<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, 2001
                                             -----------------

                                       OR

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

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

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


            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]

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>




                                TABLE OF CONTENTS

<Table>
<Caption>

                                                                                 PAGE
<S>                        <C>                                                  <C>

                                     PART I

         Item 1.           Business                                                3

         Item 2.           Properties                                              4

         Item 3.           Legal Proceedings                                       4

         Item 4.           Submission of Matters to a Vote of Security Holders     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 Supplementary Data                 9

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

                                    PART III

         Item 10.          Directors and Executive Officers of the Partnership    10

         Item 11.          Executive Compensation                                 11

         Item 12           Security Ownership of Certain Beneficial Owners
                           and Management                                         12

         Item 13.          Certain Relationships and Related Transactions         12

                                     PART IV

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

         Signatures                                                               14

         Index to Exhibits                                                        18
</Table>

                                                                          Page 2

<PAGE>

                                     PART I

ITEM 1.  BUSINESS

S/M Real Estate Fund VII, Ltd. (the "Partnership"), formerly Shearson-Murray
Real Estate Fund VII, Ltd., was formed November 4, 1982 to acquire existing
garden apartment complexes. The general partners of the Partnership are SM7
Apartment Investors Inc., a Texas corporation ("SM7"), (formerly Shearson
Apartment Investors XIV, Inc.), Murray Realty Investors VII, Inc., a Texas
corporation ("Murray"), and Crozier Partners VII, Ltd., a Texas limited
partnership ("Crozier"). SM7, Murray and Crozier are hereinafter referred to
collectively as the "General Partners." See Item 10. "Directors and Executive
Officers of the 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" 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, 2001*
                      --------      ---------             -------------------
<S>                                 <C>                   <C>
                         1             185                         94%
                         2             192                         96%
                         3             200                         95%
                         4             248                         89%
                         5             265                         94%
</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, 2001, the Partnership owned Fifth Avenue Apartments, a
198-unit apartment complex located in San Antonio, Texas and situated on
approximately 8.45 acres with 169,270 square feet of net leaseable space.
Occupancy at Fifth Avenue Apartments averaged 95% and 94% for the years ended
December 31, 2001 and 2000, respectively. At December 31, 2001 and 2000, Fifth
Avenue Apartments was 92% and 97% 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, 2001, there were 970
Limited Partners of record, owning an aggregate of 11,080 Interests.

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


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

<Table>
<Caption>
For the years ended December 31,(1)           2001           2000            1999          1998         1997
-----------------------------------         -------        -------         -------       -------      -------
<S>                                         <C>            <C>             <C>           <C>          <C>
Gross Income                                $ 1,463        $ 1,398         $ 1,371       $ 1,361      $ 1,327

Loss Before
Extraordinary Items                            (206)          (256)           (263)         (496)        (417)

Net Loss                                       (206)          (256)           (263)         (429)        (417)

Net Loss per Limited
Partnership Interest (2)                     (18.44)       (22.88)          (23.48)       (38.31)      (37.28)

Total Assets
at Year-End                                   2,646          2,918           3,257         3,585        3,942

Total Mortgage Notes Payable
at Year-End                                   6,219          6,284           6,343         6,400        6,198
</Table>

(1)  Results for the five years ended December 31, 2001 solely reflect
     operations of Fifth Avenue as Rockcreek was sold in December 1993.

(2)  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, 2001, the balance
in this replacement reserve account was $106,371. In January 2002, $105,947 of
the replacement reserve account was released to the Partnership for the
completion of certain required repairs to the Fifth Avenue property.

Cash and cash equivalents totaled $216,234 at December 31, 2001, compared to
$136,606 at December 31, 2000. The $79,628 increase is primarily attributable to
cash provided by operations offset by debt service payments and payments made to
the replacement reserve account

Cash held in escrow decreased to $53,049 at December 31, 2001, from $60,870 at
December 31, 2000. The $7,821 decrease is primarily attributable to increases in
real estate taxes and property insurance offset in part by contributions to the
insurance and real estate tax escrow, as required in the Loan Agreement.

