<PAGE>   1
                       SECURITIES AND EXCHANGE COMMISSION

                             Washington, D.C. 20549
                                    FORM 10-K

                Annual Report Pursuant to Section 13 or 15(d) of
                       the Securities Exchange Act of 1934

                   For the Fiscal Year Ended DECEMBER 31, 1997

                             Commission File Number
                                     0-13810
                       REAL ESTATE ASSOCIATES LIMITED VII
                        A CALIFORNIA LIMITED PARTNERSHIP
                  I.R.S. Employer Identification No. 95-3290316
         9090 WILSHIRE BLVD., SUITE 201, BEVERLY HILLS, CALIFORNIA 90211
        Registrant's Telephone Number, Including Area Code (310) 278-2191
      Securities Registered Pursuant to Section 12(b) or 12(g) of the Act:

                                      NONE

Indicate by check mark whether the registrant (1) has filed all reports required
to be filed with the Commission by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding twelve months (or such 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 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]


<PAGE>   2
PART I.

ITEM 1. BUSINESS

Real Estate Associates Limited VII ("REAL VII" or the "Partnership") is a
limited partnership which was formed under the laws of the State of California
on May 24, 1983. On February 1, 1984, the Partnership offered 2,600 units
consisting of 10,400 limited partnership interests and warrants to purchase a
maximum of 5,200 additional limited partnership interests through a public
offering managed by E.F. Hutton Inc.

The general partners of the Partnership are National Partnership Investments
Corp. ("NAPICO"), a California Corporation (the "Corporate General Partner"),
and National Partnership Investments Associates II ("NAPIA II"). NAPIA II is a
limited partnership formed under the California Limited Partnership Act and
consists of Mr. Charles H. Boxenbaum and two unrelated individuals as limited
partners. The business of the Partnership is conducted primarily by NAPICO.

NAPICO is a wholly owned subsidiary of Casden Investment Corporation ("CIC"),
which is wholly owned by Alan I. Casden. The current members of NAPICO's Board
of Directors are Charles H. Boxenbaum, Bruce E. Nelson, Alan I. Casden and Henry
C. Casden.

The Partnership holds limited partnership interests in thirty-one local limited
partnerships as of December 31, 1997. The Partnership also holds a general
partner interest in Real Estate Associates IV ("REA IV") which, in turn, holds
limited partnership interests in sixteen additional local limited partnerships;
therefore, the Partnership holds interests, either directly or indirectly
through REA IV, in forty-seven local limited partnerships. The other general
partner of REA IV is NAPICO. Each of the local partnerships owns a low income
housing project which is subsidized and/or has a mortgage note payable to or is
insured by agencies of the federal or local government.

In order to stimulate private investment in low income housing, the federal
government and certain state and local agencies have provided significant
ownership incentives, including among others, interest subsidies, rent
supplements, and mortgage insurance, with the intent of reducing certain market
risks and providing investors with certain tax benefits, plus limited cash
distributions and the possibility of long-term capital gains. There remain,
however, significant risks. The long-term nature of investments in government
assisted housing limits the ability of the Partnership to vary its portfolio in
response to changing economic, financial, and investment conditions. Such
investments are also subject to changes in local economic circumstances and
housing patterns, as well as rising operating costs, vacancies, rent collection
difficulties, energy shortages, and other factors which have an impact on real
estate values. These projects also require greater management expertise and may
have higher operating expenses than conventional housing projects.

Under recent adopted law and policy, HUD has determined not to renew HAP
Contracts on a long term basis on the existing terms. In connection with
renewals of the HAP Contracts under such new law and policy, the amount of
rental assistance payments under renewed HAP Contracts will be based on market
rentals instead of above market rentals, which was generally the case under
existing HAP Contracts. As a result, existing HAP Contracts that are renewed in
the future on projects insured by the FHA will not provide sufficient cash flow
to permit owners of properties to meet the debt service requirements of these
existing FHA-insured mortgages. In order to address the reduction in payments
under HAP Contracts as a result of this new policy, the Multi-family Assisted
Housing Reform and Affordability Act of 1997 (the "MAHRAA"), which was adopted
in October 1997, provides for the restructuring of mortgage loans insured by
the FHA with respect to properties subject to HAP Contracts that have been
renewed under the new policy. The restructured loans will be held by the
current lender or another lender. Under MAHRAA, an FHA-insured mortgage loan
can be restructured to reduce the annual debt service on such loan. There can
be no assurance that the Partnership will be permitted to restructure its
mortgage indebtedness pursuant to the new HUD rules implementing MAHRAA or that
the Partnership would choose to restructure such mortgage indebtedness if it
were eligible to participate in the MAHRAA program. It should be noted that
there are uncertainties as to the economic impact on the Partnership of the
combination of the reduced payments under the HAP Contracts and the
restructuring of the existing FHA-insured mortgage loans under MAHRAA.
Accordingly, the General Partners are unable to predict with certainty their
impact on the Partnership's future cash flow.


<PAGE>   3

The partnerships in which the Partnership has invested are principally existing
local limited partnerships. The Partnership became the limited partner in these
local limited partnerships pursuant to arm's-length negotiations with the local
partnership's general partners who are often the original project developers. In
certain other cases, the Partnership invested in newly formed local partnerships
which, in turn, acquired the projects. As a limited partner, the Partnership's
liability for obligations of the local limited partnership is limited to its
investment. The local general partner of the local limited partnership retains
the responsibility of maintaining, operating and managing the project. Under
certain circumstances of default, the Partnership has the right to replace the 
general partner of the local limited partnerships but otherwise does not have
control of sale or refinancing, etc.

Although each of the partnerships in which the Partnership has invested will
generally own a project which must compete in the market place for tenants,
interest subsidies and rent supplements from governmental agencies make it
possible to offer these dwelling units to eligible "low income" tenants at a
cost significantly below the market rate for comparable conventionally financed
dwelling units in the area.
<PAGE>   4

During 1997, all of the projects in which the Partnership had invested were
substantially rented. The following is a schedule of the status, as of December
31, 1997, of the projects owned by local partnerships in which the Partnership,
either directly or indirectly through REA IV, has invested.




            SCHEDULE OF PROJECTS OWNED BY LOCAL LIMITED PARTNERSHIPS
                       IN WHICH REAL VII HAS AN INVESTMENT
                                DECEMBER 31, 1997


<TABLE>
<CAPTION>
                                               Units Authorized
                                                  For Rental
                                               Assistance Under
                                                 Section 8 or
                                                  Other Rent
                                No. of            Supplement                Units       Percentage of
Name & Location                  Units              Program               Occupied       Total Units
---------------                 ------         ----------------           --------      -------------
<S>                             <C>            <C>                        <C>           <C>
Anthracite Apts.                  121               121/  0                 119              98%
  Pittston, PA

Aristocrat Manor                  114               114/  0                  83              73%
  Hot Springs, AR

Arkansas City Apts.                16                 4/  7                   9              56%
  Arkansas City, AR

Arrowsmith Apts.                   70                70/  0                  68              97%
  Corpus Christi, TX

Ashland Manor                     189               189/  0                 181              96%
  Toledo, OH

Bangor House                      121               121/  0                 120              99%
  Bangor, ME

Bellair Manor Apts.                68                 7/  7                  66              97%
  Niles, OH

Birch Manor Apts. I                60                12/  0                  57              95%
  Medina, OH

Birch Manor Apts II                60                 6/  0                  55              92%
  Medina, OH

Bluewater Apts.                   116                  None                 109              94%
  Port Huron, MI

Center City                       176               175/  0                 176             100%
  Hazelton, PA

Clarkwood Apts. I                  72                24/  0                  69              96%
  Elyria, OH

Clarkwood Apts. II                120                39/  0                 120             100%
  Elyria, OH

Cleveland Apts. I                  50                50/  0                  49              98%
  Hayti, MO

Cleveland Apts. II                 50                50/  0                  50             100%
  Hayti, MO

Cleveland Apts. III                21                21/  0                  20              95%
  Hayti, MO

Danbury Park Manor                151                85/  0                 142              94%
  Superior Township, MI

Desoto Apts.                       42                42/  0                  42             100%
  Desoto, MO

Dexter Apts.                       50                50/  0                  49              98%
  Dexter, MO

Edgewood Terrace II               258               103/  0                 245              95%
  Washington, DC

Goodlette Arms Apts.              250                  None                 249             100%
  Naples, FL

Hampshire House                   150               150/  0                 142              95%
  Warren, OH

Henrico Arms                      232               232/  0                 232             100%
  Richmond, VA
</TABLE>



<PAGE>   5
            SCHEDULE OF PROJECTS OWNED BY LOCAL LIMITED PARTNERSHIPS
                       IN WHICH REAL VII HAS AN INVESTMENT
                                DECEMBER 31, 1997
                                   (CONTINUED)


<TABLE>
<CAPTION>
                                              Units Authorized
                                                 For Rental
                                              Assistance Under
                                                Section 8 or
                                                 Other Rent
                               No. of            Supplement                Units       Percentage of
Name & Location                 Units              Program               Occupied       Total Units
---------------                ------         ----------------           --------      -------------
<S>                            <C>            <C>                        <C>           <C>
Ivywood Apts.                     124                75/  0                 123              99%
  Columbus, OH

Jasper County Prop.                24                  None                  22              92%
  Heidelberg, MS

King Towers                        68                14/  0                  68             100%
  Cincinnati, OH

Nantucket Apts.                    60                59/  0                  59              98%
  Alliance, OH

Newton Apts.                       36                  None                  30              83%
  Newton, MS

Oak Hill Apts.                    120                82/  0                 119              99%
  Franklin, PA

Oakview Apts.                      32                  None                  28              88%
  Monticello, AR

Oakwood Park I Apts                50                  None                  49              98%
  Lorain, OH

Oakwood Park II Apts               78                  None                  78             100%
  Lorain, OH

Pachuta Apartments                 16                  None                  16             100%
  Pachuta, MS

Parkway Towers Apt                104               103/  0                 103              99%
  E. Providence, RI

Pebbleshire Apts.                 120                24/  0                 118              98%
  Vernon Hills, IL
</TABLE>


<PAGE>   6
            SCHEDULE OF PROJECTS OWNED BY LOCAL LIMITED PARTNERSHIPS
                       IN WHICH REAL VII HAS AN INVESTMENT
                                DECEMBER 31, 1997
                                   (CONTINUED)


<TABLE>
<CAPTION>
                                                Units Authorized
                                                   For Rental
                                                Assistance Under
                                                  Section 8 or
                                                   Other Rent
                               No. of              Supplement             Units        Percentage of
Name & Location                 Units                Program            Occupied        Total Units
---------------                ------           ----------------        --------       -------------
<S>                            <C>              <C>                     <C>            <C>
Pinebrook Apts.                   136               109/  0                 128              94%
  Lansing, MI

Rand Grove Village                212               212/  0                 191              90%
  Palatine, IL

Richards Park Apts.                60                24/  0                  56              93%
  Elyria, OH

Ridgewood Towers                  140               140/  0                 139              99%
  Moline, IL

Shubuta Properties                 16                  None                  15              94%
  Shubuta, MS

South Glen Apts.                  159                27/  0                 157              99%
  Trenton, MI

South Park Apts.                  138               138/  0                 135              98%
  Elyria, OH

Sunland Terrace                    80                80/  0                  80             100%
  Phoenix, AZ

Tradewinds East                   150                  None                 143              95%
  Essexville, MI

Warren Heights Apts II             88                87/  0                  83              94%
  Warren, OH

White Cliff Apts.                  72                72/  0                  71              99%
  Cincinnati, OH

Yorkview Estates                   50                50/  0                  49              98%
  Massillon, OH
                                -----             ---------               -----

  TOTAL                         4,690             2,961/ 14               4,512              96%
                                =====             =========               =====
</TABLE>


<PAGE>   7
ITEM 2.     PROPERTIES

The local limited and general partnerships in which the Partnership holds
interests owns various multi-family properties. See Item 1 for information
pertaining to these properties.

ITEM 3.     LEGAL PROCEEDINGS

As of December 31, 1997, the Partnership's Corporate General Partner was a
plaintiff or defendant in several lawsuits. In addition, the Partnership is
involved in the following lawsuit. In the opinion of management and the
Corporate General Partner, the claims will not result in any material liability
to the Partnership.

John Mitchell v. Oakwood Apartments, NAPICO et al., Case No. 94CV112108, Court
of Common Pleas, Lorain County, Ohio. On March 31, 1994, the Plaintiff filed a
lawsuit alleging that on May 5, 1992, while returning to his apartment (Oakwood
Apartments, Lorain, Ohio) he tripped and sustained mental and physical injuries.
The Plaintiff voluntarily dismissed his action and a Notice of Voluntary
Dismissal without prejudice was filed. The Plaintiff, however, refiled the
action which was settled for $9,000 on December 16, 1997.

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

Not applicable.

PART II.

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

The Limited Partnership Interests are not traded on a public exchange but were
sold through a public offering managed by E.F. Hutton, Inc. It is not
anticipated that any public market will develop for the purchase and sale of any
partnership interest. Limited Partnership Interests may be transferred only if
certain requirements are satisfied. At December 31, 1997, there were 3,284
registered holders of units in the Partnership. No distributions have been made
from the inception of the Partnership to December 31, 1997. The Partnership has
invested in certain government assisted projects under programs which in many
instances restrict the cash return available to project owners. The Partnership
was not designed to provide cash distributions to investors in circumstances
other than refinancing or disposition of its investments in limited
partnerships.


<PAGE>   8
ITEM 6.       SELECTED FINANCIAL DATA:


<TABLE>
<CAPTION>
                                                                   Year Ended December 31,
                                --------------------------------------------------------------------------------------------
                                    1997                1996                1995                1994                1993
                                ------------        ------------        ------------        ------------        ------------
<S>                             <C>                 <C>                 <C>                 <C>                 <C>          
Loss From Operations            $ (3,472,967)       $ (3,240,566)       $ (3,234,086)       $ (3,225,472)       $ (3,245,333)

Distributions From
   Limited Partnerships
   Recognized as Income              234,084              63,515              19,632             249,371             190,767

Equity in Loss of Limited
   Partnerships and
   Amortization of
   Acquisition Costs                 (61,791)           (243,392)           (511,033)         (1,074,503)         (1,325,646)
                                ------------        ------------        ------------        ------------        ------------

Net Loss                        $ (3,300,674)       $ (3,420,443)       $ (3,725,487)       $ (4,050,604)       $ (4,380,212)
                                ============        ============        ============        ============        ============

Net Loss per Limited
   Partnership Interest         $       (159)       $       (164)       $       (179)       $       (193)       $       (211)
                                ============        ============        ============        ============        ============



Total assets                    $ 17,422,816        $ 18,321,519        $ 19,183,742        $ 20,411,116        $ 22,203,347
                                ============        ============        ============        ============        ============

Investments in Limited
   Partnerships                 $ 16,870,487        $ 17,873,759        $ 18,600,961        $ 19,757,594        $ 21,590,427
                                ============        ============        ============        ============        ============

Notes Payable                   $ 24,869,501        $ 24,869,501        $ 24,869,501        $ 24,869,501        $ 24,869,501
                                ============        ============        ============        ============        ============

Fees and Expenses Due to
   General Partner              $  3,762,494        $  3,213,854        $  2,630,214        $  2,041,574        $  1,597,934
                                ============        ============        ============        ============        ============
</TABLE>


<PAGE>   9
ITEM 7.   MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND 
          RESULTS OF OPERATIONS

LIQUIDITY

The Partnership's primary sources of funds include interest income on money
market funds and certificates of deposit and distributions from local
partnerships in which the Partnership has invested. It is not expected that any
of the local partnerships in which the Partnership has invested will generate
cash flow sufficient to provide for distributions to the Partnership's limited
partners in any material amount.

