FORM 10-Q

                       SECURITIES AND EXCHANGE COMMISSION

                             Washington, D.C. 20549

                    (X) QUARTERLY REPORT PURSUANT TO SECTION
                         13 OR 15 (d) OF THE SECURITIES
                              EXCHANGE ACT of 1934

               For the quarterly period ended September 30, 2004
   --------------------------------------------------------------------------

                                       OR

             ( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d)
                     OF THE SECURITIES EXCHANGE ACT of 1934

For the transition period from ______________________ to _______________________


                             Commission file number
                                     0-19140
                     ---------------------------------------


                            CNL Income Fund VII, Ltd.
--------------------------------------------------------------------------------
             (Exact name of registrant as specified in its charter)


            Florida                                        59-2963871
--------------------------------                --------------------------------
(State or other jurisdiction of                        (I.R.S. Employer
incorporation or organization)                        Identification No.)


       450 South Orange Avenue
           Orlando, Florida                                  32801
-----------------------------------------       --------------------------------
(Address of principal executive offices)                  (Zip Code)


Registrant's telephone number
(including area code)                                   (407) 540-2000
                                                --------------------------------


Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by  Sections  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 ____

Indicate  by check mark  whether  the  registrant  is an  accelerated  filer (as
defined in Rule 12b-2 of the Exchange Act):Yes___ No X


<PAGE>


                                    CONTENTS



                                                                           Page

Part I.

     Item 1.      Financial Statements:

                      Condensed Balance Sheets                             1

                      Condensed Statements of Income                       2

                      Condensed Statements of Partners' Capital            3

                      Condensed Statements of Cash Flows                   4

                      Notes to Condensed Financial Statements              5-7

     Item 2.      Management's Discussion and Analysis of Financial
                      Condition and Results of Operations                  8-10

     Item 3.      Quantitative and Qualitative Disclosures About
                      Market Risk                                          10

     Item 4.      Controls and Procedures                                  10-11


Part II.

     Other Information                                                    12-13


<PAGE>

                            CNL INCOME FUND VII, LTD.
                         (A Florida Limited Partnership)
                            CONDENSED BALANCE SHEETS
<TABLE>
<CAPTION>
<S><C>

                                                                            September 30,           December 31,
                                                                                2004                    2003
                                                                         ------------------     -------------------
                               ASSETS

   Real estate properties with operating leases, net                      $     16,116,419       $      16,352,461
   Net investment in direct financing leases                                     2,946,766               3,057,744
   Real estate held for sale                                                            --               1,575,355
   Investment in joint ventures                                                  4,249,404               4,298,683
   Cash and cash equivalents                                                     2,087,197                 996,918
   Receivables                                                                          --                  94,390
   Accrued rental income                                                         1,182,674               1,164,712
   Other assets                                                                     85,265                  85,335
                                                                         ------------------     -------------------

                                                                          $     26,667,725       $      27,625,598
                                                                         ==================     ===================

                  LIABILITIES AND PARTNERS' CAPITAL

   Accounts payable and accrued expenses                                  $         60,023       $           6,378
   Real estate taxes payable                                                        10,062                   3,656
   Distributions payable                                                           675,000                 675,000
   Due to related parties                                                           17,064                  11,333
   Rents paid in advance                                                            86,820                  81,463
   Deferred rental income                                                           81,551                 117,093
                                                                         ------------------     -------------------
       Total liabilities                                                           930,520                 894,923

   Minority interests                                                            2,864,008               3,361,915

   Partners' capital                                                            22,873,197              23,368,760
                                                                         ------------------     -------------------

                                                                             $  26,667,725           $  27,625,598
                                                                         ==================     ===================
</TABLE>

            See accompanying notes to condensed financial statements.

                                        1

<PAGE>

                            CNL INCOME FUND VII, LTD.
                         (A Florida Limited Partnership)
                         CONDENSED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
<S><C>
                                                              Quarter Ended                 Nine Months Ended
                                                              September 30,                   September 30,
                                                           2004            2003           2004            2003
                                                       -------------    ------------  -------------  ---------------
Revenues:
    Rental income from operating leases                $    526,118     $   524,381   $  1,578,661    $   1,571,754
    Earned income from direct financing leases               90,258          94,661        274,198          287,001
    Contingent rental income                                  1,590              --          4,257              815
    Interest and other income                                   387          26,555            589           28,057
                                                       -------------    ------------  -------------  ---------------
                                                            618,353         645,597      1,857,705        1,887,627
                                                       -------------    ------------  -------------  ---------------

Expenses:
    General operating and administrative                     89,734          53,116        235,976          182,198
    Property related                                          7,979           6,846         19,065           17,001
    State and other taxes                                        --           2,747         34,530           34,553
    Depreciation and amortization                            81,128          78,681        243,198          236,043
                                                       -------------    ------------  -------------  ---------------
                                                            178,841         141,390        532,769          469,795
                                                       -------------    ------------  -------------  ---------------

Income before minority interests and equity in
    earnings of unconsolidated joint ventures               439,512         504,207      1,324,936        1,417,832

Minority interests                                          (74,290)        (77,984)      (223,916)        (224,086)

