   Cumulative net loss                                    (11,063)    (16,058)
   Cumulative cash distributions                          (18,928)    (11,816)
                                                         --------    --------
      Total partners' capital                               2,929       5,002
                                                         --------    --------
                                                         $  4,656    $  6,789
                                                         ========    ========




                             See accompanying notes.


<PAGE>


                      PAINE WEBBER INCOME PROPERTIES SEVEN
                               LIMITED PARTNERSHIP

                      CONSOLIDATED STATEMENTS OF OPERATIONS
             For the years ended September 30, 1998, 1997 and 1996
                     (In thousands, except per Unit amounts)

                                                 1998        1997       1996
                                                 ----        ----       ----
Revenues:
   Rental income and expense recoveries      $    537     $   535     $   523
   Interest and other income                      431         273         250
                                             --------     -------     -------
                                                  968         808         773

Expenses:
   Loss on impairment of operating
     investment property                          418       1,000           -
   Mortgage interest                              252         188         195
   Property operating expenses                    102          92         103
   Depreciation expense                           107         154         139
   Real estate taxes                               84          80          77
   General and administrative                     285         287         285
   Bad debt expense                               147         150          89
   Management fee expense                          61          58           -
   Amortization expense                            26          13          13
                                             --------     -------     -------
                                                1,482       2,022         901
                                             --------     -------     -------
Operating loss                                   (514)     (1,214)       (128)

Partnership's share of unconsolidated
   ventures' income (losses)                      966          36        (276)

Partnership's share of gains on sale of
   operating investment properties              4,591       4,210           -

Venture partner's share of consolidated
   venture's operations                             5           1           -
                                             --------     -------     -------

Income (loss) before extraordinary gain         5,048       3,033        (404)

Partnership's share of extraordinary gain
   from settlement of debt obligations              -       7,463           -
                                             --------     -------     -------
Net income (loss)                            $  5,048     $10,496     $  (404)
                                             ========     =======     =======

Net income (loss) per Limited
  Partnership Unit:
   Income (loss) before extraordinary
     gain                                    $ 131.57     $ 79.04     $(10.53)
   Partnership's share of extraordinary
     gain from settlement of debt
     obligations                                    -      194.50           -
                                             --------     -------     -------
   Net income (loss)                         $ 131.57     $273.54     $(10.53)
                                             ========     =======     =======

Cash distributions per Limited
  Partnership Unit                           $ 187.30     $108.25     $     -
                                             ========     =======     =======

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

                             See accompanying notes.


<PAGE>


                      PAINE WEBBER INCOME PROPERTIES SEVEN
                               LIMITED PARTNERSHIP

        CONSOLIDATED STATEMENTS OF CHANGES IN PARTNERS' CAPITAL (DEFICIT)
              For the years ended September 30, 1998, 1997 and 1996
                                 (In thousands)

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


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

Net loss                                   (4)        (400)         (404)
                                      -------     --------     ---------

Balance at September 30, 1996            (756)        (621)       (1,377)

Net income                                110       10,386        10,496

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

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

Net income                                 53        4,995         5,048

Cash distributions                         (9)      (7,112)       (7,121)
                                      -------     --------     ---------

Balance at September 30, 1998         $  (609)    $  3,538     $   2,929
                                      =======     ========     =========

























                             See accompanying notes.


<PAGE>


                      PAINE WEBBER INCOME PROPERTIES SEVEN
                               LIMITED PARTNERSHIP

                      CONSOLIDATED STATEMENTS OF CASH FLOWS
             For the years ended September 30, 1998, 1997 and 1996
                Increase (Decrease) in Cash and Cash Equivalents
                                 (In thousands)
<TABLE>
<CAPTION>

                                                             1998        1997          1996
                                                             ----        ----          ----
<S>                                                          <C>         <C>           <C>

Cash flows from operating activities:
  Net income (loss)                                         $  5,048     $  10,496     $  (404)
  Adjustments to reconcile net income (loss) to
   net cash provided by operating activities:
   Loss on impairment of operating investment property           418         1,000           -
   Depreciation and amortization                                 133           167         152
   Amortization of deferred financing costs                       77             6           6
   Partnership's share of unconsolidated ventures'
     income (losses)                                            (966)          (36)        276
   Venture partner's share of consolidated venture's
     operations                                                   (5)           (1)          -
   Partnership's share of gains on sale
       of operating investment properties                     (4,591)       (4,210)          -
   Partnership's share of extraordinary gain
       from settlement of debt obligations                         -        (7,463)          -
   Changes in assets and liabilities:
     Escrowed funds                                               (4)            2           1
     Accounts receivable                                          18            81         (23)
     Accounts receivable - affiliates                              -             2           -
     Other assets                                                 (2)            -           -
     Accounts payable - affiliates                                 -             7           -
     Accounts payable and accrued expenses                         6            23          24
     Accrued interest payable                                     (1)            -          (1)
     Accrued real estate taxes                                     4            (1)         (1)
                                                            --------     ---------     -------
        Total adjustments                                     (4,913)      (10,423)        434
                                                            --------     ---------     -------
        Net cash provided by operating activities                135            73          30
                                                            --------     ---------     -------

Cash flows from investing activities:
  Additions to operating investment property                       -             -         (25)
  Distributions from unconsolidated joint ventures             5,724         1,890       1,862
                                                            --------     ---------     -------
        Net cash provided by investing activities              5,724         1,890       1,837
                                                            --------     ---------     -------

Cash flows from financing activities:
  Repayment of mortgage notes payable                            (64)          (57)        (52)
  Distributions to partners                                   (7,121)       (4,117)          -
                                                            --------     ---------     -------
        Net cash used in financing activities                 (7,185)       (4,174)        (52)
                                                            --------     ---------     --------

Net (decrease) increase in cash and cash equivalents          (1,326)       (2,211)      1,815

Cash and cash equivalents, beginning of year                   2,856         5,067       3,252
                                                            --------     ---------     -------
Cash and cash equivalents, end of year                      $  1,530     $   2,856     $ 5,067
                                                            ========     =========     =======

Cash paid during the year for interest                      $    176     $     182     $   190
                                                            ========     =========     =======
</TABLE>


                             See accompanying notes.


