<PAGE>
                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, 2002
                                             -----------------

                                       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.
              Exact name of registrant as specified in its charter


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

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


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]

Indicate by check mark whether the Registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).

                             Yes         No  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>

                                TABLE OF CONTENTS

<Table>
<Caption>

                                                            PART I                                   PAGE

<S>                        <C>                                                                       <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                         5

                                                           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 and Related Security Holder Matters                          11

         Item 13.          Certain Relationships and Related Transactions                              12

         Item 14.          Controls and Procedures                                                     12

                                                           PART IV

         Item 15.          Exhibits, Financial Statement Schedules, and
                           Reports on Form 8-K                                                         13

         Signatures                                                                                    15

         Certifications                                                                                19

         Index to Exhibits                                                                             21
</Table>



                                                                          Page 2
<PAGE>

                                     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 (formerly known as Shearson
Apartment Investors XIV, Inc.) ("SM7"), 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 Partnership."

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>



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.
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. The accrued interest on the first
mortgage was converted into a second mortgage which was coterminous with the
original principal of $5,830,000. In accordance with the Modification Agreement,
the first mortgage of $5,830,000 had a fixed interest rate of 9.875% with fixed
monthly payments of principal and interest and the maturity date was June 1,
2001.

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" of this Form 10-K 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, 2002*
--------          ---------          -------------------

<S>               <C>                <C>
   1                 185                     95%
   2                 192                     95%
   3                 200                     96%
   4                 248                     95%
   5                 265                     97%
</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, 2002, 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, 2002 and 2001, respectively. At December 31, 2002 and 2001, Fifth
Avenue Apartments was 94% and 92% 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.



                                                                          Page 4
<PAGE>


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.


                                     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, 2002, there were 954
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,      2002           2001            2000          1999           1998
--------------------------------    ---------      ---------      ---------      ---------      ---------

<S>                                 <C>            <C>            <C>            <C>            <C>
Gross Income                        $   1,408      $   1,463      $   1,398      $   1,371      $   1,361

Loss Before
Extraordinary Items                      (300)          (206)          (256)          (263)          (496)

Net Loss                                 (300)          (206)          (256)          (263)          (429)

Net Loss per Limited
Partnership Interest (1)               (26.83)        (18.44)        (22.88)        (23.48)        (38.31)

Total Assets
at Year-End                             2,287          2,646          2,918          3,257          3,585

Total Mortgage Notes Payable
at Year-End                             6,149          6,219          6,284          6,343          6,400
</Table>


(1)      Based on the Units outstanding during the year 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>

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%.

Under the terms of the Loan Agreement 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 is required to make monthly contributions of $3,905
which are held by the Lender pending application for the completion of certain
required repairs to the Fifth Avenue property. At December 31, 2002, the balance
in this replacement reserve account was $24,156.

Cash and cash equivalents totaled $259,663 at December 31, 2002, compared to
$216,234 at December 31, 2001. The $43,429 increase is primarily attributable to
cash provided by the release of funds from the replacement reserve account and
cash provided by operations offset by debt service payments and payments made to
the replacement reserve account.

Cash held in escrow increased to $82,565 at December 31, 2002, from $53,049 at
December 31, 2001. The $29,516 increase is primarily attributable to
contributions to the insurance and real estate tax escrow, as required in the
Loan Agreement, offset in part by increases in real estate taxes and property
insurance.

Restricted cash replacement reserve decreased to $24,156, at December 31, 2002,
from $106,371 at December 31, 2001. The $82,215 decrease is attributable to the
release of $129,622 of funds from the replacement reserve account offset in part
by monthly contributions to the replacements reserve account.

Other assets totaled $89,380 at December 31, 2002, compared to $57,859 at
December 31, 2001. The $31,521 increase in other assets is primarily
attributable to payment of a retainer for legal services anticipated to be
provided in 2003.

Accounts payable totaled $61,759 at December 31, 2002, compared to $54,135 at
December 31, 2001. The increase is primarily attributable to the timing of
payments associated with repairs and maintenance for apartment preparation.

Accrued expenses and other liabilities totaled $43,405 at December 31, 2002,
compared to $39,991 at December 31, 2001. The change is primarily attributable
to the timing of payments for partnership administrative costs.

The Partnership's General Partners currently expect funds from operations to be
sufficient to pay all obligations for 2003, 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

2002 Compared With 2001

Operations resulted in net losses of $300,276 for the year ended December 31,
2002, and $206,394 for the year ended December 31, 2001. The increased net loss
from 2001 to 2002 is primarily attributable to a decrease in rental income and
an increase in property operating expenses.

