<PAGE>   1
                                  UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

                                    FORM 10-Q


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

                  For the quarterly period ended March 31, 1997


                                       OR


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

             For the transition period from                     to
                                           -------------------     ------------
             Commission file number   0-15693



                        QUEST HEALTH CARE FUND VII, L.P.
             ------------------------------------------------------
             (Exact name of registrant as specified in its charter)


              Delaware                                   58-1697905
--------------------------------------------------------------------------------
     (State or other jurisdiction of                 (I.R.S. Employer
     incorporation or organization)                  Identification No.)



      1117 Perimeter Center West  E-210     Atlanta, GA    30338
--------------------------------------------------------------------------------
    (Address of principal executive offices)             (Zip code)



Registrant's telephone number, including area code       (770) 671-1014


         Formerly: Southmark/CRCA Health Care Fund VII, L.P.
--------------------------------------------------------------------------------

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, and (2) has been subject to such
filing requirements for the past 90 days.     Yes  X     No
                                                  -----    -----

                              There are no exhibits


                                TOTAL OF 12 PAGES





<PAGE>   2






                        QUEST HEALTH CARE FUND VII, L.P.
                                 BALANCE SHEETS

                         PART I. FINANCIAL INFORMATION




ITEM 1. FINANCIAL STATEMENTS

                                     ASSETS
<TABLE>
<CAPTION>

                                                             March  31,      December 31,
                                                            -----------      ----------
                                                                1997             1996
                                                            -----------      ----------
<S>                                                         <C>              <C>       
CURRENT ASSETS
   Cash and cash equivalents                                $   749,474      $  896,687
   Accounts receivable, net of allowance
      for doubtful accounts of $38,099 and
      $33,495 at March 31, 1997 and
      December 31, 1996, respectively                           975,722         850,173
   Prepaid expenses                                              90,689         129,411
                                                            -----------      ----------

         Total current assets                                 1,815,885       1,876,271
                                                            -----------      ----------

PROPERTY AND EQUIPMENT, at cost
   Land                                                         234,662         234,662
   Buildings and improvements                                 2,388,021       2,388,741
   Equipment and furnishings                                    822,214         797,346
                                                            -----------      ----------
                                                              3,444,897       3,420,749
   Less accumulated depreciation and amortization            (2,393,668)      2,374,312
                                                            -----------      ----------

         Net property and equipment                           1,051,229       1,046,437
                                                            -----------      ----------


TOTAL ASSETS                                                $ 2,867,114      $2,922,708
                                                            ===========      ==========
</TABLE>



The financial information included herein has been prepared by management
without audit by independent public accountants. See notes to financial
statements.

                                        2

<PAGE>   3
                        QUEST HEALTH CARE FUND VII, L.P.
                                 BALANCE SHEETS



                        LIABILITIES AND PARTNERS' EQUITY

<TABLE>
<CAPTION>

                                                        March 31,       December 31,
                                                       -----------      ------------
                                                           1997             1996
                                                       -----------      ------------
<S>                                                    <C>              <C>        
CURRENT LIABILITIES
   Current maturities of long-term debt                $     5,655      $     9,629
   Trade accounts payable                                  301,989          286,815
   Accrued compensation                                    263,261          121,404
   Accrued insurance                                        47,528           92,885
   Estimated third party settlements                       102,349          177,779
   Estimated sales tax settlement (Note 4)                 279,691          279,691
   Accrued expenses                                         72,189           51,128
   Other                                                    66,819           29,917
   Payable to Quest and affiliates                          20,874            3,885
                                                       -----------      -----------

         Total current liabilities                       1,160,355        1,053,133



PARTNERS' EQUITY
   Limited Partners                                      1,851,980        2,013,168
   General Partner                                        (145,221)        (143,593)
                                                       -----------      -----------

        Total partners' equity                           1,706,759        1,869,575
                                                       -----------      -----------

TOTAL LIABILITIES AND PARTNERS' EQUITY                 $ 2,867,114      $ 2,922,708
                                                       ===========      ===========

</TABLE>

The financial information included herein has been prepared by management
without audit by independent public accountants. See notes to financial
statements.

