<PAGE>   1





                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 the fiscal year ended December 31, 2000
                                             -----------------

                                       OR

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

                         Commission file number: 0-11779
                                                 -------

                         S/M REAL ESTATE FUND VII, LTD.
              (FORMERLY SHEARSON-MURRAY REAL ESTATE FUND VII, LTD.)
              -----------------------------------------------------
              Exact name of registrant as specified in its charter

<TABLE>
<S>                                                                             <C>
                       Texas                                                           75-1845682
                       -----                                                           ----------
(State or other jurisdiction of incorporation of organization)              (I.R.S. Employer Identification No.)

5520 LBJ Freeway, Suite 500, Dallas, Texas                                               75240
------------------------------------------                                               -----
 (Address of principal executive offices)                                             (zip code)
</TABLE>

Registrant's telephone number, including area code: (972) 404-7100

Securities registered pursuant to Section 12(b) of the Act:  None

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


                          LIMITED PARTNERSHIP INTERESTS
                          -----------------------------
                                (Title of Class)


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 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 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 the 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]

State aggregate market value of the voting stock held by non-affiliates of the
registrant: Not applicable

Documents Incorporated by Reference: Prospectus dated June 10, 1983, contained
in Amendment No. 3 to Registrant's Registration Statement on Form S-11 filed
with the Securities and Exchange Commission on June 10, 1983. (Parts I, II, III
& IV).



                                                                        Page 1
<PAGE>   2




                                TABLE OF CONTENTS

<TABLE>
<CAPTION>
                                                                                PAGE
<S>                                                                             <C>
                                     PART I

Item 1.  Business                                                                3

Item 2.  Properties                                                              4

Item 3.  Legal Proceedings                                                       4

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

                                     PART II

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

Item 6.  Selected Financial Data                                                 5

Item 7.  Management's Discussion and Analysis of Financial
         Condition and Results of Operations                                     6

Item 7a. Quantitative and Qualitative Disclosures about Market Risk              8

Item 8.  Financial Statements Supplementary Data                                 9

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

                                    PART III

Item 10. Directors and Executive Officers of the Registrant                     10

Item 11. Executive Compensation                                                 11

Item 12  Security Ownership of Certain Beneficial Owners
         and Management                                                         12

Item 13. Certain Relationships and Related Transactions                         12

                                     PART IV

Item 14. Exhibits, Financial Statement Schedules, and
         Reports on Form 8-K                                                    12

Signatures                                                                      14
</TABLE>


                                                                        Page 2
<PAGE>   3


                                     PART I

ITEM 1.  BUSINESS

S/M Real Estate Fund VII, Ltd. (the "Partnership"), formerly Shearson-Murray
Real Estate Fund VII, Ltd., was formed November 4, 1982 to acquire existing
garden apartment complexes. The general partners of the Partnership are SM7
Apartment Investors Inc., a Texas corporation ("SM7"), (formerly Shearson
Apartment Investors XIV, Inc.), Murray Realty Investors VII, Inc., a Texas
corporation ("Murray"), and Crozier Partners VII, Ltd., a Texas limited
partnership ("Crozier"). SM7, Murray and Crozier are hereinafter referred to
collectively as the "General Partners." See Item 10. "Directors and Executive
Officers of the Registrant."

The Partnership offered, on June 10, 1983, a minimum of 6,250 and a maximum of
14,000 limited partnership interests (the "Interests") in the Partnership at
$1,000 per Interest with a minimum required purchase of two Interests for
purchases made on behalf of Individual Retirement Accounts and five Interests
for all other purchasers. Additionally, the General Partners were given the
right to sell an additional 10,000 Interests in connection with the offering.
The offering of Interests was terminated on April 30, 1984, and the Partnership
accepted subscriptions for 11,080 Interests, for aggregate offering proceeds of
$11,080,000.

On July 29, 1983, the Partnership acquired Fifth Avenue Apartments ("Fifth
Avenue"), a 198-unit apartment complex located in San Antonio, Texas, for a
purchase price of $8,474,925. On August 31, 1983, the Partnership acquired
Rockcreek Apartments ("Rockcreek"), a 314-unit apartment complex located in
Austin, Texas, for a purchase price of $10,948,228. The two properties are
referred to collectively herein as the "Properties."

The San Antonio and Austin apartment markets deteriorated in the mid-1980s due
to overbuilding and the general economic decline of the Southwest economy.
Rental concessions and a decline in the Properties' operating results led to the
depletion of the Partnership's working capital reserve. In July 1986, the
General Partners suspended mortgage payments on the Partnership's two Properties
and commenced negotiations with the lenders in an effort to restructure the
terms of their respective mortgage loan agreements. Subsequently, in November
1986 and March 1987, the Partnership executed letters of intent with the holders
of the Rockcreek and Fifth Avenue notes, respectively, to modify certain
conditions and terms of the mortgage obligations. The Partnership resumed
payments to both lenders in March 1987 in accordance with the proposed
modifications.

Adverse market conditions continued to hamper the ability of the Properties to
generate sufficient cash flow to meet debt service payments and operating
expenses. Given the diminishing balance of the Partnership's cash and the
capital improvement requirements at Rockcreek, in April 1989, the General
Partners commenced renegotiations and suspended debt service payments on the
mortgages secured by both Rockcreek and Fifth Avenue. The objective of these
negotiations was to reduce the debt service payments required under the mortgage
notes to a level that could be paid out of cash flow generated by the
Properties. Under the terms of these loan agreements, non-payment of debt
service represented an event of default.

In May 1989, two of the lenders for Rockcreek posted that property for
foreclosure on June 7, 1989. As the Partnership was unable to reach an agreement
with one of these lenders to forbear prior to foreclosure date, the Partnership
commenced a voluntary case under Chapter 11 of the Federal Bankruptcy Code on
June 6, 1989, in an attempt to protect its Limited Partners from the effects of
foreclosure and to reorganize the Partnership's finances.

On October 4, 1989, the Partnership filed a plan of reorganization ("The Plan")
together with a disclosure statement with the Bankruptcy Court. The Plan was not
approved, and the Partnership filed its modified plan of reorganization (the
"Modified Plan") and disclosure statement, which was confirmed on February 20,
1990, and became effective on March 1, 1990. The Modified Plan restructured the
liabilities of the Partnership in a manner which was intended to permit such
liabilities to be serviced by the Partnership's anticipated cash flow.
Additionally, the Modified Plan required the Partnership to issue reorganization
notes to holders of mortgage notes payable.

The first mortgage note secured by Phase I of the Rockcreek Apartments and the
wraparound mortgage note secured by a third mortgage on Rockcreek were scheduled
to mature on December 31, 1993. The General Partners had attempted to either
restructure the debt or sell the property (both Phases I and II) for an amount
greater than the outstanding debt. As a result of the General Partners' efforts
to sell the property, the General Partners secured an offer to purchase the
property in the amount of $8,521,055. Such offer was accepted and the property
was sold on December 17, 1993. Concurrently with their sales efforts, the
General Partners successfully negotiated an agreement with the holder of the
wraparound mortgage on Rockcreek, whereby the Partnership received a release of
all the mortgage liens on the property by paying a discounted amount of the
total outstanding debt of $8,082,311.


                                                                        Page 3
<PAGE>   4



The General Partners commenced discussions in 1995 with the lender of the
mortgage secured by Fifth Avenue as a result of the scheduled debt maturity on
December 31, 1995. Such discussions continued past the December 31, 1995
maturity date, and on May 30, 1996, the General Partners of the Partnership
executed a modification and extension agreement (the "Modification Agreement")
with the lender, to modify the mortgage and extend its maturity for five years.
See more details of the Modification Agreement in Item 7 "Management's
Discussion and Analysis of Financial Condition and Results of Operations".

In order to improve the financial condition of the Partnership and provide much
needed funds for exterior improvements on Fifth Avenue, on December 3, 1998, the
General Partners of the Partnership refinanced the mortgage note payable on
Fifth Avenue. In accordance with the terms of the Loan Agreement executed in
connection with the refinancing (the "Agreement"), the principal balance of the
original mortgage totaling $6,400,000 is due January 1, 2009 and bears interest
at a fixed rate of 7.16%. The previous first and second mortgages had a combined
balance of $6,259,810 at an average interest rate of 8.97%. See more details of
the Agreement in Item 7 "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and Note 6 "Mortgage Notes Payable" of the
Notes to the Financial Statements contained herein.

Competition

Fifth Avenue competes for tenants with other apartment complexes in San Antonio.
When evaluating a particular location to lease, a tenant may consider many
factors, including, but not limited to, space availability, rental rates, lease
terms, access, parking, quality of construction and quality of management. While
the General Partners believe that Fifth Avenue is generally competitive in these
factors, there can be no assurance that, in the view of a prospective tenant,
other properties may not be more attractive.