Equity in earnings of unconsolidated joint ventures         103,513         101,823        308,780          308,776
                                                       -------------    ------------  -------------  ---------------

Income from continuing operations                           468,735         528,046      1,409,800        1,502,522
                                                       -------------    ------------  -------------  ---------------

Discontinued operations:
      Income from discontinued operations                    57,522          41,615        141,033          124,930
      Gain on disposal of discontinued operations            32,985              --         32,985               --
      Minority interest                                     (28,284)        (13,005)       (54,381)         (39,041)
                                                       -------------    ------------  -------------  ---------------
                                                             62,223          28,610        119,637           85,889
                                                       -------------    ------------  -------------  ---------------

Net income                                             $    530,958     $   556,656   $  1,529,437    $   1,588,411
                                                       =============    ============  =============  ===============

Income per limited partner unit:
      Continuing operations                            $      0.016     $     0.018   $      0.047    $       0.050
      Discontinued operations                                 0.002           0.001          0.004            0.003
                                                       -------------    ------------  -------------  ---------------
                                                       $      0.018     $     0.019   $      0.051    $       0.053
                                                       =============    ============  =============  ===============

Weighted average number of limited partner
    units outstanding                                    30,000,000      30,000,000     30,000,000       30,000,000
                                                       =============    ============  =============  ===============
</TABLE>

            See accompanying notes to condensed financial statements.

                                        2

<PAGE>

                            CNL INCOME FUND VII, LTD.
                         (A Florida Limited Partnership)
                    CONDENSED STATEMENTS OF PARTNERS' CAPITAL
<TABLE>
<CAPTION>
<S><C>
                                                                        Nine Months Ended          Year Ended
                                                                          September 30,           December 31,
                                                                               2004                   2003
                                                                      ---------------------    ------------------
General partners:
    Beginning balance                                                  $           230,931      $        230,931
    Net income                                                                          --                    --
                                                                      ---------------------    ------------------
                                                                                   230,931               230,931
                                                                      ---------------------    ------------------

Limited partners:
    Beginning balance                                                           23,137,829            23,609,162
    Net income                                                                   1,529,437             2,228,667
    Distributions ($0.068 and $0.090 per
       limited partner unit, respectively)                                      (2,025,000)           (2,700,000)
                                                                      ---------------------    ------------------
                                                                                22,642,266            23,137,829
                                                                      ---------------------    ------------------

Total partners' capital                                                $        22,873,19       $     23,368,760
                                                                      =====================    ==================
</TABLE>

            See accompanying notes to condensed financial statements.

                                        3

<PAGE>

                            CNL INCOME FUND VII, LTD.
                         (A Florida Limited Partnership)
                       CONDENSED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
<S><C>
                                                                                       Nine Months Ended
                                                                                         September 30,
                                                                                    2004               2003
                                                                                --------------    ---------------

  Net cash provided by operating activities                                      $  2,291,483      $   2,369,229
                                                                                --------------    ---------------

  Cash flows from investing activities:
       Proceeds from sale of assets                                                 1,600,000                 --
                                                                                --------------    ---------------
         Net cash provided by investing activities                                  1,600,000                 --
                                                                                --------------    ---------------

  Cash flows from financing activities:
      Distributions to limited partners                                            (2,025,000)        (2,025,000)
      Distributions to holders of minority interests                                 (776,204)          (308,350)
                                                                                --------------    ---------------
         Net cash used in financing activities                                     (2,801,204)        (2,333,350)
                                                                                --------------    ---------------

  Net increase in cash and cash equivalents                                         1,090,279             35,879

  Cash and cash equivalents at beginning of period                                    996,918            989,165
                                                                                --------------    ---------------

  Cash and cash equivalents at end of period                                     $  2,087,197      $   1,025,044
                                                                                ==============    ===============

  Supplemental schedule of non-cash financing activities:

         Distributions declared and unpaid at end of
            period                                                               $    675,000      $     675,000
                                                                                ==============    ===============

</TABLE>

            See accompanying notes to condensed financial statements.

                                        4


<PAGE>

                            CNL INCOME FUND VII, LTD.
                         (A Florida Limited Partnership)
                     NOTES TO CONDENSED FINANCIAL STATEMENTS
           Quarters and Nine Months Ended September 30, 2004 and 2003

1.       Basis of Presentation

         The accompanying  unaudited  condensed  financial  statements have been
         prepared in accordance  with the  instructions  to Form 10-Q and do not
         include  all  of the  information  and  note  disclosures  required  by
         generally  accepted  accounting  principles.  The financial  statements
         reflect all adjustments,  consisting of normal  recurring  adjustments,
         which are, in the opinion of the general partners, necessary for a fair
         statement of the results for the interim periods  presented.  Operating
         results for the quarter and nine months ended  September 30, 2004,  may
         not be  indicative  of the results  that may be  expected  for the year
         ending December 31, 2004. Amounts as of December 31, 2003,  included in
         the  financial  statements,  have been derived  from audited  financial
         statements as of that date.