                                        3

<PAGE>   4



                        QUEST HEALTH CARE FUND VII, L.P.
                            STATEMENTS OF OPERATIONS


<TABLE>
<CAPTION>

                                                            For the
                                                       Three Months Ended
                                                            March 31,
                                                  ----------------------------
                                                      1997             1996
                                                  -----------      -----------
<S>                                               <C>              <C>        
REVENUES:
     Operating revenue                            $ 1,621,019      $ 1,732,850
     Interest income                                    1,703           11,443
                                                  -----------      -----------
Total revenues                                      1,622,722        1,744,293
                                                  -----------      -----------

EXPENSES:
     Wages & salaries                                 790,238          808,095
     Payroll tax & employee benefits                  132,624          158,456
     Supplies                                         196,604          236,323
     Other operating expenses                         146,473          132,862
     Ancillary services                               258,014          272,250
     Health benefits                                   27,240           39,190
     Management fees                                   80,832           88,755
     Management fees-affiliate                         16,321           17,757
     Property taxes                                    15,333           15,895
     Interest                                             214              737
     Depreciation and amortization                     19,356           20,821
     Partnership administration                       102,289           64,339
                                                  -----------      -----------

Total expenses                                      1,785,538        1,855,480
                                                  -----------      -----------


NET LOSS                                          $  (162,816)     $  (111,187)
                                                  ===========      ===========


NET LOSS PER LIMITED
  PARTNERSHIP UNIT                                $      (.58)     $      (.39)
                                                  ===========      ===========

Weighted average limited partnership
     units outstanding                                279,278          279,278
                                                  ===========      ===========
</TABLE>


The financial information included herein has been prepared by management
without audit by independent public accountants. See notes to financial
statements.

                                        4

<PAGE>   5



                        QUEST HEALTH CARE FUND VII, L.P.
                         STATEMENTS OF PARTNERS' EQUITY

<TABLE>
<CAPTION>

                                                                            Total
                                         General         Limited          Partners'
                                         Partner         Partners          Equity
                                        ---------      -----------      -----------
<S>                                     <C>            <C>              <C>        
Balance at December 31, 1995            $(137,406)     $ 2,625,675      $ 2,488,269

Net income                                 (1,112)        (110,075)        (111,187)
                                        ---------      -----------      -----------


Balance at March 31, 1996               $(138,518)     $ 2,515,600      $ 2,377,082
                                        =========      ===========      ===========




Balance at December 31, 1996            $(143,593)     $ 2,013,168      $ 1,869,575

Net income                                 (1,628)        (161,188)        (162,816)


Balance at March 31, 1997               $(145,221)     $ 1,851,980      $ 1,706,759
                                        =========      ===========      ===========
</TABLE>


The financial information included herein has been prepared by management
without audit by independent public accountants. See notes to financial
statements.


                                        5

<PAGE>   6



                        QUEST HEALTH CARE FUND VII, L.P.
                            STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>

                                                           Three Months Ended
                                                                 March 31,
                                                       ----------------------------
                                                          1997              1996
                                                       -----------      -----------
<S>                                                    <C>              <C>        
CASH FLOWS FROM OPERATING ACTIVITIES:
   Cash received from residents and
      government agencies                              $ 1,495,470      $ 1,604,196
   Cash paid to suppliers and
      employees                                         (1,609,663)      (1,691,354)
   Interest received                                         1,703           11,443
   Interest paid                                              (214)            (737)
   Property taxes paid                                      (6,387)         (42,274)
                                                       -----------      -----------

Net cash used in
  operating activities                                    (119,091)        (118,726)
                                                       -----------      -----------