<PAGE>


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

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

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

      The  Partnership  originally  invested  the  net  proceeds  of the  public
offering,   through  five  joint  venture   partnerships,   in  seven  operating
properties,  comprised of five multi-family  apartment complexes,  one mixed-use
office and retail property and one shopping center. During fiscal 1997, three of
the multi-family  properties were sold. A fourth multi-family  property was sold
on December 18,  1997.  In addition,  subsequent  to the end of fiscal 1998,  on
November 10, 1998,  the retail  portion of the Concourse  property was sold. The
office  portion of this  mixed-use  property had been lost  through  foreclosure
proceedings  on December 17, 1992.  The shopping  center  property was also sold
subsequent to year-end,  on November 17, 1998. Subsequent to these transactions,
the  Partnership  has only one  remaining  real  estate  investment,  the Colony
Apartments. See Notes 4 and 5 for a description of these transactions and of the
remaining  real estate  investment.  The  Partnership  is currently  focusing on
potential disposition  strategies for the remaining investment in its portfolio.
Although no assurances can be given, it is currently  contemplated that the sale
of the Partnership's Colony Apartments  investment could be completed during the
first half of calendar year 1999.  The sale of the remaining  property  would be
followed by an orderly liquidation of the Partnership.

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, 1998 and 1997 and revenues
and expenses for each of the three years in the period ended September 30, 1998.
Actual results could differ from the estimates and assumptions used.

      As  of  September  30,  1998,  the  accompanying   consolidated  financial
statements  include  the  Partnership's   investments  in  three  joint  venture
partnerships  (four at  September  30,  1997)  which  own  operating  investment
properties.  Except  as  described  below,  the  Partnership  accounts  for  its
investments  in joint venture  partnerships  using the equity method because the
Partnership does not have a voting control  interest in the ventures.  Under the
equity  method,  the venture is carried at cost  adjusted for the  Partnership's
share of the venture's  earnings or losses and  distributions.  See Note 5 for a
description of these unconsolidated joint venture partnerships.

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

      The operating  investment property owned by the consolidated joint venture
is carried at cost,  net of  accumulated  depreciation  and  certain  guaranteed
payments, or an amount less than cost if indicators of impairment are present in
accordance  with  Statement of Financial  Accounting  Standards  (SFAS) No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
Be Disposed Of," which was adopted in fiscal 1997. SFAS 121 requires  impairment
losses to be recorded on long-lived assets used in operations when indicators of
impairment are present and the undiscounted cash flows estimated to be generated
by those  assets are less than the  assets'  carrying  amount.  The  Partnership
generally assesses indicators of impairment by a review of independent appraisal
reports on the operating  investment  property.  Such  appraisals  make use of a
combination of certain generally accepted valuation techniques, including direct
capitalization,  discounted  cash flows and comparable  sales  analysis.  During
fiscal 1997, the  independent  appraisal of the Concourse  operating  investment
property indicated that certain operating assets,  consisting of land, buildings
and improvements,  and equipment and fixtures were impaired.  In accordance with
SFAS No. 121, the  consolidated  Concourse joint venture recorded a reduction in
the net carrying  value of such assets  amounting to $1,000,000  relating to the
land ($212,000), buildings and improvements ($1,304,000), equipment and fixtures
($32,000) and  accumulated  depreciation  ($548,000).  During  fiscal 1998,  the
consolidated Concourse joint venture recorded an additional reduction in the net
carrying value of such assets amounting to $418,000  relating to land ($95,000),
buildings and  improvements  ($569,000),  equipment  and fixtures  ($14,000) and
accumulated  depreciation  ($260,000).  The resulting net carrying value of such
assets of $1,769,000  equals the net proceeds  after closing costs realized from
the sale of the Concourse property on November 10, 1998 (see Note 4).

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

      Deferred  expenses at September 30, 1997 included leasing  commissions and
deferred  refinancing  costs related to The Concourse  Retail Plaza. The leasing
commissions were being amortized on a straight-line  basis over the terms of the
related  leases.  The  deferred  refinancing  costs were being  amortized on the
effective  interest  method.  Amortization  of  deferred  refinancing  costs  is
included in  interest  expense on the  accompanying  statements  of  operations.
Unamortized deferred expenses were written off in fiscal 1998 in connection with
the subsequent sale of The Concourse Retail Plaza (see Note 4).

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

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

      The  cash  and  cash  equivalents  and  escrowed  funds  appearing  on the
accompanying  balance sheets  represent  financial  instruments  for purposes of
Statement of Financial  Accounting  Standards No. 107,  "Disclosures  about Fair
Value  of  Financial   Instruments."   The  carrying   amount  of  these  assets
approximates  their  fair  value as of  September  30,  1998 and 1997 due to the
short-term maturities of these instruments.  The mortgage note payable is also a
financial  instrument  for  purposes of SFAS 107. The fair value of the mortgage
note payable is  estimated  using  discounted  cash flow  analysis  based on the
current market rate for a similar type of borrowing arrangement (see Note 6).