         These unaudited financial statements should be read in conjunction with
         the financial statements and notes thereto included in Form 10-K of CNL
         Income Fund VII, Ltd. (the  "Partnership")  for the year ended December
         31, 2003.

         The Partnership accounts for its 83% interest in San Antonio #849 Joint
         Venture,  its 79%  interest in CNL  Mansfield  Joint  Venture,  its 56%
         interest  in  Duluth  Joint  Venture,   its  36.88%  interest  in  TGIF
         Pittsburgh  Joint  Venture  and its 79%  interest  in  Arlington  Joint
         Venture using the consolidation method. Prior to the liquidation of CNL
         VII, XV Columbus Joint  Venture,  in September  2004,  the  Partnership
         accounted  for its  68.75%  interest  in the  joint  venture  using the
         consolidation  method.  Minority interests represent the minority joint
         venture partners' proportionate share of the equity in the consolidated
         joint ventures. All significant  intercompany accounts and transactions
         have been eliminated.

         In December 2003,  the Financial  Accounting  Standards  Board issued a
         revision to FASB  Interpretation  No. 46 (originally  issued in January
         2003)  ("FIN  46R"),  "Consolidation  of  Variable  Interest  Entities"
         requiring  existing  unconsolidated  variable  interest  entities to be
         consolidated by their primary beneficiaries. The primary beneficiary of
         a variable  interest entity is the party that absorbs a majority of the
         entity's expected losses,  receives a majority of its expected residual
         returns, or both, as a result of holding variable interests,  which are
         the ownership,  contractual,  or other pecuniary interests in an entity
         that change with  changes in the fair value of the  entity's net assets
         excluding  variable  interests.  Prior to FIN 46R, a company  generally
         included  another  entity  in  its  financial  statements  only  if  it
         controlled the entity through voting interests.  Application of FIN 46R
         is  required  in  financial  statements  of public  entities  that have
         interests in variable  interest entities for periods ending after March
         15,  2004.  The  Partnership  adopted FIN 46R during the quarter  ended
         March 31,  2004,  which  resulted in the  consolidation  of  previously
         unconsolidated  joint ventures,  which had been accounted for under the
         equity method. FIN 46R does not require, but does permit restatement of
         previously  issued financial  statements.  The Partnership has restated
         prior year's financial statements to maintain comparability between the
         periods presented.  Such  consolidation  resulted in certain assets and
         minority  interests,  and revenues and expenses,  of the entities being
         reported on a gross basis in the  Partnership's  financial  statements;
         however,  these  restatements had no effect on partners' capital or net
         income.

2.       Discontinued Operations

         In August  2004,  CNL VII,  XV  Columbus  Joint  Venture,  in which the
         Partnership  owned a  68.75%  interest  and  accounted  for  under  the
         consolidation  method,  entered into an agreement with a third party to
         sell its  property in  Columbus,  Georgia.  In August  2004,  the joint
         venture  sold  this  property  and  received  net  sales   proceeds  of
         $1,600,000, resulting in a gain of approximately $33,000 on disposal of
         discontinued operations. As a result of the sale, the joint venture was
         dissolved, and approximately $499,700 was paid to the minority interest
         holder,   representing   its   pro-rata   share   of  the   liquidating
         distribution.

                                       5
<PAGE>

                            CNL INCOME FUND VII, LTD.
                         (A Florida Limited Partnership)
                     NOTES TO CONDENSED FINANCIAL STATEMENTS
           Quarters and Nine Months Ended September 30, 2004 and 2003


2.       Discontinued Operations - Continued

         The  following  presents  the  operating  results  of the  discontinued
         operations for this property.
<TABLE>
<CAPTION>
<S><C>
                                                   Quarter Ended                    Nine Months Ended
                                                   September 30,                      September 30,
                                               2004             2003             2004             2003
                                           --------------   --------------   --------------  ----------------

              Rental revenues               $     60,840    $      51,815    $     164,469    $      155,444
              Expenses                            (3,318)         (10,200)         (23,436)          (30,514)
                                           --------------   --------------   --------------  ----------------
              Income from discontinued
                  operations                $     57,522    $      41,615    $     141,033    $      124,930
                                           ==============   ==============   ==============  ================
</TABLE>


3.       Investment in Joint Ventures

         During 2003, CNL Restaurant  Investments  II, in which the  Partnership
         owns an 18% interest,  entered into  negotiations with a third party to
         sell the property in San Antonio,  Texas. During 2004, the contract was
         terminated and as a result,  the joint venture  reclassified the assets
         from real estate held for sale to real estate properties with operating
         leases.

         CNL  Restaurant  Investments II owns five  properties.  Des Moines Real
         Estate Joint  Venture and CNL VII & XVII Lincoln Joint Venture each own
         one property.  In addition,  the Partnership  and  affiliates,  in four
         separate tenancy in common arrangements, each own one property.