Rental income at Fifth Avenue totaled $1,402,338 for the year ended December 31,
2002, compared to $1,448,295 for the year ended December 31, 2001. Occupancy at
Fifth Avenue averaged approximately 94% during 2002 and 95% during 2001. The
average rental income per occupied square foot at Fifth Avenue was $8.77 in
2002, compared to $9.00 in 2001. At December 31, 2002, Fifth Avenue was 94%
occupied. The decrease in the average rental income per occupied square foot in
2002 is primarily attributable to increases in vacancy and rental concessions
being offered.

Total expenses for the year ended December 31, 2002 were $1,708,640 compared to
$1,669,167 for the year ended December 31, 2001. The increase is primarily
attributable to an increase in property operating expenses.


                                                                          Page 6
<PAGE>

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, 2002 were $754,234, compared to $707,917 for the
year ended December 31, 2001. The increase in property operating expenses is
primarily attributable to increases in repairs and maintenance for apartment
preparation, utility costs, and property insurance costs.

2001 Compared With 2000

Operations resulted in net losses of $206,394 for the year ended December 31,
2001, and $256,037 for the year ended December 31, 2000. The decreased net loss
from 2000 to 2001 is primarily attributable to an increase in rental income
offset in part by slight increases in general and administrative expenses and
depreciation and amortization.

Rental income at Fifth Avenue totaled $1,448,295 for the year ended December 31,
2001, compared to $1,380,401 for the year ended December 31, 2000. Occupancy at
Fifth Avenue averaged approximately 95% during 2001 and 94% during 2000. The
average rental income per occupied square foot at Fifth Avenue was $9.00 in
2001, compared to $8.76 in 2000. At December 31, 2001, Fifth Avenue was 92%
occupied. The increase in the average rental income per occupied square foot in
2001 is primarily attributable to an increase in rental rates.

Total expenses for the year ended December 31, 2001 were $1,669,167 compared to
$1,654,394 for the year ended December 31, 2000. The increase is primarily
attributable to increases in general and administrative expenses, and
depreciation and amortization.

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, 2001 were $707,917, compared to $704,176 for the
year ended December 31, 2000.

Depreciation and amortization expense totaled $432,138 for the year ended
December 31, 2001, compared to $426,124 for the year ended December 31, 2000.
The increase is attributable to additions to buildings and improvements.

General and administrative expenses for the year ended December 31, 2001 were
$75,158 compared to $64,336 for the year ended December 31, 2000. The increase
is primarily attributable to higher legal fees and other professional expenses.

General

The effect of inflation on the results of operations for the years ended
December 31, 2002, 2001 and 2000 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.

Critical Accounting Policies

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 amounts of assets and
liabilities at the date of the financial statements. It is our opinion that we
fully disclose our significant accounting policies in the Notes to the Financial
Statements. Consistent with our disclosure policies we include the following
discussion related to what we believe to be our most critical accounting
policies that require our most difficult, subjective or complex judgment:

Revenue Recognition - Rental income is the primary source of income for the
Partnership. Rental income is recorded over the term of the lease as the income
is earned.



                                                                          Page 7
<PAGE>

Valuation of Real Estate - Real estate investments have been accounted for under
the provisions of Statement of Financial Accounting Standards (SFAS) No. 121,
Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
Be Disposed Of which has been superceded by SFAS 144 effective January 1, 2002
(see below). At December 31, 2002, the Partnership's property was classified as
held for use. Accordingly, management reviews for impairment whenever events or
circumstances indicate that the carrying value of the real estate investment may
not be fully recoverable. The review of recoverability is based on the
undiscounted cash flows, excluding interest charges, that are expected to result
from the real estate investment's use and eventual disposition. Impairment is
determined if the expected future cash flows do not recover the value of the
real estate. In such an instance, an impairment loss is recorded to the extent
that the carrying value of the real estate investment exceeds the estimated fair
value.

New Accounting Pronouncements

In August 2001, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards (SFAS) No. 144 "Accounting for the
Impairment or Disposal of Long-Lived Assets" (SFAS 144), establishing financial
accounting and reporting for the impairment or disposal of long-lived assets.
The provisions of SFAS 144 are effective for fiscal years beginning after
December 15, 2001. The implementation of SFAS 144 on January 1, 2002 had no
effect on the Partnership's financial position or results of operations.

In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statements No.
4, 44, and 62, Amendment of FASB Statement No. 13, and Technical Corrections."
The main provisions of this statement address the classification of debt
extinguishments and accounting for certain lease transactions. Upon adoption,
early extinguishments will not continue to qualify for extraordinary item
treatment and the Partnership does not anticipate that the adoption of SFAS No.
145 will have a material impact on the Partnership's financial position, net
earnings or cash flow.

In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated
with Exit or Disposal Activities." The main provisions of this statement address
the recognition of liabilities associated with an exit or disposal activity.
Implementation of this statement is expected to have no impact on the financial
statements of the Partnership.