      No provision for income taxes has been made in the accompanying  financial
statements as the liability  for such taxes is that of the  individual  partners
rather  than the  Partnership.  Upon sale or  disposition  of the  Partnership's
investments,  the taxable gain or the tax loss incurred will be allocated  among
the partners. The principal difference between the Partnership's accounting on a
federal income tax basis and the accompanying  financial  statements prepared in
accordance with generally accepted  accounting  principals (GAAP) relates to the
methods used to  determine  the  depreciation  expense on the  consolidated  and
unconsolidated operating investment properties. As a result of the difference in
depreciation,  the gains  calculated  upon the sale of the operating  investment
properties for GAAP purposes differ from those calculated for federal income tax
purposes.

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

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

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

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

      All  distributable  cash,  as  defined,  for  each  fiscal  year  shall be
distributed quarterly in the ratio of 95% to the Limited Partners,  1.01% to the
General  Partners  and 3.99% to the  Adviser,  as an asset  management  fee. The
Partnership  reinstated its quarterly distribution payments in fiscal 1997. Such
distributions  had been suspended since 1990. Under the advisory  contract,  the
Adviser has  specific  management  responsibilities:  to  administer  day-to-day
operations of the Partnership, and to report periodically the performance of the
Partnership to the Managing  General  Partner.  The Adviser will be paid a basic
management  fee  (3% of  adjusted  cash  flow,  as  defined  in the  Partnership
Agreement)   and  an  incentive   management  fee  (2%  of  adjusted  cash  flow
subordinated to a noncumulative  annual return to the Limited  Partners equal to
6% based upon their adjusted  capital  contributions),  in addition to the asset
management fee described above, for services rendered.  The Adviser earned basic
and asset  management  fees  totalling  $61,000  and $58,000 for the years ended
September 30, 1998 and 1997,  respectively.  No basic or asset  management  fees
were earned by the Adviser for the year 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, 1998, 1997 and 1996 is $88,000, $86,000 and $81,000, 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 $8,000, $17,000 and $13,000 (included in general and administrative expenses)
for managing the  Partnership's  cash assets during fiscal 1998,  1997 and 1996,
respectively.

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

      Operating  investment  property at September 30, 1998 and 1997  represents
the fixed assets of West Palm Beach  Concourse  Associates,  a joint  venture in
which the Partnership has a controlling  interest.  The Partnership  acquired an
interest  in West Palm Beach  Concourse  Associates  (the  "Joint  Venture"),  a
Florida  general  partnership  organized on July 31, 1985 in  accordance  with a
joint venture  agreement  between the Partnership and Palm Beach Lake Associates
(co-venturer), to own and operate The Concourse Towers I and II and Retail Plaza
(the  "Properties").  The Properties  originally  consisted of two office towers
with 140,000  square feet of rentable  space and a 30,473  rentable  square foot
retail plaza located in West Palm Beach,  Florida.  On September  14, 1990,  the
co-venture partner of West Palm Beach Concourse  Associates assigned its general
partnership  interest to Seventh Income  Properties  Fund,  Inc.  ("SIPF"),  the
Managing  General Partner of the  Partnership,  in return for a release from any
further  obligations  or duties  called for under the terms of the joint venture
agreement.  As a result, the Partnership assumed control over the affairs of the
joint venture.

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

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

      Subsequent  to the end of fiscal 1998,  on November  10,  1998,  West Palm
Beach Concourse Associates sold its operating investment property, The Concourse
Retail  Plaza,  to an unrelated  party for $2 million.  The sale  generated  net
proceeds of  approximately  $225,000,  after the  assumption of the  outstanding
first  mortgage  loan  of   approximately   $1,539,000,   accrued   interest  of
approximately  $4,000, net closing proration adjustments of approximately $2,000
and closing costs of approximately  $230,000.  The Partnership  received 100% of
the net proceeds in accordance  with the terms of the joint  venture  agreement.
The mortgage  loan,  which was  assumable,  contains a prohibition on prepayment
through January 10, 2000. As a result,  any sale transaction  completed prior to
such date had to involve an  assumption  of this  mortgage loan which carries an
interest rate of 11.12% per annum. The sale price was discounted to reflect this
above-market interest rate.  Nonetheless,  the Managing General Partner believed
that a current sale was in the best interests of the Limited Partners.

      The  following is a summary of property  operating  expenses for the years
ended September 30, 1998, 1997 and 1996 (in thousands):

                                                 1998       1997         1996
                                                 ----       ----         ----
     Property operating expenses:
       Repairs and maintenance                $    42     $    50      $   59
       Utilities                                    4           5           5
       Insurance                                    5           6           6
       General and administrative                  36          16          18
       Management fees                             15          15          15
                                              -------     -------      ------
                                              $   102     $    92      $  103
                                              =======     =======      ======

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

      At  September  30,  1998,   the   Partnership   had   investments  in  two
unconsolidated  joint  ventures  (three  at  September  30,  1997)  which  owned
operating  investment  properties.  On December  18,  1997,  the Daniel  Meadows
Partnership sold the The Meadows on the Lake  Apartments.  Subsequent to the end
of fiscal 1998, on November 17, 1998, the Chicago Colony Square  Associates sold
the Colony Square Shopping Center. HMF Associates,  a joint venture in which the
Partnership  had an  interest,  owned three  multi-family  apartment  properties
located in the Seattle,  Washington  area. On June 27, 1997, HMF Associates sold
the properties known as The Hunt Club Apartments and The Marina Club Apartments,
and then, on September 9, 1997, HMF Associates sold the remaining property known
as The Enchanted Woods  Apartments.  Subsequent to the sale of Enchanted  Woods,
HMF Associates was liquidated.  See below for a further discussion of these sale
transactions.  The unconsolidated joint ventures are accounted for on the equity
method in the Partnership's financial statements.