         The following presents the combined,  condensed  financial  information
         for the joint  ventures and the  properties  held as  tenants-in-common
         with affiliates at:
<TABLE>
<CAPTION>
<S><C>
                                                                    September 30,                    December 31,
                                                                        2004                             2003
                                                                   ----------------                 ----------------
          Real estate properties with operating                    $    11,639,216                  $    11,861,912
              leases, net
          Net investment in direct financing
              leases                                                       871,563                          883,215
          Cash                                                              14,173                           71,961
          Receivables                                                       10,691                               --
          Accrued rental income                                            368,489                          338,964
          Liabilities                                                        3,842                           42,836
          Partners' capital                                             12,900,290                       13,113,216

                                                            Quarter Ended                  Nine Months Ended
                                                            September 30,                    September 30,
                                                      2004              2003             2004            2003
                                                   ------------    ----------------  -------------  ----------------

          Revenues                                 $    397,051     $      393,404   $   1,180,359  $     1,181,189
          Expenses                                      (77,143)           (78,945)       (229,570)        (231,053)
                                                   ------------    ----------------  -------------  ----------------

          Net income                               $    319,908     $      314,459   $     950,789   $      950,136
                                                   ============    ================  =============  ================
</TABLE>
                                       6
<PAGE>

                            CNL INCOME FUND VII, LTD.
                         (A Florida Limited Partnership)
                     NOTES TO CONDENSED FINANCIAL STATEMENTS
           Quarters and Nine Months Ended September 30, 2004 and 2003


3.       Investment in Joint Ventures - Continued

         The Partnership  recognized  income of $308,780 and $308,776 during the
         nine months ended September 30, 2004 and 2003,  respectively,  $103,513
         and $101,823 of which were earned during the third quarters of 2004 and
         2003,  respectively,  from these joint  ventures and  tenants-in-common
         arrangements.

4.       Merger Transaction

         On August 9, 2004, the Partnership entered into a definitive  Agreement
         and Plan of Merger  pursuant  to which the  Partnership  will be merged
         with a subsidiary of U.S. Restaurant Properties,  Inc. (NYSE: USV). The
         merger is one of multiple concurrent  transactions pursuant to which 17
         other  affiliated  limited  partnerships  also  will be  merged  with a
         subsidiary  of  U.S.  Restaurant  Properties,  Inc.  and in  which  CNL
         Restaurant  Properties,  Inc., an  affiliate,  also will be merged with
         U.S.  Restaurant  Properties,  Inc.  CNL  Restaurant  Properties,  Inc.
         currently  provides  property  management  and  other  services  to the
         Partnership.  The merger of the  Partnership  (and each of the 17 other
         affiliated mergers) is subject to certain conditions including approval
         by a majority of the limited partners, consummation of a minimum number
         of limited partnership mergers representing at least 75.0% in value (as
         measured  by the  value of the  merger  consideration)  of all  limited
         partnerships,  consummation  of  the  merger  between  U.S.  Restaurant
         Properties,  Inc. and CNL Restaurant Properties,  Inc., approval of the
         shareholders of U.S. Restaurant  Properties,  Inc., and availability of
         financing.  The  transaction is expected to be consummated in the first
         quarter of 2005.

         Under  the  terms  of  the  merger  agreement,  if the  transaction  is
         approved,  the limited  partners  will receive total  consideration  of
         approximately  $30.21  million,   consisting  of  approximately  $25.26
         million in cash and  approximately  $4.95  million  in U.S.  Restaurant
         Properties, Inc. Series A Convertible Preferred Stock that is listed on
         the New York Stock  Exchange.  The general  partners will receive total
         consideration  of  approximately  $188,000  consisting of approximately
         $157,000 in cash and approximately $31,000 in preferred stock.
                                       7

<PAGE>


ITEM 2.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
         OF OPERATIONS

         CNL Income Fund VII, Ltd. (the "Partnership,"  which may be referred to
as "we," "us," or "our") is a Florida limited  partnership that was organized on
August 18, 1989, to acquire for cash,  either  directly or through joint venture
and  tenancy  in  common  arrangements,  both  newly  constructed  and  existing
restaurants,  as well as land upon which restaurants were to be constructed (the
"Properties"),  which are leased primarily to operators of national and regional
fast-food  restaurant chains.  The leases generally are triple-net leases,  with
the  lessees  responsible  for all  repairs  and  maintenance,  property  taxes,
insurance  and  utilities.  As of  September  30, 2003,  we owned 18  Properties
directly and 17 Properties indirectly through joint venture or tenancy in common
arrangements.  As of September 30, 2004, we owned 18 Properties  directly and 16
Properties indirectly through joint venture or tenancy in common arrangements.

Merger Transaction

         The general  partners  believe their  primary  objective is to maintain
current operations with restaurant operators as successfully as possible,  while
evaluating  strategic  alternatives,  including  alternatives  that may  provide
liquidity to the limited  partners.  Real estate  markets are strong  throughout
much of the nation,  and the performance of restaurants  has generally  improved
after several  challenging years. As a result, the general partners believe that
this is an attractive  period for a strategic event to monetize the interests of
the limited partners.

