<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, 1999
                                             -----------------

                                       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>
                                PART I                                         PAGE
<S>                                                                            <C>
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 and 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 Partnership                   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

Index to Exhibits                                                                18
</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 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 (the
"Agreement"), the principal balance of the original mortgage totaling $6,400,000
is due January 1, 2009 and bears interest at a 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 five apartment complexes:

<TABLE>
<CAPTION>
                  Number of             Percent Occupied at
Property            Units*               December 15, 1999*
--------          ---------             -------------------
<S>               <C>                   <C>
   1                 185                         96%
   2                 265                         96%
   3                 248                         91%
   4                 253                         96%
   5                 300                         86%
</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, 1999, 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 95% and 96% for the years ended
December 31, 1999 and 1998, respectively. At December 31, 1999 and 1998, Fifth
Avenue Apartments was 90% and 93% 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 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, 1999, there were 992 Limited Partners of record, owning an
aggregate of 11,080 Interests.

There have been no cash distributions to the Limited Partners since 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)          1999           1998            1997          1996         1995
-------------------------------------------------------------------------------------------------------------
<S>                                         <C>            <C>             <C>           <C>          <C>
Income                                      $ 1,371        $ 1,361         $ 1,327       $ 1,341      $ 1,358

Loss Before
Extraordinary Item                             (263)          (496)           (417)         (365)        (270)

Net Loss                                       (263)          (429)           (417)         (139)        (270)

Net Loss per Limited
Partnership Interest (2)                     (23.48)        (38.31)         (37.28)       (12.43)      (24.12)

Total Assets
at Year-End                                   3,257          3,585           3,942         4,329        5,213

Total Mortgage Notes Payable
at Year-End                                   6,343          6,400           6,198         6,250        6,381
</TABLE>
----------------

(1)  Results for the five years ended December 31, 1999 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 income or
     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 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 principal loan amount, the Partnership reduced the
total debt service payments in 1999 from $689,572 to $519,231, a reduction of
$170,341. As a part of the refinancing, the previous lender forgave $181,142 of
debt, resulting in a gain on debt restructuring of $67,638, and required the
Partnership to pay a $139,223 prepayment penalty.

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 the
amount of $114,375 which is held by the Lender pending application for the
completion of certain required repairs to Fifth Avenue. At December 31, 1999,
the balance was $31,273.

The Previous Mortgage was subject to 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 an
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 $203,840 at December 31, 1999, compared to
$274,735 at December 31, 1998. The $70,895 decrease is primarily attributable to
the increase in fixed asset additions.

Cash held in escrow increased to $54,365 at December 31, 1999, from $35,987 at
December 31, 1998. The $18,378 increase is primarily attributable to escrow
contributions for insurance and real estate taxes exceeding payments for
insurance and real estate taxes.

Restricted cash replacement reserve decreased to $39,414, at December 31, 1999,
from $114,375 at December 31, 1998. The $74,961 decrease is attributable to the
release of $125,665 for replacements and completed required lender repairs,
offset in part by monthly contributions to the replacement reserve in accordance
with the terms of the Loan Agreement.

Accounts receivable totaled $5,097 at December 31, 1999, compared to $6,311 at
December 31, 1998. The decrease is primarily attributable to the timing of
tenant rental receipts. Accounts payable totaled $70,376 at December 31, 1999,
compared to $73,444 at December 31, 1998. The decrease is primarily attributable
to the timing of payments associated with repairs and maintenance for apartment
preparation.

Accrued expenses and other liabilities totaled $46,860 at December 31, 1999,
compared to $52,796 at December 31, 1998. The change is primarily attributable
to the timing of payments for legal fees and other partnership administrative
expenses.


                                                                          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 2000, 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

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.

Total expenses for the year ended December 31, 1999 were $1,633,945 compared to
$1,856,891 for the year ended December 31, 1998. The decrease is primarily
attributable to decreases in interest expense and general and administrative
expenses which were offset in part by an increase in property operating
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, 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.

1998 Compared With 1997

Operations resulted in net losses of $428,725 for the year ended December 31,
1998, and $417,257 for the year ended December 31, 1997. Operations before
extraordinary items resulted in net losses of $496,363 for the year ended
December 31, 1998, and $417,257 for the year ended December 31, 1997. The
increased net loss before extraordinary items from 1997 to 1998 is primarily
attributable to an increase in interest expense due to the prepayment penalty
associated with the Refinancing offset in part with a decrease in general and
administrative 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.