In the current year, the fees and expenses due the general exceeded the
Partnership's cash. The general partner, during the forthcoming year, will not
demand payment of amounts due in excess of such cash or such that the
Partnership would not have sufficient operating cash; however, the Partnership
will remain liable for all such amounts.

CAPITAL RESOURCES

The Partnership received $39,000,000 in subscriptions for units of limited
partnership interests (at $5,000 per unit) during the period March 7, 1984 to
June 11, 1985, pursuant to a registration statement on Form S-11.

RESULTS OF OPERATIONS

The Partnership was formed to provide various benefits to its partners as
discussed in Item 1. It is anticipated that the local limited partnerships in
which REAL VII has invested could produce tax losses for as long as 20 years.
Tax benefits will decline over time as the advantages of accelerated
depreciation are greatest in the earlier years, as deductions for interest
expense will decrease as mortgage principal is amortized and as the Tax Reform
Act of 1986 limits the deductions available.

At December 31, 1997, the Partnership has investments in 47 limited
partnerships, all of which own housing projects that were substantially all
rented. The Partnership, as a limited partner, is entitled to 93% to 99% of the
profits and losses of the local limited partnerships. The Partnership accounts
for its investments in the local limited partnerships on the equity method,
thereby adjusting its investment balance by its proportionate share of the
income or loss of the local limited partnerships. Equity in losses of limited
partnerships is recognized in the financial statements until the limited
partnership investment account is reduced to a zero balance. Losses incurred
after the limited partnership investment account is reduced to zero are not
recognized. Limited partners are not liable for losses beyond their contributed
capital.

Distributions received from limited partnerships are recognized as return of
capital until the investment balance has been reduced to zero or to a negative
amount equal to future capital contributions required. Subsequent distributions
received are recognized as income.

The total losses from the 47 local limited partnerships that were allocated to
the Partnership were $1,126,000, $1,642,000 and $1,606,000 for the years ended
December 31, 1997, 1996 and 1995, respectively. However, because losses incurred
after the investment account is reduced to a zero balance are not recognized,
the Partnership recognized equity in loss of limited partnerships of $61,791,
$243,392 and $511,033 for the years ended December 31, 1997, 1996 and 1995,
respectively. Recognized losses have been decreasing as investment accounts are
reduced to zero balances. The cumulative amount of the unrecognized equity in
losses of certain limited partnerships was approximately $8,729,000 and
$8,129,000 as of December 31, 1997 and 1996, respectively.


<PAGE>   10
Distributions from the local limited partnerships in which the Partnership did
not have a positive investment balance were $234,084, $63,515 and $19,632 for
the years ended December 31, 1997, 1996 and 1995, respectively. These amounts
were recognized as income on the accompanying statements of operations, in
accordance with the equity method of accounting. Distributions were higher in
1997 as compared to 1996 and 1995 because two partnerships made distributions to
the Partnership of approximately $492,000 in 1997, but none in 1996 and 1995.

As of December 31, 1997, 1996 and 1995, the Partnership has cash and cash
equivalents of $447,200, $342,631 and $352,652, respectively. Substantially all
of these amounts are on deposit with two high credit quality financial
institutions, earning interest. This resulted in the Partnership earning
$15,911, $20,741 and $16,409 in interest income for the years ended December 31,
1997, 1996, 1995 and 1994, respectively. The amount of interest income varies
with market rates available on investments and with the amount of funds
available for investment. Cash equivalents can be converted to cash to meet
obligations of the Partnership as they arise. The Partnership intends to
continue investing available funds in this manner.

The Partnership is obligated on non-recourse notes payable of $24,869,501 which
bear interest at 9.5 percent per annum and have principal maturities ranging
from August 1999 to 2002. The notes and related interest are payable from cash
flow generated from operations of the related rental properties as defined in
the notes. These obligations are collateralized by the Partnership's investments
in the limited partnerships. Unpaid interest is due at maturity of the notes.
Since no payments have been made on these notes, interest expense has remained
fairly constant at $2,344,792, $2,320,842 and $2,323,426 for 1997, 1996 and
1995, respectively. The partnership is currently negotiating with the
respective noteholders to obtain extensions, reductions in interest rate and
principal reductions. There is no assurance that these properties will not be
lost to foreclosure.

A recurring partnership expense is the annual management fee. The fee is payable
to the Corporate General Partner of the Partnership and is calculated at .5
percent of the Partnership's invested assets. The management fee is paid to the
Corporate General Partner for its continuing management of partnership affairs.
The fee is payable beginning with the month following the Partnership's initial
investment in a local limited partnership. Since the invested assets have not
changed during each of the three years in the period ended December 31, 1996,
management fees have remained constant at $743,640 for each of these years.


Under recent adopted law and policy, HUD has determined not to renew HAP
Contracts on a long term basis on the existing terms. In connection with
renewals of the HAP Contracts under such new law and policy, the amount of
rental assistance payments under renewed HAP Contracts will be based on market
rentals instead of above market rentals, which was generally the case under
existing HAP Contracts. As a result, existing HAP Contracts that are renewed in
the future on projects insured by the FHA will not provide sufficient cash flow
to permit owners of properties to meet the debt service requirements of these
existing FHA-insured mortgages. In order to address the reduction in payments
under HAP Contracts as a result of this new policy, the Multi-family Assisted
Housing Reform and Affordability Act of 1997 (the "MAHRAA"), which was adopted
in October 1997, provides for the restructuring of mortgage loans insured by
the FHA with respect to properties subject to HAP Contracts that have been
renewed under the new policy. The restructured loans will be held by the
current lender or another lender. Under MAHRAA, an FHA-insured mortgage loan
can be restructured to reduce the annual debt service on such loan. There can
be no assurance that the Partnership will be permitted to restructure its
mortgage indebtedness pursuant to the new HUD rules implementing MAHRAA or that
the Partnership would choose to restructure such mortgage indebtedness if it
were eligible to participate in the MAHRAA program. It should be noted that
there are uncertainties as to the economic impact on the Partnership of the
combination of the reduced payments under the HAP Contracts and the
restructuring of the existing FHA-insured mortgage loans under MAHRAA.
Accordingly, the General Partners are unable to predict with certainty their
impact on the Partnership's future cash flow.

As a result of the foregoing, the Partnership is undergoing an extensive review
of disposition, refinancing or re-engineering alternatives for the properties
in which the limited partnerships have invested and are subject to HUD mortgage
and rental subsidy programs. The Partnership has incurred expenses in
connection with this review by various third party professionals, including
accounting, legal, valuation, structural and engineering costs, which amounted
to $167,778 for the year ended December 31, 1997.






<PAGE>   11

A real estate investment trust ("REIT") organized by an affiliate of NAPICO
has advised the Partnership that it intends to make a proposal to purchase from
the Partnership certain of the limited partnership interests held for
investment by the Partnership.

The REIT proposes to purchase such limited partner interests for cash, which it
plans to raise in connection with a private placement of its equity securities.
The purchase is subject to, among other things, (i) consummation of such
private placement by the REIT; (ii) the purchase of the general partner
interests in the local limited partnerships by the REIT; (iii) the approval of
HUD and certain state housing finance agencies; (iv) the consent of the limited
partners to the sale of the local limited partnership interests held for
investment by REAL VII; and (v) the consummation of a minimum number of
purchase transactions with other Casden affiliated partnerships. As of March
31, 1998, the REIT had completed buy-out negotiations with a majority of the
general partners of the local limited partnerships.

A proxy is contemplated to be sent to the limited partners setting forth the
terms and conditions of the purchase of the limited partners' interests held for
investment by the Partnership, together with certain amendments to the
Partnership Agreement and other disclosures of various conflicts of interest in
connection with the transaction.

Operating expenses, other than interest expense and management fees, consist of
legal and accounting fees for services rendered to the Partnership and general
and administrative expenses, which were generally consistent for the three years
presented. Legal and accounting fees were $109,962, $88,801 and $81,534 for the
years ended December 31, 1997, 1996 and 1995, respectively. General and
administrative expenses were $289,898, $103,194 and $106,227 for the years ended
December 31, 1997, 1996 and 1995, respectively. Included in administrative
expenses are reimbursements to NAPICO for certain expenses, which totalled
$46,975, $43,124 and $39,900 for the years ended December 31, 1996, 1995 and
1994, respectively. Also included in general and administrative expenses for
1997 is $167,778 in expenses, approximately $101,000 of which is included in
accounts payable at December 31, 1997, related to the aforementioned proposed
purchase of certain properties by the affiliate of NAPICO.

The results of operations of the local limited partnerships were fairly constant
during the years ended December 31, 1997, 1996 and 1995. Contributing to the
relative stability of operations at the local partnerships is the fact that
substantially all of the local partnerships are operating apartment projects
which are subsidized and have mortgage notes payable to or insured by agencies 
of the federal or local government.

Total revenue for the 48 local partnerships has remained fairly constant, and
was $28,267,000, $27,858,000 and $27,145,000 for the years ended December 31,
1997, 1996 and 1995, respectively.

Total expenses for the 48 local partnerships remained fairly consistent, and
were $29,397,000, $29,519,000 and $28,768,000 for the years ended December 31,
1997, 1996 and 1995, respectively.

The total net loss for the 48 local partnerships for 1997, 1996 and 1995
aggregated $1,130,000, $1,661,000 and $1,623,000, respectively. The losses
allocated to the Partnership were $1,126,000, $1,642,000 and $1,606,000 for
1997, 1996 and 1995, respectively.

During the year ended December 31, 1997, the local limited partnership that
owns Meherrin consummated the sale of the apartment complex. The Partnership
received $187,297 which was recognized as distributions to income. The
Partnership's financial statements reflect no investment in the Meherrin Local
Partnership, thus no gain was recognized upon the sale.

The Partnership, as a limited partner in the local partnerships in which it has
invested, is subject to the risks incident to the construction, management and
ownership of improved real estate. The Partnership investments are also subject
to adverse general economic conditions and, accordingly, the status of the
national economy, including 



<PAGE>   12


substantial unemployment concurrent inflation, and changing legislation could 
increase vacancy levels, rental payment defaults and operating expenses, which
in turn, could substantially increase the risk of operating losses for the
projects.

The Partnership has assessed the potential impact of the Year 2000 computer
systems issue on its operations. The Partnership believes that no significant
actions are required to be taken by the Partnership to address the issue and
that the impact of the Year 2000 computer systems issue will not materially
affect the Partnership's future operating results or financial condition.


ITEM 8.   FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

The Financial Statements and Supplementary Data are listed under Item 14.


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

Not applicable.
<PAGE>   13
                    REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To the Partners of
Real Estate Associates Limited VII
(A California limited partnership)

We have audited the accompanying balance sheets of Real Estate Associates
Limited VII (a California limited partnership) as of December 31, 1997 and 1996,
and the related statements of operations, partners' deficiency and cash flows
for each of the three years in the period ended December 31, 1997. Our audits
also included the financial statement schedules listed in the index at item 14.
These financial statements and financial statement schedules are the
responsibility of the management of the Partnership. Our responsibility is to
express an opinion on these financial statements and financial statement
schedules based on our audits. We did not audit the financial statements of
certain limited partnerships, the investments in which are reflected in the
accompanying financial statements using the equity method of accounting. The
investments in these limited partnerships represent 34 percent and 32 percent of
total assets as of December 31, 1997 and 1996, respectively, and the equity in
loss of these limited partnerships represents 13 percent, 17 percent and 21
percent of the total net loss of the Partnership for the years ended December
31, 1997, 1996 and 1995, respectively, and represent a substantial portion of
the investee information in Note 2 and the financial statement schedules. The
financial statements of these limited partnerships are audited by other
auditors. Their reports have been furnished to us and our opinion, insofar as it
relates to the amounts included for these limited partnerships, is based solely
on the reports of the other auditors.

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

In our opinion, based on our audits and the reports of other auditors, the
financial statements referred to above present fairly, in all material respects,
the financial position of Real Estate Associates Limited VII as of December 31,
1997 and 1996, and the results of its operations and its cash flows for each of
the three years in the period ended December 31, 1997 in conformity with
generally accepted accounting principles. Also, in our opinion, based on our
audits and the reports of other auditors, such financial statement schedules,
when considered in relation to the basic financial statements taken as a whole,
present fairly in all material respects the information set forth therein.




DELOITTE & TOUCHE LLP

Los Angeles, California
March 26, 1997


<PAGE>   14
         [PARENTE o RANDOLPH o ORLANDO o CAREY & ASSOCIATES LETTERHEAD]


                          INDEPENDENT AUDITOR'S REPORT

To the Partners
South Mill Associates:

      We have audited the accompanying balance sheets of South Mill Associates
(a limited partnership), FHA Project No. 034-35145-LD, as of December 31, 1997
and 1996, and the related statements of income, partners' equity (deficit) and
cash flows for the years then ended. These financial statements are the
responsibility of the Partnership's management. Our responsibility is to express
an opinion on these financial statements based on our audits.

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

      In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of South Mill Associates (a
limited partnership) as of December 31, 1997 and 1996, and the results of its
operations, changes in partners' equity (deficit) and cash flows for the years
then ended in conformity with generally accepted accounting principles.

      In accordance with Government Auditing Standards and the Consolidated
Audit Guide for Audits of HUD Programs issued by the U.S. Department of Housing
and Urban Development, we have also issued a report dated January 30, 1998, on
our consideration of South Mill Associates' (a limited partnership) internal
control, and reports dated January 30, 1998, on its compliance with specific
requirements applicable to major HUD programs and specific requirements
applicable to Fair Housing and Non-Discrimination.


                                      -2-
<PAGE>   15
      Our audit was conducted for the purpose of forming an opinion on the basic
financial statements taken as a whole. The accompanying supplementary
information on pages 15 to 23 is presented for purposes of additional analysis
and is not a required part of the basic financial statements of South Mill
Associates (a limited partnership). Such information has been subjected to the
auditing procedures applied in the audit of the basic financial statements and,
in our opinion, is fairly stated in all material respects in relation to the
basic financial statements taken as a whole.