In November 2002, the FASB issued Interpretation No. 45, "Guarantor's Accounting
and Disclosure Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness to Others, an interpretation of FASB Statements No. 5, 57 and 107
and a rescission of FASB Interpretation No. 34." This Interpretation elaborates
on the disclosures to be made by a guarantor in its interim and annual financial
statements about its obligations under guarantees issued. The Interpretation
also clarifies that a guarantor is required to recognize, at inception of a
guarantee, a liability for the fair value of the obligation undertaken. The
initial recognition and measurement provisions of this Interpretation are
applicable to guarantees issued or modified after December 31, 2002.
Implementation of these provisions of this statement is expected to have no
effect on the Partnership's financial position or results of operations. The
disclosure requirements in this Interpretation are effective for interim and
annual periods ending after December 15, 2002. The Partnership has no additional
items to disclose in connection with this Interpretation.

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 which did occur during 2002. The
following table summarizes the expected maturities of the Partnership's
long-term debt. 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 is $6,382,000 at December 31, 2002. As of December
31, 2002, the long-term debt carrying value approximated fair value.

<Table>
<S>                                         <C>
Year ending December 31,
                   2003                     $    75,444
                   2004                          81,107
                   2005                          87,195
                   2006                          93,740
                   2007                         100,776
                   Thereafter                 5,710,243
                                            -----------
                                            $ 6,148,505
                                            ===========
</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>


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, 2002 and 2001 ................................................     F-2

Statements of Partners' Deficit - For the years ended December 31, 2002, 2001 and 2000 ........     F-2

Statements of Operations - For the years ended December 31, 2002, 2001 and 2000 ...............     F-3

Statements of Cash Flows - For the years ended December 31, 2002, 2001 and 2000 ...............     F-4

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

Schedule III - Real Estate and Accumulated Depreciation .......................................     F-10
</Table>


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

None


                                                                          Page 9
<PAGE>

                                    PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE PARTNERSHIP

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 this 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, 2002.

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

Richard E. Hoffmann, 48, 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.

Lynn D. Maynard, 50, 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.

Sandy Robison, 47, 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 received a Bachelor of Science Degree in Finance from the University
of Texas at Dallas.

Murray Realty Investors VII, Inc., Corporate General Partner

Fulton Murray, 62, 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, including Murray Realty Investors VII, Inc. He holds a
Bachelor of Business Administration degree in Finance from Southern Methodist
University.



                                                                         Page 10
<PAGE>

SM7 Apartment Investors Inc., Corporate General Partner

Richard E. Hoffmann, 48, 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.

Lynn D. Maynard, 50, 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.

Sandy Robison, 47, 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 received a Bachelor of Science Degree in Finance from the University of
Texas at Dallas.

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, 2002.


ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
         RELATED SECURITY HOLDER MATTERS

     (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, 2002.



                                                                         Page 11
<PAGE>

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

     (a) During the years ended December 31, 2002, 2001 and 2000, the General
         Partners or their affiliates were reimbursed for Partnership
         administrative and operating expenses, excluding property and
         construction management fees, in the amounts of $11,641, $11,681 and
         $11,050, 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 Properties Company and its affiliates, and earned property
         and construction management fees of $56,205, $57,867 and $61,528 for
         the years ended December 31, 2002, 2001 and 2000, respectively.

     (b) None.

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

     (d) Not applicable.

ITEM 14. CONTROLS AND PROCEDURES

     Within 90 days prior to the date of this report, we carried out an
     evaluation, under the supervision and with the participation of the chief
     executive officer and chief financial officer of our general partner, of
     the effectiveness of the design and operation of our disclosure controls
     and procedures (as defined in Rule 13a-14(c) under the Securities and
     Exchange Act of 1934). Based on this evaluation, the chief executive
     officer and chief financial officer concluded that our disclosure controls
     and procedures are effective in timely alerting them to material
     information required to be included in our periodic SEC reports.

     In addition, we reviewed our internal controls, and there has been no
     significant changes in our internal controls or in other factors, including
     any corrective actions with regard to significant deficiencies and material
     weaknesses, that could significantly affect those controls subsequent to
     the date of their last evaluation.




                                                                         Page 12
<PAGE>

                                     PART IV


ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES 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:

                  2.1       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.

                  2.2       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.

                 10.1       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.

                 10.2       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.

                 99.1       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.

                 99.2       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.

                 99.3       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.


                                                                         Page 13
<PAGE>

                 99.4       $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.

                 99.5       $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.

                 99.6       $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.

                 99.7       Certification Pursuant to 18 U.S.C. Section 1350, as
                            Adopted Pursuant to Section 906 of the
                            Sarbanes-Oxley Act of 2002.

                 99.8       Certification Pursuant to 18 U.S.C. Section 1350, as
                            Adopted Pursuant to Section 906 of the
                            Sarbanes-Oxley Act of 2002.