Fifth Avenue directly competes with the following similar five apartment
complexes in San Antonio:

<TABLE>
<CAPTION>
                                    Number of           Percent Occupied at
                      Property        Units*            December 15, 2000*
                      --------      ---------           -------------------
<S>                                 <C>                 <C>
                         1            185                     94%
                         2            192                     96%
                         3            200                     71%
                         4            248                     96%
                         5            265                     95%
</TABLE>

     * This information has been obtained from sources believed to be reliable
     by the Partnership, but the Partnership has not verified the accuracy of
     such information.

Employees

The Partnership has no employees. Fifth Avenue is managed by Anterra Management
Corporation which provides certain administrative and management services. See
Item 13. "Certain Relationships and Related Transactions."

ITEM 2. PROPERTIES

As of December 31, 2000, the Partnership owned Fifth Avenue Apartments, a
198-unit apartment complex located in San Antonio, Texas and situated on
approximately 8.45 acres with 169,270 square feet of net leaseable space.
Occupancy at Fifth Avenue Apartments averaged 94% and 95% for the years ended
December 31, 2000 and 1999, respectively. At December 31, 2000 and 1999, Fifth
Avenue Apartments was 97% and 90% occupied, respectively.


ITEM 3. LEGAL PROCEEDINGS

There are no material pending legal proceedings to which the General Partners or
the Partnership is a party or to which Fifth Avenue is subject.


ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

No matters were submitted to a vote of security holders during the fourth
quarter of the fiscal year covered by this report through solicitation of
proxies or otherwise.


                                                                         Page 4
<PAGE>   5



                                     PART II


ITEM 5. MARKET FOR THE PARTNERSHIP'S LIMITED PARTNERSHIP INTERESTS AND RELATED
SECURITY HOLDER MATTERS

A public market for the Partnership's Limited Partnership Interests does not
exist and is not likely to develop. Consequently, a Limited Partner may not be
able to liquidate its investment in the event of emergency or for any other
reason, and Interests may not be readily accepted as collateral for a loan.
Furthermore, the transfer of Interests is subject to certain limitations,
including approval of the General Partners. At December 31, 2000, there were 982
Limited Partners of record, owning an aggregate of 11,080 Interests.

There have been no cash distributions to the Limited Partners since the
inception of the Partnership.


ITEM 6.  SELECTED FINANCIAL DATA
(dollars in thousands except per Interest data)

<TABLE>
<CAPTION>
For the years ended December 31, (1)                    2000          1999          1998          1997          1996
------------------------------------                 ----------    ----------    ----------    ----------    ----------
<S>                                                  <C>           <C>           <C>           <C>           <C>

Gross Income                                         $    1,398    $    1,371    $    1,361    $    1,327    $    1,341


Loss Before
Extraordinary Items                                        (256)         (263)         (496)         (417)         (365)

Net Loss                                                   (256)         (263)         (429)         (417)         (139)

Net Loss per Limited
Partnership Interest (2)                                 (22.88)       (23.48)       (38.31)       (37.28)       (12.43)

Total Assets
at Year-End                                               2,918         3,257         3,585         3,942         4,329

Total Mortgage Notes Payable
at Year-End                                               6,284         6,343         6,400         6,198         6,250
</TABLE>


(1)  Results for the five years ended December 31, 2000 solely reflect
     operations of Fifth Avenue as Rockcreek was sold in December 1993.

(2)  Based on the Units outstanding at the end of such period and net loss
     allocated to the Limited Partners.

The above selected financial data should be read in conjunction with the
Financial Statements and related notes incorporated by reference to Item 8 of
this report.

                                                                        Page 5

<PAGE>   6



ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS

Liquidity and Capital Resources

In order to improve the financial condition of the Partnership and provide much
needed funds for exterior improvements on Fifth Avenue, on December 3, 1998, the
Partnership refinanced the mortgage note payable on Fifth Avenue, (the
"Refinancing"). In accordance with the terms of the Loan Agreement (the "Loan
Agreement"), the principal balance of the original mortgage totaling $6,400,000
is due January 1, 2009 and bears interest at a fixed rate of 7.16% (the "New
First Mortgage"). The previous first and second mortgage (the "Previous
Mortgage") had a combined balance of $6,259,810 at an average interest rate of
8.97%. In spite of having a slightly higher loan principal amount, the
Partnership reduced its total annual debt service payments by approximately
$170,000. As a part of the refinancing, the previous lender forgave $181,142 of
debt and required the Partnership to pay a $139,223 prepayment penalty,
resulting in a gain on debt restructuring to the Partnership of $67,638.

Under the terms of the New First Mortgage with General Electric Capital
Corporation (the "Lender"), the Partnership is required to make fixed monthly
payments of principal and interest in the amount of $43,269 commencing on
February 1, 1999 until maturity on January 1, 2009, at which time the entire
outstanding principal balance and accrued interest is due. Under the terms of
the Loan Agreement, the Partnership was required to deposit with the Lender
$114,375 and make monthly contributions of $3,905 which are held by the Lender
pending application for the completion of certain required repairs to Fifth
Avenue. At December 31, 2000, the balance in this replacement reserve account
was $55,621.

The Previous Mortgage was subject to the terms of a modification and extension
agreement (the "Modification Agreement") executed on May 30, 1996 with Federal
National Mortgage Association (the "Previous Lender"). At the time the
Modification Agreement was executed, the previous first mortgage had an
aggregate balance of $7,111,142, representing $5,830,000 in original principal
and $1,281,142 in accrued interest. In accordance with the terms of the
Modification Agreement, the previous first mortgage of $5,830,000 had a fixed
interest rate of 9.875% with fixed monthly payments of principal and interest in
the amount of $52,464 and the previous first mortgage's maturity date was June
1, 2001 (the "Previous First Mortgage").

The accrued interest on the first mortgage in the amount of $1,281,142 was
converted into a previous second mortgage which was coterminous with the
Previous First Mortgage (the "Previous Second Mortgage"). Upon execution of the
Modification Agreement, the Partnership made a $300,000 payment to the Lender,
at which time the Lender reduced the Previous Second Mortgage balance to
$681,142. The Previous Second Mortgage was non-interest bearing and scheduled to
be fully amortized over the five-year term and pre-payable at any time. Under
the terms of the Previous Second Mortgage, payments of principal, in monthly
installments of $3,333 were due commencing on July 1, 1996, and continuing
through June 1, 1998, $5,000 per month beginning July 1, 1998 and continuing
through June 1, 2000, and $8,333 per month beginning July 1, 2000 and continuing
until maturity on June 1, 2001. The sum of the total minimum monthly payments
over the term of the Previous Second Mortgage was $300,000. Pursuant to the
Modification Agreement, if $500,000 in principal payments had been received
unconditionally and irrevocably by the Lender, the Previous Second Mortgage's
remaining unpaid principal in the amount $181,142 would be forgiven by the
Lender.

Cash and cash equivalents totaled $136,606 at December 31, 2000, compared to
$203,840 at December 31, 1999. The $67,234 decrease is primarily attributable to
fixed asset additions offset by an increase in cash provided by operations.

Cash held in escrow increased to $60,870 at December 31, 2000, from $54,365 at
December 31, 1999. The $6,505 increase is primarily attributable to
contributions to the insurance and real estate tax escrow, as required in the
Loan Agreement, and an increase in interest earned on the cash held in escrow.

Restricted cash replacement reserve increased to $55,621, at December 31, 2000,
from $39,414 at December 31, 1999. The $16,207 increase is attributable to the
monthly contributions to the replacements reserve, offset in part by the release
of $33,198 for replacements and completed required lender repairs in accordance
with the terms of the Loan Agreement.

Other assets totaled $61,821 at December 31, 2000, compared to $69,716 at
December 31, 1999. The decrease in other assets is primarily attributable to the
amortization of loan costs.

Accounts payable totaled $47,565 at December 31, 2000, compared to $70,376 at
December 31, 1999. The decrease is primarily attributable to the timing of
payments associated with repairs and maintenance for apartment preparation and
construction management fees.



                                                                        Page 6
<PAGE>   7



As a result of the Refinancing and anticipated reductions in general and
administrative expenses, the General Partners currently expect funds from
operations to pay all obligations for 2001, including debt service. In the event
of any cash flow deficits, it is expected that such deficits will be funded by
the Partnership's existing cash balances. However, there can be no assurance
that the Partnership will have sufficient cash to fund such deficits.