Rental income at Fifth Avenue totaled $1,351,810 for the year ended December 31,
1998, compared to $1,310,235 for the year ended December 31, 1997. Occupancy at
Fifth Avenue averaged approximately 96% during 1998 and 95% during 1997. The
average rental income per occupied square foot at Fifth Avenue was $8.39 in
1998, compared to $8.20 in 1997. At December 31, 1998, Fifth Avenue was 93%
occupied.

Interest and other income totaled $8,718 for the year ended December 31, 1998
compared to $16,888 for the year ended December 31, 1997. The decrease is
primarily attributable to a lower average invested cash balance during 1998.


                                                                          Page 7
<PAGE>   8


Total expenses for the year ended December 31, 1998 were $1,856,891 compared to
$1,744,380 for the year ended December 31, 1997. The increase is primarily
attributable to an increase in interest expense which was 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, 1998 were $622,700, slightly decreased from
$632,243 for the year ended December 31, 1997. The decrease is primarily
attributable to lower real estate tax expense and repair and maintenance costs
in 1998 offset in part by increases in all other expense areas.

Interest expense totaled $739,720 for the year ended December 31, 1998 compared
to $617,680 for the year ended December 31, 1998. The increase in 1998 is
primarily attributable to the prepayment penalty of $139,223 associated with the
Refinancing.

General and administrative expenses for the year ended December 31, 1998 were
$105,490 compared to $116,963 for the year ended December 31, 1997. The decrease
is primarily attributable to decreases in accounting and administrative
expenses.

Year 2000 Issues

The Partnership recognized that the arrival of the Year 2000 posed a unique
challenge to the ability of an entity's information technology system and
non-information technology systems to recognize the date change from December
31, 1999 to January 1, 2000. During 1999, the Partnership assessed and made
certain changes to provide for continued functionality of its systems and
evaluated the readiness of the Partnership's external entities, such as vendors,
customers, payment systems and others. With the arrival of Year 2000, the
Partnership's operations, at this time, have not been affected by Year 2000
issues, and the Partnership does not believe that it will experience a material
adverse effect on the continuing business operation or the financial performance
of the Partnership. There can be no assurance, however, that Year 2000 issues
will not arise or adversely effect the Partnership or its business. The
Partnership believes that the cost to make appropriate changes, if any, to its
internal and external systems will not be significant and that such costs will
be funded completely through operations.

General

The effect of inflation on the results of operations for the years ended
December 31, 1999, 1998 and 1997 was not significant.

Over the past several years the real estate market has gotten stronger and thus
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. As the debt was
refinanced in December 1998, the Partnership believes the carrying amount
approximates the fair value as the rate of the debt represents borrowing rates
currently available to the Partnership for such loans with similar terms and
maturities.

<TABLE>
<CAPTION>
Year ending December 31,
<S>                              <C>
                    2000            $59,474
                    2001             65,277
                    2002             70,177
                    2003             75,444
                    2004             81,107
                    Thereafter    5,991,954
                                 ----------
                                 $6,343,433
                                 ----------
</TABLE>


                                                                          Page 8
<PAGE>   9


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.


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, 1999 and 1998 ....................................................F-2

Statements of Partners' Deficit - For the years ended December 31, 1999, 1998 and 1997 ............F-2

Statements of Operations - For the years ended December 31, 1999, 1998 and 1997 ...................F-3

Statements of Cash Flows - For the years ended December 31, 1999, 1998 and 1997 ...................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, 1999.

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

Richard E. Hoffmann, 45, 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, 47, 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, 44, 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, 59, 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, 64, 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, 45, 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, 47, 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, 44, 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, 1999.