                                                                         Page 14
<PAGE>



                                   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 28, 2003
                                       BY:  /s/ Richard E. Hoffmann
                                       --------------------------------------
                                            Richard E. Hoffmann
                                            Chief Executive Officer,
                                            Director, President and Treasurer




                                                                         Page 15
<PAGE>





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 28, 2003
                                  BY: /s/ Richard E. Hoffmann
                                  --------------------------------------------
                                      Richard E. Hoffmann
                                      Chief Executive Officer, President,
                                      Director and Treasurer



Date:  March 28, 2003
                                  BY: /s/ Lynn D. Maynard
                                  --------------------------------------------
                                      Lynn D. Maynard
                                      Executive Vice President and Director



Date:  March 28, 2003
                                  BY: /s/ Sandy Robison
                                  --------------------------------------------
                                      Chief Financial Officer, Vice President,
                                      Secretary and Controller



                                                                         Page 16
<PAGE>





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 28, 2003
                             BY:  /s/ Richard E. Hoffmann
                             ---------------------------------------------
                                  Richard E. Hoffmann
                                  President, Director and Treasurer



Date:  March 28, 2003
                             BY:  /s/ Lynn D. Maynard
                             ---------------------------------------------
                                  Lynn D. Maynard
                                  Executive Vice President and Director




                                                                         Page 17
<PAGE>


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 28, 2003
                             BY: /s/ Fulton Murray
                             -------------------------------------------------
                                 Fulton Murray
                                 President, Chairman of the Board and Director




                                                                         Page 18
<PAGE>




                                 CERTIFICATIONS

I, Richard E. Hoffmann, certify that:

   1.    I have reviewed this annual report on Form 10-K of S/M Real Estate Fund
         VII, Ltd.;

   2.    Based on my knowledge, this annual report does not contain any untrue
         statement of a material fact or omit to state a material fact necessary
         to make the statements made, in light of the circumstances under which
         such statements were made, not misleading with respect to the period
         covered by this annual report;

   3.    Based on my knowledge, the financial statements, and other financial
         information included in this annual report, fairly present in all
         material respects the financial condition, results of operations and
         cash flows of the registrant as of, and for, the period presented in
         this annual report;

   4.    The registrant's other certifying officer and I are responsible for
         establishing and maintaining disclosure controls and procedures (as
         defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
         we have:

            a)    designed such disclosure controls and procedures to ensure
                  that material information relating to the registrant,
                  including its consolidated subsidiaries, is made known to us
                  by others within those entities, particularly during the
                  period in which this annual report is being prepared;

            b)    evaluated the effectiveness of our disclosure controls and
                  procedures as of a date within 90 days prior to the filing
                  date of this annual report (the "Evaluation Date"); and

            c)    presented in this annual report our conclusions about the
                  effectiveness of the disclosure controls and procedures based
                  on our evaluation as of the Evaluation Date;

   5.    The registrant's other certifying officer and I have disclosed, based
         on our most recent evaluation, to the registrant's auditors and the
         audit committee of registrant's board of directors (or persons
         performing the equivalent function):

            a)    all significant deficiencies in the design or operation of
                  internal controls which could adversely affect our ability to
                  record, process, summarize and report financial data and have
                  identified for the registrant's auditors any material
                  weaknesses in internal controls; and

            b)    any fraud, whether or not material, that involves management
                  or other employees who have a significant role in our internal
                  controls;

   6.    The registrant's other certifying officer and I have indicated in this
         annual report whether there were significant changes in internal
         controls or in other factors that could significantly affect internal
         controls subsequent to the date of our most recent evaluation,
         including any corrective actions with regard to significant
         deficiencies and material weaknesses.


Date:  March 28, 2003           BY:      /s/ Richard E. Hoffmann
                                ----------------------------------------
                                Name:   Richard E. Hoffmann
                                Title:  Chief Executive Officer, Director,
                                        President and Treasurer of
                                        SM7 Apartment Investors Inc.,
                                        a general partner


                                                                         Page 19
<PAGE>

                                 CERTIFICATIONS

I, Sandy Robison, certify that:

   1.    I have reviewed this annual report on Form 10-K of S/M Real Estate Fund
         VII, Ltd.;

   2.    Based on my knowledge, this annual report does not contain any untrue
         statement of a material fact or omit to state a material fact necessary
         to make the statements made, in light of the circumstances under which
         such statements were made, not misleading with respect to the period
         covered by this annual report;

   3.    Based on my knowledge, the financial statements, and other financial
         information included in this annual report, fairly present in all
         material respects the financial condition, results of operations and
         cash flows of the registrant as of, and for, the period presented in
         this annual report;