               /s/ PARENTE, RANDOLPH, ORLANDO, CAREY & ASSOCIATES


Wilkes-Barre, Pennsylvania
January 30, 1998


                                      -3-
<PAGE>   16
         [PARENTE o RANDOLPH o ORLANDO o CAREY & ASSOCIATES LETTERHEAD]


                              REPORT OF INDEPENDENT
                          CERTIFIED PUBLIC ACCOUNTANTS


To the Partners
South Mill Associates:

      We have audited the accompanying balance sheets of South Mill Associates
(a limited partnership), FHA Project No. 034-35145-LD, as of December 31, 1996
and 1995, and the related statements of income, partners' equity (deficit) and
cash flows for the years then ended. These financial statements are the
responsibility of the Partnership's management. Our responsibility is to express
an opinion on these financial statements based on our audits.

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

      In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of South Mill Associates (a
limited partnership) as of December 31, 1996 and 1995, and the results of its
operations, changes in partners' equity (deficit) and its cash flows for the
years then ended in conformity with generally accepted accounting principles.

      In accordance with Government Auditing Standards and the Consolidated
Audit Guide for Audits of HUD Programs issued by the U.S. Department of Housing
and Urban Development, we have also issued a report dated January 29, 1997, on
our consideration of South Mill Associates' (a limited partnership) internal
control structure, and reports dated January 29, 1997, on its compliance with
specific requirements applicable to major HUD programs and specific requirements
applicable to Affirmative Fair Housing.


                                      -2-
<PAGE>   17
      Our audit was conducted for the purpose of forming an opinion on the basic
financial statements taken as a whole. The accompanying supplementary
information on pages 14 to 22 is presented for purposes of additional analysis
and is not a required part of the basic financial statements of South Mill
Associates (a limited partnership). Such information has been subjected to the
auditing procedures applied in the audit of the basic financial statements and,
in our opinion, is fairly stated in all material respects in relation to the
basic financial statements taken as a whole.


               /s/ PARENTE, RANDOLPH, ORLANDO, CAREY & ASSOCIATES


Wilkes-Barre, Pennsylvania
January 29, 1997


                                      -3-
<PAGE>   18
               [JEFFREY PHILLIPS MOSLEY & SCOTT, P.A. LETTERHEAD]




                          INDEPENDENT AUDITORS' REPORT


TO THE PARTNERS
ARISTOCRAT MANOR, LTD.:

We have audited the accompanying financial statements of Aristocrat Manor, Ltd.
(Project Number 082-38007) (a limited partnership hereinafter referred to as
the "Partnership") as of December 31, 1997, and for the year then ended, listed
in the foregoing table of contents. These financial statements are the
responsibility of the General Partner. Our responsibility is to express an
opinion on these financial statements based on our audit.

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

In our opinion, such financial statements present fairly, in all material
respects, the financial position of the Partnership as of December 31, 1997, and
the results of its operations, changes in partners' equity, and cash flows for
the year then ended in conformity with generally accepted accounting principles.

In accordance with Government Auditing Standards and the Consolidated Audit
Guide for Audits of HUD Programs issued by the U.S. Department of Housing and
Urban Development, we have also issued a report dated January 15, 1998, on our
consideration of Aristocrat Manor, Ltd.'s internal control and reports dated
January 15, 1998, on its compliance with specific requirements applicable to
major HUD programs and specific requirements applicable to fair housing and
non-discrimination.

Our audit was conducted for the purpose of forming an opinion on the basic
financial statements taken as a whole. The supplemental schedules of the
Partnership on pages 11 - 14 are presented for the purpose of additional
analysis and are not a required part of the basic financial statements of the
Partnership, but are required by the Consolidated Audit Guide for Audits of
HUD Programs, issued by the U.S. Department of Housing and Urban Development,
Office of Inspector General. Such schedules, which are the responsibility of
the General Partner, have been subjected to the auditing procedures applied in
our audit of the basic financial statements and, in our opinion, are fairly
stated in all material respects in relation to the basic financial statements
taken as a whole.


JEFFREY, PHILLIPS, MOSLEY & SCOTT, P.A.


Little Rock, Arkansas
January 15, 1998




<PAGE>   19
              [JEFFREY, PHILLIPS, MOSLEY & SCOTT, P.A. LETTERHEAD]


INDEPENDENT AUDITORS' REPORT

TO THE PARTNERS

ARISTOCRAT MANOR, LTD.:

We have audited the accompanying financial statements of Aristocrat Manor, Ltd.
(Project Number 082-38007) (a limited partnership hereinafter referred to as the
"Partnership') as of December 31, 1996, and for the year then ended, listed in
the foregoing table of contents. These financial statements are the
responsibility of the General Partners. Our responsibility is to express an
opinion on these financial statements based on our audit.

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

In our opinion, such financial statements present fairly, in all material
respects, the financial position of the Partnership as of December 31, 1996, and
the results of its operations, changes in partners' equity, and cash flows for
the year then ended in conformity with generally accepted accounting principles.

In accordance with Government Auditing Standards, we have also issued a report
dated January 9, 1997, on our consideration of Aristocrat Manor, Ltd.'s internal
control structure and a report dated January 9, 1997, on its compliance with
laws and regulations.

Our audit was conducted for the purpose of forming an opinion on the basic
financial statements taken as a whole. The supplemental schedules of the
Partnership on pages 11 - 15 are presented for the purpose of additional
analysis and are not a required part of the basic financial statements of the
Partnership, but are required by the Consolidated Audit Guide for Audits of HUD
Programs, issued July 1993 by the U.S. Department of Housing and Urban
Development, Office of Inspector General. Such schedules, which are the
responsibility of the General Partners, have been subjected to the auditing
procedures applied in our audit of the basic financial statements and, in our
opinion, are fairly stated in all material respects in relation to the basic
financial statements taken as a whole.


/s/ JEFFREY, PHILLIPS, MOSLEY & SCOTT, P.A.


Little Rock, Arkansas
January 9, 1997

<PAGE>   20
                   [JEFFREY, PHILLIPS, MOSLEY & SCOTT, P.A.]

To The Partners
Aristocrat Manor, Ltd.:

We have audited the accompanying financial statements of Aristocrat Manor, Ltd.
(Project Number 082-38007) (a limited partnership hereinafter referred to as the
"Partnership") as of December 31, 1995, and for the year then ended, listed in
the foregoing table of contents. These financial statements are the
responsibility of the General Partners. Our responsibility is to express an
opinion on these financial statements based on our audit.

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

In our opinion, such financial statements present fairly, in all material
respects, the financial position of the Partnership as of December 31, 1995, and
the results of its operations, changes in partners' equity, and cash flows for
the year then ended in conformity with generally accepted accounting principles.

In accordance with Government Auditing Standards, we have also issued a report
dated February 6, 1996, on our consideration of Aristocrat Manor, Ltd.'s
internal control structure and a report dated February 6, 1996, on its
compliance with laws and regulations.

Our audit was conducted for the purpose of forming an opinion on the basic
financial statements taken as a whole. The supplemental schedules of the
Partnership on pages 11 - 15 are presented for the purpose of additional
analysis and are not a required part of the basic financial statements of the
Partnership, but are required by the Consolidated Audit Guide for Audits of HUD
Programs, issued July 1993 by the U.S. Department of Housing and Urban
Development, Office of Inspector General. Such schedules, which are the
responsibility of the General Partners, have been subjected to the auditing
procedures applied in our audit of the basic financial statements and, in our
opinion, are fairly stated in all material respects in relation to the basic
financial statements taken as a whole.

/s/ JEFFREY, PHILLIPS, MOSLEY & SCOTT, P.A.

Little Rock, Arkansas
February 6, 1996

<PAGE>   21
                [ALTSCHULER, MELVOIN AND GLASSER LLP LETTERHEAD]


              INDEPENDENT AUDITORS' REPORT ON FINANCIAL STATEMENTS
                    AND ADDITIONAL FINANCIAL DATA REQUIRED BY
              THE U.S. DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT


To the Partners
Arrowsmith, Ltd.

We have audited the accompanying balance sheets of ARROWSMITH, LTD. (a limited
partnership), FHA Project No. 115-35166-PM-L8 (the "Partnership"), as of
December 31, 1997 and 1996 and the related statements of operations, changes in
partners' equity and cash flows for the years then ended. These financial
statements are the responsibility of the Partnership's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.

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

In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Arrowsmith, Ltd. as of December
31, 1997 and 1996, and the results of its operations and its cash flows for the
years then ended in conformity with generally accepted accounting principles.

Our audits were conducted for the purpose of forming an opinion on the basic
financial statements taken as a whole. The accompanying 1997 additional
financial data (shown on pages 13 through 18) are presented for the purpose of
additional analysis and are not a required part of the basic financial
statements of the Partnership. Such information has been subjected to the
auditing procedures applied in the audit of the 1997 basic financial statements
and, in our opinion, is fairly stated in all material respects in relation to
the basic financial statements taken as a whole.


                                                                               2
<PAGE>   22
In accordance with Government Auditing Standards, we have also issued a report
dated February 10, 1998 on our consideration of the Partnership's internal
controls and a report dated February 10, 1998 on its compliance with laws and
regulations.


                    /s/ ALTSCHULER, MELVOIN AND GLASSER LLP


Los Angeles, California
February 10, 1998



                                                                               3
<PAGE>   23
                [ALTSCHULER, MELVOIN AND GLASSER LLP LETTERHEAD]


            INDEPENDENT AUDITORS' REPORT ON FINANCIAL STATEMENTS AND
                      ADDITIONAL FINANCIAL DATA REQUIRED BY
              THE U.S. DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT


To the Partners of
Arrowsmith, Ltd.


We have audited the accompanying balance sheet of ARROWSMITH, LTD. (a limited
partnership), FHA Project Number 115-35166-PM-L8, (the "Partnership"), as of
December 31, 1995, and the related statements of operations, changes in
partners' equity and cash flows for the year then ended. These financial
statements are the responsibility of the Partnership's management. Our
responsibility is to express an opinion on these financial statements based on
our audit. The financial statements of the Partnership as of and for the year
ended December 31, 1994 were audited by other auditors whose report dated
February 10, 1995, expressed an unqualified opinion on those statements.

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

In our opinion, the 1995 financial statements referred to above present fairly,
in all material respects, the financial position of Arrowsmith, Ltd. as of
December 31, 1995, and the results of its operations, changes in its partners'
equity, and its cash flows for the year then ended, in conformity with generally
accepted accounting principles.

In accordance with Government Auditing Standards, we have also issued a report
dated February 15, 1996 on our consideration of the Partnership's internal
control structure and a report dated February 15, 1996 on its compliance with
laws and regulations.


<PAGE>   24
Our audit was conducted for the purpose of forming an opinion on the financial
statements taken as a whole. The accompanying additional financial data shown on
pages 14 through 20 are presented for purposes of additional analysis and are
not a required part of the financial statements. Such information has been
subjected to the auditing procedures applied in the audit of the financial
statements and, in our opinion, is fairly stated in all material respects in
relation to the financial statements taken as a whole.


                    /s/ ALTSCHULER, MELVOIN AND GLASSER LLP


Los Angeles, California
February 15, 1996
<PAGE>   25
                      [HUGHES AND COMPANY P.C. LETTERHEAD]


                          Independent Auditors' Report


To the Partners
Bangor House Proprietary
Boston, Massachusetts

We have audited the accompanying balance sheets of Bangor House Proprietary (A
Limited Partnership) Project No. ME36-H017-107 as of December 31, 1997 and 1996,
and the related statements of changes in partners' equity, revenue and expenses,
and cash flows for the years then ended. These financial statements are the
responsibility of the Partnership's management. Our responsibility is to express
an opinion on these financial statements based on our audits.

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

In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Bangor House Proprietary (A
Limited Partnership) as of December 31, 1997 and 1996, and the results of its
operations, changes in partners' equity and cash flows for the years then ended
in conformity with generally accepted accounting principles.

In accordance with Government Auditing Standards and the Consolidated Audit
Guide for Audits of HUD Programs issued by the U.S. Department of Housing and
Urban Development, we have also issued a report dated January 16, 1998, on our
consideration of Bangor House Proprietary's internal control and reports dated
January 16, 1998, on its compliance with laws and regulations, specific
requirements applicable to major HUD programs and specific requirements
applicable to Fair Housing and Non-Discrimination.

Our audits were conducted for the purpose of forming an opinion on the basic
financial statements taken as a whole. The accompanying supplementary
information shown on pages 12 to 20 is presented for purposes of additional
analysis and is not a required part of the basic financial statements. Such
information has been subjected to the auditing procedures applied in the audits
of the basic financial statements and, in our opinion, is fairly stated in all
material respects in relation to the basic financial statements taken as a
whole.

/s/ HUGHES AND COMPANY, P.C.

HUGHES AND COMPANY, P.C.
Melrose, Massachusetts
January 16, 1998
<PAGE>   26
                     [HUGHES AND COMPANY, P.C. LETTERHEAD]


                          Independent Auditors' Report

To the Partners
Bangor House Proprietary
Boston, Massachusetts

We have audited the accompanying balance sheets of Bangor House Proprietary (A
Limited Partnership) Project No. ME36-H017-107 as of December 31, 1996 and 1995,
and the related statements of changes in partners' equity, revenue and expenses,
and cash flows for the years then ended. These financial statements are the
responsibility of the Partnership's management. Our responsibility is to express
an opinion on these financial statements based on our audits.

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

In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Bangor House Proprietary (A
Limited Partnership) as of December 31, 1996 and 1995, and the results of its
operations, changes in partners' equity and cash flows for the years then ended
in conformity with generally accepted accounting principles.

In accordance with Government Auditing Standards and the Consolidated Audit
Guide for Audits of HUD Programs issued by the U.S. Department of Housing and
Urban Development, we have also issued a report dated January 17, 1997, on our
consideration of Bangor House Proprietary's internal control structure and
reports dated January 17, 1997, on its compliance with laws and regulations,
specific requirements applicable to major HUD programs and specific requirements
applicable to Affirmative Fair Housing.

Our audits were conducted for the purpose of forming an opinion on the basic
financial statements taken as a whole. The accompanying supplementary
information shown on pages 12 to 20 is presented for purposes of additional
analysis and is not a required part of the basic financial statements. Such
information has been subjected to the auditing procedures applied in the audits
of the basic financial statements and, in our opinion, is fairly stated in all
material respects in relation to the basic financial statements taken as a
whole.

/s/ HUGHES AND COMPANY, P.C.

HUGHES AND COMPANY, P.C.
Melrose, Massachusetts

January 17, 1997
<PAGE>   27
                [ALTSCHULER, MELVOIN AND GLASSER LLP LETTERHEAD]


              INDEPENDENT AUDITORS' REPORT ON FINANCIAL STATEMENTS
                    AND ADDITIONAL FINANCIAL DATA REQUIRED BY
              THE U.S. DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT


To the Partners of
Bellair Manor Apartments,
Limited Partnership

We have audited the accompanying balance sheets of BELLAIR MANOR APARTMENTS,
LIMITED PARTNERSHIP, FHA Project No. 042-44174-LDP, as of December 31, 1997 and
1996, and the related statements of operations, changes in partners' equity and
cash flows for the year then ended. These financial statements are the
responsibility of the Partnership's management. Our responsibility is to express
an opinion on these financial statements based on our audits.