Results of Operations

2000 Compared With 1999

Operations resulted in net losses of $256,037 for the year ended December 31,
2000, and $262,832 for the year ended December 31, 1999. The decreased net loss
from 1999 to 2000 is primarily attributable to an increase in rental income and
a decrease in general and administrative expenses offset in part by increases in
property operating expenses and depreciation and amortization.

Rental income at Fifth Avenue totaled $1,380,401 for the year ended December 31,
2000, compared to $1,353,692 for the year ended December 31, 1999. Occupancy at
Fifth Avenue averaged approximately 94% during 2000 and 95% during 1999. The
average rental income per occupied square foot at Fifth Avenue was $8.76 in
2000, compared to $8.48 in 1999. At December 31, 2000, Fifth Avenue was 97%
occupied. The increase in the average rental income per occupied square foot in
2000 is primarily attributable to an increase in rental rates.

Total expenses for the year ended December 31, 2000 were $1,654,394 compared to
$1,633,945 for the year ended December 31, 1999. The increase is primarily
attributable to increases in property operating expenses, and depreciation and
amortization expenses which were offset in part by a decrease in general and
administrative expenses.

Property operating expenses consist primarily of on-site personnel expenses,
utility costs, repair and maintenance costs, property management fees,
advertising costs, insurance and real estate taxes. Property operating expenses
for the year ended December 31, 2000 were $704,176, compared to $677,746 for the
year ended December 31, 1999. The increase is primarily attributable to higher
repair and maintenance costs primarily for apartment preparation, real estate
taxes and loss on retirement of assets, offset in part by lower general repairs
and maintenance costs and lower insurance costs.

Depreciation and amortization expense totaled $426,124 for the year ended
December 31, 2000, compared to $412,864 for the year ended December 31, 1999.
The increase is attributable to additions to buildings and improvements.

General and administrative expenses for the year ended December 31, 2000 were
$64,336 compared to $80,671 for the year ended December 31, 1999. The decrease
is primarily attributable to lower legal fees and other professional expenses.

1999 Compared With 1998

Operations resulted in net losses of $262,832 for the year ended December 31,
1999, and $428,725 for the year ended December 31, 1998. Operations before
extraordinary items resulted in net losses of $262,832 for the year ended
December 31, 1999, and $496,363 for the year ended December 31, 1998. The
decreased net loss before extraordinary items from 1998 to 1999 is primarily
attributable to a decrease in interest expense due to the Refinancing, and a
decrease in general and administrative expenses offset in part with an increase
in property operating expenses. The extraordinary item for the 1998 period is
attributable to the Partnership realizing an extraordinary gain of $67,638 as a
result of the Refinancing completed in December 1998.

Rental income at Fifth Avenue totaled $1,353,692 for the year ended December 31,
1999, compared to $1,351,810 for the year ended December 31, 1998. Occupancy at
Fifth Avenue averaged approximately 95% during 1999 and 96% during 1998. The
average rental income per occupied square foot at Fifth Avenue was $8.48 in
1999, compared to $8.39 in 1998. At December 31, 1999, Fifth Avenue was 90%
occupied. The increase in the average rental income per occupied square foot in
1999 is primarily attributable to an increase in rental rates offset in part
with an increase in rental concessions.

Interest and other income totaled $17,421 for the year ended December 31, 1999,
compared to $8,718 for the year ended December 31, 1998. The increase is
primarily attributable to a higher average invested cash balance during 1999
associated with the cash held in escrow and the replacement reserves.


                                                                        Page 7
<PAGE>   8



Property operating expenses consist primarily of on-site personnel expenses,
utility costs, repair and maintenance costs, property management fees,
advertising costs, insurance and real estate taxes. Property operating expenses
for the year ended December 31, 1999 were $677,746, compared to $622,700 for the
year ended December 31, 1998. The increase is primarily attributable to higher
repair and maintenance costs primarily for apartment preparation.

Interest expense totaled $462,664 for the year ended December 31, 1999, compared
to $739,720 for the year ended December 31, 1998. The decrease is primarily
attributable to the Refinancing.

General and administrative expenses for the year ended December 31, 1999 were
$80,671 compared to $105,490 for the year ended December 31, 1998. The decrease
is primarily attributable to lower accounting and related administrative
expenses.

General

The effect of inflation on the results of operations for the years ended
December 31, 2000, 1999 and 1998 was not significant.

Over the past several years the real estate market has gotten stronger and this
improvement has resulted in an increase in the number of potential buyers as
well as the number of parties interested in purchasing limited partnership units
on the secondary market. Some of these groups have solicited the Partnership's
Limited Partners directly with offers to buy their units. The General Partners
are constantly analyzing market conditions, comparable sales, and economic
trends in order to evaluate their impact on the value of the Partnership's
property, and intend to consider the sale of Fifth Avenue at the time when such
sale will maximize the property's value and otherwise be in the best interests
of the Limited Partners.

Words or phrases when used in this Form 10-K or other filings with the
Securities and Exchange Commission, such as "does not believe" and "believes",
or similar expressions are intended to identify "forward-looking statements"
within the meaning of the Private Securities Litigation Reform Act of 1995.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The Partnership's primary market risk exposure relates to changes in interest
rates related to its long-term debt. To limit the impact of interest rate
changes, the Partnership has entered into fixed rate debt of 7.16% that expires
in 2009. As a result, the Partnership's only interest rate risk is the
opportunity loss should interest rates decline. The following table summarizes
the expected maturities of the Partnership's long-term debt. The Partnership
believes that borrowing rates available to the Partnership at December 31, 2000
for such loans with similar terms and maturities approximate the Partnership's
fixed rate of 7.16% and therefore the carrying amount approximates the fair
value.

<TABLE>
<CAPTION>
Year ending December 31,
<S>                                  <C>
                 2001                $  65,277
                 2002                   70,177
                 2003                   75,444
                 2004                   81,107
                 2005                   87,195
                 Thereafter           5,904,759
                                     ----------
                                     $6,283,959
                                     ----------
</TABLE>

The fair value of the Partnership's remaining financial instruments, consisting
of cash and cash equivalents, cash held in escrow, restricted cash replacement
reserves, accounts receivable and accounts payable, approximate fair value due
to the short-term nature of these instruments and are relatively unaffected by
interest rate changes or other market risks.


                                                                         Page 8
<PAGE>   9



ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

The following financial statements are filed as part of this report:


<TABLE>
<CAPTION>
                                                                                                  Page
                                                                                                 Number
                                                                                                 ------
<S>                                                                                              <C>
Independent Auditors' Report ......................................................................F-1

Balance Sheets - At December 31, 2000 and 1999 ....................................................F-2

Statements of Partners' Deficit - For the years ended December 31, 2000, 1999 and 1998 ............F-2

Statements of Operations - For the years ended December 31, 2000, 1999 and 1998 ...................F-3

Statements of Cash Flows - For the years ended December 31, 2000, 1999 and 1998 ...................F-4

Notes to the Financial Statements .................................................................F-5

Schedule III - Real Estate and Accumulated Depreciation ...........................................F-9
</TABLE>


ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE

None




                                                                        Page 9
<PAGE>   10




                                    PART III


ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

Murray Realty Investors VII, Inc., a Texas corporation, SM7 Apartment Investors
Inc., a Texas corporation ("SM7"), and Crozier Partners VII, Ltd., a Texas
limited partnership, are the General Partners of the Partnership. On June 16,
1998, DA Group Holdings, Inc., a Delaware corporation and the parent company of
SM7 ("DA"), and Anterra Property Investors VIII, Inc., a Texas corporation
("Anterra"), entered into a Stock Purchase Agreement. Pursuant to the Stock
Purchase Agreement, Anterra purchased from DA all of the issued and outstanding
shares of common stock, $1.00 par value per share, of SM7. Anterra is an
affiliate of Anterra Property Investors VII, Inc. which is the general partner
of Crozier Partners VII, Ltd. The following is a summary of certain information
concerning the directors and executive officers of Anterra Property Investors
VII, Inc., Murray Realty Investors VII, Inc. and SM7 Apartment Investors Inc.,
as of December 31, 2000.

Anterra Property Investors VII, Inc., general partner of Crozier Partners VII,
Ltd.

Richard E. Hoffmann, 46, President, Treasurer and Director. For more than five
years prior to July 15, 1990, Mr. Hoffmann was a Vice President and Treasurer of
Murray Properties Company and various other affiliated companies. He resigned
his position with substantially all Murray Properties Company affiliates on July
15, 1990. Mr. Hoffmann was elected Senior Vice President, Treasurer and a
Director of Anterra Realty Corporation in June of 1990, and was elected
President of Anterra Realty Corporation in July of 1994. He is President,
Treasurer and a Director of all other subsidiary corporations of Anterra Realty
Corporation, including Anterra Property Investors VII, Inc. Mr. Hoffmann
received a Master of Business Administration degree from the University of Texas
at Austin in 1979 and a B.S. from Tulane University in 1977. He is a Certified
Public Accountant.