                                                                         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, 1999.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

     (a)  During the years ended December 31, 1999, 1998 and 1997, the General
          Partners or their affiliates were reimbursed for Partnership
          administrative and operating expenses, excluding property and
          construction management fees, in the amounts of $11,906, $11,385 and
          $1,262, 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 $65,086, $67,759 and $52,420 for the
          years ended December 31, 1999, 1998 and 1997, 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 15, 2000
                                        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 15, 2000
                                BY:     /s/ Richard E. Hoffmann
                                ------------------------------------------------
                                        Richard E. Hoffmann
                                        President, Director and Treasurer



Date:  March 15, 2000
                                BY: /s/ Lynn D. Maynard
                                ------------------------------------------------
                                        Lynn D. Maynard
                                        Executive Vice President and Director



Date:  March 15, 2000
                                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 15, 2000
                              BY:  /s/ Richard E. Hoffman
                              --------------------------------------------------
                                   Richard E. Hoffman
                                   President, Director and Treasurer



Date:  March 15, 2000
                              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 15, 2000
                          BY:  /s/ Fulton Murray
                          ------------------------------------------------------
                                   Fulton Murray
                                   President, Chairman of the Board and Director



Date:  March 15, 2000
                          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 generally accepted auditing
standards. 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, 1999 and 1998, and the results of its operations and its cash
flows for each of the years in the three-year period ended December 31, 1999, in
conformity with generally accepted accounting principles. Also in our opinion,
the related financial statement schedule, when considered in relation to the
basic financial statements taken as a whole, presents fairly, in all material
respects, the information set forth therein.


                                             KPMG LLP

Dallas, Texas
February 4, 2000


                                      F-1
<PAGE>   19


S/M REAL ESTATE FUND VII, LTD.



<TABLE>
<CAPTION>
                                                AT DECEMBER 31,    AT DECEMBER 31,
BALANCE SHEETS                                             1999               1998
--------------                                   ---------------    ---------------
<S>                                              <C>                <C>
ASSETS
Real estate, at cost:
   Land                                          $       962,216    $       962,216
   Buildings and improvements                          7,863,701          7,707,214
                                                 ---------------    ---------------
                                                       8,825,917          8,669,430
   Less accumulated depreciation                      (5,941,608)        (5,587,802)
                                                 ---------------    ---------------
                                                       2,884,309          3,081,628

Cash and cash equivalents                                203,840            274,735
Cash held in escrow                                       54,365             35,987
Restricted cash - replacement reserve                     39,414            114,375
Accounts receivable                                        5,097              6,311
Other assets                                              69,716             72,108
                                                 ---------------    ---------------
     TOTAL ASSETS                                $     3,256,741    $     3,585,144
                                                 ===============    ===============
LIABILITIES AND PARTNERS' DEFICIT
Liabilities:
   First mortgage note payable                   $     6,343,433    $     6,400,000
   Accounts payable:
     Trade                                                19,022             13,374
     Affiliates                                           51,354             60,070
   Accrued expenses and other liabilities                 46,860             52,796
                                                 ---------------    ---------------
     Total Liabilities                                 6,460,669          6,526,240
                                                 ---------------    ---------------
Partners' Deficit:
   General Partners                                     (118,651)          (116,023)
   Limited Partners (11,080 units outstanding)        (3,085,277)        (2,825,073)
                                                 ---------------    ---------------
     Total Partners' Deficit                          (3,203,928)        (2,941,096)
                                                 ---------------    ---------------
     TOTAL LIABILITIES AND PARTNERS' DEFICIT     $     3,256,741    $     3,585,144
                                                 ===============    ===============
</TABLE>


STATEMENTS OF PARTNERS' DEFICIT
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997