   4.    The registrant's other certifying officer and I are responsible for
         establishing and maintaining disclosure controls and procedures (as
         defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
         we have:

            a)    designed such disclosure controls and procedures to ensure
                  that material information relating to the registrant,
                  including its consolidated subsidiaries, is made known to us
                  by others within those entities, particularly during the
                  period in which this annual report is being prepared;

            b)    evaluated the effectiveness of our disclosure controls and
                  procedures as of a date within 90 days prior to the filing
                  date of this annual report (the "Evaluation Date"); and

            c)    presented in this annual report our conclusions about the
                  effectiveness of the disclosure controls and procedures based
                  on our evaluation as of the Evaluation Date;

   5.    The registrant's other certifying officer and I have disclosed, based
         on our most recent evaluation, to the registrant's auditors and the
         audit committee of registrant's board of directors (or persons
         performing the equivalent function):

            a)    all significant deficiencies in the design or operation of
                  internal controls which could adversely affect our ability to
                  record, process, summarize and report financial data and have
                  identified for the registrant's auditors any material
                  weaknesses in internal controls; and

            b)    any fraud, whether or not material, that involves management
                  or other employees who have a significant role in our internal
                  controls;

   6.    The registrant's other certifying officer and I have indicated in this
         annual report whether there were significant changes in internal
         controls or in other factors that could significantly affect internal
         controls subsequent to the date of our most recent evaluation,
         including any corrective actions with regard to significant
         deficiencies and material weaknesses.


Date:  March 28, 2003      BY: /s/ Sandy Robison
                           ---------------------------------------------------
                           Name:   Sandy Robison
                           Title:  Chief Financial Officer,
                                   Vice President, Secretary and
                                   Controller of SM7 Apartment Investors Inc.,
                                   a general partner


                                                                         Page 20
<PAGE>

                                INDEX TO EXHIBITS


   Document
    Number        Description


     2.1          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.

     2.2          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.

     10.1         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.

     10.2         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.

     99.1         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.

     99.2         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.

     99.3         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.

     99.4         $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.

     99.5         $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.

     99.6         $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.


                                                                         Page 21
<PAGE>

                          INDEX TO EXHIBITS (continued)


   Document
    Number        Description


     99.7         Certification Pursuant to 18 U.S.C. Section 1350, as Adopted
                  Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

     99.8         Certification Pursuant to 18 U.S.C. Section 1350, as Adopted
                  Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.


                                                                         Page 22
<PAGE>


--------------------------------------------------------------------------------
                          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 at Item 8. In
connection with our audits of the financial statements, we also have audited the
financial statement schedule as listed in the accompanying index at Item 8.
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 are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.

In our opinion, the 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, 2002 and 2001, and the results of its operations and its cash
flows for each of the years in the three-year period ended December 31, 2002, 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
February 14, 2003




                                      F-1
<PAGE>


S/M REAL ESTATE FUND VII, LTD.

BALANCE SHEETS

<Table>
<Caption>
                                                             AT DECEMBER 31,       AT DECEMBER 31,
                                                                  2002                  2001
                                                            ----------------      ----------------

<S>                                                         <C>                   <C>
ASSETS
Real estate, at cost:
   Land                                                     $        962,216      $        962,216
   Buildings and improvements                                      7,963,821             7,971,336
                                                            ----------------      ----------------
                                                                   8,926,037             8,933,552
   Less accumulated depreciation                                  (7,104,900)           (6,724,462)
                                                            ----------------      ----------------
                                                                   1,821,137             2,209,090

Cash and cash equivalents                                            259,663               216,234
Cash held in escrow                                                   82,565                53,049
Restricted cash - replacement reserve                                 24,156               106,371
Accounts receivable                                                   10,133                 3,846
Other assets, net                                                     89,380                57,859
                                                            ----------------      ----------------
     TOTAL ASSETS                                           $      2,287,034      $      2,646,449
                                                            ================      ================

LIABILITIES AND PARTNERS' DEFICIT
Liabilities:
   First mortgage note payable                              $      6,148,505      $      6,218,682
   Accounts payable:
     Trade                                                            21,094                13,470
     Affiliates                                                       40,665                40,665
   Accrued expenses and other liabilities                             43,405                39,991
                                                            ----------------      ----------------
     Total Liabilities                                             6,253,669             6,312,808
                                                            ----------------      ----------------
Partners' Deficit:
   General Partners                                                 (126,278)             (123,275)
   Limited Partners (11,080 units outstanding)                    (3,840,357)           (3,543,084)
                                                            ----------------      ----------------
     Total Partners' Deficit                                      (3,966,635)           (3,666,359)
                                                            ----------------      ----------------
     TOTAL LIABILITIES AND PARTNERS' DEFICIT                $      2,287,034      $      2,646,449
                                                            ================      ================
</Table>