CASH FLOWS FROM INVESTING ACTIVITIES:

   Payment for purchases of property
      and equipment                                        (24,148)          (9,193)
                                                       -----------      -----------

Net cash used in
 investing activities                                      (24,148)          (9,193)
                                                       -----------      -----------

CASH FLOWS FROM FINANCING ACTIVITIES:

   Principal payments on long-term debt                     (3,974)          (3,329)
                                                       -----------      -----------

Net cash used in financing activities                       (3,974)          (3,329)
                                                       -----------      -----------

DECREASE IN CASH AND CASH
   EQUIVALENTS                                            (147,213)        (131,248)

Cash and cash equivalents at beginning of
   period                                                  896,687        1,325,321
                                                       -----------      -----------

Cash and cash equivalents at end of period             $   749,474      $ 1,194,073
                                                       ===========      ===========
</TABLE>











The financial information included herein has been prepared by management
without audit by independent public accountants. See notes to financial
statements.

                                        6

<PAGE>   7



                        QUEST HEALTH CARE FUND VII, L.P.
                            STATEMENTS OF CASH FLOWS


<TABLE>
<CAPTION>


                                                                                     Three Months Ended
                                                                                           March 31,
                                                                                   -------------------------
                                                                                     1997            1996
                                                                                   ---------      ---------

<S>                                                                                <C>            <C>       
RECONCILIATION OF NET LOSS TO NET CASH
   USED IN OPERATING ACTIVITIES:

   Net loss                                                                        $(162,816)     $(111,187)

   Adjustments to reconcile net loss to net cash used in operating activities:

            Depreciation and amortization                                             19,356         20,821

   Changes in assets and liabilities:

            Accounts receivable                                                     (125,549)      (128,654)

            Other current assets                                                      38,722         59,380

            Accounts payable and accrued
               liabilities                                                            94,207         42,334

            Payable to Quest and affiliates                                           16,989         (1,420)
                                                                                   ---------      ---------

Net cash used in
  operating activities                                                             $(119,091)     $(118,726)
                                                                                   =========      =========
</TABLE>

The financial information included herein has been prepared by management
without audit by independent public accountants. See notes to financial
statements.

                                        7

<PAGE>   8



                        QUEST HEALTH CARE FUND VII, L.P.
                          NOTES TO FINANCIAL STATEMENTS

                                 March 31, 1997

NOTE 1

During interim periods, Quest Health Care Fund VII, L.P. (the "Partnership")
follows the accounting policies set forth in its Annual Report on Form 10-K
filed with the Securities and Exchange Commission. Users of financial
information provided for interim periods should refer to the annual financial
information and footnotes contained in the Annual Report on Form 10-K when
reviewing the interim financial results presented herein.

In the opinion of management, the accompanying unaudited interim financial
statements, prepared in accordance with the instructions for Form 10-Q, contain
all material adjustments, consisting only of normal recurring adjustments
necessary to present fairly the financial condition, results of operations,
changes in partners' equity and cash flows of the Partnership for the respective
interim periods presented. The results of operations for such interim periods
are not necessarily indicative of results of operations for a full year.

NOTE 2 CASH AND CASH EQUIVALENTS

For purposes of reporting cash flows, cash and cash equivalents include cash on
hand, demand deposits and money market funds.

The Partnership maintains cash accounts with a variety of unrelated banks, all
of which are covered by the Federal Deposit Insurance Corporation (FDIC). At
March 31, 1997, the Partnership maintained cash balances at these banks
aggregating $509,586 in excess of the $100,000 FDIC insured maximum.


NOTE 3 TRANSACTIONS WITH AFFILIATES

The Partnership Agreement provides for payment of property management fees based
on 6% of gross property operating revenue. Quest Administrative Services, L.P.
(QASLP), an affiliate of Quest, receives 1% of gross property operating revenue
relating to services provided directly to the facilities. Total payments to
QASLP under these contracts for the periods ending March 31, 1997 and 1996 were
$16,321 and $17,757, respectively.