<TABLE>
<CAPTION>
                                 GENERAL       LIMITED
                                 PARTNERS      PARTNERS         TOTAL
                               -----------    -----------    -----------
<S>                            <C>            <C>            <C>
BALANCE AT DECEMBER 31, 1996   $  (107,563)   $(1,987,551)   $(2,095,114)
Net Loss                            (4,173)      (413,084)      (417,257)
                               -----------    -----------    -----------
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)
                               ===========    ===========    ===========
</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,          1999           1998           1997
                                      -----------    -----------    -----------
<S>                                   <C>            <C>            <C>
INCOME
Rental                                $ 1,353,692    $ 1,351,810    $ 1,310,235
Interest and other                         17,421          8,718         16,888
                                      -----------    -----------    -----------
     Total Income                       1,371,113      1,360,528      1,327,123
                                      -----------    -----------    -----------
EXPENSES
Property operating                        677,746        622,700        632,243
Interest                                  462,664        739,720        617,680
Depreciation and amortization             412,864        388,981        377,494
General and administrative                 80,671        105,490        116,963
                                      -----------    -----------    -----------
     Total Expenses                     1,633,945      1,856,891      1,744,380
                                      -----------    -----------    -----------
     Loss before extraordinary item      (262,832)      (496,363)      (417,257)
                                      -----------    -----------    -----------
EXTRAORDINARY ITEM
Gain on debt restructuring                     --         67,638             --
                                      -----------    -----------    -----------
     NET LOSS                         $  (262,832)   $  (428,725)   $  (417,257)
                                      ===========    ===========    ===========
NET LOSS ALLOCATED:
   To the General Partners            $    (2,628)   $    (4,287)   $    (4,173)
   To the Limited Partners               (260,204)      (424,438)      (413,084)
                                      -----------    -----------    -----------
                                      $  (262,832)   $  (428,725)   $  (417,257)
                                      ===========    ===========    ===========
PER LIMITED PARTNERSHIP UNIT
(11,080 OUTSTANDING)
Net loss before extraordinary item    $    (23.48)   $    (44.35)   $    (37.28)
Extraordinary item                             --           6.04             --
                                      -----------    -----------    -----------
     NET LOSS                         $    (23.48)   $    (38.31)   $    (37.28)
                                      ===========    ===========    ===========
</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,                                   1999           1998           1997
-------------------------------------                          -----------    -----------    -----------
<S>                                                            <C>            <C>            <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Loss                                                       $  (262,832)   $  (428,725)   $  (417,257)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
   Depreciation and amortization                                   412,864        388,981        377,494
   Loss on retirement of asset                                      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                                           (18,378)       165,979       (107,050)
     Accounts receivable                                             1,214         (4,324)           199
     Other assets                                                   (3,721)         2,439         (1,757)
     Accounts payable                                               (3,068)        26,966          4,084
     Accrued expenses and other liabilities                         (5,936)      (157,626)        78,213
                                                               -----------    -----------    -----------
Net cash provided by (used in) operating activities                134,553        (73,948)       (66,074)
                                                               -----------    -----------    -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Decrease (increase) in restricted cash - replacement reserve        74,961        (26,371)        (9,659)
Additions to real estate                                          (223,842)       (43,728)       (25,383)
                                                               -----------    -----------    -----------
Net cash used in investing activities                             (148,881)       (70,099)       (35,042)
                                                               -----------    -----------    -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments of principal on first mortgage note payable               (56,567)    (5,738,101)       (59,694)
Payment of principal and amortization of discount
   on second mortgage note payable                                      --       (391,912)         7,802
Additions to first mortgage note payable                                --      6,400,000             --
Refinancing costs                                                       --        (61,129)            --
                                                               -----------    -----------    -----------
Net cash (used in) provided by financing activities                (56,567)       208,858        (51,892)
                                                               -----------    -----------    -----------
Net (decrease) increase in cash and cash equivalents               (70,895)        64,811       (153,008)
Cash and cash equivalents, beginning of year                       274,735        209,924        362,932
                                                               -----------    -----------    -----------
CASH AND CASH EQUIVALENTS, END OF YEAR                         $   203,840    $   274,735    $   209,924
                                                               ===========    ===========    ===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the year for interest                         $   462,664    $   726,631    $   569,878
                                                               -----------    -----------    -----------
SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING ACTIVITIES:
Write-off of fully depreciated building improvements           $     8,675    $        --    $     5,783
                                                               -----------    -----------    -----------
</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, 1999, 1998 AND 1997

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, see Note 6, and anticipated reductions in
general and administrative expenses, the General Partners currently expect funds
from operations to pay all obligations for 2000, 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 generally accepted accounting
principles. 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-four 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.

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


                                      F-5
<PAGE>   23


S/M REAL ESTATE FUND VII, LTD.


USE OF ESTIMATES The preparation of financial statements in conformity with
generally accepted accounting principles 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, 1999 and 1998, Fifth Avenue was 90% and 93% 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 an 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, resulting in a gain on debt
restructuring of $67,638, and required the Partnership to pay a $139,223
prepayment penalty.

Per the terms of the New First Mortgage, the Partnership was required to deposit
with the Lender the amount of $114,375 which is held by the Lender for the
completion of certain required repairs. At December 31, 1999, the balance was
$31,273.


                                      F-6
<PAGE>   24


S/M REAL ESTATE FUND VII, LTD.