STATEMENTS OF PARTNERS' DEFICIT
FOR THE YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000

<Table>
<Caption>
                                                      GENERAL               LIMITED
                                                      PARTNERS              PARTNERS               TOTAL
                                                  ----------------      ----------------      ----------------
<S>                                               <C>                   <C>                   <C>
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)
Net Loss                                                    (2,064)             (204,330)             (206,394)
                                                  ----------------      ----------------      ----------------
BALANCE AT DECEMBER 31, 2001                      $       (123,275)     $     (3,543,084)     $     (3,666,359)
Net Loss                                                    (3,003)             (297,273)             (300,276)
                                                  ----------------      ----------------      ----------------
BALANCE AT DECEMBER 31, 2002                      $       (126,278)     $     (3,840,357)     $     (3,966,635)
                                                  ================      ================      ================
</Table>


See accompanying notes to the financial statements.


                                      F-2
<PAGE>
S/M REAL ESTATE FUND VII, LTD.

STATEMENTS OF OPERATIONS

<Table>
<Caption>
FOR THE YEARS ENDED DECEMBER 31,                       2002                2001                2000
                                                  --------------      --------------      --------------
<S>                                               <C>                 <C>                 <C>
INCOME
Rental                                            $    1,402,338      $    1,448,295      $    1,380,401
Interest and other                                         6,026              14,478              17,956
                                                  --------------      --------------      --------------
     Total Income                                      1,408,364           1,462,773           1,398,357
                                                  --------------      --------------      --------------

EXPENSES
Property operating                                       754,234             707,917             704,176
Interest                                                 449,054             453,954             459,758
Depreciation and amortization                            430,279             432,138             426,124
General and administrative                                75,073              75,158              64,336
                                                  --------------      --------------      --------------
     Total Expenses                                    1,708,640           1,669,167           1,654,394
                                                  --------------      --------------      --------------
NET LOSS                                          $     (300,276)     $     (206,394)     $     (256,037)
                                                  ==============      ==============      ==============

NET LOSS ALLOCATED:
   To the General Partners                        $       (3,003)     $       (2,064)     $       (2,560)
   To the Limited Partners                              (297,273)           (204,330)           (253,477)
                                                  --------------      --------------      --------------
                                                  $     (300,276)     $     (206,394)     $     (256,037)
                                                  ==============      ==============      ==============
NET LOSS PER LIMITED PARTNERSHIP UNIT
(11,080 UNITS OUTSTANDING)                        $       (26.83)     $       (18.44)     $       (22.88)
                                                  ==============      ==============      ==============
</Table>

See accompanying notes to the financial statements.




                                      F-3
<PAGE>
S/M REAL ESTATE FUND VII, LTD.

STATEMENTS OF CASH FLOWS

<Table>
<Caption>
FOR THE YEARS ENDED DECEMBER 31,                                                   2002              2001               2000
                                                                              --------------    --------------    --------------

<S>                                                                           <C>               <C>               <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Loss                                                                      $     (300,276)   $     (206,394)   $     (256,037)
Adjustments to reconcile net loss to net cash
provided by operating activities:
   Depreciation and amortization                                                     430,279           432,138           426,124
   Loss on retirement of assets                                                           --                --            28,602
   Increase (decrease) in cash arising from changes
   in operating assets and liabilities:
     Cash held in escrow                                                             (29,516)            7,821            (6,505)
     Accounts receivable                                                              (6,287)            1,605              (354)
     Other assets                                                                    (37,634)           (2,151)            1,782
     Accounts payable                                                                  7,624             6,570           (22,811)
     Accrued expenses and other liabilities                                            3,414            (6,626)             (243)
                                                                              --------------    --------------    --------------
Net cash provided by operating activities                                             67,604           232,963           170,558
                                                                              --------------    --------------    --------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Decrease (increase) in restricted cash - replacement reserve                          82,215           (50,750)          (16,207)
Additions to real estate                                                             (36,213)          (37,308)         (162,111)
                                                                              --------------    --------------    --------------
Net cash provided by (used in) investing activities                                   46,002           (88,058)         (178,318)
                                                                              --------------    --------------    --------------
CASH FLOWS FROM FINANCING ACTIVITIES - Payments of
   principal on first mortgage note payable                                          (70,177)          (65,277)          (59,474)
                                                                              --------------    --------------    --------------
Net increase (decrease) in cash and cash equivalents                                  43,429            79,628           (67,234)
Cash and cash equivalents, beginning of year                                         216,234           136,606           203,840
                                                                              --------------    --------------    --------------
CASH AND CASH EQUIVALENTS, END OF YEAR                                        $      259,663    $      216,234    $      136,606
                                                                              ==============    ==============    ==============

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the year for interest                                        $      449,054    $      453,954    $      459,758
                                                                              ==============    ==============    ==============
SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING ACTIVITIES:
Write-off of fully depreciated building improvements                          $       43,728    $       10,123    $       18,567
                                                                              ==============    ==============    ==============
</Table>



See accompanying notes to the financial statements.