         In furtherance of this, on August 9, 2004, we entered into a definitive
Agreement  and  Plan of  Merger  pursuant  to  which  we will be  merged  with a
subsidiary of U.S. Restaurant Properties, Inc. (NYSE: USV). The merger is one of
multiple concurrent  transactions  pursuant to which 17 other affiliated limited
partnerships  also  will  be  merged  with  a  subsidiary  of  U.S.   Restaurant
Properties,  Inc. and in which CNL  Restaurant  Properties,  Inc., an affiliate,
also will be merged with U.S. Restaurant  Properties,  Inc. Our merger (and each
of the 17 other affiliated  mergers) is subject to certain conditions  including
approval by a majority of the limited partners, consummation of a minimum number
of limited partnership mergers representing at least 75.0% in value (as measured
by  the  value  of  the  merger  consideration)  of  all  limited  partnerships,
consummation  of the merger  between U.S.  Restaurant  Properties,  Inc. and CNL
Restaurant  Properties,  Inc.,  approval of the shareholders of U.S.  Restaurant
Properties,  Inc., and availability of financing.  U.S.  Restaurant  Properties,
Inc.  is a real  estate  investment  trust  (REIT)  that  focuses  primarily  on
acquiring, owning and leasing restaurant properties. The transaction is expected
to be consummated in the first quarter of 2005.

         Under  the  terms  of  the  merger  agreement,  if the  transaction  is
approved, our limited partners will receive total consideration of approximately
$30.21  million,   consisting  of  approximately  $25.26  million  in  cash  and
approximately  $4.95  million  in U.S.  Restaurant  Properties,  Inc.  Series  A
Convertible  Preferred Stock that is listed on the New York Stock Exchange.  The
general  partners will receive total  consideration  of  approximately  $188,000
consisting  of  approximately  $157,000  in cash and  approximately  $31,000  in
preferred stock.

         We received an opinion from Wachovia  Capital  Markets,  LLC that as of
August 9, 2004 the merger  consideration  to be  received  by the holders of our
general and limited  partnership  interests is fair,  from a financial  point of
view, to such holders.

         As reflected  above, the  contemplated  transactions  are complex,  and
contingent upon certain conditions. The restaurant marketplace,  the real estate
industry,  and the equities markets, all individually or taken as a whole, could
impact the  economics of this  transaction.  As a result,  there is no assurance
that we will be successful in completing the contemplated transaction.

Capital Resources

         For the  nine  months  ended  September  30,  2004 and  2003,  net cash
provided by operating activities was $2,291,483 and $2,369,229, respectively.

                                       8
<PAGE>

         In August 2004, CNL VII, XV Columbus Joint Venture, in which we owned a
68.75%  interest and  accounted  for under the  consolidation  method,  sold its
Property in Columbus,  Georgia and received  net sales  proceeds of  $1,600,000,
resulting  in a gain on disposal of  discontinued  operations  of  approximately
$33,000.  As a  result  of the  sale of the  Property,  the  joint  venture  was
dissolved,  and $499,690 was paid to the minority interest holder,  representing
its  pro-rata  share of the  liquidating  distribution.  We may reinvest the net
sales  proceeds  in  additional  Properties  or use the  sales  proceeds  to pay
liabilities.

         At September 30, 2004, we had $2,087,197 in cash and cash  equivalents,
as compared to $996,918 at December 31, 2003. At September 30, 2004, these funds
were held in demand deposit  accounts at a commercial bank. The increase in cash
and cash  equivalents was primarily a result of holding sales  proceeds,  net of
the amount  distributed to the minority interest holder.  The funds remaining at
September 30, 2004, after payment of distributions and other liabilities, may be
used to invest in additional Properties and to meet our working capital needs.

Short-Term Liquidity

         Our  investment  strategy of acquiring  Properties for cash and leasing
them under triple-net leases to operators who generally meet specified financial
standards  minimizes our operating  expenses.  The general partners believe that
the leases will continue to generate cash flow in excess of operating expenses.

         Our  short-term   liquidity   requirements  consist  primarily  of  our
operating expenses.

         The general  partners have the right,  but not the obligation,  to make
additional capital  contributions if they deem it appropriate in connection with
our operations.

         We  generally  distribute  cash  from  operations  remaining  after the
payment of operating  expenses to the extent that the general partners determine
that such funds are available for distribution.  Based primarily on current cash
from operations, we declared distributions to the limited partners of $2,025,000
for each of the nine months ended September 30, 2004 and 2003 ($675,000 for each
applicable quarter).  This represents  distributions of $0.068 per unit for each
of the nine months ended  September  30, 2004 and 2003 ($0.023 per unit for each
applicable quarter).  No distributions were made to the general partners for the
quarters  and nine  months  ended  September  30,  2004  and  2003.  No  amounts
distributed to the limited partners for the nine months ended September 30, 2004
and 2003 are  required  to be or have been  treated as a return of  capital  for
purposes of calculating the limited  partners'  return on their adjusted capital
contributions.  We  intend  to  continue  to make  distributions  of cash to the
limited partners on a quarterly basis.

         Total liabilities,  including  distributions  payable, were $930,520 at
September 30, 2004,  as compared to $894,923 at December 31, 2003.  The increase
in liabilities  was primarily the result of an increase in accounts  payable and
accrued expenses. The increase in liabilities was partially offset by a decrease
in deferred rental income.  The general partners believe that we have sufficient
cash on hand to meet our current working capital needs.