Restricted cash replacement reserve increased to $106,371, at December 31, 2001,
from $55,621 at December 31, 2000. The $50,750 increase is attributable to the
monthly contributions to the replacements reserve account.

Other assets totaled $57,859 at December 31, 2001, compared to $61,821 at
December 31, 2000. The decrease in other assets is primarily attributable to the
amortization of loan costs offset in part to an increase in property insurance.

Accounts payable totaled $54,135 at December 31, 2001, compared to $47,565 at
December 31, 2000. The increase is primarily attributable to the timing of
payments associated with repairs and maintenance for apartment preparation.

Accrued expenses and other liabilities totaled $39,991 at December 31, 2001,
compared to $46,617 at December 31, 2000. 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 2002, 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

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.




                                                                          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, 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.


2000 Compared With 1999

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

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

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

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

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

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


In August 2001, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards 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.

General

The effect of inflation on the results of operations for the years ended
December 31, 2001, 2000 and 1999 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.



                                                                          Page 7
<PAGE>
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.

Valuation of Real Estate - Real estate investments are 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 above). At December 31, 2001, 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.

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 2001. The
following table summarizes the expected maturities of the Partnership's
long-term debt. The Partnership believes that borrowing rates available to the
Partnership at December 31, 2001 for such loans with similar terms and
maturities approximate the Partnership's fixed rate of 7.16% and therefore the
carrying amount approximates the fair value.

<Table>
<Caption>
         Year ending December 31,
<S>                                    <C>
                2002                   $   70,177
                2003                       75,444
                2004                       81,107
                2005                       87,195
                2006                       93,740
                Thereafter              5,811,019
                                       ----------
                                       $6,218,682
                                       ==========
</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, 2001 and 2000 ....................................................F-2

           Statements of Partners' Deficit - For the years ended December 31, 2001, 2000 and 1999 ............F-2

           Statements of Operations - For the years ended December 31, 2001, 2000 and 1999 ...................F-3

           Statements of Cash Flows - For the years ended December 31, 2001, 2000 and 1999 ...................F-4

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

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


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

None



                                                                          Page 9
<PAGE>
                                    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 the Stock
Purchase Agreement, Anterra purchased from DA all of the issued and outstanding
shares of common stock, $1.00 par value per share, of SM7. Anterra is an
affiliate of Anterra Property Investors VII, Inc. which is the general partner
of Crozier Partners VII, Ltd. The following is a summary of certain information
concerning the directors and executive officers of Anterra Property Investors
VII, Inc., Murray Realty Investors VII, Inc. and SM7 Apartment Investors Inc.,
as of December 31, 2001.

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

Richard E. Hoffmann, 47, President, Treasurer and Director. For more than five
years prior to July 15, 1990, Mr. Hoffmann was a Vice President and Treasurer of
Murray Properties Company and various other affiliated companies. He resigned
his position with substantially all Murray Properties Company affiliates on July
15, 1990. Mr. Hoffmann was elected Senior Vice President, Treasurer and a
Director of Anterra Realty Corporation in June of 1990, and was elected
President of Anterra Realty Corporation in July of 1994. He is President,
Treasurer and a Director of all other subsidiary corporations of Anterra Realty
Corporation, including Anterra Property Investors VII, Inc. Mr. Hoffmann
received a Master of Business Administration degree from the University of Texas
at Austin in 1979 and a B.S. from Tulane University in 1977. He is a Certified
Public Accountant.

Lynn D. Maynard, 49, Executive Vice President and Director. For more than five
years prior to December 26, 1989, Ms. Maynard was an officer of Murray
Properties Company and various other affiliated companies. She was elected Vice
President of Murray Properties Company and Murray Realty Investors, Inc. in
December of 1986. Ms. Maynard resigned her positions with substantially all
Murray Properties Company affiliates on December 26, 1989. Ms. Maynard was
elected Senior Vice President and a Director of Anterra Realty Corporation in
November 1989, and is Executive Vice President and a Director of all other
subsidiary corporations of Anterra Realty Corporation, including Anterra
Property Investors VII, Inc. Ms. Maynard received a Bachelor of Science Degree
in Accounting from the University of Texas at Dallas, and is a Certified Public
Accountant. She is a member of the American Institute of Certified Public
Accountants, the Texas Society of Certified Public Accountants and the Dallas
Chapter of Certified Public Accountants.