                                      F-4
<PAGE>
S/M REAL ESTATE FUND VII, LTD.


NOTES TO THE FINANCIAL STATEMENTS
DECEMBER 31, 2002, 2001, AND 2000

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

The General Partners currently expect funds from operations to pay all
obligations for 2003, 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 property is classified as held
for use. 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.

NEW ACCOUNTING PRONOUNCEMENTS In August 2001, the Financial Accounting Standards
Board ("FASB") issued Statement of Financial Accounting Standards (SFAS) No. 144
"Accounting for the Impairment or Disposal of Long-Lived Assets" (SFAS 144),
establishing financial accounting and reporting for the impairment or disposal
of long-lived assets. The provisions of SFAS 144 are effective for fiscal years
beginning after December 15, 2001. The implementation of SFAS 144 on January 1,
2002 had no effect on the Partnership's financial position or results of
operations.

In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statements No.
4, 44, and 62, Amendment of FASB Statement No. 13, and Technical Corrections."
The main provisions of this statement address the classification of debt
extinguishments and accounting for certain lease transactions. Upon adoption,
early extinguishments will not continue to qualify for extraordinary item


                                      F-5
<PAGE>
S/M REAL ESTATE FUND VII, LTD.


treatment and the Partnership does not anticipate that the adoption of SFAS No.
145 will have a material impact the Partnership's financial position, net
earnings or cash flow.

In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated
with Exit or Disposal Activities." The main provisions of this statement address
the recognition of liabilities associated with an exit or disposal activity.
Implementation of this statement is expected to have no impact on the financial
statements of the Partnership.

In November 2002, the FASB issued Interpretation No. 45, "Guarantor's Accounting
and Disclosure Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness to Others, an interpretation of FASB Statements No. 5, 57 and 107
and a rescission of FASB Interpretation No. 34." This Interpretation elaborates
on the disclosures to be made by a guarantor in its interim and annual financial
statements about its obligations under guarantees issued. The Interpretation
also clarifies that a guarantor is required to recognize, at inception of a
guarantee, a liability for the fair value of the obligation undertaken. The
initial recognition and measurement provisions of this Interpretation are
applicable to guarantees issued or modified after December 31, 2002.
Implementation of these provisions of this statement is expected to have no
effect on the Partnership's financial position or results of operations. The
disclosure requirements in this Interpretation are effective for interim and
annual periods ending after December 15, 2002. The Partnership has no additional
items to disclose in connection with this Interpretation.

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 eighteen 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 income taxes are reflected in the financial
statements of the Partnership since such taxes are the responsibility of the
partners rather than the Partnership.

NET LOSS PER LIMITED PARTNERSHIP UNIT Net loss per limited partnership unit is
based upon the limited partnership interests outstanding during the year 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


                                      F-6
<PAGE>
S/M REAL ESTATE FUND VII, LTD.


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, 2002 and 2001, Fifth Avenue was 94% and 92% occupied, respectively.

6.       MORTGAGE NOTES PAYABLE

Under the terms of the Partnership's loan agreement with General Electric
Capital Corporation (the "Loan Agreement"), the Partnership is required to make
fixed monthly payments of principal and interest in the amount of $43,269 until
maturity on January 1, 2009, at which time the entire outstanding principal
balance and accrued interest is due. Interest accrues at an annual fixed
interest rate of 7.16%. Under the terms of the Loan Agreement, the Partnership
is required to make monthly contributions of $3,905 which are held by the lender
pending application for the completion of certain required repairs to the Fifth
Avenue property. At December 31, 2002, the balance in this replacement reserve
account was $24,156.

The following represents principal payments required under the Loan Agreement
subsequent to December 31, 2002:

<Table>
<S>                                <C>
Year ending December 31,
                  2003             $    75,444
                  2004                  81,107
                  2005                  87,195
                  2006                  93,740
                  2007                 100,776
                  2008                 108,340
                  2009               5,601,903
                                   -----------
                                   $ 6,148,505
                                   ===========
</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 is $6,382,000 at December 31, 2002. As of December 31, 2001, the long-term
debt carrying value approximated fair value.

7.       TRANSACTIONS WITH RELATED PARTIES

During the years ended December 31, 2002, 2001 and 2000, the General Partners or
their affiliates were reimbursed for Partnership administrative and operating
expenses, excluding property and construction management fees, in the amounts of
$11,641, $11,681 and $11,050, 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 $56,205, $57,867 and $61,528 for the years
ended December 31, 2002, 2001 and 2000, respectively.