The following represents principal payments required under the New First
Mortgage for the five years subsequent to December 31, 1999:

<TABLE>
<CAPTION>
Year ending December 31,
------------------------
<S>                         <C>
                    2000    $59,474
                    2001     65,277
                    2002     70,177
                    2003     75,444
                    2004     81,107
</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, 1999, 1998 and 1997, the General Partners or
their affiliates were reimbursed for Partnership administrative and operating
expenses, excluding property and construction management fees, in the amounts of
$11,906, $11,385 and $1,262, 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 $65,086, $67,759 and $52,420 for the years
ended December 31, 1999, 1998 and 1997, respectively.


                                      F-7
<PAGE>   25


S/M REAL ESTATE FUND VII, LTD.


8. 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, 1999, 1998 and 1997:


<TABLE>
<CAPTION>
                                                               1999         1998        1997
                                                            ---------    ---------    ---------
<S>                                                         <C>          <C>          <C>
Net loss for financial statements purposes                  $(262,832)   $(428,725)   $(417,257)
Financial statement depreciation over tax
         basis depreciation                                   358,444      170,694      167,854

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

Federal income tax basis interest expense under financial
statement interest expense                                         --           --       58,900

Other                                                            (500)       1,739         (536)
                                                            ---------    ---------    ---------
Federal income tax basis net loss under (over) financial
         statement net income                                 357,944      104,795      226,218
                                                            ---------    ---------    ---------
Federal income tax basis net income (loss)                  $  95,112    $(323,930)   $(191,039)
                                                            =========    =========    =========
</TABLE>

Reconciliation of financial statement partners' deficit to federal income tax
basis partners' deficit for the years ended December 31, 1999, 1998 and 1997:


<TABLE>
<CAPTION>
                                                         1999           1998           1997
                                                     -----------    -----------    -----------
<S>                                                  <C>            <C>            <C>
Financial statement basis partners' deficit          $(3,203,928)   $(2,941,096)   $(2,512,371)

Current year federal income tax basis net loss
         under (over) financial statement net loss       357,944        104,795        226,218

Cumulative federal income tax basis net loss
         over financial statement net loss            (1,623,242)    (1,728,037)    (1,954,255)
                                                     -----------    -----------    -----------
Federal income tax basis partners' deficit           $(4,469,226)   $(4,564,338)   $(4,240,408)
                                                     ===========    ===========    ===========
</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, 1999

<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                       $ 6,343,433
Initial cost to Partnership (1):
     Land                              962,216
     Building and
     improvements                    7,512,710
Costs capitalized
subsequent to acquisition:
     Land, buildings
     and improvements                  433,664
Retirements                            (82,673)
Gross amount at which
carried at close of period (2):
     Land                          $   962,216
     Building and
     improvements                    7,863,701
                                   -----------
                                   $ 8,825,917
                                   -----------
Accumulated depreciation           $ 5,941,608
                                   -----------
</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, 1999 and 1998 and 1997,
for Federal income tax purposes is $8,953,204, $8,831,189 and $8,787,461,
respectively.

A reconciliation of the carrying amount of real estate and accumulated
depreciation for the years ended December 31, 1999, 1998, and 1997 follows:

<TABLE>
<CAPTION>
                               1999           1998          1997
                            -----------    -----------   -----------
<S>                         <C>            <C>           <C>
REAL ESTATE INVESTMENTS:
Beginning of year           $ 8,669,430    $ 8,625,702   $ 8,606,102
Additions                       223,842         43,728        25,383
Retirements                     (67,355)            --        (5,783)
                            -----------    -----------   -----------
End of year                 $ 8,825,917    $ 8,669,430   $ 8,625,702
                            -----------    -----------   -----------

ACCUMULATED DEPRECIATION:
Beginning of year           $ 5,587,802    $ 5,199,331   $ 4,827,620
Depreciation expense            406,751        388,471       377,494
Retirements                     (52,945)            --        (5,783)
                            -----------    -----------   -----------
End of year                 $ 5,941,608    $ 5,587,802   $ 5,199,331
                            -----------    -----------   -----------
</TABLE>


                                      F-9
<PAGE>   27


                                INDEX TO EXHIBITS


<TABLE>
<CAPTION>
Document
 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>


                                                                         Page 18