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

In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Bellair Manor Apartments,
Limited Partnership as of December 31, 1997 and 1996, and its results of
operations, changes in partners' equity and cash flows for the year then ended
in conformity with generally accepted accounting principles.


                                                                               2
<PAGE>   28
Our audits were conducted for the purpose of forming an opinion on the basic
financial statements taken as a whole. The accompanying 1997 additional
financial data (shown on pages 13 through 18) are presented for the purpose of
additional analysis and are not a required part of the basic financial
statements of the Partnership. Such information has been subjected to the
auditing procedures applied in the audit of the 1997 basic financial statements
and, in our opinion, is fairly stated in all material respects in relation to
the basic financial statements taken as a whole.

In accordance with Government Auditing Standards, we have also issued a report
dated February 6, 1998 on our consideration of the Partnership's internal
control structure and a report dated February 6, 1998, on its compliance with
laws and regulations.


/s/ ALTSCHULER, MELVOIN AND GLASSER LLP


Chicago, Illinois
February 6, 1998



                                                                               3
<PAGE>   29
                [ALTSCHULER, MELVOIN AND GLASSER LLP LETTERHEAD]


            INDEPENDENT AUDITORS' REPORT ON FINANCIAL STATEMENTS AND
                      ADDITIONAL FINANCIAL DATA REQUIRED BY
              THE U.S. DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT


To the Partners of
Bellair Manor Apartments,
Limited Partnership


We have audited the balance sheets of BELLAIR MANOR APARTMENTS, LIMITED
PARTNERSHIP, FHA Project Number 042-44174-LDP, as of December 31, 1996 and 1995,
and the statements of operations, changes in partners' equity and cash flows for
the years then ended. These financial statements are the responsibility of the
Partnership's management. Our responsibility is to express an opinion on these
financial statements based on our audits.

We conducted our audits in accordance with generally accepted auditing standards
and Government Auditing Standards, issued by the Comptroller General of the
United States. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management as well as evaluating the overall financial statement
presentation. We believe 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 Bellair Manor Apartments,
Limited Partnership as of December 31, 1996 and 1995, and the results of its
operations, changes in partners' equity and cash flows for the years then ended
in conformity with generally accepted accounting principles.

In accordance with Government Auditing Standards, we have also issued a report
dated January 21, 1997, on our consideration of the Partnership's internal
control structure and a report dated January 21, 1997, on its compliance with
laws and regulations.




                                                                             2.
<PAGE>   30
Our audits were performed for the purpose of forming an opinion on the financial
statements taken as a whole. The additional financial data on pages 14 through
20 are presented for purposes of additional analysis and are not a required part
of the financial statements. This information has been subjected to the
procedures applied in the audits of the financial statements and, in our
opinion, is stated fairly in all material respects in relation to the financial
statements taken as a whole.


/s/ ALTSCHULER, MELVOIN AND GLASSER LLP


Chicago, Illinois
January 21, 1997



                                                                              3.
<PAGE>   31
                     [COOPERS & LYBRAND L.L.P. LETTERHEAD]


REPORT OF INDEPENDENT ACCOUNTANTS


To the Partners of
Bluewater Limited Dividend
Housing Association:

We have audited the accompanying balance sheet of Bluewater Limited Dividend
Housing Association (a Michigan limited partnership), MSHDA Development No. 35,
as of December 31, 1997 and the related statements of profit and loss,
partners' equity, and cash flows for the year then ended. These financial
statements are the responsibility of the Partnership's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.

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

In our opinion, such financial statements referred to above present fairly, in
all material respects, the financial position of Bluewater Limited Dividend
Housing Association, MSHDA Development No. 35, as of December 31, 1997 and the
results of its operations and its cash flows for the year then ended, in
conformity with generally accepted accounting principles.

In accordance with Government Auditing Standards, we have also issued a report
dated January 26, 1998 on our consideration of Bluewater Limited Dividend
Housing Association's internal control structure and a report dated January 26,
1998 on its compliance with laws and regulations.

Our audit was conducted for the purpose of forming an opinion on the basic
financial statements taken as a whole. The supplemental data included on pages
13 and 14 is presented for purposes of additional analysis and is not a required
part of the basic financial statements of Bluewater Limited Dividend Housing
Association. This supplementary data is the responsibility of the Partnership's
management. Such information has been subjected to the auditing procedures
applied in the audit of the basic financial statements and, in our opinion, is
fairly stated, in all material respects, in relation to the basic financial
statements taken as a whole.


                                       1
<PAGE>   32
We have previously audited and expressed an unqualified opinion on the financial
statements of Bluewater Limited Dividend Housing Association for the years 1990
through 1995. In our opinion, the supplemental data included on page 15,
relating to the years 1990 through 1997, is fairly stated, in all material
respects, in relation to the basic financial statements from which it has been
derived. The data on page 15 for the years 1974 through 1989 was not audited by
us and, accordingly, we do not express an opinion on such data. That data was
audited by other auditors who have ceased operation and whose report, dated
January 24, 1990, stated that such information was fairly stated, in all
material respects, in relation to the basic financial statements taken as a
whole.


/s/ COOPERS & LYBRAND L.L.P.


Detroit, Michigan
January 26, 1998


                                        2
<PAGE>   33
                     [COOPERS & LYBRAND L.L.P. LETTERHEAD]


Report of Independent Accountants


To the Partners of
Bluewater Limited Dividend
Housing Association:

We have audited the accompanying balance sheet of Bluewater Limited Dividend
Housing Association (a Michigan limited partnership), MSHDA Development No. 35,
as of December 31, 1996 and the related statements of profit and loss,
partners' equity, and cash flows for the year then ended. These financial
statements are the responsibility of the Partnership's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.

We conducted our audit in accordance with generally accepted auditing standards
and Government Auditing Standards, issued by the Comptroller General of the
United States. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audit provides 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 Bluewater Limited Dividend
Housing Association, as of December 31, 1996 and the results of its operations
and its cash flows for the year then ended, in conformity with generally
accepted accounting principles.

In accordance with Government Auditing Standards, we have also issued a report
dated January 31, 1997 on our consideration of Bluewater Limited Dividend
Housing Association's internal control structure and a report dated January 31,
1997 on its compliance with laws and regulations.

Our audit was conducted for the purpose of forming an opinion on the basic
financial statements taken as a whole. The supplemental data included on pages
13 and 14 is presented for purposes of additional analysis and is not a required
part of the basic financial statements of Bluewater Limited Dividend Housing
Association. Such information has been subjected to the auditing procedures
applied in the audit of the basic financial statements and, in our opinion, is
fairly stated, in all material respects, in relation to the basic financial
statements taken as a whole.


                                       1
<PAGE>   34
We have previously audited and expressed an unqualified opinion on the financial
statements of Bluewater Limited Dividend Housing Association for the years 1990
through 1995. In our opinion, the supplemental data included on page 15,
relating to the years 1990 through 1996, is fairly stated, in all material
respects, in relation to the basic financial statements from which it has been
derived. The data on page 15 for the years 1974 through 1989 was not audited by
us and, accordingly, we do not express an opinion on such data. That data was
audited by other auditors who have ceased operation and whose report, dated
January 24, 1990, stated that such information was fairly stated, in all
material respects, in relation to the basic financial statements taken as a
whole.


/s/ COOPERS & LYBRAND L.L.P.


Detroit, Michigan
January 31, 1997


                                       2
<PAGE>   35
                     [COOPERS & LYBRAND L.L.P. LETTERHEAD]


REPORT OF INDEPENDENT ACCOUNTANTS


To the Partners of
Bluewater Limited Dividend
Housing Association:

We have audited the accompanying balance sheet of Bluewater Limited Dividend
Housing Association (a Michigan limited partnership), MSHDA Development No. 35,
as of December 31, 1995 and the related statements of profit and loss,
partners' equity, and cash flows for the year then ended. These financial
statements are the responsibility of the Partnership's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.

We conducted our audit in accordance with generally accepted auditing standards
and Government Auditing Standards, issued by the Comptroller General of the
United States. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audit provides 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 Bluewater Limited Dividend
Housing Association, as of December 31, 1995 and the results of its operations
and its cash flows for the year then ended, in conformity with generally
accepted accounting principles.

In accordance with Government Auditing Standards, we have also issued a report
dated January 25, 1996 on our consideration of Bluewater Limited Dividend
Housing Association's internal control structure and a report dated January 25,
1996 on its compliance with laws and regulations.

Our audit was conducted for the purpose of forming an opinion on the basic
financial statements taken as a whole. The supplemental data included on pages
13 and 14 is presented for purposes of additional analysis and is not a required
part of the basic financial statements of Bluewater Limited Dividend Housing
Association. Such information has been subjected to the auditing procedures
applied in the audit of the basic financial statements and, in our opinion, is
fairly stated, in all material respects, in relation to the basic financial
statements taken as a whole.


                                       1
<PAGE>   36
We have previously audited and expressed an unqualified opinion on the financial
statements of Bluewater Limited Dividend Housing Association for the years 1990
through 1994. In our opinion, the supplemental data included on page 15,
relating to the years 1990 through 1995, is fairly stated, in all material
respects, in relation to the basic financial statements from which it has been
derived. The data on page 15 for the years 1974 through 1989 was not audited by
us and, accordingly, we do not express an opinion on such data. That data was
audited by other auditors who have ceased operation and whose report, dated
January 24, 1990, stated that such information was fairly stated, in all
material respects, in relation to the basic financial statements taken as a
whole.


/s/ COOPERS & LYBRAND L.L.P.


Detroit, Michigan
January 25, 1996



                                       2
<PAGE>   37
            [PARENTE RANDOLPH ORLANDO CAREY & ASSOCIATES LETTERHEAD]


                          INDEPENDENT AUDITOR'S REPORT

To the Partners
Center City Associates:

      We have audited the accompanying balance sheets of Center City Associates
(a limited partnership), FHA Project No. 034-35147-LD, as of December 31, 1997
and 1996, and the related statements of income, partners' equity (deficit) and
cash flows for the years then ended. These financial statements are the
responsibility of the Partnership's management. Our responsibility is to express
an opinion on these financial statements based on our audits.

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

      In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Center City Associates (a
limited partnership) as of December 31, 1997 and 1996, and the results of its
operations, changes in partners' equity (deficit) and cash flows for the years
then ended in conformity with generally accepted accounting principles.

      In accordance with Government Auditing Standards and the Consolidated
Audit Guide for Audits of HUD Programs issued by the U.S. Department of Housing
and Urban Development, we have also issued a report dated January 30, 1998, on
our consideration of Center City Associates' (a limited partnership) internal
control, and reports dated January 30, 1998, on its compliance with specific
requirements applicable to major HUD programs and specific requirements
applicable to Fair Housing and Non-Discrimination.


                                      -2-
<PAGE>   38
      Our audit was conducted for the purpose of forming an opinion on the basic
financial statements taken as a whole. The accompanying supplementary
information on pages 15 to 22 is presented for purposes of additional analysis
and is not a required part of the basic financial statements of Center City
Associates (a limited partnership). Such information has been subjected to the
auditing procedures applied in the audit of the basic financial statements and,
in our opinion, is fairly stated in all material respects in relation to the
basic financial statements taken as a whole.


                /s/ PARENTE, RANDOLPH, ORLANDO, CAREY & ASSOCIATES


Wilkes-Barre, Pennsylvania
January 30, 1998



                                     -3-
<PAGE>   39
            [PARENTE RANDOLPH ORLANDO CAREY & ASSOCIATES LETTERHEAD]


                              REPORT OF INDEPENDENT
                          CERTIFIED PUBLIC ACCOUNTANTS

To the Partners
Center City Associates:

      We have audited the accompanying balance sheets of Center City Associates
(a limited partnership), FHA Project No. 034-35147-LD, as of December 31, 1996
and 1995, and the related statements of income, partners' equity (deficit) and
cash flows for the years then ended. These financial statements are the
responsibility of the Partnership's management. Our responsibility is to express
an opinion on these financial statements based on our audits.

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

      In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Center City Associates (a
limited partnership) as of December 31, 1996 and 1995, and the results of its
operations, changes in partners' equity (deficit) and its cash flows for the
years then ended in conformity with generally accepted accounting principles.

      In accordance with Government Auditing Standards and the Consolidated
Audit Guide for Audits of HUD Programs issued by the U.S. Department of Housing
and Urban Development, we have also issued a report dated January 29, 1997, on
our consideration of Center City Associates' (a limited partnership) internal
control structure, and reports dated January 29, 1997, on its compliance with
specific requirements applicable to major HUD programs and specific requirements
applicable to Affirmative Fair Housing.


                                      -2-
<PAGE>   40
      Our audit was conducted for the purpose of forming an opinion on the basic
financial statements taken as a whole. The accompanying supplementary
information on pages 14 to 22 is presented for purposes of additional analysis
and is not a required part of the basic financial statements of Center City
Associates (a limited partnership). Such information has been subjected to the
auditing procedures applied in the audit of the basic financial statements and,
in our opinion, is fairly stated in all material respects in relation to the
basic financial statements taken as a whole.


                /s/ PARENTE, RANDOLPH, ORLANDO, CAREY & ASSOCIATES


Wilkes-Barre, Pennsylvania
January 29, 1997



                                      -3-
<PAGE>   41
                    [RESNICK FEDDER & SILVERMAN LETTERHEAD]


                          INDEPENDENT AUDITORS' REPORT


To the Partners
Hayti Associates I

      We have audited the accompanying balance sheet of Hayti Associates I as of
December 31, 1997, and the related statements of profit and loss (on HUD Form
No. 92410), partners' deficit and cash flows for the year then ended. These
financial statements are the responsibility of the partnership's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.

      We conducted our audit in accordance with generally accepted auditing
standards and Government Auditing Standards, issued by the Comptroller General
of the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audit provides 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 Hayti Associates I as of
December 31, 1997, and the results of its operations, the changes in partners'
deficit and cash flows for the year then ended, in conformity with generally
accepted accounting principles.

      Our audit was made for the purpose of forming an opinion on the basic
financial statements taken as a whole. The supplemental information on pages 19
through 24 is presented for purposes of additional analysis and is not a
required part of the basic financial statements. Such information has been
subjected to the auditing procedures applied in the audit of the basic financial
statements and, in our opinion, is fairly stated in all material respects in
relation to the basic financial statements taken as a whole.


                                      -6-
<PAGE>   42
      In accordance with Government Auditing Standards and the "Consolidated
Audit Guide for Audits of HUD Programs," we have also issued reports dated
January 26, 1998 on our consideration of Hayti Associates I's internal control
and on its compliance with specific requirements applicable to major and 
nonmajor HUD programs, fair housing and nondiscrimination and laws and 
regulations applicable to the financial statements.