Long-Term Liquidity

         We have no long-term debt or other long-term liquidity requirements.

Results of Operations

         Rental revenues from continuing  operations were $1,852,859  during the
nine months ended September 30, 2004, as compared to $1,858,755  during the same
period of 2003,  $616,376  and  $619,042 of which were  earned  during the third
quarter  of  2004  and  2003,  respectively.  Rental  revenues  from  continuing
operations  during the quarter and nine months  ended  September  30,  2004,  as
compared to the same periods of 2003,  remained  relatively constant because the
only change in the Property  portfolio  related to a Property  accounted  for as
discontinued operations.

                                       9
<PAGE>

         In December 2003, Waving Leaves,  Inc., the tenant of the Properties in
Orrville,  Akron,  Minerva and  Seville,  Ohio filed for  Chapter 11  bankruptcy
protection.  In May 2004,  the leases  were  assigned to and assumed by Hardee's
Food Systems,  Inc. As of November 5, 2004, we have received all rental payments
relating to these leases.

         We earned $308,780  attributable to net income earned by unconsolidated
joint ventures  during the nine months ended  September 30, 2004, as compared to
$308,776  during the same period of 2003,  $103,513  and  $101,823 of which were
earned during the quarters ended September 30, 2004 and 2003, respectively.  Net
income earned by  unconsolidated  joint ventures during 2004, as compared to the
same periods of 2003,  remained relatively  constant,  as the property portfolio
owned by the joint ventures and tenancies in common did not change. During 2003,
CNL Restaurant  Investments II, in which the  Partnership  owns an 18% interest,
entered  into  negotiations  with a third  party  to sell  the  property  in San
Antonio,  Texas.  During 2004, the contract was terminated and as a result,  the
joint  venture  reclassified  the assets  from real estate held for sale to real
estate properties with operating leases.

         Operating expenses,  including  depreciation and amortization  expense,
were  $532,769  during the nine months ended  September 30, 2004, as compared to
$469,795  during the same period of 2003,  $178,841  and  $141,390 of which were
incurred  during the quarters ended  September 30, 2004 and 2003,  respectively.
The  increase in  operating  expenses  during the quarter and nine months  ended
September 30, 2004, was primarily due to incurring  additional general operating
and  administrative  expenses,  including,  primarily,  legal fees  incurred  in
connection with the merger transaction described above.

         We recognized income from discontinued operations (rental revenues less
property  related  expenses) of $141,033 as compared to $124,930 during the same
period of 2003,  $57,522 and $41,615 of which were  earned  during the  quarters
ended  September 30, 2004 and 2003. In August 2004,  CNL VII, XV Columbus  Joint
Venture,  in which we  owned a 68.75%  interest  and  accounted  for  under  the
consolidation  method,  sold its property in Columbus,  Georgia to a third party
resulting  in a gain on disposal of  discontinued  operations  of  approximately
$33,000.  The  amount of income and gain  attributed  to the owner of the 31.25%
interest was $54,381 and $39,041 during the nine months ended September 30, 2004
and 2003,  respectively,  of which  $28,284 and $13,005  related to the quarters
ended September 30, 2004 and 2003, respectively.

         In December 2003,  the Financial  Accounting  Standards  Board issued a
revision to FASB Interpretation No. 46 (originally issued in January 2003) ("FIN
46R"),   "Consolidation  of  Variable  Interest  Entities"   requiring  existing
unconsolidated  variable  interest  entities to be consolidated by their primary
beneficiaries.  The primary  beneficiary  of a variable  interest  entity is the
party that  absorbs a  majority  of the  entity's  expected  losses,  receives a
majority  of its  expected  residual  returns,  or both,  as a result of holding
variable  interests,  which are the ownership,  contractual,  or other pecuniary
interests  in an  entity  that  change  with  changes  in the fair  value of the
entity's net assets excluding  variable  interests.  Prior to FIN 46R, a company
generally  included  another  entity  in its  financial  statements  only  if it
controlled  the  entity  through  voting  interests.  Application  of FIN 46R is
required in  financial  statements  of public  entities  that have  interests in
variable  interest  entities for periods ending after March 15, 2004. We adopted
FIN 46R  during  the  quarter  ended  March  31,  2004,  which  resulted  in the
consolidation of previously  unconsolidated joint ventures,  CNL Mansfield Joint
Venture, Duluth Joint Venture, TGIF Pittsburgh Joint Venture and Arlington Joint
Venture,  which had been  accounted  for under the equity  method.  Prior to its
liquidation  in  September  2004,  CNL VII, XV Columbus  Joint  Venture was also
consolidated and had previously been accounted for under the equity method.  FIN
46R does not require, but does permit restatement of previously issued financial
statements.   We  restated  prior  year's   financial   statements  to  maintain
comparability  between the periods  presented.  Such  consolidation  resulted in
certain  assets and  minority  interests,  and  revenues  and  expenses,  of the
entities being reported on a gross basis in our financial  statements;  however,
these restatements had no effect on partners' capital or net income.


ITEM 3.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

         Not applicable.