      Condensed combined financial statements of these joint ventures follow:

                        Condensed Combined Balance Sheets
                           September 30, 1998 and 1997
                                 (in thousands)
                                     Assets                1998        1997
                                                           ----        ----
   Current assets                                        $  3,193     $ 3,445
   Operating investment properties, net                    17,840      22,481
   Other assets, net                                          135         238
                                                         --------     -------
                                                         $ 21,168     $26,164
                                                         ========     =======

                   Liabilities and Partners' Capital (Deficit)
                   -------------------------------------------

   Current liabilities                                   $  3,434     $ 3,069
   Long-term debt, less current portion                    17,138      22,185
   Partnership's share of combined capital (deficit)          795       1,167
   Co-venturers' share of combined capital (deficit)         (199)       (257)
                                                         --------     -------
                                                         $ 21,168     $26,164
                                                         =========    =======

                   Reconciliation of Partnership's Investment
                   ------------------------------------------


                                                             1998        1997
                                                             ----        ----

   Partnership's share of combined capital
     (deficit), as shown above                           $    795    $  1,167
   Prepaid distributions to Partnership                         -         (76)
   Partnership's share of distributions payable
      to venturers                                            427         168
   Excess basis due to investment in ventures, net (1)         17         147
                                                         --------    --------
     Investment in unconsolidated ventures, at equity    $  1,239    $  1,406
                                                         ========    ========

    (1) At September 30, 1998 and 1997, the  Partnership's  investment  exceeded
        its  share  of the  joint  venture  partnerships'  capital  accounts  by
        approximately  $17,000 and $147,000,  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.

                    Condensed Combined Summary of Operations
             For the years ended September 30, 1998, 1997 and 1996
                                 (in thousands)

                                                1998         1997        1996
                                                ----         ----        ----

   Rental revenues and expense recoveries    $  7,348   $  10,391    $ 10,372
   Interest and other income                      315         466         521
   Gain on insurance settlement                     -           -         197
                                             --------   ---------    --------
                                                7,663      10,857      11,090

   Mortgage interest                            1,532       3,652       3,961
   Property operating expenses                  3,642       5,539       5,609
   Depreciation and amortization                1,109       1,649       1,780
                                             --------   ---------    --------
                                                6,283      10,840      11,350
                                             --------   ---------    --------
   Operating income (loss)                      1,380          17        (260)

   Gain on sale of operating investment
     properties                                 4,992       4,291           -
   Income (loss) before extraordinary gain      6,372       4,308        (260)

   Extraordinary gain from settlement of
    debt obligations                                -       7,552           -
                                             --------   ---------    --------
   Net income (loss)                         $  6,372   $  11,860    $   (260)
                                             ========   =========    ========

   Net income (loss):
     Partnership's share of combined
       net income (loss)                     $ 5,687    $  11,746    $   (269)
     Co-venturers' share of combined
       net income (loss)                         685          114           9
                                             -------    ---------    --------

                                             $ 6,372    $  11,860    $   (260)
                                             =======    =========    ========

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

                                                1998        1997         1996
                                                ----        ----         ----
   Partnership's share of combined net
     income (loss), as shown above           $ 5,687    $  11,746    $   (269)
   Amortization of excess basis                 (130)         (37)         (7)
                                             -------    ---------    --------
   Partnership's share of unconsolidated
    ventures' net income (losses)            $ 5,557    $  11,709    $   (276)
                                             =======    =========    ========
<PAGE>

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

   Partnership's share of unconsolidated
     ventures' income (losses)               $   966    $      36    $   (276)
   Partnership's share of gains on sale
     of operating investment properties        4,591        4,210           -
   Partnership's share of extraordinary
     gain on settlement of debt
     obligations                                   -        7,463           -
                                             -------    ---------    --------
                                             $ 5,557    $  11,709    $   (276)
                                             =======    =========    ========

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

      Investments in  unconsolidated  joint ventures,  at equity, on the balance
sheet  is  comprised  of  the  following   equity  method  carrying  values  (in
thousands):
                                                            1998         1997
                                                            ----         ----

   Chicago Colony Apartments Associates                  $     11    $     77
   Chicago Colony Square Associates                         1,228       1,256
   Daniel Meadows Partnership                                   -          73
                                                         --------    --------
                                                         $  1,239    $  1,406
                                                         ========    ========

      The Partnership  received cash distributions from the unconsolidated joint
ventures during fiscal 1998, 1997 and 1996 as set forth below (in thousands):

                                                1998        1997         1996
                                                ----        ----         ----

   Chicago Colony Apartments Associates      $  1,100     $   774     $ 1,517
   Chicago Colony Square                          142           -           -
   Daniel Meadows Partnership                   4,482         567         345
   HMF Associates                                   -         549           -
                                             --------     -------     -------
                                             $  5,724     $ 1,890     $ 1,862
                                             ========     =======     =======