                                       /s/ REZNICK FEDDER & SILVERMAN

Bethesda, Maryland                     Federal Employer
January 26, 1998                       Identification Number:
                                       52-1088612


Audit Principal: Craig Birmingham


                                      -7-
<PAGE>   43
                    [REZNICK FEDDER & SILVERMAN LETTERHEAD]


                          INDEPENDENT AUDITORS' REPORT

To the Partners
Hayti Associates I

      We have audited the accompanying balance sheet of Hayti Associates I as of
December 31, 1996, and the related statements of profit and loss (on HUD Form
No. 92410), partners' equity and cash flows for the year then ended. These
financial statements are the responsibility of the partnership's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.

      We conducted our audit in accordance with generally accepted auditing
standards and Government Auditing Standards, issued by the Comptroller General
of the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audit provides 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 Hayti Associates I as of
December 31, 1996, and the results of its operations, the changes in partners'
equity and cash flows for the year then ended, in conformity with generally
accepted accounting principles.

      Our audit was made for the purpose of forming an opinion on the basic
financial statements taken as a whole. The supplemental information on pages 19
through 26 is presented for purposes of additional analysis and is not a
required part of the basic financial statements. Such information has been
subjected to the auditing procedures applied in the audit of the basic financial
statements and, in our opinion, is fairly stated in all material respects in
relation to the basic financial statements taken as a whole.


                                      -6-
<PAGE>   44
      In accordance with Government Auditing Standards and the "Consolidated
Audit Guide for Audits of HUD Programs," we have also issued reports dated
January 24, 1997 on our consideration of Hayti Associates I's internal control
structure and on its compliance with specific requirements applicable to major
and nonmajor HUD programs, affirmative fair housing and laws and regulations
applicable to the financial statements.


                                       /s/ REZNICK FEDDER & SILVERMAN

Bethesda, Maryland                     Federal Employer
January 26, 1998                       Identification Number:
                                       52-1088612


Audit Principal: Craig Birmingham


                                      -7-
<PAGE>   45
                     [REZNICK FEDDER & SILVERMAN LETTERHEAD]

                          INDEPENDENT AUDITORS' REPORT

To the Partners
Hayti Associates I

        We have audited the accompanying balance sheet of Hayti Associates I as
of December 31, 1995, and the related statements of profit and loss (on HUD Form
No. 92410), partners' equity and cash flows for the year then ended. These
financial statements are the responsibility of the partnership's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.

        We conducted our audit in accordance with generally accepted auditing
standards and Government Auditing Standards issued by the Comptroller General of
the United States. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audit provides 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 Hayti Associates I
as of December 31, 1995, and the results of its operations, the changes in
partners, equity and cash flows for the year then ended, in conformity with
generally accepted accounting principles.


                                       -6-


<PAGE>   46
        Our audit was made for the purpose of forming an opinion on the basic
financial statements taken as a whole. The supplemental information on pages 19
through 25 is presented for purposes of additional analysis and is not a
required part of the basic financial statements. Such information has been
subjected to the auditing procedures applied in the audit of the basic financial
statements and, in our opinion, is fairly stated in all material respects in
relation to the basic financial statements taken as a whole.

        In accordance with Government Auditing Standards, we have also issued
reports dated January 31, 1996 on our consideration of Hayti Associates I's a
internal control structure and on its compliance with specific requirements
applicable to major and nonmajor HUD programs, affirmative fair housing and laws
and regulations applicable to the financial statements.



                                   /s/  REZNICK FEDDER & SILVERMAN

Bethesda, Maryland                 Federal Employer
January 31, 1996                     Identification Number: 
                                     52-1088612


Audit Principal: Craig Birmingham


                                      -7-


<PAGE>   47
                     [REZNICK FEDDER & SILVERMAN LETTERHEAD]

                           INDEPENDENT AUDITORS'REPORT


To the Partners
Hayti Associates II

        We have audited the accompanying balance sheet of Hayti Associates II as
of December 31, 1997, and the related statements of profit and loss (on HUD Form
No. 92410), partners' deficit and cash flows for the year then ended. These
financial statements are the responsibility of the partnership's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.

        We conducted our audit in accordance with generally accepted auditing
standards and Government Auditing Standards, issued by the Comptroller General
of the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audit provides 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 Hayti Associates II
as of December 31, 1997, and the results of its operations, the changes in
partners' deficit and cash flows for the year then ended, in conformity with
generally accepted accounting principles.

        Our audit was made for the purpose of forming an opinion on the basic
financial statements taken as a whole. The supplemental information on pages 19
through 24 is presented for purposes of additional analysis and is not a
required part of the basic financial statements. Such information has been
subjected to the auditing procedures applied in the audit of the basic financial
statements and, in our opinion, is fairly stated in all material respects in
relation to the basic financial statements taken as a whole.


                                       -6-


<PAGE>   48
        In accordance with Government Auditing Standards and the "Consolidated
Audit Guide for Audits of HUD Programs," we have also issued reports dated
January 27, 1998 on our consideration of Hayti Associates II's internal control
and on its compliance with specific requirements applicable to major and
nonmajor HUD programs, fair housing and nondiscrimination, and laws and
regulations applicable to the financial statements.



                                 /s/ REZNICK FEDDER & SILVERMAN

Bethesda, Maryland               Federal Employer
January 27, 1998                    Identification Number: 
                                    52-1088612


Audit Principal: Craig Birmingham


                                       -7-


<PAGE>   49
                     [REZNICK FEDDER & SILVERMAN LETTERHEAD]

                          INDEPENDENT AUDITORS' REPORT

To the Partners
Hayti Associates II

        We have audited the accompanying balance sheet of Hayti Associates II as
of December 31, 1996, and the related statements of profit and loss (on HUD Form
No. 92410), partners, equity and cash flows for the year then ended. These
financial statements are the responsibility of the partnership's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.

        We conducted our audit in accordance with generally accepted auditing
standards and Government Auditing Standards, issued by the Comptroller General
of the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audit provides 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 Hayti Associates II
as of December 31, 1996, and the results of its operations, the changes in
partners' equity and cash flows for the year then ended, in conformity with
generally accepted accounting principles.

        Our audit was made for the purpose of forming an opinion on the basic
financial statements taken as a whole. The supplemental information on pages 19
through 25 is presented for purposes of additional analysis and is not a
required part of the basic financial statements. Such information has been
subjected to the auditing procedures applied in the audit of the basic financial
statements and, in our opinion, is fairly stated in all material respects in
relation to the basic financial statements taken as a whole.


                                       -6-


<PAGE>   50
        In accordance with Government Auditing Standards and the "Consolidated
Audit Guide for Audits of HUD Programs," we have also issued reports dated
January 24, 1997 on our consideration of Hayti Associates II's internal control
structure and on its compliance with specific requirements applicable to major
and nonmajor HUD programs, affirmative fair housing, and laws and regulations
applicable to the financial statements.



                                 /S/ REZNICK FEDDER & SILVERMAN

Bethesda, Maryland               Federal Employer
January 24, 1997                   Identification Number: 
                                   52-1088612


Audit Principal: Craig Birmingham


                                       -7-


<PAGE>   51
                     [REZNICK FEDDER & SILVERMAN LETTERHEAD]

                          INDEPENDENT AUDITORS' REPORT


To the Partners
Hayti Associates II

        We have audited the accompanying balance sheet of Hayti Associates II as
of December 31, 1995, and the related statements of profit and loss (on HUD Form
No. 92410), partners, equity and cash flows for the year then ended. These
financial statements are the responsibility of the partnership's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.

        We conducted our audit in accordance with generally accepted auditing
standards and Government Auditing the Comptroller General of the United States.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides 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 Hayti Associates II
as of December 31, 1995, and the results of its operations, the changes in
partners, equity and cash flows for the year then ended, in conformity with
generally accepted accounting principles.

        Our audit was made for the purpose of forming an opinion on the basic
financial statements taken as a whole. The supplemental information on pages 19
through 25 is presented for purposes of additional analysis and is not a
required part of the basic financial statements. Such information has been
subjected to the auditing procedures applied in the audit of the basic financial
statements and, in our opinion, is fairly stated in all material respects in
relation to the basic financial statements taken as a whole.


                                       -6-


<PAGE>   52
        In accordance with Government Auditing Standards, we have also issued
reports dated January 31, 1996 on our consideration of Hayti Associates II's
internal control structure and on its compliance with specific requirements
applicable to major and nonmajor HUD programs, affirmative fair housing, and
laws and regulations applicable to the financial statements.


                                /s/ REZNICK FEDDER & SILVERMAN

Bethesda, Maryland              Federal Employer
January 31, 1996                   Identification Number: 
                                   52-1088612


Audit Principal: Craig Birmingham


                                       -7-


<PAGE>   53
                     [REZNICK FEDDER & SILVERMAN LETTERHEAD]

                          INDEPENDENT AUDITORS' REPORT

To the Partners
DeSoto Associates

        We have audited the accompanying balance sheet of DeSoto Associates as
of December 31, 1997, and the related statements of profit and loss (on HUD Form
No. 92410), partners' equity and cash flows for the year then ended. These
financial statements are the responsibility of the partnership's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.

        We conducted our audit in accordance with generally accepted auditing
standards and Government Auditing Standards, issued by the Comptroller General
of the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audit provides 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 DeSoto Associates as
of December 31, 1997, and the results of its operations, the changes in
partners' equity and cash flows for the year then ended, in conformity with
generally accepted accounting principles.

        Our audit was made for the purpose of forming an opinion on the basic
financial statements taken as a whole. The supplemental information on pages 19
through 24 is presented for purposes of additional analysis and is not a
required part of the basic financial statements. Such information has been
subjected to the auditing procedures applied in the audit of the basic financial
statements and, in our opinion, is fairly stated in all material respects in
relation to the basic financial statements taken as a whole.


                                       -6-


<PAGE>   54
                     [REZNICK FEDDER & SILVERMAN LETTERHEAD]

                          INDEPENDENT AUDITORS' REPORT


To the Partners
DeSoto Associates

        We have audited the accompanying balance sheet of DeSoto Associates as
of December 31, 1996, and the related statements of profit and loss (on HUD Form
No. 92410), partners' equity and cash flows for the year then ended. These
financial statements are the responsibility of the partnership's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.

        We conducted our audit in accordance with generally accepted auditing
standards and Government Auditing Standards, issued by the Comptroller General
of the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audit provides 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 DeSoto Associates as
of December 31, 1996, and the results of its operations, the changes in
partners' equity and cash flows for the year then ended, in conformity with
generally accepted accounting principles.

        Our audit was made for the purpose of forming an opinion on the basic
financial statements taken as a whole. The supplemental information on pages 19
through 26 is presented for purposes of additional analysis and is not a
required part of the basic financial statements. Such information has been
subjected to the auditing procedures applied in the audit of the basic financial
statements and, in our opinion, is fairly stated in all material respects in
relation to the basic financial statements taken as a whole.


                                      -6-


<PAGE>   55
        In accordance with Government Auditing Standards and the "Consolidated
Audit Guide for Audits of HUD Programs," we have also issued reports dated
January 24, 1997 on our consideration of DeSoto Associates' internal control
structure and on its compliance with specific requirements applicable to major
and nonmajor HUD programs, affirmative fair housing, and laws and regulations
applicable to the financial statements.



                                  /s/ REZNICK FEDDER & SILVERMAN

Bethesda, Maryland                Federal Employer
January 24, 1997                    Identification Number: 
                                    52-1088612


Audit Principal: Craig Birmingham




<PAGE>   56
                     [REZNICK FEDDER & SILVERMAN LETTERHEAD]

                          INDEPENDENT AUDITORS' REPORT

To the Partners
DeSoto Associates

        We have audited the accompanying balance sheet of DeSoto Associates as
of December 31, 1995, and the related statements of profit and lose (on HUD Form
No. 92410), partners' equity and cash flows for the year then ended. These
financial statements are the responsibility of the partnership's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.

        We conducted our audit in accordance with generally accepted auditing
standards and Government Auditing Standards, issued by the Comptroller General
of the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audit provides 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 Desoto Associates as
of December 31, 1995, and the results of its operations, the changes in
partners, equity and cash flows for the year then ended, in conformity with
generally accepted accounting principles.

        Our audit was made for the purpose of forming an opinion on the basic
financial statements taken as a whole. The supplemental information on pages 19
through 25 is presented for purposes of additional analysis and is not a
required part of the basic financial statements. Such information has been
subjected to the auditing procedures applied in the audit of the basic financial
statements and, in our opinion, is fairly stated in all material respects in
relation to the basic financial statements taken as a whole.


                                       -6-


<PAGE>   57
        In accordance with Government Auditing Standards, we have also issued
reports dated January 31, 1996 on our consideration of DeSoto Associates'
internal control structure and on its compliance with specific requirements
applicable to major and nonmajor KM programs, affirmative fair housing, and laws
and regulations applicable to the financial statements.



                                  /s/ REZNICK FEDDER & SILVERMAN
                                                                 
Bethesda, Maryland                Federal Employer
January 31, 1996                     Identification Number: 
                                     52-1088612


Audit Principal: Craig Birmingham


                                       -7-


<PAGE>   58
                     [REZNICK FEDDER & SILVERMAN LETTERHEAD]

                          INDEPENDENT AUDITORS' REPORT


To the Partners
Dexter Associates I

        We have audited the accompanying balance sheet of Dexter Associates I as
of December 31, 1997, and the related statements of profit and loss (on HUD Form
No. 92410), partners' deficit and cash flows for the year then ended. These
financial statements are the responsibility of the partnership's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.

        We conducted our audit in accordance with generally accepted auditing
standards and Government Auditing Standards, issued by the Comptroller General
of the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audit provides 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 Dexter Associates I
as of December 31, 1997, and the results of its operations, the changes in
partners' deficit and cash flows for the year then ended, in conformity with
generally accepted accounting principles.

        Our audit was made for the purpose of forming an opinion on the basic
financial statements taken as a whole. The supplemental information on pages 19
through 24 is presented for purposes of additional analysis and is not a
required part of the basic financial statements. Such information has been
subjected to the auditing procedures applied in the audit of the basic financial
statements and, in our opinion, is fairly stated in all material respects in
relation to the basic financial statements taken as a whole.

                                  /s/ REZNICK FEDDER & SILVERMAN

Bethesda, Maryland                Federal Employer
January 24, 1997                    Identification Number: 
                                    52-1088612


Audit Principal: Craig Birmingham



<PAGE>   59
                     [REZNICK FEDDER & SILVERMAN LETTERHEAD]

                          INDEPENDENT AUDITORS' REPORT

To the Partners
Dexter Associates I

        We have audited the accompanying balance sheet of Dexter Associates I as
of December 31, 1996, and the related statements of profit and loss (on HUD Form
No. 92410), partners' equity and cash flows for the year then ended. These
financial statements are the responsibility of the partnership's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.