Lynn D. Maynard, 48, Executive Vice President and Director. For more than five
years prior to December 26, 1989, Ms. Maynard was an officer of Murray
Properties Company and various other affiliated companies. She was elected Vice
President of Murray Properties Company and Murray Realty Investors, Inc. in
December of 1986. Ms. Maynard resigned her positions with substantially all
Murray Properties Company affiliates on December 26, 1989. Ms. Maynard was
elected Senior Vice President and a Director of Anterra Realty Corporation in
November 1989, and is Executive Vice President and a Director of all other
subsidiary corporations of Anterra Realty Corporation, including Anterra
Property Investors VII, Inc. Ms. Maynard received a Bachelor of Science Degree
in Accounting from the University of Texas at Dallas, and is a Certified Public
Accountant. She is a member of the American Institute of Certified Public
Accountants, the Texas Society of Certified Public Accountants and the Dallas
Chapter of Certified Public Accountants.

Sandy Robison, 45, Vice President and Secretary. Ms. Robison joined Anterra
Realty Corporation's predecessor company in 1983 and has served in all areas of
the Accounting Department, including the positions of Staff Accountant, Systems
Manager and Assistant Controller. Ms. Robison became Secretary of Anterra Realty
Corporation in December 1997 and became Vice President and Controller of Anterra
Realty Corporation in December 1998. She is Vice President, Secretary and
Controller of Anterra Realty Corporation and all other subsidiary corporations
of Anterra Realty Corporation, including Anterra Property Investors VII, Inc.
Ms. Robison holds an associates degree from Eastfield College.

Murray Realty Investors VII, Inc., Corporate General Partner

Fulton Murray, 60, President, Chairman of the Board and Director. Mr. Murray has
been Chairman of the Board and Chief Executive Officer of Murray Properties
Company and Murray Financial Corporation for more than five years prior to the
date of this report. In addition, he is a director or officer of substantially
all affiliates of Murray Properties Company. His family, or trusts for their
benefit, own approximately 64% of the outstanding stock of Murray Financial
Corporation, which is the parent corporation of Murray Properties Company and
most of its affiliates. He holds a Bachelor of Business Administration degree in
Finance from Southern Methodist University.

Charles W. Karlen, 65, Vice President. Mr. Karlen is Senior Vice President and
Treasurer of Murray Financial Corporation. Prior to joining the Murray
Organization in 1971, he was employed by Peat Marwick Mitchell & Co., a public
accounting firm. Mr. Karlen is a Certified Public Accountant and holds a
Bachelor of Business Administration degree in Accounting from the University of
North Texas.



                                                                       Page 10
<PAGE>   11




SM7 Apartment Investors Inc., Corporate General Partner

Richard E. Hoffmann, 46, President, Treasurer and Director. For more than five
years prior to July 15, 1990, Mr. Hoffmann was a Vice President and Treasurer of
Murray Properties Company and various other affiliated companies. He resigned
his position with substantially all Murray Properties Company affiliates on July
15, 1990. Mr. Hoffmann was elected Senior Vice President, Treasurer and a
Director of Anterra Realty Corporation in June of 1990, and was elected
President of Anterra Realty Corporation in July of 1994. He is President,
Treasurer and a Director of all other subsidiary corporations of Anterra Realty
Corporation, including SM7 Apartment Investors Inc. Mr. Hoffmann received a
Master of Business Administration degree from the University of Texas at Austin
in 1979 and a B.S. from Tulane University in 1977. He is a Certified Public
Accountant.

Lynn D. Maynard, 48, Executive Vice President and Director. For more than five
years prior to December 26, 1989, Ms. Maynard was an officer of Murray
Properties Company and various other affiliated companies. She was elected Vice
President of Murray Properties Company and Murray Realty Investors, Inc. in
December of 1986. Ms. Maynard resigned her positions with substantially all
Murray Properties Company affiliates on December 26, 1989. Ms. Maynard was
elected Senior Vice President and a Director of Anterra Realty Corporation in
November 1989, and is Executive Vice President and a Director of all other
subsidiary corporations of Anterra Realty Corporation including SM7 Apartment
Investors Inc. Ms. Maynard received a Bachelor of Science Degree in Accounting
from the University of Texas at Dallas, and is a Certified Public Accountant.
She is a member of the American Institute of Certified Public Accountants, the
Texas Society of Certified Public Accountants and the Dallas Chapter of
Certified Public Accountants.

Sandy Robison, 45, Vice President and Secretary. Ms. Robison joined Anterra
Realty Corporation's predecessor company in 1983 and has served in all areas of
the Accounting Department, including the positions of Staff Accountant, Systems
Manager and Assistant Controller. Ms. Robison became Secretary of Anterra Realty
Corporation in December 1997 and became Vice President and Controller of Anterra
Realty Corporation in December 1998. She is Vice President, Secretary and
Controller of Anterra Realty Corporation and all other subsidiary corporations
of Anterra Realty Corporation, including SM7 Apartment Investors Inc. Ms.
Robison holds an associates degree from Eastfield College.


Affiliated Bankruptcies

Certain officers and directors of Murray Realty Investors VII, Inc. were also
officers and directors or general partners of affiliates of Murray Realty
Investors VII, Inc. which served as general partners of certain affiliated
public funds which filed cases under Chapter 11 of the Federal Bankruptcy Code.
Certain officers and directors of SM7 Apartment Investors Inc. were also
officers and directors of companies which served as general partners of these
affiliated public funds. Additionally, Fulton Murray was a general partner of a
partnership that had an involuntary bankruptcy petition filed against it, which
was subsequently dismissed. All the partnerships which commenced cases under the
Federal Bankruptcy Code owned real estate that was secured by significant
amounts of debt. As a result of the dramatic decline in the economy and
overbuilding in the markets in which those partnerships held real estate, those
partnerships were unable to meet their scheduled debt payments and commenced
bankruptcy cases to protect each partnerships' properties from foreclosure by
the lenders to such partnerships.


ITEM 11. EXECUTIVE COMPENSATION

The Partnership has not paid and does not propose to pay any cash compensation,
bonuses or deferred compensation, compensation pursuant to retirement or other
plans, or other compensation to the officers, directors, or partners of the
General Partners. The General Partners and their affiliates receive various fees
and distributions. See Item 13. "Certain Relationships and Related Transactions"
for information on the fees and other compensation or reimbursements paid to the
General Partners or their affiliates during the year ended December 31, 2000.


                                                                       Page 11
<PAGE>   12




ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

     (a) Beneficial owners of 5% or more of Registrant's Securities

<TABLE>
<CAPTION>
                                                                       Amount and
                                                                       Nature of
                                                                       Beneficial                Percent
         Title of Class                 Beneficial Owner               Ownership                 of Class
         --------------                 ----------------               ----------                --------
<S>                                     <C>                            <C>                       <C>
         Limited Partnership            Naomi Ruth                     600                         5.4%
         Interest, $1,000               Wilden Trust                   (owned beneficially
         per Interest                   221 N Central Ave,  #299       and of record)
                                        Medford, OR 97501-5927
</TABLE>

     (b)  No General Partner or any officer or director of a General Partner
          beneficially owned or owned of record directly or indirectly any
          Interests as of December 31, 2000.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

     (a)  During the years ended December 31, 2000, 1999 and 1998, the General
          Partners or their affiliates were reimbursed for Partnership
          administrative and operating expenses, excluding property and
          construction management fees, in the amounts of $11,050, $11,906 and
          $11,385, respectively.

          On January 1, 1990, Murray Management Corporation retained Anterra
          Management Corporation, an affiliate of the general partners, to
          provide certain administrative and management services with respect to
          the Partnership and its Properties. Anterra Management Corporation is
          a real estate related service company formed by former executive
          officers of Murray and its affiliates, and earned property and
          construction management fees of $61,528, $65,086 and $67,759 for the
          years ended December 31, 2000, 1999 and 1998, respectively.

     (b)  None.

     (c)  No management person is indebted to the Partnership.

     (d)  Not applicable.


                                     PART IV


ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULE AND REPORTS ON FORM 8-K

     (a) 1.   Financial Statements - see Index to Financial Statements in
              Item 8 of this Form 10-K.

         2.   Financial Statement Schedule - see Index to Financial
              Statements in Item 8 of this Form 10-K.

              All other schedules have been omitted because they are not
              required or the required information is shown in the
              financial statements or notes thereto.