                                       10
<PAGE>


ITEM 4.  CONTROLS AND PROCEDURES

         The  general  partners  maintain  a  set  of  disclosure  controls  and
procedures  designed to ensure that information  required to be disclosed in our
filings  under  the  Securities  Exchange  Act of 1934 is  recorded,  processed,
summarized and reported within the time periods  specified in the Securities and
Exchange  Commission's  rules and forms.  The principal  executive and financial
officers of the corporate general partner have evaluated our disclosure controls
and procedures as of the end of the period  covered by this Quarterly  Report on
Form 10-Q and have determined  that such disclosure  controls and procedures are
effective.

         There was no change in internal  control over financial  reporting that
occurred during the most recent fiscal quarter that has materially affected,  or
is  reasonably  likely to materially  affect,  internal  control over  financial
reporting.

                                       11
<PAGE>


                           PART II. OTHER INFORMATION


Item 1.   Legal Proceedings.   Inapplicable.
          ------------------

Item 2.   Unregistered Sales of Equity Securities and Use of Proceeds.
          ------------------------------------------------------------
          Inapplicable.

Item 3.   Default upon Senior Securities.   Inapplicable.
          -------------------------------

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

Item 5.   Other Information.   Inapplicable.
          ------------------

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

          (a)   Exhibits

                2.1     Agreement  and  Plan of  Merger  among  U.S.  Restaurant
                        Properties,  Inc., Ivanhoe Acquisition VII, LLC, and CNL
                        Income  Fund VII,  Ltd.,  dated as of  August  9,  2004.
                        (Included  as  Exhibit  99.2 to Form 8-K filed  with the
                        Securities  and Exchange  Commission  on August 9, 2004,
                        and incorporated herein by reference.)

                3.1     Affidavit and Certificate of Limited  Partnership of CNL
                        Income  Fund  VII,  Ltd.  (Included  as  Exhibit  4.1 to
                        Registration  Statement  No.  33-31482  on Form S-11 and
                        incorporated herein by reference.)

                4.1     Affidavit and Certificate of Limited  Partnership of CNL
                        Income  Fund  VII,  Ltd.  (Included  as  Exhibit  4.1 to
                        Registration  Statement  No.  33-31482  on Form S-11 and
                        incorporated herein by reference.)

                4.2     Amended and Restated Agreement of Limited Partnership of
                        CNL Income Fund VII,  Ltd.  (Included  as Exhibit 4.2 to
                        Form  10-K  filed  with  the   Securities  and  Exchange
                        Commission on April 1, 1996, and incorporated  herein by
                        reference.)

                10.1    Management  Agreement  between CNL Income Fund VII, Ltd.
                        and CNL Investment  Company (Included as Exhibit 10.1 to
                        Form  10-K  filed  with  the   Securities  and  Exchange
                        Commission on April 1, 1996, and incorporated  herein by
                        reference.)

                10.2    Assignment of Management  Agreement  from CNL Investment
                        Company to CNL Income Fund Advisors,  Inc.  (Included as
                        Exhibit 10.2 to Form 10-K filed with the  Securities and
                        Exchange  Commission on March 30, 1995, and incorporated
                        herein by reference.)

                10.3    Assignment of Management  Agreement from CNL Income Fund
                        Advisors,  Inc. to CNL Fund Advisors,  Inc. (Included as
                        Exhibit 10.3 to Form 10-K filed with the  Securities and
                        Exchange  Commission on April 1, 1996, and  incorporated
                        herein by reference.)

                10.4    Assignment  of  Management   Agreement   from  CNL  Fund
                        Advisors,  Inc. to CNL APF  Partners,  LP.  (Included as
                        Exhibit 10.4 to Form 10-Q filed with the  Securities and
                        Exchange Commission on August 10, 2001, and incorporated
                        herein by reference.)
                                       12
<PAGE>

                10.5    Assignment   of  Management   Agreement   from  CNL  APF
                        Partners, LP to CNL Restaurants XVIII, Inc. (Included as
                        Exhibit 10.5 to Form 10-Q filed with the  Securities and
                        Exchange Commission on August 13, 2002, and incorporated
                        herein by reference.)

                31.1    Certification  of Chief  Executive  Officer of Corporate
                        General  Partner  Pursuant  to Rule  13a-14  as  Adopted
                        Pursuant  to Section  302 of the  Sarbanes-Oxley  Act of
                        2002. (Filed herewith.)

                31.2    Certification  of Chief  Financial  Officer of Corporate
                        General  Partner  Pursuant  to Rule  13a-14  as  Adopted
                        Pursuant  to Section  302 of the  Sarbanes-Oxley  Act of
                        2002. (Filed herewith.)

                32.1    Certification  of Chief  Executive  Officer of Corporate
                        General  Partner  Pursuant to 18 U.S.C.  Section 1350 as
                        Adopted  Pursuant to Section  906 of the  Sarbanes-Oxley
                        Act of 2002. (Filed herewith.)

                32.2    Certification  of Chief  Financial  Officer of Corporate
                        General  Partner  Pursuant to 18 U.S.C.  Section 1350 as
                        Adopted  Pursuant to Section  906 of the  Sarbanes-Oxley
                        Act of 2002. (Filed herewith.)