Quest, in an effort to continue certain health benefits for employees, created
an employee benefit trust (the "Trust") in compliance with the guidelines
promulgated by VEBA and ERISA. Amounts contributed to the Trust by the
Partnership and Partnership employees are strictly for the benefit of employees
of the participating employers, payment of excess loss reinsurance, life
insurance and accidental death and dismemberment and claims and plan
administration and employee medical claims. Quest has engaged a claims
pre-certification organization to review all claims made by the Partnership's
employees. Approximately $27,240 and $39,190 was recorded under this arrangement
for the periods ending March 31, 1997 and 1996, respectively.



                                        8

<PAGE>   9



                        QUEST HEALTH CARE FUND VII, L.P.
                          NOTES TO FINANCIAL STATEMENTS


NOTE 4  LITIGATION


In 1994, a complaint associated with a sexual harassment and wrongful
termination was filed against the Partnership. In the fourth quarter of 1996, a
complaint for discrimination and wrongful termination was received by one of the
Partnership's facilities. The Partnership's liability, if any, is not
determinable at this time and no provision has been made in the accompanying
Financial Statements. It is the opinion of management that the ultimate
resolution will not have a material effect on the Partnership's financial
position. There has been no significant change in the status of this litigation.

In December 1994, the Partnership received a Notice and Demand for Payment from
the Idaho State Tax Commission resulting from sales tax audits for the years
1976 through 1988 under a theory of successor liability for approximately
$470,000. The Partnership has recorded a provision in the 1994 Financial
Statements for $352,602, at December 31, 1994. As a result of selling certain
facility interests in 1995, this successor liability was reduced to
approximately $373,000 and the reserves were reduced to $279,691. As of year end
1996 the reserve remains at $279,691. The amount of this liability could change
in the near term and the difference between the final settlement and the
recorded liability of $279,691 will be reflected in the results from operations.
As of year end 1996, the state was reassessing its position relative to these
claims.



NOTE 5 FACILITY SALES

During the first quarter of 1997, the Partnership entered into a contract with
an unaffiliated third party to sell all of the assets of one of its subsidiary
partnerships. The contract calls for all cash consideration to be paid at the
date of closing. The Partnership will distribute the proceeds of sale, should
the sale be completed, as part of its final liquidation.


NOTE 6 GOING CONCERN

The Partnership's financial statements have been presented on the basis that it
is a going concern, which contemplates the realization of assets and the
satisfaction of liabilities in the normal course of business. The sale of the
Partnership's interests in five nursing homes and possible future sales of any
or all of its remaining facilities will have an effect on cash flow from
operations in the future.




                                        9

<PAGE>   10



                                     PART I

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


Revenues:

Revenues for the first quarter of 1997 decreased $121,571 when compared to the
first quarter in 1996. The majority of this decrease is a result of lower
occupancies at the facilities, in particular, Valley Living Center where market
competition with newer facilities in town has effected the facility. At Valley
Convalescent there have been fewer discharges from the hospital. As the Medicare
census rebuilds at the facility the ancillary revenue associated with these
types of patients will increase as well.

All resident receivables are recorded at their original face amount and are due
and payable under "normal" market terms and conditions. In the event of
non-collection, the ultimate loss to the Partnership would be limited to the
recorded balance of the receivables as shown in the balance sheet.