     (b) Reports on Form 8-K filed during the last quarter of the fiscal
         year:

              None

     (c) Exhibits:

         2a   Voluntary Petition of Shearson-Murray Real Estate Fund VII,
              Ltd. to commence a case under Chapter 11 of the Federal
              Bankruptcy Code in the United States Bankruptcy Court for
              the Western District of Texas-Austin Division, as filed on
              June 6, 1989. Reference is made to Exhibit 2a to the
              Partnership's Annual Report on Form 10-K filed with the
              Securities and Exchange Commission on June 14, 1989.


                                                                       Page 12
<PAGE>   13




               2b   Modified First Amended Plan of Reorganization of
                    Shearson-Murray Real Estate Fund VII, Ltd. in the United
                    States Bankruptcy Court for the Western District of
                    Texas-Austin Division Case No. 89-11662-LC filed February
                    20, 1990. Reference is made to the Partnership's Annual
                    Report on Form 10-K filed with the Securities and Exchange
                    Commission on April 12, 1990.

               3    Agreement of Limited Partnership of Shearson-Murray Real
                    Estate Fund VII, Ltd., as amended as of September 30, 1983.
                    Reference is made to Partnership's Form 8-K filed with the
                    Securities and Exchange Commission on October 26, 1983.
                    Reference is made to Exhibit A to the Prospectus dated June
                    10, 1983 contained in Amendment No. 3 to Partnership's Form
                    S-11 Registration Statement filed with the Securities and
                    Exchange Commission on June 10, 1983.

              10a   Assignment and Assumption Agreement between Murray
                    Management Corporation and Anterra Management Corporation
                    for property management and leasing services dated January
                    1, 1990. Reference is made to Exhibit 10u to the
                    Partnership's Annual Report on Form 10-K filed with the
                    Securities and Exchange Commission on May 15, 1990.

              10b   Loan Agreement between S/M Real Estate Fund VII, Ltd. and
                    General Electric Capital Corporation, dated December 3,
                    1998. Reference is made to Exhibit 10.1 to Partnership's
                    Form 8-K filed with the Securities and Exchange Commission
                    on December 14, 1998.

              27    Financial Data Schedule. Filed herewith.

              28a   Pages A-16 to A-18 of Exhibit A to the Prospectus dated June
                    10, 1983, contained in Amendment No. 3 to Partnership's Form
                    S-11 Registration Statement filed with the Securities and
                    Exchange Commission on June 10, 1983. Reference is made to
                    Exhibit 28a to the Partnership's Annual Report on Form 10-K
                    filed with the Securities and Exchange Commission on May 12,
                    1988.

              28b   Pages 10-18 of the Prospectus dated June 10, 1983, contained
                    in Amendment No. 3 to Partnership's Form S-11 Registration
                    Statement filed with the Securities and Exchange Commission
                    on June 10, 1983. Reference is made to Exhibit 28b to the
                    Partnership's Annual Report on Form 10-K filed with the
                    Securities and Exchange Commission on May 12, 1988.

              99a   Compromise Settlement Agreement between S/M Real Estate Fund
                    VII, Ltd. and Federal National Mortgage Association, dated
                    May 6, 1996. Reference is made to Exhibit 99.1 to the
                    Partnership's Quarterly Report on Form 10-Q for the quarter
                    ended June 30, 1996 filed with the Securities and Exchange
                    Commission.

              99b   $5,830,000 Multifamily Note and Addendum, dated May 30,
                    1996. Reference is made to Exhibit 99.2 to the Partnership's
                    Quarterly Report on Form 10-Q for the quarter ended June 30,
                    1996 filed with the Securities and Exchange Commission.

              99c   $681,142 Subordinate Multifamily Note and Addendum, dated
                    May 30, 1996. Reference is made to Exhibit 99.3 to the
                    Partnership's Quarterly Report on Form 10-Q for the quarter
                    ended June 30, 1996 filed with the Securities and Exchange
                    Commission.

              99d   $6,400,000 Promissory Note, dated December 3, 1998.
                    Reference is made to Exhibit 99.1 of the Partnership's Form
                    8-K filed with the Securities and Exchange Commission on
                    December 14, 1998.


                                                                        Page 13
<PAGE>   14



                                   SIGNATURES


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


                                            S/M REAL ESTATE FUND VII, LTD.

                                            BY:  SM7 APARTMENT INVESTORS INC.
                                                 A General Partner





Date:  March 21, 2001
                                            BY:  /s/ Richard E. Hoffmann
                                               -------------------------------
                                                     Richard E. Hoffmann
                                                     Director and President





                                                                       Page 14
<PAGE>   15





Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following members of the Board of Directors and
officers of SM7 Apartment Investors Inc., a corporate general partner of the
Registrant, on behalf of the Registrant in the capacities and on the dates
indicated.






Date:  March 21, 2001
                                            BY:  /s/ Richard E. Hoffmann
                                               -------------------------------
                                                     Richard E. Hoffmann
                                                     President, Director and
                                                     Treasurer



Date:  March 21, 2001
                                            BY: /s/ Lynn D. Maynard
                                               -------------------------------
                                                     Lynn D. Maynard
                                                     Executive Vice President
                                                     and Director



Date:  March 21, 2001
                                            BY: /s/ Sandy Robison
                                               -------------------------------
                                                    Chief Financial Officer,
                                                    Vice President,
                                                    Secretary and Controller



                                                                       Page 15
<PAGE>   16






Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following members of the Board of Directors and
officers of Anterra Property Investors VII, Inc., a corporate general partner of
the Registrant, on behalf of the Registrant in the capacities and on the dates
indicated.



                                    BY:  CROZIER PARTNERS VII, LTD.
                                         A general partner

                                    BY:  ANTERRA PROPERTY INVESTORS VII, INC.,
                                         General Partner of Crozier Partners
                                         VII, Ltd.



Date:  March 21, 2001
                                    BY: /s/ Richard E. Hoffman
                                       ---------------------------------------
                                            Richard E. Hoffman
                                            President, Director and Treasurer



Date:  March 21, 2001
                                    BY: /s/ Lynn D. Maynard
                                       ---------------------------------------
                                            Lynn D. Maynard
                                            Executive Vice President and
                                            Director


                                                                        Page 16
<PAGE>   17





Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following members of the Board of Directors and
officers of Murray Realty Investors VII, Inc., a corporate general partner of
the Registrant, on behalf of the Registrant in the capacities and on the dates
indicated.



                                       MURRAY REALTY INVESTORS VII, INC.
                                       A General Partner





Date:  March 21, 2001
                                       BY:  /s/  Fulton Murray
                                          ------------------------------------
                                                 Fulton Murray
                                                 President, Chairman of the
                                                 Board and Director



Date:  March 21, 2001
                                       BY:  /s/  Charles W. Karlen
                                          ------------------------------------
                                                 Charles W. Karlen
                                                 Vice President




                                                                       Page 17
<PAGE>   18





-------------------------------------------------------------------------------
                          INDEPENDENT AUDITORS' REPORT
-------------------------------------------------------------------------------



The Partners
S/M Real Estate Fund VII, Ltd.:

We have audited the financial statements of S/M Real Estate Fund VII, Ltd. (a
Texas Limited Partnership), as listed in the accompanying index. In connection
with our audits of the financial statements, we also have audited the financial
statement schedule as listed in the accompanying index. These financial
statements and the financial statement schedule are the responsibility of the
Partnership's management. Our responsibility is to express an opinion on these
financial statements and financial statement schedule based on our audits.

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

In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of S/M Real Estate Fund VII, Ltd.
as of December 31, 2000 and 1999, and the results of its operations and its cash
flows for each of the years in the three-year period ended December 31, 2000, in
conformity with accounting principles generally accepted in the United States of
America. 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.


                                             KPMG LLP

Dallas, Texas
January 26, 2001



                                      F-1
<PAGE>   19



S/M REAL ESTATE FUND VII, LTD.