Sandy Robison, 46, Vice President and Secretary. Ms. Robison joined Anterra
Realty Corporation's predecessor company in 1983 and has served in all areas of
the Accounting Department, including the positions of Staff Accountant, Systems
Manager and Assistant Controller. Ms. Robison became Secretary of Anterra Realty
Corporation in December 1997 and became Vice President and Controller of Anterra
Realty Corporation in December 1998. She is Vice President, Secretary and
Controller of Anterra Realty Corporation and all other subsidiary corporations
of Anterra Realty Corporation, including Anterra Property Investors VII, Inc.
Ms. Robison holds an associates degree from Eastfield College.

Murray Realty Investors VII, Inc., Corporate General Partner

Fulton Murray, 61, President, Chairman of the Board and Director. Mr. Murray has
been Chairman of the Board and Chief Executive Officer of Murray Properties
Company and Murray Financial Corporation for more than five years prior to the
date of this report. In addition, he is a director or officer of substantially
all affiliates of Murray Properties Company. His family, or trusts for their
benefit, own approximately 64% of the outstanding stock of Murray Financial
Corporation, which is the parent corporation of Murray Properties Company and
most of its affiliates. He holds a Bachelor of Business Administration degree in
Finance from Southern Methodist University.


                                                                         Page 10
<PAGE>




SM7 Apartment Investors Inc., Corporate General Partner

Richard E. Hoffmann, 47, President, Treasurer and Director. For more than five
years prior to July 15, 1990, Mr. Hoffmann was a Vice President and Treasurer of
Murray Properties Company and various other affiliated companies. He resigned
his position with substantially all Murray Properties Company affiliates on July
15, 1990. Mr. Hoffmann was elected Senior Vice President, Treasurer and a
Director of Anterra Realty Corporation in June of 1990, and was elected
President of Anterra Realty Corporation in July of 1994. He is President,
Treasurer and a Director of all other subsidiary corporations of Anterra Realty
Corporation, including SM7 Apartment Investors Inc. Mr. Hoffmann received a
Master of Business Administration degree from the University of Texas at Austin
in 1979 and a B.S. from Tulane University in 1977. He is a Certified Public
Accountant.

Lynn D. Maynard, 49, Executive Vice President and Director. For more than five
years prior to December 26, 1989, Ms. Maynard was an officer of Murray
Properties Company and various other affiliated companies. She was elected Vice
President of Murray Properties Company and Murray Realty Investors, Inc. in
December of 1986. Ms. Maynard resigned her positions with substantially all
Murray Properties Company affiliates on December 26, 1989. Ms. Maynard was
elected Senior Vice President and a Director of Anterra Realty Corporation in
November 1989, and is Executive Vice President and a Director of all other
subsidiary corporations of Anterra Realty Corporation including SM7 Apartment
Investors Inc. Ms. Maynard received a Bachelor of Science Degree in Accounting
from the University of Texas at Dallas, and is a Certified Public Accountant.
She is a member of the American Institute of Certified Public Accountants, the
Texas Society of Certified Public Accountants and the Dallas Chapter of
Certified Public Accountants.

Sandy Robison, 46, Vice President and Secretary. Ms. Robison joined Anterra
Realty Corporation's predecessor company in 1983 and has served in all areas of
the Accounting Department, including the positions of Staff Accountant, Systems
Manager and Assistant Controller. Ms. Robison became Secretary of Anterra Realty
Corporation in December 1997 and became Vice President and Controller of Anterra
Realty Corporation in December 1998. She is Vice President, Secretary and
Controller of Anterra Realty Corporation and all other subsidiary corporations
of Anterra Realty Corporation, including SM7 Apartment Investors Inc. Ms.
Robison holds an associates degree from Eastfield College.