The significant components of accounts receivable at March 31, 1997 and December
31, 1996 are:
<TABLE>
<CAPTION>

                                                                            1997              1996
                                                                          ------             ------
<S>                                                                         <C>                 <C>
Medicaid                                                                     46%                 48%
Private Pay                                                                  11%                 10%
VA, Medicare and Other                                                       43%                 42%
                                                                          ------             ------
                                                                            100%                100%
                                                                          ======             ======
</TABLE>

Payments by both the state and federal governments are normally received within
60-90 days. The sources of patient revenues for periods ended March 31, 1997 and
1996 are:
<TABLE>
<CAPTION>

                                                                            1997                1996
                                                                          -------             ------
<S>                                                                         <C>                 <C>
Medicaid                                                                     43%                 47%
Private Pay                                                                  13%                 11%
VA, Medicare and Other                                                       44%                 42%
                                                                          -------             ------
                                                                            100%                100%
                                                                          =======             ======
</TABLE>

Expenses:

Expenses for the first quarter of 1997 decreased $69,942 when compared to the
first quarter of 1996. These decreases are attributable to payroll decreases and
decreased ancillary utilization as well as effective expense and personnel
controls as a result of lower occupancies. The increase in partnership
administration expenses during the first quarter is primarily legal expenses
necessitated by the negotiation of the contract on the Valley Convalescent
facility as well as costs incurred with preparing the other facilities for sale.


Liquidity and Capital Resources:

At March 31, 1997, the Partnership held cash and cash equivalents of $749,474.
This is a decrease of $147,213 since December 31, 1996. This is due primarily to
cash used in operating activities. There are no major capital improvements
planned at the remaining facilities.

During the first quarter of 1997, the Valley Convalescent facility experienced
some delay in collecting its Medicare receivables. This is primarily as a result
of the resignation of Aetna Insurance Company as the Medicare intermediary and
the conversion to Mutual of Omaha as the Medicare intermediary for that
facility. The delays seem to have been resolved subsequent to the end of the
first quarter and are not anticipated to create further problems. The Valley
Convalescent

                                       10

<PAGE>   11



facility, located two hours east of San Diego in the desert, continues to
experience difficulty in attracting qualified, certified nursing assistants and
is continuing to experience wage competition from non-nursing home businesses.
This, in addition to accrued vacation at all partnership facilities, was the
primary reason for the increase in accrued compensation.

The Valley Living Center, located in Idaho Falls, Idaho, has done well at
controlling its expenses, however, the facility is in direct competition with
newly built assisted living properties in the same town and has experienced a
decrease in occupancy. This situation is not expected to change until such time
as the competing facilities achieve a stable occupancy. The Mountain View
facility, located in Kimberly, Idaho, has not made significant progress in
increasing its occupancy.

Litigation filed against two of the Partnership's majority owned facility
partnerships continues unabated. As of this writing, the litigation has not
effected the Partnership's plan of liquidation and the Partnership will use
whatever strategies are necessary to protect its interests and to complete its
liquidation. The sale of the Valley Convalescent facility is proceeding
according to contract and negotiations for the sale of the two remaining
facilities are drawing to a conclusion.

The Partnership has no established credit lines with outside lending sources and
relies solely on cash flow and cash resources to conduct Partnership business.
There are no material commitments for capital improvements at the remaining
facilities.

The Partnership's continued existence is dependent upon its ability to: (i)
generate sufficient cash flow to meet its obligations on a timely basis; and
(ii) obtain additional sources of funding as may be required. As stated above,
the Partnership will entertain offers to sell any or all of its three remaining
facilities and, if accepted and closed, plans to liquidate in an orderly
fashion.



                           PART II. OTHER INFORMATION

ITEMS 1-5.

    None

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

(A) Exhibits.

    Exhibit 27 - Financial Data Schedule (for SEC use only)

(B) Reports on Form 8-K.

    None during the first quarter of 1997.

                                       11

<PAGE>   12






                                   SIGNATURES




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


                                       QUEST HEALTH CARE
                                       FUND VII, L.P.
                                       (Registrant)


                                       By: QUEST RESCUE PARTNERS - 7, L.P.
                                       General Partner

                                       By: QUEST RESCUE PARTNERS - 7 Corp.


Date:   May 20, 1997                   By: /s/ Stuart C. Berry
      ----------------                     -------------------
                                           CEO/CFO











                                       12