<TABLE>
<CAPTION>
BALANCE SHEETS                                            AT DECEMBER 31,    AT DECEMBER 31,
                                                               2000               1999
                                                          ---------------    ---------------
<S>                                                       <C>                <C>
ASSETS
Real estate, at cost:
   Land                                                   $       962,216    $       962,216
   Buildings and improvements                                   7,944,151          7,863,701
                                                          ---------------    ---------------
                                                                8,906,367          8,825,917
   Less accumulated depreciation                               (6,308,560)        (5,941,608)
                                                          ---------------    ---------------
                                                                2,597,807          2,884,309

Cash and cash equivalents                                         136,606            203,840
Cash held in escrow                                                60,870             54,365
Restricted cash - replacement reserve                              55,621             39,414
Accounts receivable                                                 5,451              5,097
Other assets                                                       61,821             69,716
                                                          ---------------    ---------------
     TOTAL ASSETS                                         $     2,918,176    $     3,256,741
                                                          ===============    ===============
LIABILITIES AND PARTNERS' DEFICIT
Liabilities:
   First mortgage note payable                            $     6,283,959    $     6,343,433
   Accounts payable:
     Trade                                                          6,605             19,022
     Affiliates                                                    40,960             51,354
   Accrued expenses and other liabilities                          46,617             46,860
                                                          ---------------    ---------------
     Total Liabilities                                          6,378,141          6,460,669
                                                          ---------------    ---------------
Partners' Deficit:
   General Partners                                              (121,211)          (118,651)
   Limited Partners (11,080 units outstanding)                 (3,338,754)        (3,085,277)
                                                          ---------------    ---------------
     Total Partners' Deficit                                   (3,459,965)        (3,203,928)
                                                          ---------------    ---------------
     TOTAL LIABILITIES AND PARTNERS' DEFICIT              $     2,918,176    $     3,256,741
                                                          ===============    ===============
</TABLE>



STATEMENTS OF PARTNERS' DEFICIT
FOR THE YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998

<TABLE>
<CAPTION>
                                                             GENERAL            LIMITED
                                                             PARTNERS           PARTNERS             TOTAL
                                                          ---------------    ---------------    ---------------
<S>                                                       <C>                <C>                <C>
BALANCE AT DECEMBER 31, 1997                              $      (111,736)   $    (2,400,635)   $    (2,512,371)
Net Loss                                                           (4,287)          (424,438)          (428,725)
                                                          ---------------    ---------------    ---------------
BALANCE AT DECEMBER 31, 1998                              $      (116,023)   $    (2,825,073)   $    (2,941,096)
Net Loss                                                           (2,628)          (260,204)          (262,832)
                                                          ---------------    ---------------    ---------------
BALANCE AT DECEMBER 31, 1999                              $      (118,651)   $    (3,085,277)   $    (3,203,928)
Net Loss                                                           (2,560)          (253,477)          (256,037)
                                                          ---------------    ---------------    ---------------
BALANCE AT DECEMBER 31, 2000                              $      (121,211)   $    (3,338,754)   $    (3,459,965)
                                                          ===============    ===============    ===============
</TABLE>



See accompanying notes to the financial statements.


                                       F-2

<PAGE>   20



S/M REAL ESTATE FUND VII, LTD.


<TABLE>
<CAPTION>
STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31,                     2000             1999             1998
                                                -------------    -------------    -------------
<S>                                             <C>              <C>              <C>
INCOME
Rental                                          $   1,380,401    $   1,353,692    $   1,351,810
Interest and other                                     17,956           17,421            8,718
                                                -------------    -------------    -------------

     Total Income                                   1,398,357        1,371,113        1,360,528
                                                -------------    -------------    -------------
EXPENSES
Property operating                                    704,176          677,746          622,700
Interest                                              459,758          462,664          739,720
Depreciation and amortization                         426,124          412,864          388,981
General and administrative                             64,336           80,671          105,490
                                                -------------    -------------    -------------
     Total Expenses                                 1,654,394        1,633,945        1,856,891
                                                -------------    -------------    -------------
     Loss before extraordinary item                  (256,037)        (262,832)        (496,363)
                                                -------------    -------------    -------------
EXTRAORDINARY ITEM
Gain on debt restructuring                                 --               --           67,638
                                                -------------    -------------    -------------
     NET LOSS                                   $    (256,037)   $    (262,832)   $    (428,725)
                                                =============    =============    =============
NET LOSS ALLOCATED:
   To the General Partners                      $      (2,560)   $      (2,628)   $      (4,287)
   To the Limited Partners                           (253,477)        (260,204)        (424,438)
                                                -------------    -------------    -------------
                                                $    (256,037)   $    (262,832)   $    (428,725)
                                                =============    =============    =============
PER LIMITED PARTNERSHIP UNIT
(11,080 OUTSTANDING)

Net loss before extraordinary item              $      (22.88)   $      (23.48)   $      (44.35)
                                                -------------    -------------    -------------
Extraordinary item                                         --               --             6.04
                                                -------------    -------------    -------------
     NET LOSS                                   $      (22.88)   $      (23.48)   $      (38.31)
                                                =============    =============    =============
</TABLE>



See accompanying notes to the financial statements.


                                       F-3


<PAGE>   21


S/M REAL ESTATE FUND VII, LTD.

<TABLE>
<CAPTION>
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31,                                         2000             1999             1998
                                                                    -------------    -------------    -------------
<S>                                                                 <C>              <C>              <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Loss                                                            $    (256,037)   $    (262,832)   $    (428,725)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
   Depreciation and amortization                                          426,124          412,864          388,981
   Loss on retirement of assets                                            28,602           14,410               --
   Extraordinary gain on debt restructuring                                    --               --          (67,638)
   Increase (decrease) in cash arising from changes
   in operating assets and liabilities:
     Cash held in escrow                                                   (6,505)         (18,378)         165,979)
     Accounts receivable                                                     (354)           1,214           (4,324)
     Other assets                                                           1,782           (3,721)           2,439
     Accounts payable                                                     (22,811)          (3,068)          26,966
     Accrued expenses and other liabilities                                  (243)          (5,936)        (157,626)
                                                                    -------------    -------------    -------------
Net cash provided by (used in) operating activities                       170,558          134,553          (73,948)
                                                                    -------------    -------------    -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
(Increase) decrease in restricted cash - replacement reserve              (16,207)          74,961          (26,371)
Additions to real estate                                                 (162,111)        (223,842)         (43,728)
                                                                    -------------    -------------    -------------
Net cash used in investing activities                                    (178,318)        (148,881)         (70,099)
                                                                    -------------    -------------    -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments of principal on first mortgage note payable                      (59,474)         (56,567)      (5,738,101)
Payment of principal and amortization of discount
   on second mortgage note payable                                             --               --         (391,912)
Additions to first mortgage note payable                                       --               --        6,400,000
Refinancing costs                                                              --               --          (61,129)
                                                                    -------------    -------------    -------------
Net cash (used in) provided by financing activities                       (59,474)         (56,567)         208,858
                                                                    -------------    -------------    -------------
Net (decrease) increase in cash and cash equivalents                      (67,234)         (70,895)          64,811
Cash and cash equivalents, beginning of year                              203,840          274,735          209,924
                                                                    -------------    -------------    -------------
CASH AND CASH EQUIVALENTS, END OF YEAR                              $     136,606    $     203,840    $     274,735
                                                                    =============    =============    =============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the year for interest                              $     459,758    $     462,664    $     726,631
                                                                    -------------    -------------    -------------
SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING ACTIVITIES:
Write-off of fully depreciated building improvements                $      18,567    $       8,675    $          --
                                                                    -------------    -------------    -------------
</TABLE>


See accompanying notes to the financial statements.


                                       F-4


<PAGE>   22



S/M REAL ESTATE FUND VII, LTD.

     NOTES TO THE FINANCIAL STATEMENTS
     DECEMBER 31, 2000, 1999, AND 1998

     1. ORGANIZATION

     S/M Real Estate Fund VII, Ltd. (the "Partnership") (see below) was
     organized on November 4, 1982 pursuant to the filing of a Certificate of
     Limited Partnership with the Secretary of State of the State of Texas. The
     Partnership was formed for the purpose of acquiring existing garden style
     apartment complexes. The general partners of the Partnership are SM7
     Apartment Investors Inc. (see below), a Texas corporation, Murray Realty
     Investors VII, Inc., a Texas corporation ("Murray") and Crozier Partners
     VII, Ltd., a Texas limited partnership (collectively referred to as the
     "General Partners"). The Partnership will continue until January 31, 2012,
     unless sooner terminated in accordance with the terms of the Partnership
     Agreement.

     On June 16, 1998, DA Group Holdings, Inc., a Delaware corporation ("DA"),
     and Anterra Property Investors VIII, Inc., a Texas corporation ("Anterra"),
     entered into a Stock Purchase Agreement (the "Stock Agreement"). Pursuant
     to the Stock Agreement, Anterra purchased from DA all of the issued and
     outstanding shares of common stock, $1.00 par value per share, of SM7
     Apartment Investors, Inc. Anterra is an affiliate of Anterra Property
     Investors VII, Inc., which is a general partner of Crozier Partners VII,
     Ltd.

     2. LIQUIDITY

     As a result of the refinancing in 1998, see Note 6, and anticipated
     reductions in general and administrative expenses, the General Partners
     currently expect funds from operations to pay all obligations for 2001,
     including debt service. In the event of any cash flow deficits, it is
     expected that such deficits will be funded by the Partnership's existing
     cash balances. However, there can be no assurance that the Partnership will
     have sufficient cash to fund such deficits.