        We conducted our audit in accordance with generally accepted auditing
standards and Government Auditing Standards, issued by the Comptroller General
of the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audit provides 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 Dexter Associates I
as of December 31, 1996, and the results of its operations, the changes in
partners' equity and cash flows for the year then ended, in conformity with
generally accepted accounting principles.

        Our audit was made for the purpose of forming an opinion on the basic
financial statements taken as a whole. The supplemental information on pages 19
through 25 is presented for purposes of additional analysis and is not a
required part of the basic financial statements. Such information has been
subjected to the auditing procedures applied in the audit of the basic financial
statements and, in our opinion, is fairly stated in all material respects in
relation to the basic financial statements taken as a whole.


                                      -6-


<PAGE>   60

        In accordance with Government Auditing Standards, we have also issued
reports dated January 24, 1997 on our consideration of Dexter Associates I's
internal control structure and on its compliance with specific requirements
applicable to major and nonmajor HUD programs, affirmative fair housing and laws
and regulations applicable to the financial statements.



                                /s/ REZNICK FEDDER & SILVERMAN


Bethesda, Maryland               Federal Employer
January 24, 1997                    Identification Number: 
                                    52-1088612


Audit Principal: Craig Birmingham


                                       -7-


<PAGE>   61
                     [REZNICK FEDDER & SILVERMAN LETTERHEAD]

                          INDEPENDENT AUDITORS' REPORT

To the Partners
Dexter Associates I

        We have audited the accompanying balance sheet of Dexter Associates I as
of December 31, 1995, and the related statements of profit and loss (on HUD Form
No. 92410), partners' equity and cash flows for the year then ended. These
financial statements are the responsibility of the partnership's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.

        We conducted our audit in accordance with generally accepted auditing
standards and Government Auditing Standards, issued by the Comptroller General
of the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audit provides 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 Dexter Associates I
as of December 31, 1995, and the results of its operations, the changes in
partners' equity and cash flows for the year then ended, in conformity with
generally accepted accounting principles.


                                      -6-


<PAGE>   62
        Our audit was made for the purpose of forming an opinion on the basic
financial statements taken as a whole. The supplemental information on pages 19
through 25 is presented for purposes of additional analysis and is not a
required part of the basic financial statements. Such information has been
subjected to the auditing procedures applied in the audit of the basic financial
statements and, in our opinion, is fairly stated in all material respects in
relation to the basic financial statements taken as a whole.

               In accordance with Government Auditing Standards, we have also
issued reports dated January 31, 1996 on our consideration of Dexter Associates
I internal control structure and on its compliance with specific requirements
applicable to major and nonmajor HUD programs, affirmative fair housing and laws
and regulations applicable to the financial statements.



                                 /s/ REZNICK FEDDER & SILVERMAN  

Bethesda, Maryland               Federal Employer
January 31, 1996                   Identification Number: 
                                   52-1088612


Audit Principal: Craig Birmingham


                                       -7-


<PAGE>   63
                     [REZNICK FEDDER & SILVERMAN LETTERHEAD]

                          INDEPENDENT AUDITORS' REPORT

To the Partners
Edgewood II Associates

        We have audited the accompanying balance sheet of Edgewood II Associates
as of December 31, 1997, and the related statements of profit and loss (on HUD
Form No. 92410), partners' deficit and cash flows for the year then ended. These
financial statements are the responsibility of the partnership's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.

        We conducted our audit in accordance with generally accepted auditing
standards and Government Auditing Standards, issued by the Comptroller General
of the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audit provides 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 Edgewood II
Associates as of December 31, 1997, and the results of its operations, the
changes in partners' deficit and cash flows for the year then ended in
conformity with generally accepted accounting principles.

        Our audit was made for the purpose of forming an opinion on the basic
financial statements taken as a whole. The supplemental information on pages 20
through 25 is presented for purposes of additional analysis and is not a
required part of the basic financial statements. Such information has been
subjected to the auditing procedures applied in the audit of the basic financial
statements and, in our opinion, is fairly stated in all material respects in
relation to the basic financial statements taken as a whole.


                                      -6-


<PAGE>   64
        In accordance with Government Auditing Standards and the "Consolidated
Audit Guide for Audits of HUD Programs," we have also issued reports dated
January 16, 1998 on our consideration of Edgewood II Associates' internal
control and on its compliance with specific requirements applicable to major HUD
programs, fair housing and non-discrimination, and laws and regulations
applicable to the financial statements.



                                 /s/ REZNICK FEDDER & SILVERMAN

Bethesda, Maryland               Federal Employer
January 16, 1998                   Identification Number:      
                                   52-1088612


Audit Principal: Bill D. Tzamaras


                                       -7-


<PAGE>   65
                     [REZNICK FEDDER & SILVERMAN LETTERHEAD]

                          INDEPENDENT AUDITORS' REPORT

To the Partners
Edgewood II Associates Limited Partnership

        We have audited the accompanying balance sheet of Edgewood II Associates
Limited Partnership as of December 31, 1996, and the related statements of
profit and loss (on HUD Form No. 92410), partners' deficit and cash flows for
the year then ended. These financial statements are the responsibility of the
partnership's management. Our responsibility is to express an opinion on these
financial statements based on our audit.

        We conducted our audit in accordance with generally accepted auditing
standards and Government Auditing Standards, issued by the Comptroller General
of the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audit provides 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 Edgewood II
Associates Limited Partnership as of December 31, 1996, and the results of its
operations, the changes in partners' deficit and cash flows for the year then
ended in conformity with generally accepted accounting principles.

        Our audit was made for the purpose of forming an opinion on the basic
financial statements taken as a whole. The supplemental information on pages 20
through 26 is presented for purposes of additional analysis and is not a
required part of the basic financial statements. Such information has been
subjected to the auditing procedures applied in the audit of the basic financial
statements and, in our opinion, is fairly stated in all material respects in
relation to the basic financial statements taken as a whole.


                                      -6-


<PAGE>   66
        In accordance with Government Auditing Standards and the "Consolidated
Audit Guide for Audits of HUD Programs," we have also issued reports dated
January 17, 1997 on our consideration of Edgewood II Associates Limited
Partnership's internal control structure and on its compliance with specific
requirements applicable to major HUD programs, affirmative fair housing, and
laws and regulations applicable to the financial statements.



                                    /s/ REZNICK FEDDER & SILVERMAN

Bethesda, Maryland                  Federal Employer
January 17, 1997                       Identification Number: 
                                       52-1088612


Audit Principal: Bill D. Tzamaras


                                       -7-


<PAGE>   67
                     [REZNICK FEDDER & SILVERMAN LETTERHEAD]

                          INDEPENDENT AUDITORS' REPORT

To the Partners
Edgewood II Associates Limited Partnership

        We have audited the accompanying balance sheet of Edgewood II Associates
Limited Partnership as of December 31, 1995, and the related statements of
profit and loss (on HUD Form No. 92410), partners' deficit and cash flows for
the year then ended. These financial statements are the responsibility of the
partnerships management. Our responsibility is to express an opinion on these
financial statements based on our audit.

        We conducted our audit in accordance with generally accepted auditing
standards and Government Auditing Standards, issued by the Comptroller General
of the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audit provides 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 Edgewood II
Associates Limited Partnership as of December 31, 1995, and the results of its
operations, the changes in partners' deficit and cash flows for the year then
ended in conformity with generally accepted accounting principles.

        Our audit was made for the purpose of forming an opinion on the basic
financial statements taken as a whole. The supplemental information on pages 21
through 27 is presented for purposes of additional analysis and is not a
required part of the basic financial statements. Such information has been
subjected to the auditing procedures applied in the audit of the basic financial
statements and, in our opinion, is fairly stated in all material respects in
relation to the basic financial statements taken as a whole.


                                      -6-


<PAGE>   68
        In accordance with Government Auditing Standards, we have also issued
reports dated January 11, 1996 on our consideration of Edgewood II Associates
Limited Partnership's internal control structure and on its compliance with
specific requirements applicable to major HUD programs, affirmative fair
housing, and laws and regulations applicable to the financial statements.



                                 /s/ REZNICK FEDDER & SILVERMAN

Bethesda, Maryland               Federal Employer
January 11, 1996                   Identification Number: 
                                   52-1088612


Audit Principal: Jeffrey D. Barsky


                                       -7-


<PAGE>   69
                         [ERNST & YOUNG LLP LETTERHEAD]

                         Report of Independent Auditors

To the Partners
Goodlette Arms Apartments

We have audited the accompanying balance sheet of Goodlette Arms Apartments, a
limited partnership--Project Number 066-44117-NP, as of December 31, 1997, and
the related statements of profit and loss, partners' capital and cash flows for
the year then ended. These financial statements are the responsibility of the
Partnership's management. Our responsibility is to express an opinion on these
financial statements based on our audit.

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

In determining the basis of fixed assets as a result of the transfer of
ownership in 1984, the Partnership used the historical cost of purchase money
notes given by the new partners as part of the transfer. Generally accepted
accounting principles would require these notes be discounted to approximate
their fair market value, thereby reducing the basis of fixed assets. The
Partnership has not made (nor, in accordance with instructions from the
Partnership, have we made) a determination of the basis of fixed assets using a
discounted value of the purchase money notes; therefore, the effects on the
Partnership's financial statements of using the historical cost of the notes are
not known.

In our opinion, except for the effects of such adjustments, if any, as might
have been determined to be necessary had the basis of fixed assets been
determined using a discounted value of purchase money notes been known, the
financial statements referred to above present fairly, in all material respects,
the financial position of Goodlette Arms Apartments at December 31, 1997, and
the results of its operations and its cash flows for the year then ended in
conformity with generally accepted accounting principles.

In accordance with Government Auditing Standards, we have also issued a report
entitled "Independent Auditors' Report on Compliance and Internal Control Over
Financial Reporting Based on an Audit of the Financial Statements in Accordance
with Government Auditing Standards" dated January 22, 1998 on our consideration
of the Partnership's internal control over financial reporting and our tests of
its compliance with certain provisions of laws, regulations and contracts.



                                       1
<PAGE>   70
Our audit was made for the purpose of forming an opinion on the financial
statements taken as a whole. The supporting data listed on the contents page is
presented for purposes of additional analysis and is not a required part of the
financial statements of the Partnership. Such data has been subjected to the
auditing procedures applied in our audit of the financial statements and, in our
opinion, except for the effects on the supporting data of such adjustments, if
any, as might have been determined to be necessary had the basis of fixed assets
determined using a discounted value of purchase money notes been known, is
fairly stated in all material respects in relation to the financial statements
taken as a whole.


                                             /s/ ERNST & YOUNG LLP

Indianapolis, Indiana
January 22, 1998
<PAGE>   71
                         [ERNST & YOUNG LLP LETTERHEAD]

                         Report of Independent Auditors

To the Partners
Goodlette Arms Apartments

We have audited the accompanying balance sheet of Goodlette Arms Apartments, a
limited partnership--Project Number 066-44117-NP, as of December 31, 1996, and
the related statements of profit and loss, partners' capital and cash flows for
the year then ended. These financial statements are the responsibility of the
Partnership's management. Our responsibility is to express an opinion on these
financial statements based on our audit.

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

In determining the basis of fixed assets as a result of the transfer of
ownership in 1984, the Partnership used the historical cost of purchase money
notes given by the new partners as part of the transfer. Generally accepted
accounting principles would require these notes be discounted to approximate
their fair market value, thereby reducing the basis of fixed assets. The
Partnership has not made (nor, in accordance with instructions from the
Partnership, have we made) a determination of the basis of fixed assets using a
discounted value of the purchase money notes; therefore, the effects on the
Partnership's financial statements of using the historical cost of the notes are
not known.

In our opinion, except for the effects of such adjustments, if any, as might
have been determined to be necessary had the basis of fixed assets been
determined using a discounted value of purchase money notes been known, the
financial statements referred to above present fairly, in all material respects,
the financial position of Goodlette Arms Apartments at December 31, 1996, and
the results of its operations and its cash flows for the year then ended in
conformity with generally accepted accounting principles.

In accordance with Government Auditing Standards, we have issued a report
entitled "Independent Auditors' Report on Internal Control Based on an Audit of
the Financial Statements in Accordance with Government Auditing Standards" dated
January 22, 1997 on our consideration of the Partnership's internal control and
a report entitled "Independent Auditors' Report on Compliance with Laws and
Regulations in Accordance with Government Auditing Standards" dated January 22,
1997 on its compliance with applicable laws and regulations.


                                       1


<PAGE>   72
Our audit was made for the purpose of forming an opinion on the financial
statements taken as a whole. The supporting data listed on the contents page is
presented for purposes of additional analysis and is not a required part of the
financial statements of the Partnership. Such data has been subjected to the
auditing procedures applied in our audit of the financial statements and, in our
opinion, except for the effects on the supporting data of such adjustments, if
any, as might have been determined to be necessary had the basis of fixed assets
determined using a discounted value of purchase money notes been known, is
fairly stated in all material respects in relation to the financial statements
taken as a whole.


                                             /s/ ERNST & YOUNG LLP


Indianapolis, Indiana
January 22, 1997


                                       2

<PAGE>   73
                         [ERNST & YOUNG LLP LETTERHEAD]

                         Report of Independent Auditors

To the Partners
Goodlette Arms Apartments


We have audited the accompanying balance sheet of Goodlette Arms Apartments, a
limited partnership--Project Number 066-44117-NP, as of December 31, 1995, and
the related statements of profit and loss, partners' capital and cash flows for
the year then ended. These financial statements are the responsibility of the
Partnership's management. Our responsibility is to express an opinion on these
financial statements based on our audit.

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

In determining the basis of fixed assets as a result of the transfer of
ownership in 1984, the Partnership used the historical cost of purchase money
notes given by the new partners as part of the transfer. Generally accepted
accounting principles would require these notes be discounted to approximate
their fair market value, thereby reducing the basis of fixed assets. The
Partnership has not made (nor, in accordance with instructions from the
Partnership, have we made) a determination of the basis of fixed assets using a
discounted value of the purchase money notes; therefore, the effects on the
Partnership's financial statements of using the historical cost of the notes are
not known.

In our opinion, except for the effects of such adjustments, if any, as might
have been determined to be necessary had the basis of fixed assets been
determined using a discounted value of purchase money notes been known, the
financial statements referred to above present fairly, in all material respects,
the financial position of Goodlette Arms Apartments at December 31, 1995, and
the results of its operations and its cash flows for the year then ended in
conformity with generally accepted accounting principles.

In accordance with Government Auditing Standards, we have issued a report
entitled "Independent Auditors' Report on Internal Control Based on an Audit of
the Financial Statements in Accordance with Government Auditing Standards" dated
January 22, 1996 on our consideration of the Partnership's internal control and
a report entitled "Independent Auditors' Report on Compliance with Laws and
Regulations in Accordance with Government Auditing Standards" dated January 22,
1996 on its compliance with applicable laws and regulations.