Affiliated Bankruptcies

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

ITEM 11.  EXECUTIVE COMPENSATION

The Partnership has not paid and does not propose to pay any cash compensation,
bonuses or deferred compensation, compensation pursuant to retirement or other
plans, or other compensation to the officers, directors, or partners of the
General Partners. The General Partners and their affiliates receive various fees
and distributions. See Item 13. "Certain Relationships and Related Transactions"
for information on the fees and other compensation or reimbursements paid to the
General Partners or their affiliates during the year ended December 31, 2001.

                                                                         Page 11

<PAGE>




ITEM 12.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

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

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

     (b)  No General Partner or any officer or director of a General Partner
          beneficially owned or owned of record directly or indirectly any
          Interests as of December 31, 2001.

ITEM 13.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

     (a)  During the years ended December 31, 2001, 2000 and 1999, the General
          Partners or their affiliates were reimbursed for Partnership
          administrative and operating expenses, excluding property and
          construction management fees, in the amounts of $11,681, $11,050 and
          $11,906, respectively.

          On January 1, 1990, Murray Management Corporation retained Anterra
          Management Corporation, an affiliate of the general partners, to
          provide certain administrative and management services with respect to
          the Partnership and its Properties. Anterra Management Corporation is
          a real estate related service company formed by former executive
          officers of Murray and its affiliates, and earned property and
          construction management fees of $57,867, $61,528 and $65,086 for the
          years ended December 31, 2001, 2000 and 1999, respectively.

     (b)  None.

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

     (d)  Not applicable.

                                     PART IV

ITEM 14.  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.


                                                                         Page 12
<PAGE>
         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.

         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.


                                                                         Page 13
<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 29, 2002
                                            BY:      /s/ Richard E. Hoffmann
                                               ---------------------------------
                                                     Richard E. Hoffmann
                                                     Director and President





                                                                         Page 14
<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 29, 2002
                                            BY:        /s/ Richard E. Hoffmann
                                               ---------------------------------
                                                     Richard E. Hoffmann
                                                     President, Director and
                                                     Treasurer



Date:  March 29, 2002
                                            BY:        /s/ Lynn D. Maynard
                                               ---------------------------------
                                                     Lynn D. Maynard
                                                     Executive Vice President
                                                     and Director



Date:  March 29, 2002
                                            BY:        /s/ Sandy Robison
                                               ---------------------------------
                                                     Chief Financial Officer,
                                                     Vice President, Secretary
                                                     and Controller


                                                                         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 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 29, 2002
                                            BY:        /s/ Richard E. Hoffmann
                                               ---------------------------------
                                                     Richard E. Hoffmann
                                                     President, Director and
                                                     Treasurer



Date:  March 29, 2002
                                            BY:         /s/ Lynn D. Maynard
                                               ---------------------------------
                                                     Lynn D. Maynard
                                                     Executive Vice President
                                                     and Director


                                                                         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 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 29, 2002
                                            BY:         /s/ Fulton Murray
                                               ---------------------------------
                                                    Fulton Murray
                                                    President, Chairman of the
                                                    Board and Director




                                                                         Page 17
<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. 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 and schedule are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements and schedule. An audit also includes assessing the
accounting principles used and significant estimates made by management, as well
as evaluating the overall financial statement and schedule presentation. We
believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of S/M Real Estate Fund VII, Ltd.
as of December 31, 2001 and 2000, and the results of its operations and its cash
flows for each of the years in the three-year period ended December 31, 2001, 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 8, 2002


                                      F-1

<PAGE>



S/M REAL ESTATE FUND VII, LTD.