                                      F-7
<PAGE>


S/M REAL ESTATE FUND VII, LTD.

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>
2002

Total Income                                                $      357      $      366      $      342      $      343

Net Loss                                                           (56)            (49)            (94)           (101)

Net Loss per Limited Partnership Interest                        (5.04)          (4.38)          (8.38)          (9.02)
</TABLE>

Previously presented in the Partnership's Quarterly Report on Form 10-Q for the
three months ended September 30, 2002 were a Net Loss of $100,825 and a Net Loss
per Limited Partnership Interest of $9.01. These amounts for the three months
ended September 30, 2002 have been restated above (dollars in thousands, except
per Interest data).

<TABLE>
<Caption>
2001

<S>                                                         <C>             <C>             <C>             <C>
Total Income                                                $      366      $      360      $      370      $      367

Net Loss                                                           (44)            (42)            (74)            (46)

Net Loss per Limited Partnership Interest                        (3.91)          (3.78)          (6.59)          (4.16)
</Table>

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

The following is a reconciliation of the net loss for financial statement
purposes to federal income tax basis net income for the years ended December 31,
2002, 2001 and 2000:

<Table>
<Caption>

                                                                            2002                2001                2000
                                                                       --------------      --------------      --------------

<S>                                                                    <C>                 <C>                 <C>
Net loss for financial statements purposes                             $     (300,276)     $     (206,394)     $     (256,037)

Financial statement depreciation over tax
         basis depreciation                                                   370,684             381,787             352,422

Federal income tax basis loss on retirement of assets over
         financial statement loss on retirement of assets                     (10,927)             (5,311)            (21,430)

Other                                                                           2,862              (2,652)              1,486
                                                                       --------------      --------------      --------------
Federal income tax basis net loss under financial
         statement net loss                                                   362,619             373,824             332,478
                                                                       --------------      --------------      --------------
Federal income tax basis net income                                    $       62,343      $      167,430      $       76,441
                                                                       ==============      ==============      ==============
</Table>



                                      F-8
<PAGE>

S/M REAL ESTATE FUND VII, LTD.


Reconciliation of financial statement partners' deficit to federal income tax
basis partners' deficit for the years ended December 31, 2002, 2001 and 2000:

<Table>
<Caption>
                                                                 2002                2001                2000
                                                            --------------      --------------      --------------

<S>                                                         <C>                 <C>                 <C>
Financial statement basis partners' deficit                 $   (3,966,635)     $   (3,666,359)     $   (3,459,965)

Current year federal income tax basis net loss
         under  financial statement net loss                       362,619             373,824             332,478

Cumulative federal income tax basis net loss
         over financial statement net loss                        (558,996)           (932,820)         (1,265,298)
                                                            --------------      --------------      --------------
Federal income tax basis partners' deficit                  $   (4,163,012)     $   (4,225,355)     $   (4,392,785)
                                                            ==============      ==============      ==============
</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-9
<PAGE>

S/M REAL ESTATE FUND VII, LTD.


SCHEDULE III - REAL ESTATE AND ACCUMULATED DEPRECIATION
December 31, 2002

<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                           $      6,148,505
Initial cost to Partnership (1):
     Land                                       962,216
     Building and
     improvements                             7,512,710
Costs capitalized
subsequent to acquisition:
     Land, buildings
     and improvements                           669,296
Retirements                                    (218,185)
Gross amount at which
carried at close of period (2):
     Land                              $        962,216
     Building and
     improvements                             7,963,821
                                       ----------------
                                       $      8,926,037
                                       ================

Accumulated depreciation               $      7,104,900
                                       ================
</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, 2002 and 2001 and
         2000, for Federal income tax purposes is $9,134,988, $9,142,503 and
         $9,115,315, respectively.

A reconciliation of the carrying amount of real estate and accumulated
depreciation for the years ended December 31, 2002, 2001, and 2000 follows:

<Table>
<Caption>
                                             2002                2001                2000
                                        --------------      --------------      --------------

<S>                                     <C>                 <C>                 <C>
REAL ESTATE INVESTMENTS:
Beginning of year                       $    8,933,552      $    8,906,367      $    8,825,917
Additions                                       36,213              37,308             162,111
Retirements                                    (43,728)            (10,123)            (81,661)
                                        --------------      --------------      --------------
End of year                             $    8,926,037      $    8,933,552      $    8,906,367
                                        ==============      ==============      ==============

ACCUMULATED DEPRECIATION:
Beginning of year                       $    6,724,462      $    6,308,560      $    5,941,608
Depreciation expense                           424,166             426,025             420,011
Retirements                                    (43,728)            (10,123)            (53,059)
                                        --------------      --------------      --------------
End of year                             $    7,104,900      $    6,724,462      $    6,308,560
                                        ==============      ==============      ==============
</Table>



                                      F-10