                                       1


<PAGE>   74
Our audit was made for the purpose of forming an opinion on the financial
statements taken as a whole. The supporting data listed on the contents page is
presented for purposes of additional analysis and is not a required part of the
financial statements of the Partnership. Such data has been subjected to the
auditing procedures applied in our audit of the financial statements and, in our
opinion, except for the effects on the supporting data of such adjustments, if
any, as might have been determined to be necessary had the basis of fixed assets
determined using a discounted value of purchase money notes been known, is
fairly stated in all material respects in relation to the financial statements
taken as a whole.



                                             /s/ ERNST & YOUNG LLP

Indianapolis, Indiana
January 22, 1996
<PAGE>   75
                [ALTSCHULER, MELVOIN AND GLASSER LLP LETTERHEAD]

              INDEPENDENT AUDITORS' REPORT ON FINANCIAL STATEMENTS
                    AND ADDITIONAL FINANCIAL DATA REQUIRED BY
              THE U.S. DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT


To the Partners of
Ivywood Apartments, Limited Partnership

We have audited the accompanying balance sheets of IVYWOOD APARTMENTS, LIMITED
PARTNERSHIP, FHA Project No. 043-44072-LDP (Partnership), as of December 31,
1997 and 1996, and the related statements of operations, changes in partners'
equity and cash flows for the years then ended. These financial statements are
the responsibility of the Partnership's management. Our responsibility is to
express an opinion on these financial statements based on our audits.

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

In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Ivywood Apartments, as of
December 31, 1997 and 1996, and its results of operations, changes in partners'
equity and cash flows for the years then ended in conformity with generally
accepted accounting principles.

Our audits were conducted for the purpose of forming an opinion on the basic
financial statements taken as a whole. The accompanying 1997 additional
financial data (shown on pages 13 through 23) are presented for the purpose of
additional analysis and are not a required part of the basic financial
statements of the Partnership. Such information has been subjected to the
auditing procedures applied in the audit of the 1997 basic financial statements
and, in our opinion, is fairly stated in all material respects in relation to
the basic financial statements taken as a whole.


                                                                               2
<PAGE>   76
In accordance with Government Auditing Standards, we have also issued a report
dated January 27, 1998 on our consideration of the Partnership's internal
control and a report dated January 27, 1998, on its compliance with laws and
regulations.


/s/ ALTSCHULER, MELVOIN AND GLASSER LLP


Chicago, Illinois
January 27, 1998


                                                                               3


<PAGE>   77
                [ALTSCHULER, MELVOIN AND GLASSER LLP LETTERHEAD]

            INDEPENDENT AUDITORS' REPORT ON FINANCIAL STATEMENTS AND
                      ADDITIONAL FINANCIAL DATA REQUIRED BY
              THE U.S. DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT


To the Partners of
Ivywood Apartments, Limited Partnership


We have audited the accompanying balance sheet of IVYWOOD APARTMENTS, LIMITED
PARTNERSHIP, FHA Project Number 043-44072-LDP, (the "Partnership") as of
December 31, 1995, and the related statements of operations, changes in
partners' equity and cash flows for the year then ended. These financial
statements are the responsibility of the Partnership's management. Our
responsibility is to express an opinion on these financial statements based on
our audit. The Partnership's financial statements as of and for the year ended
December 31, 1994 were audited by other auditors whose report dated January 19,
1995, expressed an unqualified opinion on those statements.

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

In our opinion, the 1995 financial statements referred to above present fairly,
in all material respects, the financial position of Ivywood Apartments, Limited
Partnership as of December 31, 1995, and the results of its operations, changes
in partners' equity and cash flows for the year then ended in conformity with
generally accepted accounting principles.

In accordance with Government Auditing Standards, we have also issued a report
dated February 2, 1996, on our consideration of the Partnership's internal
control structure and a report dated February 2, 1996, on its compliance with
laws and regulations.


                                                                              2.


<PAGE>   78
Our audit was performed for the purpose of forming an opinion on the financial
statements taken as a whole. The additional financial data shown on pages 14
through 19 are presented for purposes of additional analysis and are not a
required part of the financial statements. Such information has been subjected
to the procedures applied in the audit of the financial statements and, in our
opinion, is fairly stated in all material respects in relation to the financial
statements taken as a whole.


/s/ ALTSCHULER, MELVOIN AND GLASSER LLP

Chicago, Illinois
February 2, 1996


                                                                              3.


<PAGE>   79
                [ALTSCHULER, MELVOIN AND GLASSER LLP LETTERHEAD]

            INDEPENDENT AUDITORS' REPORT ON FINANCIAL STATEMENTS AND
                      ADDITIONAL FINANCIAL DATA REQUIRED BY
              THE U.S. DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT


To the Partners of
King Towers Associates


We have audited the accompanying balance sheets of KING TOWERS ASSOCIATES (an
Ohio limited partnership) FHA Project No. 046-44165-LDP, as of December 31, 1997
and 1996, and the related statements of operations, changes in partners' equity
and cash flows for the years then ended. These financial statements are the
responsibility of the Partnership's management. Our responsibility is to express
an opinion on these financial statements based on our audits.

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

In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of King Towers Associates as of
December 31, 1997 and 1996, and its results of operations, changes in partners'
equity and cash flows for the years then ended in conformity with generally
accepted accounting principles.


                                                                               2


<PAGE>   80
Our audits were conducted for the purpose of forming an opinion on the basic
financial statements taken as a whole. The accompanying 1997 additional
financial data (shown on pages 14 through 19) are presented for the purpose of
additional analysis and are not a required part of the basic financial
statements of the Partnership. Such information has been subjected to the
auditing procedures applied in the audit of the 1997 basic financial statements
and, in our opinion, is fairly stated in all material respects in relation to
the basic financial statements taken as a whole.

In accordance with Government Auditing Standards, we have also issued a report 
dated February 10, 1998 on our consideration of the Partnership's internal 
control and a report dated February 10, 1998, on its compliance with laws and 
regulations.


/s/ ALTSCHULER, MELVOIN AND GLASSER LLP

Chicago, Illinois
February 10, 1998


                                                                               3


<PAGE>   81
                [ALTSCHULER, MELVOIN AND GLASSER LLP LETTERHEAD]

            INDEPENDENT AUDITORS' REPORT ON FINANCIAL STATEMENTS AND
                      ADDITIONAL FINANCIAL DATA REQUIRED BY
              THE U.S. DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT

To the Partners of
King Towers Associates


We have audited the accompanying balance sheet of KING TOWERS ASSOCIATES (an
Ohio limited partnership), FHA Project Number 046-44165-LDP, (the "Partnership")
as of December 31, 1995, and the related statements of operations, changes in
partners' equity and cash flows for the year then ended. These financial
statements are the responsibility of the Partnership's management. Our
responsibility is to express an opinion on these financial statements based on
our audit. The financial statements of the Partnership as of and for the year
ended December 31, 1994 were audited by other auditors whose report dated
January 19, 1995, expressed an unqualified opinion on those statements.

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

In our opinion, the 1995 financial statements referred to above present fairly,
in all material respects, the financial position of King Towers Associates as of
December 31, 1995, and the results of its operations, changes in partners'
equity and cash flows for the year then ended in conformity with generally
accepted accounting principles.

In accordance with Government Auditing Standards, we have also issued a report
dated February 2, 1996, on our consideration of the Partnership's internal
control structure and a report dated February 2, 1996, on its compliance with
laws and regulations.


                                                                              2.


<PAGE>   82
Our audit was performed for the purpose of forming an opinion on the financial
statements taken as a whole. The additional financial data required by the U.S.
Department of Housing and Urban Development shown on pages 13 through 18 are
presented for purposes of additional analysis and are not a required part of the
financial statements. Such information has been subjected to the procedures
applied in the audit of the financial statements and, in our opinion, is fairly
stated in all material respects in relation to the financial statements taken as
a whole.


/s/ ALTSCHULER, MELVOIN AND GLASSER LLP

Chicago, Illinois
February 2, 1996


                                                                              3.


<PAGE>   83
                [ALTSCHULER, MELVOIN AND GLASSER LLP LETTERHEAD]

            INDEPENDENT AUDITORS' REPORT ON FINANCIAL STATEMENTS AND
                      ADDITIONAL FINANCIAL DATA REQUIRED BY
              THE U.S. DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT


To the Partners of
Mount Union Apartments, Ltd.

We have audited the accompanying balance sheets of MOUNT UNION APARTMENTS, LTD.,
aka Nantucket Circle FHA Project No. 042-44070-LDP, as of December 31, 1997 and
1996, and the related statements of operations, changes in partners' equity and
cash flows for the years then ended. These financial statements are the
responsibility of the Partnership's management. Our responsibility is to express
an opinion on these financial statements based on our audits.

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

In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Mount Union Apartments, Ltd.,
as of December 31, 1997 and 1996, and its results of operations, changes in
partners' equity and cash flows for the years then ended in conformity with
generally accepted accounting principles.

Our audits were conducted for the purpose of forming an opinion on the basic
financial statements taken as a whole. The accompanying 1997 additional
financial data (shown on pages 14 through 19) are presented for the purpose of
additional analysis and are not a required part of the basic financial
statements of the Partnership. Such information has been subjected to the
auditing procedures applied in the audit of the 1997 basic financial statements
and, in our opinion, is fairly stated in all material respects in relation to
the basic financial statements taken as a whole.


                                                                               2


<PAGE>   84
In accordance with Government Auditing Standards, we have also issued a report
dated February 14, 1998 on our consideration of the Partnership's internal
control and a report dated February 14, 1998, on its compliance with laws and
regulations.


/s/ ALTSCHULER, MELVOIN AND GLASSER LLP

Chicago, Illinois
February 14, 1998


                                                                               3


<PAGE>   85
                [ALTSCHULER, MELVOIN AND GLASSER LLP LETTERHEAD]

            INDEPENDENT AUDITORS' REPORT ON FINANCIAL STATEMENTS AND
                      ADDITIONAL FINANCIAL DATA REQUIRED BY
              THE U.S. DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT


To the Partners of
Mount Union Apartments, Ltd.


We have audited the accompanying balance sheet of MOUNT UNION APARTMENTS, LTD.
(an Ohio limited partnership), a/k/a Nantucket Circle, FHA Project Number
042-44070-LDP, (the "Partnership") as of December 31, 1995, and the related
statements of operations, changes in partners' equity and cash flows for the
year then ended. These financial statements are the responsibility of the
Partnership's management. Our responsibility is to express an opinion on these
financial statements based on our audit. The Partnership's financial statements
as of and for the year ended December 31, 1994, were audited by other auditors
whose report dated January l7, 1995, expressed an unqualified opinion on those
statements.

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

In our opinion, the 1995 financial statements referred to above present fairly,
in all material respects, the financial position of Mount Union Apartments, Ltd.
as of December 31, 1995, and the results of its operations, changes in partners'
equity and cash flows for the year then ended in conformity with generally
accepted accounting principles.

In accordance with Government Auditing Standards, we have also issued a report
dated February 2, 1996, on our consideration of the Partnership's internal
control structure and a report dated February 2, 1996, on its compliance with
laws and regulations.


                                                                              2.


<PAGE>   86
Our audit was performed for the purpose of forming an opinion on the financial
statements taken as a whole. The additional financial data required by the U.S.
Department of Housing and Urban Development shown on pages 14 through 19 are
presented for purposes of additional analysis and are not a required part of the
financial statements. Such information has been subjected to the procedures
applied in the audit of the financial statements and, in our opinion, is fairly
stated in all material respects in relation to the financial statements taken as
a whole.


/s/ ALTSCHULER, MELVOIN AND GLASSER LLP

Chicago, Illinois
February 2, 1996


                                                                              3.


<PAGE>   87
                [ALTSCHULER, MELVOIN AND GLASSER LLP LETTERHEAD]

            INDEPENDENT AUDITORS' REPORT ON FINANCIAL STATEMENTS AND
                      ADDITIONAL FINANCIAL DATA REQUIRED BY
              THE U.S. DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT


To the Partners of
Oak Hill Apartments, Ltd.,

We have audited the accompanying balance sheets of OAK HILL APARTMENTS, LTD.,
FHA Project No. 033-44149-LDP, as of December 31, 1997 and 1996, and the related
statements of operations, changes in partners' equity (deficiency) and cash
flows for the years then ended. These financial statements are the
responsibility of the Partnership's management. Our responsibility is to express
an opinion on these financial statements based on our audits.

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

In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Oak Hill Apartments, Ltd., as
of December 31, 1997 and 1996, and its results of operations, changes in
partners' equity (deficiency) and cash flows for the years then ended in
conformity with generally accepted accounting principles.

Our audits were performed for the purpose of forming an opinion on the financial
statements taken as a whole. The additional 1997 financial data (shown on pages
13 through 19) are presented for the purpose of additional analysis and are not
a required part of the financial statements. This information has been subjected
to the auditing procedures applied in the audit of the 1997 financial statements
and, in our opinion, is stated fairly in all material respects in relation to
the financial statements taken as a whole.


                                                                               2


<PAGE>   88
In accordance with Government Auditing Standards, we have also issued a report
dated February 10, 1998 on our consideration of the Partnership's internal
control and a report dated February 10, 1998, on its compliance with laws and
regulations.


/s/ ALTSCHULER, MELVOIN AND GLASSER LLP

Chicago, Illinois
February 10, 1998


                                                                               3


<PAGE>   89
                [ALTSCHULER, MELVOIN AND GLASSER LLP LETTERHEAD]

            INDEPENDENT AUDITORS' REPORT ON FINANCIAL STATEMENTS AND
                      ADDITIONAL FINANCIAL DATA REQUIRED BY
              THE U.S. DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT


To the Partners of
Oak Hill Apartments, Ltd.


We have audited the accompanying balance sheet of OAK HILL APARTMENTS, LTD. (a
Pennsylvania limited partnership), FHA Project Number 033-44149-LDP, (the
"Partnership") as of December 31, 1995, and the related statements of
operations, changes in partners' equity and cash flows for the year then ended.
These financial statements are the responsibility of the Partnership's
management. Our responsibility is to express an opinion on these financial
statements based on our audit. The Partnership's financial statements as of and
for the year ended December 31, 1994 were audited by other auditors whose report
dated January 19, 1995, expressed an unqualified opinion on those statements.

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

In our opinion, the 1995 financial statements referred to above present fairly,
in all material respects, the financial position of Oak Hill Apartments, Ltd. at
December 31, 1995, and the results of its operations, changes in partners'
equity and cash flows for the year then ended in conformity with generally
accepted accounting principles.

In accordance with Government Auditing Standards, we have also issued a report
dated February 2, 1996, on our consideration of the Partnership's internal
control structure and a report dated February 2, 1996, on its compliance with
laws and regulations.


                                                                              2.


<PAGE>   90
Our audit was performed for the purpose of forming an opinion on the financial
statements taken as a whole. The additional financial data shown on pages 13
through 18 are presented for purposes of additional analysis and are not a
required part of the financial statements. Such information has been subjected
to the procedures applied in the audit of the financial statements and, in our
opinion, is fairly stated in all material respects in relation to the financial
statements taken as a whole.