BALANCE SHEETS

<Table>
<Caption>
                                                     AT DECEMBER 31,   AT DECEMBER 31,
                                                          2001              2000
                                                     --------------    --------------
<S>                                                  <C>               <C>
ASSETS Real estate, at cost:
   Land                                              $      962,216    $      962,216
   Buildings and improvements                             7,971,336         7,944,151
                                                     --------------    --------------
                                                          8,933,552         8,906,367
   Less accumulated depreciation                         (6,724,462)       (6,308,560)
                                                     --------------    --------------
                                                          2,209,090         2,597,807

Cash and cash equivalents                                   216,234           136,606
Cash held in escrow                                          53,049            60,870
Restricted cash - replacement reserve                       106,371            55,621
Accounts receivable                                           3,846             5,451
Other assets, net                                            57,859            61,821
                                                     --------------    --------------
     TOTAL ASSETS                                    $    2,646,449    $    2,918,176
                                                     ==============    ==============
LIABILITIES AND PARTNERS' DEFICIT
Liabilities:
   First mortgage note payable                       $    6,218,682    $    6,283,959
   Accounts payable:
     Trade                                                   13,470             6,605
     Affiliates                                              40,665            40,960
   Accrued expenses and other liabilities                    39,991            46,617
                                                     --------------    --------------
     Total Liabilities                                    6,312,808         6,378,141
                                                     --------------    --------------
Partners' Deficit:
   General Partners                                        (123,275)         (121,211)
   Limited Partners (11,080 units outstanding)           (3,543,084)       (3,338,754)
                                                     --------------    --------------
     Total Partners' Deficit                             (3,666,359)       (3,459,965)
                                                     --------------    --------------
     TOTAL LIABILITIES AND PARTNERS' DEFICIT         $    2,646,449    $    2,918,176
                                                     ==============    ==============
</Table>



STATEMENTS OF PARTNERS' DEFICIT
FOR THE YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999

<Table>
<Caption>
                                                                  GENERAL            LIMITED
                                                                 PARTNERS            PARTNERS            TOTAL
                                                                -----------       -------------       -------------
<S>                                                             <C>               <C>                 <C>
BALANCE AT DECEMBER 31, 1998                                    $  (116,023)      $  (2,825,073)      $  (2,941,096)
Net Loss                                                             (2,628)           (260,204)           (262,832)
                                                                -----------       -------------       -------------

BALANCE AT DECEMBER 31, 1999                                    $  (118,651)      $  (3,085,277)      $  (3,203,928)
Net Loss                                                             (2,560)           (253,477)           (256,037)
                                                                -----------       -------------       -------------

BALANCE AT DECEMBER 31, 2000                                    $  (121,211)      $  (3,338,754)      $  (3,459,965)
Net Loss                                                             (2,064)           (204,330)           (206,394)
                                                                -----------       -------------       -------------

BALANCE AT DECEMBER 31, 2001                                    $  (123,275)      $  (3,543,084)      $  (3,666,359)
                                                                ===========       =============       =============
</Table>


See accompanying notes to the financial statements.

                                      F-2

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

STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31,

<Table>
<Caption>
                                           2001           2000           1999
                                        -----------    -----------    -----------
<S>                                     <C>            <C>            <C>
INCOME
Rental                                  $ 1,448,295    $ 1,380,401    $ 1,353,692
Interest and other                           14,478         17,956         17,421
                                        -----------    -----------    -----------
     Total Income                         1,462,773      1,398,357      1,371,113
                                        -----------    -----------    -----------
EXPENSES
Property operating                          707,917        704,176        677,746
Interest                                    453,954        459,758        462,664
Depreciation and amortization               432,138        426,124        412,864
General and administrative                   75,158         64,336         80,671
                                        -----------    -----------    -----------
     Total Expenses                       1,669,167      1,654,394      1,633,945
                                        -----------    -----------    -----------
NET LOSS                                $  (206,394)   $  (256,037)   $  (262,832)
                                        ===========    ===========    ===========
NET LOSS ALLOCATED:
   To the General Partners              $    (2,064)   $    (2,560)   $    (2,628)
   To the Limited Partners                 (204,330)      (253,477)      (260,204)
                                        -----------    -----------    -----------
                                        $  (206,394)   $  (256,037)   $  (262,832)
                                        ===========    ===========    ===========
NET LOSS PER LIMITED PARTNERSHIP UNIT
(11,080 UNITS OUTSTANDING)              $    (18.44)   $    (22.88)   $    (23.48)
                                        ===========    ===========    ===========
</Table>

See accompanying notes to the financial statements.