     3. SIGNIFICANT ACCOUNTING POLICIES

     BASIS OF ACCOUNTING The accompanying financial statements have been
     prepared on the accrual basis of accounting in accordance with accounting
     principles generally accepted in the United States of America. Income is
     recognized as earned and expenses are recorded as obligations are incurred.

     REAL ESTATE INVESTMENT The real estate investment, which consists of land,
     apartment buildings, building improvements and furniture, fixtures and
     equipment, is recorded at cost less accumulated depreciation. Cost includes
     the initial purchase price of the property plus acquisition costs.
     Depreciation is computed using the straight-line method based on estimated
     useful lives of the related assets ranging from three to twenty-one years.

     IMPAIRMENT OF LONG-LIVED ASSETS The Partnership assesses its real estate
     investment for impairment whenever events or changes in circumstances
     indicate that the carrying amount of the real estate may not be
     recoverable. Recoverability of real estate to be held and used is measured
     by a comparison of the carrying amount of the real estate to future net
     cash flows (undiscounted and without interest) expected to be generated by
     the real estate. If the real estate is considered to be impaired, the
     impairment to be recognized is measured by the amount by which the carrying
     amount of the real estate exceeds the fair value of the real estate.

     LEASE REVENUE The Partnership has determined that all leases associated
     with the rental of space at the investment property are operating leases.
     Leases on the Partnership's property typically have a term of twenty months
     or less.

     CASH AND CASH EQUIVALENTS Cash and cash equivalents consist of short-term
     highly liquid investments which have maturities of three months or less
     from the date of issuance. The carrying value approximates fair value
     because of the short maturity of these instruments.

     INCOME TAXES The Partnership distributes all profits, losses and other
     taxable items to the individual partners. No provision for income taxes is
     made in the financial statements of the Partnership since the liability for
     such taxes is that of the partners rather than the Partnership.


                                       F-5


<PAGE>   23



S/M REAL ESTATE FUND VII, LTD.


     NET LOSS PER LIMITED PARTNERSHIP UNIT Net loss per limited partnership unit
     is based upon the limited partnership interests outstanding at year-end and
     the net loss allocated to the limited partners (the "Limited Partners").

     USE OF ESTIMATES The preparation of financial statements in conformity with
     accounting principles generally accepted in the United States of America
     requires management to make estimates and assumptions that affect the
     reported amount of assets and liabilities and disclosure of contingent
     assets and liabilities at the date of the financial statements and the
     reported amounts of income and expenses during the reporting period. Actual
     results could differ from those estimates.

     FAIR VALUE OF FINANCIAL INSTRUMENTS Statement of Financial Accounting
     Standards No. 107, "Disclosures about Fair Value of Financial Instruments"
     ("FAS 107"), requires that the Partnership disclose the estimated fair
     values of its financial instruments. Fair values generally represent
     estimates of amounts at which a financial instrument could be exchanged
     between willing parties in a current transaction other than in forced
     liquidation.

     Fair value estimates are subjective and are dependent on a number of
     significant assumptions based on management's judgment regarding future
     expected loss experience, current economic conditions, risk characteristics
     of various financial instruments, and other factors. In addition, FAS 107
     allows a wide range of valuation techniques, therefore, comparisons between
     entities, however similar, may be difficult.

     4. PARTNERSHIP AGREEMENT

     Pursuant to the terms of the Partnership Agreement, all items of income,
     gain, loss, deduction and credit are generally allocated 1% to Crozier
     Partners VII, Ltd. and 99% to the Limited Partners except that: (a) first,
     income and net gain shall be allocated to the General Partners and the
     Limited Partners pro rata based on and to the extent of their respective
     deficit balances in their capital accounts in an amount sufficient to cause
     the aggregate deficits in the Partners' capital accounts to not exceed the
     Minimum Gain (as defined), (b) net gain shall then be allocated: (i) to the
     Limited Partners in an amount sufficient to cause each Limited Partner's
     capital account to equal its unreturned Original Invested Capital plus any
     unpaid Preferred Return (as defined); and (ii) then, to the Limited
     Partners and the General Partners in the proportion between them of 85% to
     the Limited Partners and 15% to the General Partners.

     Cash distributions from operations, as defined, will be allocated 1% to
     Crozier Partners VII, Ltd. and 99% to the Limited Partners. Cash
     distributions from sales or refinancings of property will be allocated 99%
     to the Limited Partners and 1% to Crozier Partners VII, Ltd. until the
     Limited Partners have received an amount from cash distributions from sales
     or refinancings or property equal to their Original Invested Capital plus
     their Preferred Return (as defined). Next, cash distributions from the sale
     or refinancing of property will be allocated 1% to Crozier Partners VII,
     Ltd., and 99% to the Limited Partners and the General Partners in the
     proportions between them of 85% to the Limited Partners and 15% to the
     General Partners.

     5. REAL ESTATE INVESTMENTS

     On July 29, 1983, the Partnership acquired Fifth Avenue Apartments ("Fifth
     Avenue"), a 198-unit apartment complex located in San Antonio, Texas. As of
     December 31, 2000 and 1999, Fifth Avenue was 97% and 90% occupied,
     respectively.

     6. MORTGAGE NOTES PAYABLE

     On December 3, 1998, the Partnership refinanced the mortgage note payable
     with General Electric Capital Corporation (the "Lender") on Fifth Avenue.
     In accordance with the terms of the Loan Agreement (the "Agreement"), the
     principal balance of the original mortgage totaling $6,400,000 is due in
     ten years and will bear interest at a fixed interest rate of 7.16% (the
     "New First Mortgage"). Under the terms of the New First Mortgage, the
     Partnership is required to make fixed monthly payments of principal and
     interest in the amount of $43,269 commencing on February 1, 1999 until
     maturity on January 1, 2009, at which time the entire outstanding principal
     balance is due. As a part of the refinancing, the previous lender forgave
     $181,142 of debt and required the Partnership to pay a $139,223 prepayment
     penalty, resulting in a gain on debt restructuring of $67,638.


                                       F-6


<PAGE>   24



S/M REAL ESTATE FUND VII, LTD.




     Under the terms of the New First Mortgage, the Partnership was required to
     deposit with the Lender $114,375 and make monthly contributions of $3,905
     which are held by the Lender pending application for the completion of
     certain required repairs to Fifth Avenue. At December 31, 2000, the balance
     in this replacement reserve account was $55,621.

     The following represents principal payments required under the New First
     Mortgage for the five years subsequent to December 31, 2000:

<TABLE>
<CAPTION>
              Year ending December 31,
              ------------------------
<S>                                               <C>
                                   2001           $    65,277
                                   2002                70,177
                                   2003                75,444
                                   2004                81,107
                                   2005                87,195
</TABLE>

     Based on the borrowing rates currently available to the Partnership for
     mortgage loans with similar terms and average maturities, the fair value of
     long-term debt approximates its carrying value as of the balance sheet
     dates.

     7. TRANSACTIONS WITH RELATED PARTIES

     During the years ended December 31, 2000, 1999 and 1998, the General
     Partners or their affiliates were reimbursed for Partnership administrative
     and operating expenses, excluding property and construction management
     fees, in the amounts of $11,050, $11,906 and $11,385, respectively.

     On January 1, 1990, Murray Management Corporation subcontracted Anterra
     Management Corporation to provide certain administrative and management
     services with respect to the Partnership. Anterra Management Corporation is
     a real estate management company and an affiliate of the general partners,
     and earned property and construction management fees of $61,528, $65,086
     and $67,759 for the years ended December 31, 2000, 1999 and 1998,
     respectively.

     8. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)

     Interim results are not necessarily indicative of fiscal year performance
     because of the impact of seasonal and short-term variations. Selected
     quarterly financial data are summarized as follows (dollars in thousands,
     except per Interest data):

<TABLE>
<CAPTION>
QUARTER ENDED                                          03/31           06/30         09/30         12/31
-------------                                          -----           ------        ------        ------
<S>                                                    <C>             <C>           <C>           <C>
2000

Total Income                                           $ 345           $  342        $  348        $  363

Net Loss                                                 (44)             (88)          (89)          (35)

Net Loss per Limited Partnership Interest              (3.93)           (7.86)        (7.92)        (3.17)

1999

Total Income                                           $ 329           $  333        $  351        $  358

Net Loss                                                 (86)             (96)          (48)          (33)

Net Loss per Limited Partnership Interest              (7.68)           (8.58)        (4.29)        (2.93)
</TABLE>



                                       F-7


<PAGE>   25



S/M REAL ESTATE FUND VII, LTD.