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

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

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

      The  aggregate  cash  investment by the  Partnership  for its interest was
approximately  $11,848,000 (including an acquisition fee of $687,500 paid to the
Adviser). On August 1, 1995, the $16.75 million non-recourse wraparound mortgage
note secured by the Colony  Apartments  property was refinanced with a new $17.4
million  non-recourse  mortgage note at a fixed interest rate of 7.6% per annum.
The joint venture received a discount of approximately $1,070,000 on the pay-off
of the  wraparound  mortgage loan under the terms of the loan  agreement and did
not  require  any  contributions  from the  venture  partners  to  complete  the
refinancing  transaction.  The  discount  was  recorded  by  the  venture  as an
extraordinary  gain  on  settlement  of debt  obligation.  The  Partnership  was
allocated 100% of such  extraordinary  gain. As a condition of the new loan, the
Colony  Apartments  joint venture was required to establish an escrow account in
the amount of $685,000 for the  completion of agreed upon repairs,  $156,600 for
capital replacement reserves and $600,000 for real estate taxes. The outstanding
balance of the first mortgage loan, which is scheduled to mature in August 2002,
was $16,589,000 as of September 30, 1998.

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

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

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

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

      The Joint Venture originally 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 payable to
this  affiliated  manager was 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,  1998  totalled  approximately
$275,000.  On April 1, 1997,  management of the property was  transferred  to an
unrelated third party.

      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 was 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  $937,000 at September 30, 1998.
This mortgage loan was scheduled to mature in November 2006.

      Subsequent to the end of fiscal 1998, on November 17, 1998, Chicago Colony
Square  Associates  sold its operating  investment  property,  the Colony Square
Shopping Center to an unrelated  party for $2.3 million.  The sale generated net
proceeds of  approximately  $1,014,000,  after the repayment of the  outstanding
first mortgage loan of approximately $864,000, accrued interest of approximately
$13,000   (including  a  prepayment   penalty  of  $9,000),   closing  proration
adjustments  of  approximately  $221,000  and  closing  costs  of  approximately
$188,000.  The Partnership  received 100% of the net proceeds in accordance with
the terms of the joint venture agreement.

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

      On December 18, 1997,  the Joint  Venture  sold the  operating  investment
property to an unrelated  third party for $9,525,000.  The Partnership  received
net  proceeds of  approximately  $4.4 million  after paying off the  outstanding
mortgage loan of  approximately  $4.7 million and closing costs of approximately
$310,000.  The Partnership  received 100% of the net proceeds in accordance with
the terms of the Joint Venture Agreement. On February 13, 1998, the net proceeds
from the sale of The Meadows property was distributed to the Limited Partners of
record on  December  18,  1997 in the  amount of  $116.39  per  original  $1,000
investment.

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

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

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

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

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

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

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 was secured by the venture's operating investment property. At September 30,
1998 and 1997, mortgage note payable consists of the following (in thousands):

                                                             1998       1997
                                                             ----       ----

     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 $1,685 as
     of  September  30,  1998.                              $ 1,550   $ 1,614
                                                            =======   =======
<PAGE>


      In  accordance  with  the  Concourse  mortgage  loan  agreements,  certain
insurance premiums and real estate taxes were required to be held in escrow. The
balance of escrowed  funds on the  accompanying  balance sheets at September 30,
1998 and 1997 consist of such escrowed  insurance premiums and real estate taxes
in the aggregate amounts of $76,000 and $72,000,  respectively.  As discussed in
Note 4,  subsequent to year-end,  on November 10, 1998, the Concourse  operating
property was sold and this mortgage loan was assumed by the buyer.

7.  Leases
    ------

      The Partnership's  consolidated  joint venture,  West Palm Beach Concourse
Associates,  derived 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  were  as  follows  (in
thousands):

            1999          $    334
            2000               298
            2001               184
            2002               134
            2003                74
            Thereafter       1,173
                          --------
                          $  2,197
                          ========

      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.  No
percentage rents were received during fiscal 1998, 1997 and 1996.

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

      On November 13, 1998, the Partnership  distributed $194,000 to the Limited
Partners,  $2,000 to the General  Partners and $8,000 to the Adviser as an asset
management  fee for the quarter  ended  September  30,  1998.  In  addition,  on
December 15, 1998 the Partnership  distributed  $1,253,000,  or $33 per original
$1,000  investment,  to the Limited Partners which represented the Partnership's
share of the proceeds from the sales of the Concourse  Retail Plaza (see Note 4)
and the Colony  Square  Shopping  Center (see Note 5) and the release of certain
cash reserves that exceeded 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, 1998
                                 (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.        $1,550       $ 742   $4,518    $(2,387)     $391     $2,482     $2,873   $1,104     1979-80      7/31/85   5-30 yrs.
            ======       =====   ======    =======      ====     ======     ======   ======
Notes:
(A) The  aggregate  cost of real estate owned at September  30, 1998 for Federal income tax purposes is approximately $5,416.
(B) See Notes 4 and 6 of Notes to Financial  Statements.
(C) Reconciliation of real estate owned:
                                                                 1998           1997           1996
                                                                 ----           ----           ----

      Balance at beginning of year                          $   3,551       $  5,099       $  5,074
      Acquisitions and improvements                                 -              -             25
      Write off due to permanent impairment (see Note 2)         (678)        (1,548)             -
                                                            ---------       --------       --------
      Balance at end of year                                $   2,873       $  3,551       $  5,099
                                                            =========       ========       ========

(D) Reconciliation of accumulated depreciation:

      Balance at beginning of year                          $   1,257       $  1,651       $  1,512
      Depreciation expense                                        107            154            139
      Write off due to permanent impairment (see Note 2)         (260)          (548)             -
                                                            ---------       --------       --------
      Balance at end of year                                $   1,104       $  1,257       $  1,651
                                                            =========       ========       ========

(E)Costs  removed   subsequent  to  acquisition   include   certain   impairment writedowns  recognized  in  fiscal  1998 and 1997
   (see  Note 2),  as well as certain guaranteed payments received from the co-venturer of the consolidated joint venture.