                                      F-3

<PAGE>

S/M REAL ESTATE FUND VII, LTD.

STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31,

<Table>
<Caption>
                                                                  2001         2000         1999
                                                               ---------    ---------    ---------
<S>                                                            <C>          <C>          <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Loss                                                       $(206,394)   $(256,037)   $(262,832)
Adjustments to reconcile net loss to net cash
provided by operating activities:
   Depreciation and amortization                                 432,138      426,124      412,864
   Loss on retirement of assets                                       --       28,602       14,410
   Increase (decrease) in cash arising from changes
   in operating assets and liabilities:
     Cash held in escrow                                           7,821       (6,505)     (18,378)
     Accounts receivable                                           1,605         (354)       1,214
     Other assets                                                 (2,151)       1,782       (3,721)
     Accounts payable                                              6,570      (22,811)      (3,068)
     Accrued expenses and other liabilities                       (6,626)        (243)      (5,936)
                                                               ---------    ---------    ---------
Net cash provided by operating activities                        232,963      170,558      134,553
                                                               ---------    ---------    ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
(Increase) decrease in restricted cash - replacement reserve     (50,750)     (16,207)      74,961
Additions to real estate                                         (37,308)    (162,111)    (223,842)
                                                               ---------    ---------    ---------
Net cash used in investing activities                            (88,058)    (178,318)    (148,881)
                                                               ---------    ---------    ---------
CASH FLOWS FROM FINANCING ACTIVITIES - Payments of
   principal on first mortgage note payable                      (65,277)     (59,474)     (56,567)
                                                               ---------    ---------    ---------
Net increase (decrease) in cash and cash equivalents              79,628      (67,234)     (70,895)
Cash and cash equivalents, beginning of year                     136,606      203,840      274,735
                                                               ---------    ---------    ---------
CASH AND CASH EQUIVALENTS, END OF YEAR                         $ 216,234    $ 136,606    $ 203,840
                                                               =========    =========    =========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the year for interest                         $ 453,954    $ 459,758    $ 462,664
                                                               ---------    ---------    ---------
SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING ACTIVITIES:
Write-off of fully depreciated building improvements           $  10,123    $  18,567    $   8,675
                                                               ---------    ---------    ---------
</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, 2001, 2000, AND 1999

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 2002, including debt service. In the event of any cash flow
deficits, it is expected that such deficits will be funded by the Partnership's
existing cash balances. However, there can be no assurance that the Partnership
will have sufficient cash to fund such deficits.

3. SIGNIFICANT ACCOUNTING POLICIES

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

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

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

In August 2001, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards 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.

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.

                                      F-5

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


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

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

NET 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
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, 2001 and 2000, Fifth Avenue was 92% and 97% 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%.

                                      F-6

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

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, 2001, the balance in this replacement reserve account was $106,371.
In January 2002, $105,947 of the replacement reserve account was released to the
Partnership for the completion of certain required repairs to the Fifth Avenue
property.

The following represents principal payments required under the Loan Agreement
subsequent to December 31, 2001:

<Table>
<Caption>
       Year ending December 31,
       ------------------------
<S>                                   <C>
                2002                  $  70,177
                2003                     75,444
                2004                     81,107
                2005                     87,195
                2006                     93,740
                2007                    100,776
                2008                    108,340
                2009                  5,601,903
</Table>

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

7. TRANSACTIONS WITH RELATED PARTIES

During the years ended December 31, 2001, 2000 and 1999, the General Partners or
their affiliates were reimbursed for Partnership administrative and operating
expenses, excluding property and construction management fees, in the amounts of
$11,681, $11,050 and $11,906, 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 $57,867, $61,528 and $65,086 for the years
ended December 31, 2001, 2000 and 1999, respectively.

8. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)

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

<Table>
<Caption>
QUARTER ENDED                               03/31    06/30    09/30    12/31
                                            -----    -----    -----    -----
<S>                                         <C>      <C>      <C>      <C>
2001

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)

2000

Total Income                                $ 345    $ 342    $ 348    $ 363

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

Net Loss per Limited Partnership Interest   (3.93)   (7.86)   (7.92)   (3.17)
</Table>


                                      F-7
<PAGE>
S/M REAL ESTATE FUND VII, LTD.

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

The following is a reconciliation of the net loss for financial statement
purposes to federal income tax basis net income (loss) for the years ended
December 31, 2001, 2000 and 1999:

<Table>
<Caption>
                                                                2001         2000         1999
                                                             ---------    ---------    ---------
<S>                                                          <C>          <C>          <C>
Net loss for financial statements purposes                   $(206,394)   $(256,037)   $(262,832)
Financial statement depreciation over tax
         basis depreciation                                    381,787      352,422      358,444

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

Other                                                           (2,652)       1,486         (500)
                                                             ---------    ---------    ---------
Federal income tax basis net loss under financial
         statement net loss                                    373,824      332,478      357,944
                                                             ---------    ---------    ---------
Federal income tax basis net income                          $ 167,430    $  76,441    $  95,112
                                                             =========    =========    =========
</Table>

Reconciliation of financial statement partners' deficit to federal income tax
basis partners' deficit for the years ended December 31, 2001, 2000 and 1999:

<Table>
<Caption>
                                                     2001           2000           1999
                                                 -----------    -----------    -----------
<S>                                              <C>            <C>            <C>
Financial statement basis partners' deficit      $(3,666,359)   $(3,459,965)   $(3,203,928)

Current year federal income tax basis net loss
         under  financial statement net loss         373,824        332,478        357,944

Cumulative federal income tax basis net loss
         over financial statement net loss          (932,820)    (1,265,298)    (1,623,242)
                                                 -----------    -----------    -----------
Federal income tax basis partners' deficit       $(4,225,355)   $(4,392,785)   $(4,469,226)
                                                 ===========    ===========    ===========
</Table>

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


                                      F-8

<PAGE>

S/M REAL ESTATE FUND VII, LTD.


SCHEDULE III - REAL ESTATE AND ACCUMULATED DEPRECIATION
December 31, 2001

<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                              $   6,218,682
Initial cost to Partnership (1):
     Land                                       962,216
     Building and
     improvements                             7,512,710
Costs capitalized
subsequent to acquisition:
     Land, buildings
     and improvements                           633,083
Retirements                                    (174,457)
Gross amount at which
carried at close of period (2):
     Land                                 $     962,216
     Building and
     improvements                             7,971,336
                                          -------------
                                          $   8,933,552

Accumulated depreciation                  $   6,724,462
                                          =============
</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, 2001 and 2000 and 1999,
     for Federal income tax purposes is $9,142,503, $9,115,315 and $8,953,204,
     respectively.

A reconciliation of the carrying amount of real estate and accumulated
depreciation for the years ended December 31, 2001, 2000, and 1999 follows:

<Table>
<Caption>
                                2001           2000           1999
                            -----------    -----------    -----------
<S>                         <C>            <C>            <C>
REAL ESTATE INVESTMENTS:
Beginning of year           $ 8,906,367    $ 8,825,917    $ 8,669,430
Additions                        37,308        162,111        223,842
Retirements                     (10,123)       (81,661)       (67,355)
                            -----------    -----------    -----------
End of year                 $ 8,933,552    $ 8,906,367    $ 8,825,917
                            ===========    ===========    ===========

ACCUMULATED DEPRECIATION:
Beginning of year           $ 6,308,560    $ 5,941,608    $ 5,587,802
Depreciation expense            426,025        420,011        406,751
Retirements                     (10,123)       (53,059)       (52,945)
                            -----------    -----------    -----------
End of year                 $ 6,724,462    $ 6,308,560    $ 5,941,608
                            ===========    ===========    ===========
</Table>


                                      F-9
<PAGE>

                               INDEX TO EXHIBITS

<Table>
<Caption>
  DOCUMENT
   NUMBER       DESCRIPTION
  --------      -----------
<S>             <C>
     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.

     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.

</Table>