                                       13
<PAGE>

                                   SIGNATURES


         Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended,  the  registrant has duly caused this report to be signed on its behalf
by the undersigned, thereunto duly authorized.

         DATED this 10th day of November 2004


                                CNL INCOME FUND VII, LTD.

                                By:   CNL REALTY CORPORATION
                                      General Partner


                                      By:   /s/ James M. Seneff, Jr.
                                           -------------------------------------
                                            JAMES M. SENEFF, JR.
                                            Chief Executive Officer
                                           (Principal Executive Officer)


                                      By:   /s/ Robert A. Bourne
                                           -------------------------------------
                                             ROBERT A. BOURNE
                                             President and Treasurer
                                             (Principal Financial and
                                             Accounting Officer)


<PAGE>


                                  EXHIBIT INDEX


Exhibit Number

                Exhibits


                2.1     Agreement  and  Plan of  Merger  among  U.S.  Restaurant
                        Properties,  Inc., Ivanhoe Acquisition VII, LLC, and CNL
                        Income  Fund VII,  Ltd.,  dated as of  August  9,  2004.
                        (Included  as  Exhibit  99.2 to Form 8-K filed  with the
                        Securities  and Exchange  Commission  on August 9, 2004,
                        and incorporated herein by reference.)

                3.1     Affidavit and Certificate of Limited  Partnership of CNL
                        Income  Fund  VII,  Ltd.  (Included  as  Exhibit  4.1 to
                        Registration  Statement  No.  33-31482  on Form S-11 and
                        incorporated herein by reference.)

                4.1     Affidavit and Certificate of Limited  Partnership of CNL
                        Income  Fund  VII,  Ltd.  (Included  as  Exhibit  4.1 to
                        Registration  Statement  No.  33-31482  on Form S-11 and
                        incorporated herein by reference.)

                4.2     Amended and Restated Agreement of Limited Partnership of
                        CNL Income Fund VII,  Ltd.  (Included  as Exhibit 4.2 to
                        Form  10-K  filed  with  the   Securities  and  Exchange
                        Commission on April 1, 1996, and incorporated  herein by
                        reference.)

                10.1    Management  Agreement  between CNL Income Fund VII, Ltd.
                        and CNL Investment  Company (Included as Exhibit 10.1 to
                        Form  10-K  filed  with  the   Securities  and  Exchange
                        Commission on April 1, 1996, and incorporated  herein by
                        reference.)

                10.2    Assignment of Management  Agreement  from CNL Investment
                        Company to CNL Income Fund Advisors,  Inc.  (Included as
                        Exhibit 10.2 to Form 10-K filed with the  Securities and
                        Exchange  Commission on March 30, 1995, and incorporated
                        herein by reference.)

                10.3    Assignment of Management  Agreement from CNL Income Fund
                        Advisors,  Inc. to CNL Fund Advisors,  Inc. (Included as
                        Exhibit 10.3 to Form 10-K filed with the  Securities and
                        Exchange  Commission on April 1, 1996, and  incorporated
                        herein by reference.)

                10.4    Assignment  of  Management   Agreement   from  CNL  Fund
                        Advisors,  Inc. to CNL APF  Partners,  LP.  (Included as
                        Exhibit 10.4 to Form 10-Q filed with the  Securities and
                        Exchange Commission on August 10, 2001, and incorporated
                        herein by reference.)

                10.5    Assignment   of  Management   Agreement   from  CNL  APF
                        Partners, LP to CNL Restaurants XVIII, Inc. (Included as
                        Exhibit 10.5 to Form 10-Q filed with the  Securities and
                        Exchange Commission on August 13, 2002, and incorporated
                        herein by reference.)

                31.1    Certification  of Chief  Executive  Officer of Corporate
                        General  Partner  Pursuant  to Rule  13a-14  as  Adopted
                        Pursuant  to Section  302 of the  Sarbanes-Oxley  Act of
                        2002. (Filed herewith.)
<PAGE>

                31.2    Certification  of Chief  Financial  Officer of Corporate
                        General  Partner  Pursuant  to Rule  13a-14  as  Adopted
                        Pursuant  to Section  302 of the  Sarbanes-Oxley  Act of
                        2002. (Filed herewith.)

                32.1    Certification  of Chief  Executive  Officer of Corporate
                        General  Partner  Pursuant to 18 U.S.C.  Section 1350 as
                        Adopted  Pursuant to Section  906 of the  Sarbanes-Oxley
                        Act of 2002. (Filed herewith.)

                32.2    Certification  of Chief  Financial  Officer of Corporate
                        General  Partner  Pursuant to 18 U.S.C.  Section 1350 as
                        Adopted  Pursuant to Section  906 of the  Sarbanes-Oxley
                        Act of 2002. (Filed herewith.)

<PAGE>


                                  EXHIBIT 31.1




<PAGE>



                                  EXHIBIT 31.2




<PAGE>



                                  EXHIBIT 32.1



<PAGE>


                                  EXHIBIT 32.2