</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, 1998 and 1997, and the related  combined  statements of operations
and  changes in  venturers'  capital  (deficit),  and cash flows for each of the
three years in the period ended September 30, 1998. 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, 1998 and 1997,  and the combined  results of their
operations  and their cash flows for each of the three years in the period ended
September 30, 1998, 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 17, 1998


<PAGE>


                           COMBINED JOINT VENTURES OF
            PAINE WEBBER INCOME PROPERTIES SEVEN LIMITED PARTNERSHIP

                             COMBINED BALANCE SHEETS
                           September 30, 1998 and 1997
                                 (In thousands)

                                     Assets
                                                           1998        1997
                                                           ----        ----

Current assets:
   Cash and cash equivalents                             $  2,067    $  1,844
   Escrow deposits                                          1,057       1,302
   Other current assets                                        69         299
                                                         --------    --------
      Total current assets                                  3,193       3,445

Operating investment properties
   Land                                                     3,861       4,563
   Buildings, improvements and equipment                   28,547      35,763
                                                         --------    --------
                                                           32,408      40,326
   Less accumulated depreciation                          (14,568)    (17,845)
                                                         --------    --------
      Net operating investment properties                  17,840      22,481

Deferred expenses, net of accumulated amortization
   of $108 ($120 in 1997)                                     135         173
Other assets                                                    -          65
                                                         --------    --------
                                                         $ 21,168    $ 26,164
                                                         ========    ========

                       Liabilities and Venturers' Capital

Current liabilities:
   Current portion of long-term debt                     $    388    $    418
   Real estate taxes payable                                1,952       1,872
   Accounts payable and accrued liabilities                    73         144
   Accounts payable - affiliates                                -           3
   Accrued interest                                           116         143
   Tenant security deposits                                   281         273
   Distributions payable to venturers                         624         216
                                                         --------    --------
      Total current liabilities                             3,434       3,069

Long-term debt                                             17,138      22,185

Venturers' capital                                            596         910
                                                         --------    --------
                                                         $ 21,168    $ 26,164
                                                         ========    ========






                             See accompanying notes.


<PAGE>


                           COMBINED JOINT VENTURES OF
            PAINE WEBBER INCOME PROPERTIES SEVEN LIMITED PARTNERSHIP

  COMBINED STATEMENTS OF OPERATIONS AND CHANGES IN VENTURERS' CAPITAL (DEFICIT)
             For the years ended September 30, 1998, 1997 and 1996
                                 (In thousands)

                                                1998        1997        1996
                                                ----        ----        ----

Revenues:
   Rental revenues and expense recoveries    $  7,348    $ 10,391    $ 10,372
   Interest and other income                      315         466         521
   Gain on insurance settlement                     -           -         197
                                             --------    --------    --------
                                                7,663      10,857      11,090

Expenses:
   Interest expense                             1,532       3,652       3,961
   Depreciation expense                         1,106       1,635       1,766
   Real estate taxes                            1,624       1,835       1,830
   Repairs and maintenance                        383         741         780
   Management fees                                234         537         541
   Utilities                                      273         607         620
   Salaries and related expenses                  769       1,026         979
   General and administrative                     359         793         859
   Amortization expense                             3          14          14
                                             --------    --------    --------
                                                6,283      10,840      11,350
                                             --------    --------    --------
Operating income (loss)                         1,380          17        (260)

Gains on sale of operating
  investment properties                         4,992       4,291           -
                                             --------    --------    --------

Income (loss) before extraordinary gain         6,372       4,308        (260)

Extraordinary gain from settlement of
  debt obligations                                  -       7,552           -

Net income (loss)                               6,372      11,860        (260)

Distributions to venturers                     (6,686)     (2,049)     (1,254)

Contributions from partners                         -         391           -

Venturers' capital (deficit),
  beginning of year                               910      (9,292)     (7,778)
                                             --------    --------    --------

Venturers' capital (deficit), end of year    $    596    $    910    $ (9,292)
                                             ========    ========    ========











                             See accompanying notes.


<PAGE>

<TABLE>

                           COMBINED JOINT VENTURES OF
            PAINE WEBBER INCOME PROPERTIES SEVEN LIMITED PARTNERSHIP
                        COMBINED STATEMENTS OF CASH FLOWS
             For the years ended September 30, 1998, 1997 and 1996
                Increase (Decrease) in Cash and Cash Equivalents
                                 (In thousands)
<CAPTION>

                                                            1998        1997           1996
                                                            ----        ----           ----
<S>                                                         <C>         <C>           <C>