     9. RECONCILIATION OF FINANCIAL STATEMENT NET LOSS AND PARTNERS' DEFICIT TO
     FEDERAL INCOME TAX BASIS NET INCOME (LOSS) AND PARTNERS' DEFICIT

     The following is a reconciliation of the net loss for financial statement
     purposes to federal income tax basis net income (loss) for the years ended
     December 31, 2000, 1999 and 1998:

<TABLE>
<CAPTION>
                                                                         2000                1999               1998
                                                                    ---------------    ---------------    ---------------
<S>                                                                 <C>                <C>                <C>
Net loss for financial statements purposes                          $      (256,037)   $      (262,832)   $      (428,725)
Financial statement depreciation over tax
         basis depreciation                                                 352,422            358,444            170,694

Financial statement gain on debt restructuring over
         tax basis                                                               --                 --            (67,638)

Federal income tax basis loss on retirement of assets over
         financial statement loss on retirement of assets                   (21,430)                --                 --

Other                                                                         1,486               (500)             1,739
                                                                    ---------------    ---------------    ---------------
Federal income tax basis net loss under financial
         statement net loss                                                 332,478            357,944            104,795
                                                                    ---------------    ---------------    ---------------
Federal income tax basis net income (loss)                          $        76,441    $        95,112    $      (323,930)
                                                                    ===============    ===============    ===============
</TABLE>

Reconciliation of financial statement partners' deficit to federal income tax
basis partners' deficit for the years ended December 31, 2000, 1999 and 1998:

<TABLE>
<CAPTION>
                                                                         2000               1999                1998
                                                                    ---------------    ---------------    ---------------
<S>                                                                 <C>                <C>                <C>
Financial statement basis partners' deficit                         $    (3,459,965)   $    (3,203,928)   $    (2,941,096)

Current year federal income tax basis net loss
         under  financial statement net loss                                332,478            357,944            104,795

Cumulative federal income tax basis net loss
         over financial statement net loss                               (1,265,298)        (1,623,242)        (1,728,037)
                                                                    ---------------    ---------------    ---------------
Federal income tax basis partners' deficit                          $    (4,392,785)   $    (4,469,226)   $    (4,564,338)
                                                                    ===============    ===============    ===============
</TABLE>

     Because many types of transactions are susceptible to varying
     interpretations under federal and state income tax laws and regulations,
     the amounts reported above may be subject to change at a later date upon
     final determination by the taxing authorities.


                                       F-8


<PAGE>   26



S/M REAL ESTATE FUND VII, LTD.



     SCHEDULE III - REAL ESTATE AND ACCUMULATED DEPRECIATION
     December 31, 2000

<TABLE>
<CAPTION>
                                     FIFTH AVENUE
OFFICE BUILDINGS:                     APARTMENTS
                                   ---------------
<S>                                <C>
Location                           San Antonio, TX

Date of construction                          1982
Acquisition date                              1983
Life on which depreciation
in latest income statements
is computed                           3 - 21 years
Encumbrances                          $  6,283,959
Initial cost to Partnership (1):
     Land                                  962,216
     Building and
     improvements                        7,512,710
Costs capitalized
subsequent to acquisition:
     Land, buildings
     and improvements                      595,775
Retirements                               (164,334)
Gross amount at which
carried at close of period (2):
     Land                             $    962,216
     Building and
     improvements                        7,944,151
                                      ------------
                                      $  8,906,367
                                      ============
Accumulated depreciation              $  6,308,560
                                      ============
</TABLE>

     (1) The initial cost to the Partnership represents the original purchase
     price of the property.

     (2)  The aggregate cost of real estate at December 31, 2000 and 1999 and
     1998, for Federal income tax purposes is $9,115,315, $8,953,204 and
     $8,831,189, respectively.

     A reconciliation of the carrying amount of real estate and accumulated
     depreciation for the years ended December 31, 2000, 1999, and 1998 follows:

<TABLE>
<CAPTION>
                                           2000            1999             1998
                                      -------------    -------------    -------------
<S>                                   <C>              <C>              <C>
REAL ESTATE INVESTMENTS:
Beginning of year                     $   8,825,917    $   8,669,430    $   8,625,702
Additions                                   162,111          223,842           43,728
Retirements                                 (81,661)         (67,355)              --
                                      -------------    -------------    -------------
End of year                           $   8,906,367    $   8,825,917    $   8,669,430
                                      =============    =============    =============

ACCUMULATED DEPRECIATION:
Beginning of year                     $   5,941,608    $   5,587,802    $   5,199,331
Depreciation expense                        420,011          406,751          388,471
Retirements                                 (53,059)         (52,945)              --
                                      -------------    -------------    -------------
End of year                           $   6,308,560    $   5,587,802    $   5,587,802
                                      =============    =============    =============
</TABLE>


                                      F-9
<PAGE>   27
                                INDEX TO EXHIBITS


<TABLE>
<CAPTION>

 EXHIBIT
 NUMBER           DESCRIPTION
 -------          -----------

<S>               <C>
     2a           Voluntary Petition of Shearson-Murray Real Estate Fund VII,
                  Ltd. to commence a case under Chapter 11 of the Federal
                  Bankruptcy Code in the United States Bankruptcy Court for the
                  Western District of Texas-Austin Division, as filed on June 6,
                  1989. Reference is made to Exhibit 2a to the Partnership's
                  Annual Report on Form 10-K filed with the Securities and
                  Exchange Commission on June 14, 1989.

     2b           Modified First Amended Plan of Reorganization of
                  Shearson-Murray Real Estate Fund VII, Ltd. In the United
                  States Bankruptcy Court for the Western District of
                  Texas-Austin Division Case No. 89-11662-LC filed February 20,
                  1990. Reference is made to the Partnership's Annual Report on
                  Form 10-K filed with the Securities and Exchange Commission on
                  April 12, 1990.

     3            Agreement of Limited Partnership of Shearson-Murray Real
                  Estate Fund VII, Ltd., as amended as of September 30, 1983.
                  Reference is made to Partnership's Form 8-K filed with the
                  Securities and Exchange Commission on October 26, 1983.
                  Reference is made to Exhibit A to the Prospectus dated June
                  10, 1983 contained in Amendment No. 3 to Partnership's Form
                  S-11 Registration Statement filed with the Securities and
                  Exchange Commission on June 10, 1983.

     10a          Assignment and Assumption Agreement between Murray Management
                  Corporation and Anterra Management Corporation for property
                  management and leasing services dated January 1, 1990.
                  Reference is made to Exhibit 10u to the Partnership's Annual
                  Report on Form 10-K filed with the Securities and Exchange
                  Commission on May 15, 1990.

     10b          Loan Agreement between S/M Real Estate Fund VII, Ltd. and
                  General Electric Capital Corporation, dated December 3, 1998.
                  Reference is made to Exhibit 10.1 to the Partnership's Form
                  8-K filed with the Securities and Exchange Commission on
                  December 14, 1998.

     27           Financial Data Schedule.

     28a          Pages A-16 to A-18 of Exhibit A to the Prospectus dated June
                  10, 1983, contained in Amendment No. 3 to Partnership's Form
                  S-11 Registration Statement filed with the Securities and
                  Exchange Commission on June 10, 1983. Reference is made to
                  Exhibit 28a to the Partnership's Annual Report on Form 10-K
                  filed with the Securities and Exchange Commission on May 12,
                  1988.

     28b          Pages 10-18 of the Prospectus dated June 10, 1983, contained
                  in Amendment No. 3 to Partnership's Form S-11 Registration
                  Statement filed with the Securities and Exchange Commission on
                  June 10, 1983. Reference is made to Exhibit 28b to the
                  Partnership's Annual Report on Form 10-K filed with the
                  Securities and Exchange Commission on May 12, 1988.

     99a          Compromise Settlement Agreement between S/M Real Estate Fund
                  VII, Ltd. and Federal National Mortgage Association, dated May
                  6, 1996. Reference is made to Exhibit 99.1 to the
                  Partnership's Quarterly Report on Form 10-Q for the quarter
                  ended June 30, 1996 filed with the Securities and Exchange
                  Commission.

     99b          $5,830,000 Multifamily Note and Addendum, dated May 30, 1996.
                  Reference is made to Exhibit 99.2 to the Partnership's
                  Quarterly Report on Form 10-Q for the quarter ended June 30,
                  1996 filed with the Securities and Exchange Commission.

     99c          $681,142 Subordinate Multifamily Note and Addendum, dated May
                  30, 1996. Reference is made to Exhibit 99.3 to the
                  Partnership's Quarterly Report on Form 10-Q for the quarter
                  ended June 30, 1996 filed with the Securities and Exchange
                  Commission.

     99d          $6,400,000 Promissory Note, dated December 3, 1998. Reference
                  is made to Exhibit 99.1 to the Partnership's Form 8-K filed
                  with the Securities and Exchange Commission on December 14,
                  1998.
</TABLE>