Cash flows from operating activities:
  Net income (loss)                                         $  6,372    $ 11,860      $   (260)
  Adjustments to reconcile net income (loss) to
    net cash provided by operating activities:
   Gains on sale of operating investment properties           (4,992)     (4,291)            -
   Extraordinary gain from settlement of debt obligations          -      (7,552)            -
   Depreciation and amortization                               1,109       1,649         1,780
   Amortization of deferred financing costs                       90          46            69
   Interest added to long-term debt principal                      -         770         2,053
   Interest on loans from venturers                                -          25            17
   Changes in assets and liabilities:
     Escrow deposits                                             245        (406)        1,129
     Accounts receivable                                           -          10             -
     Prepaid distribution to venturer                              -           7             -
     Other current assets                                          4          14            70
     Deferred expenses                                             -           -           (13)
     Other assets                                                 10         (17)           25
     Accounts payable and accrued liabilities                    (71)        (87)         (194)
     Accounts payable - affiliates                                (3)        (30)           28
     Real estate taxes payable                                    80         690          (753)
     Accrued interest                                            (27)          1            (5)
     Tenant security deposits                                      8         (36)           10
     Other current liabilities                                     -         (30)            -
                                                            --------    --------      --------
        Total adjustments                                     (3,547)     (9,237)        4,216
                                                            --------    --------      --------
        Net cash provided by operating activities              2,825       2,623         3,956
                                                            --------    --------      --------

Cash flows from investment activities:
  Additions to operating investment properties                  (687)       (800)       (1,188)
  Proceeds from sale of operating investment properties        9,214      17,013             -
                                                            --------    --------      --------
        Net cash provided by (used in) investing
          activities                                           8,527      16,213        (1,188)
                                                            --------    --------      --------

Cash flows from financing activities:
  Increase in deferred financing costs                             -           -           (37)
  Repayment of long-term debt                                 (5,077)    (16,909)       (1,412)
  Repayment of loans to venturers                                  -           -          (100)
  Distributions to venturers                                  (6,052)     (2,041)       (1,750)
                                                            --------    --------      --------
        Net cash used in financing activities                (11,129)    (18,950)       (3,299)
                                                            --------    --------      --------

Net increase (decrease) in cash and cash equivalents             223        (114)         (531)
Cash and cash equivalents, beginning of year                   1,844       1,958         2,489
                                                            --------    --------      --------
Cash and cash equivalents, end of year                      $  2,067    $  1,844      $  1,958
                                                            ========    ========      ========
Cash paid during the year for interest                      $  1,469    $  2,798      $  1,827
                                                            ========    ========      ========

</TABLE>

                             See accompanying notes.


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


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

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

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

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

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

      On June 27, 1997,  HMF Associates  sold the  properties  known as The Hunt
Club  Apartments  located in Seattle,  Washington and The Marina Club Apartments
located in Des Moines,  Washington to an unrelated third party for approximately
$5.3  million and $3.1  million,  respectively.  PWIP 7 received net proceeds of
approximately  $288,000  in  connection  with the sale of these  two  assets  in
accordance  with a discounted  mortgage loan payoff  agreement  reached with the
lender in April 1997. On September 9, 1997,  HMF  Associates  sold its remaining
asset, the property known as The Enchanted Woods  Apartments  located in Federal
Way,  Washington,  to an unrelated third party for  approximately  $9.2 million.
PWIP 7 received net proceeds of  approximately  $261,000 in connection  with the
sale in accordance with the discounted mortgage loan payoff agreement.  See Note
5 for a further discussion of these  transactions.  On December 18, 1997, Daniel
Meadows Partnership sold its operating investment  property,  The Meadows on the
Lakes  Apartments,  located in Birmingham,  Alabama,  to an unrelated  party for
$9.525 million.  The sale generated net proceeds of  approximately  $4.4 million
after repayment of the  outstanding  first mortgage loan of  approximately  $4.7
million and closing costs of approximately $310,000. PWIP 7 received 100% of the
net  proceeds  in  accordance  with the  terms of the joint  venture  agreement.
Subsequent to year-end,  on November 17, 1998,  Chicago Colony Square Associates
sold its operating investment property,  the Colony Square Shopping Center to an
unrelated   party  for  $2.3  million.   The  sale  generated  net  proceeds  of
approximately $1,014,000,  after the repayment of the outstanding first mortgage
loan of  approximately  $864,000,  accrued  interest  of  approximately  $13,000
(including a prepayment  penalty of $9,000),  closing  proration  adjustments of
approximately  $221,000  and  closing  costs  of  approximately   $188,000.  The
Partnership  received 100% of the net proceeds in  accordance  with the terms of
the joint venture agreement.

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

      The  accompanying  financial  statements have been prepared on the accrual
basis of accounting in accordance with generally accepted accounting  principles
which require  management  to make  estimates  and  assumptions  that affect the
reported amounts of assets and liabilities and disclosures of contingent  assets
and  liabilities as of September 30, 1998 and 1997 and revenues and expenses for
each of the three years in the period ended  September 30, 1998.  Actual results
could differ from the estimates and assumptions used.

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

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

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

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

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

      Deferred  expenses  consist  primarily  of  loans  fees  which  are  being
amortized  using the  effective  interest  method  over the terms of the related
loans.  Such  amortization  expense  is  included  in  interest  expense  on the
accompanying statements of operations.

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

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

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

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

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

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

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

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

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

      In  accordance  with the mortgage loan  agreements  of the Combined  Joint
Ventures,  certain  building  repair  reserves,  capital  improvement  reserves,
insurance  premiums and real estate taxes are required to be held in escrow. The
escrow  deposit  amounts on the balance sheet at September 30, 1998 and 1997 are
principally comprised of such escrowed amounts.

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

      The  carrying  amounts of cash and cash  equivalents  and escrow  deposits
approximate  their  fair  values as of  September  30,  1998 and 1997 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.
<PAGE>

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

      The joint venture owned and operated the Colony Square Shopping  Center, a
39,572 gross leasable  square foot shopping  center,  located in Mount Prospect,
Illinois.  As discussed in Note 1, on November 17, 1998,  Chicago  Colony Square
Associates  sold the  Colony  Square  Shopping  Center and  distributed  the net
proceeds to PWIP7.

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

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

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

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

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

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

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

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

      The agreements generally provide that taxable income and tax losses (other
than those  resulting from sales or other  dispositions of the projects) will be
allocated  between PWIP7 and the  co-venturers  in the same  proportions as cash
flow distributed or distributable  for such year, except for certain items which
are  specifically  allocated to the  partners as set forth in the joint  venture
agreements. Internal Revenue Service regulations require partnership allocations
of income and loss to the  respective  partners  to have  "substantial  economic
effect".  For certain of the joint ventures this  requirement  resulted in joint
venture  losses for the years  ended  September  30,  1998,  1997 and 1996 being
allocated  in a  manner  different  from  that  provided  in the  joint  venture
agreements. Allocations of income and loss for financial reporting purposes have
been made in accordance  with the actual  allocations  of taxable income and tax
loss.

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

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

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

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

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

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

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

      The Combined Joint Ventures  originally  entered into property  management
agreements  with  affiliates  of the  co-venturers,  cancellable  at  the  joint
ventures' option upon the occurrence of certain events. The original  management
fees were generally equal to 5% of gross receipts, as defined in the agreements.
As of April 1, 1997, the management for Chicago Colony Apartments Associates and
Chicago Colony Square Associates was transferred to an unrelated third party.

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

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

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

     Long-term debt at September 30, 1998 and 1997 consists of the following (in
thousands):

                                                          1998          1997
                                                          ----          ----

     7.6% mortgage loan,  secured by the
     Colony Apartments property, payable
     in monthly installments,  including
     principal   and  interest  of  $130
     through  August 1,  2002,  at which
     time    the     final     principal
     installment  of  $15,277  plus  any
     accrued  interest is due.  The fair
     value   of   this   note    payable
     approximated  its carrying value as
     of  September  30,  1998 and  1997.               $16,589        $16,873

     9-1/2%  mortgage  loan,  secured by
     the Colony Square  Shopping  Center
     property,    payable   in   monthly
     installments of $14 through October
     1, 2006 with the remaining  balance
     ($10,581)   due  and   payable   on
     November 1, 2006. The fair value of
     this note payable  approximated its
     carrying  value as of September 30,
     1998 and 1997. This loan was repaid
     in full  subsequent  to year-end in
     connection   with  a  sale  of  the
     operating  investment property (see
     Note 1).                                              937          1,011

     First mortgage loan, secured by the
     Meadows  on  the  Lake   Apartments
     property.  Monthly  installments of
     principal,   based  on  a   25-year
     amortization      schedule,     and
     interest, based on LIBOR plus 2.25%
     (7.90625% at September  30,  1997),
     were  due   through   maturity   on
     February 5, 2000. The fair value of
     this note payable  approximated its
     carrying  value as of September 30,
     1997.  This loan was repaid in full
     in fiscal 1998 in connection with a
     sale  of the  operating  investment
     property  (see  Note  1).                               -          4,719
                                                       -------        -------

                                                        17,526         22,603

      Less current portion                                (388)          (418)
                                                       -------        -------
                                                       $17,138        $22,185
                                                       =======        =======

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

            1999           $    388
            2000                420
            2001                455
            2002             15,703
            2003                118
            Thereafter          442
                           --------
                           $ 17,526
                           ========

6.  Leases
    ------

      Chicago Colony Square  Associates  leased  shopping center space to retail
tenants under  operating  leases.  Lease  effective  dates ranged from 12 to 192
months.  Approximate  future  minimum  payments  due to be received by the joint
venture under  non-cancelable  operating  lease  agreements  were as follows (in
thousands):

            1999      $    521
            2000           439
            2001           401
            2002           184
            2003            11
                      --------
                      $  1,557
                      ========

<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, 1998
                                 (In thousands)
<CAPTION>


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

COMBINED JOINT VENTURES:

Apartment
 Complex
Mount
 Prospect,
IL           $16,589    $ 3,132 $25,378      $  889        $ 2,875  $26,524   $29,399   $13,759    1975       12/27/85  5-30 yrs.

Shopping
 Center
Mount
 Prospect,
IL               937      1,014   1,883         112            986    2,023     3,009       809    1978       12/27/85  5-30 yrs.
             -------    ------- -------      ------        -------  -------   ------    -------
             $17,526    $ 4,146 $27,261      $1,001        $ 3,861  $28,547   $32,408   $14,568
             =======    ======= =======      ======        =======  =======   =======   =======
Notes
(A) The  aggregate  cost of real estate owned at September  30, 1998 for Federal income  tax  purposes  is  approximately  $34,955.
(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:
                                                           1998           1997          1996
                                                           ----           ----          ----


      Balance at beginning of year                     $ 40,326       $ 58,104       $56,916
      Acquisitions and improvements                         687            800         1,188
      Reductions due to dispositions                     (8,605)       (18,578)            -
                                                      ---------       --------       -------
      Balance at end of year                          $  32,408       $ 40,326       $58,104
                                                      =========       ========       =======

(D) Reconciliation of accumulated depreciation:

      Balance at beginning of year                    $  17,845       $ 22,085       $20,319
      Depreciation expense                                1,106          1,635         1,766
      Decreases due to dispositions                      (4,383)        (5,875)            -
                                                      ---------       --------       -------
      Balance at end of year                          $  14,568       $ 17,845       $22,085
                                                      =========       ========       =======

</TABLE>