/s/ ALTSCHULER, MELVOIN AND GLASSER LLP

Chicago, Illinois
February 2, 1996


                                                                              3.


<PAGE>   91
                          [PEAT MARWICK LLP LETTERHEAD]

                     REPORT ON AUDITED FINANCIAL STATEMENTS
                          AND SUPPLEMENTARY INFORMATION

                          INDEPENDENT AUDITORS' REPORT

The Partners
Parkway Towers Associates
(A Limited Partnership):

We have audited the accompanying balance sheet of Parkway Towers Associates (A
Limited Partnership) (the "Partnership"), HUD Project No. RI-43-HO23-026, as of
July 31, 1996, and the related statements of profit and loss (on HUD Form
92410), changes in partners' equity and cash flows for the year then ended.
These financial statements are the responsibility of the Partnership's
management. Our responsibility is to express an opinion on these financial
statements based on our audit.

We conducted our audit in accordance with generally accepted auditing standards
and Government Auditing Standards, issued by the Comptroller General of the
United States. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audit provides 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 the Partnership as of July 31,
1996 and the results of its operations and its cash flows for the year then
ended in conformity with generally accepted accounting principles.

In accordance with Government Auditing Standards, we have also issued reports
dated September 13, 1996, on: our consideration of the Partnership's internal
control structure, the Partnership's compliance with specific requirements
applicable to major HUD programs, and the Partnership's compliance with specific
requirements applicable to affirmative fair housing.

Our audit was conducted for the purpose of forming an opinion on the basic
financial statements taken as a whole. The accompanying supplementary
information included in Schedules 1 through 7 is presented for purposes of
additional analysis and is not a required part of the basic financial
statements. Such information has been subjected to the auditing procedures
applied in the audit of the basic financial statements and, in our opinion, is
fairly stated in all material respects in relation to the financial statements
taken as a whole.


                                                       /s/ KPMG PEAT MARWICK LLP

Providence, Rhode Island
September 13, 1996



<PAGE>   92
                          [PEAT MARWICK LLP LETTERHEAD]

                          INDEPENDENT AUDITORS' REPORT


The Partners
Parkway Towers Associates
(A Limited Partnership):

We have audited the accompanying balance sheet of Parkway Towers Associates (A
Limited Partnership) Project No. RI-43-HO23-026 as of July 31, 1995, and the
related statements of profit and loss (in HUD Form 92410), changes in partners'
equity and cash flows for the year then ended. These financial statements are
the responsibility of the Partnership's management. Our responsibility is to
express an opinion on these financial statements based on our audit.

We conducted our audit in accordance with generally accepted auditing standards
and Government Auditing Standards, issued by the Comptroller General of the
United States. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in he financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides 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 Parkway Towers Associates (A
Limited Partnership) Project No. RI-43-HO23-026 at July 31, 1995 and the
results of its operations and its cash flows for the year then ended in
conformity with generally accepted accounting principles.

Our audit was made for the purpose of forming an opinion on the basic financial
statements taken as a whole. The supplementary information included in
Schedules 1 through 7 is presented for purposes of additional analysis and is
not a required part of the basic financial statements. Such information has
been subjected to the auditing procedures applied in the audit of the basic
financial statements and, in our opinion, is fairly presented in all material
respects in relation to the basic financial statements taken as a whole.

                         
                                        /s/  KPMG PEAT MARWICK LLP


Providence, Rhode Island
August 25, 1995


<PAGE>   93
                [ALTSCHULER, MELVOIN AND GLASSER LLP LETTERHEAD]

            INDEPENDENT AUDITORS' REPORT ON FINANCIAL STATEMENTS AND
                      ADDITIONAL FINANCIAL DATA REQUIRED BY
              THE U.S. DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT


To the Partners
Pinebrook Manor aka Coachlight Apartments Co.

We have audited the accompanying balance sheets of PINEBROOK MANOR AKA
COACHLIGHT APARTMENTS CO. (a limited partnership), FHA Project No.
047-44016-LDP-SUP (the "Partnership"), as of December 31, 1997 and 1996, and the
related statements of income, changes in partners' equity and cash flows for the
years then ended. These financial statements are the responsibility of the
Partnership's management. Our responsibility is to express an opinion on these
financial statements based on our audits.

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

In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Pinebrook Manor aka Coachlight
Apartments Co. as of December 31, 1997 and 1996, and the results of its
operations and its cash flows for the years then ended in conformity with
generally accepted accounting principles.

Our audits were conducted for the purpose of forming an opinion on the basic
financial statements taken as a whole. The accompanying 1997 additional
financial data (shown on pages 13 through 19) are presented for the purpose of
additional analysis and are not a required part of the basic financial
statements of the Partnership. Such information has been subjected to the
auditing procedures applied in the audit of the 1997 basic financial statements
and, in our opinion, is fairly stated in all material respects in relation to
the basic financial statements taken as a whole.


/s/ ALTSCHULER, MELVOIN AND GLASSER LLP

Los Angeles, California
<PAGE>   94
                [ALTSCHULER, MELVOIN AND GLASSER LLP LETTERHEAD]

            INDEPENDENT AUDITORS' REPORT ON FINANCIAL STATEMENTS AND
                      ADDITIONAL FINANCIAL DATA REQUIRED BY
              THE U.S. DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT

To the Partners of
Pinebrook Manor AKA Coachlight Apartments Co.


We have audited the accompanying balance sheet of PINEBROOK MANOR AKA COACHLIGHT
APARTMENTS CO. (a limited partnership), FHA Project Number 047-44016-LDP-SUP,
(the "Partnership") as of December 31, 1995, and the related statements of
operations, changes in partners' equity and cash flows for the year then ended.
These financial statements are the responsibility of the Partnership's
management. Our responsibility is to express an opinion on these financial
statements based on our audit. The financial statements of the Partnership as of
and for the year ended December 31, 1994 were audited by other auditors whose
report dated February 16, 1995 expressed an unqualified opinion on those
statements.

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

In our opinion, the 1995 financial statements referred to above present fairly,
in all material respects, the financial position of Pinebrook Manor AKA
Coachlight Apartments Co. as of December 31, 1995, and the results of its
operations, changes in its partners' equity and its cash flows for the year then
ended, in conformity with generally accepted accounting principles.

In accordance with Government Auditing Standards, we have also issued a report
dated February 15, 1996 on our consideration of the Partnership's internal
control structure and a report dated February 15, 1996 on its compliance with
laws and regulations.


                                                                              2.


<PAGE>   95
Our audit was conducted for the purpose of forming an opinion on the financial
statements taken as a whole. The accompanying additional financial data shown on
pages 14 through 20 is presented for purposes of additional analysis and is not
a required part of the financial statements. Such information has been subjected
to the auditing procedures applied in the audit of the financial statements and,
in our opinion, is fairly stated in all material respects in relation to the
financial statements taken as a whole.



/s/ ALTSCHULER, MELVOIN AND GLASSER LLP

Los Angeles, California
February 15, 1996


                                                                              3.
<PAGE>   96
                [ALTSCHULER, MELVOIN AND GLASSER LLP LETTERHEAD]

            INDEPENDENT AUDITORS' REPORT ON FINANCIAL STATEMENTS AND
                      ADDITIONAL FINANCIAL DATA REQUIRED BY
              THE U.S. DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT

To the Partners of
Ridgewood Towers Associates

We have audited the accompanying balance sheets of RIDGEWOOD TOWERS ASSOCIATES,
FHA Project No. 071-35254-PM (Partnership), as of December 31, 1997 and 1996,
and the related statements of operations, changes in partners' equity and cash
flows for the year then ended. These financial statements are the responsibility
of the Partnership's management. Our responsibility is to express an opinion on
these financial statements based on our audits.

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

In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Ridgewood Towers Associates as
of December 31, 1997 and 1996, and its results of operations, changes in
partners' equity and cash flows for the year then ended in conformity with
generally accepted accounting principles.

Our audits were conducted for the purpose of forming an opinion on the basic
financial statements taken as a whole. The accompanying 1997 additional
financial data (shown on pages 12 through 18) are presented for the purpose of
additional analysis and are not a required part of the basic financial
statements of the Partnership. Such information has been subjected to the
auditing procedures applied in the audit of the 1997 basic financial statements
and, in our opinion, is fairly stated in all material respects in relation to
the basic financial statements taken as a whole.





                                                                               2
<PAGE>   97


In accordance with Government Auditing Standards, we have also issued a report
dated February 12, 1998 on our consideration of the Partnership's internal
control and a report dated February 12, 1998, on its compliance with laws and
regulations.


/s/ ALTSCHULER, MELVOIN AND GLASSER LLP


Chicago, Illinois
February 12, 1998


                                                                               3


<PAGE>   98
                [ALTSCHULER, MELVOIN AND GLASSER LLP LETTERHEAD]

            INDEPENDENT AUDITORS' REPORT ON FINANCIAL STATEMENTS AND
                      ADDITIONAL FINANCIAL DATA REQUIRED BY
              THE U.S. DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT

To the Partners of
Ridgewood Towers Associates


We have audited the accompanying balance sheet of RIDGEWOOD TOWERS ASSOCIATES
(an Illinois limited partnership) , FHA Project Number 071-35254-PM, as of
December 31, 1995, and the related statements of operations, changes in
partners' equity and cash flows for the year then ended. These financial
statements are the responsibility of the Partnership's management. Our
responsibility is to express an opinion on these financial statements based on
our audit. The financial statements of Ridgewood Towers Associates as of and for
the year ended December 31, 1994, were audited by other auditors whose report
dated January 18, 1995, expressed an unqualified opinion on those statements.

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

In our opinion, the 1995 financial statements referred to above present fairly,
in all material respects, the financial position of Ridgewood Towers Associates
as of December 31, 1995, and the results of its operations, changes in partners'
equity and cash flows for the year then ended in conformity with generally
accepted accounting principles.

In accordance with Government Auditing Standards, we have also issued a report
dated January 19, 1996, on our consideration of the Partnership's internal
control structure and a report dated January 19, 1996, on its compliance with
laws and regulations.


                                                                               2


<PAGE>   99
Our audit was performed for the purpose of forming an opinion on the financial
statements taken as a whole. The additional financial data shown on pages 13
through 19 are presented for purposes of additional analysis and are not a
required part of the financial statements. Such information has been subjected
to the procedures applied in the audit of the financial statements and, in our
opinion, is fairly stated in all material respects in relation to the financial
statements taken as a whole.


/s/ ALTSCHULER, MELVOIN AND GLASSER LLP

Chicago, Illinois
January 19, 1996


                                                                              3.


<PAGE>   100
[COOPERS & LYBRAND L.L.P. LETTERHEAD]

Report of Independent Accountants


To the Partners of
Tradewinds East Associates Limited 
Dividend Housing Association:

We have audited the accompanying balance sheet of Tradewinds East Associates
Limited Dividend Housing Association (a Michigan limited partnership), MSHDA
Development No. 147, as of December 31, 1997 and the related statements of
profit and loss, partners' equity, and cash flows for the year then ended. These
financial statements are the responsibility of the Partnership's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.

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

In our opinion, such financial statements referred to above present fairly, in
all material respects, the financial position of Tradewinds East Associates
Limited Dividend Housing Association, MSHDA Development No. 147, as of December
31, 1997 and the results of its operations and its cash flows for the year then
ended, in conformity with generally accepted accounting principles.

In accordance with Government Auditing Standards, we have also issued a report
dated January 26, 1998 on our consideration of Tradewinds East Associates
Limited Dividend Housing Association's internal control structure and a report
dated January 26, 1998 on its compliance with laws and regulations.

Our audit was conducted for the purpose of forming an opinion on the basic
financial statements taken as a whole. The supplemental data included on pages
13 and 14 is presented for purpose of additional analysis and is not a required
part of the basic financial statements of Tradewinds East Associates Limited
Dividend Housing Association. This supplemental data is the responsibility of
the Partnership's management. Such information has been subjected to the
auditing procedures applied in the audit of the basic financial statements and,
in our opinion, is fairly stated, in all material respects, in relation to the
basic financial statements taken as a whole.


                                       1


<PAGE>   101
We have previously audited and expressed an unqualified opinion on the financial
statements of Tradewinds East Associates Limited Dividend Housing Association
for the years 1990 through 1995. In our opinion, the supplemental data included
on page 15, relating to the years 1990 through 1997, is fairly stated, in all
material respects, in relation to the basic financial statements from which it
has been derived. The data on page 15 for the years 1975 through 1989 was not
audited by us and, accordingly, we do not express an opinion on such data. That
data was audited by other auditors who have ceased operation and whose report,
dated January 24, 1990, stated that such information was fairly stated, in all
material respects, in relation to the basic financial statements taken as a
whole.


/s/ COOPERS & LYBRAND L.L.P.

Detroit, Michigan
January 26, 1998


                                        2


<PAGE>   102
[COOPERS & LYBRAND L.L.P. LETTERHEAD]

Report of Independent Accountants


To the Partners of
Tradewinds East Associates Limited 
Dividend Housing Association:

We have audited the accompanying balance sheet of Tradewinds East Associates
Limited Dividend Housing Association (a Michigan limited partnership), MSHDA
Development No. 147, as of December 31, 1996 and the related statements of
profit and loss, partners' equity, and cash flows for the year then ended. These
financial statements are the responsibility of the Partnership's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.

We conducted our audit in accordance with generally accepted auditing standards
and Government Auditing Standards issued by the Comptroller General of the
United States. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audit provides 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 Tradewinds East Associates
Limited Dividend Housing Association, as of December 31, 1996 and the results of
its operations and its cash flows for the year then ended, in conformity with
generally accepted accounting principles.

In accordance with Government Auditing Standards, we have also issued a report
dated January 31, 1997 on our consideration of Tradewinds East Associates
Limited Dividend Housing Association's internal control structure and a report
dated January 31, 1997 on its compliance with laws and regulations.

Our audit was conducted for the purpose of forming an opinion on the basic
financial statements taken as a whole. The supplemental data included on pages
13 and 14 is presented for purposes of additional analysis and is not a required
part of the basic financial statements of Tradewinds East Associates Limited
Dividend Housing Association. Such information has been subjected to the
auditing procedures applied in the audit of the basic financial statements and,
in our opinion, is fairly stated, in all material respects, in relation to the
basic financial statements taken as a whole.


                                       1


<PAGE>   103
We have previously audited and expressed an unqualified opinion on the financial
statements of Tradewinds East Associates Limited Dividend Housing Association
for the years 1990 through 1995. In our opinion, the supplemental data included
on page 15, relating to the years 1990 through 1996, is fairly stated, in all
material respects, in relation to the basic financial statements from which it
has been derived. The data on page 15 for the years 1975 through 1989 was not
audited by us and, accordingly, we do not express an opinion on such data. That
data was audited by other auditors who have ceased operation and whose report,
dated January 24, 1990, stated that such information was fairly stated, in all
material respects, in relation to the basic financial statements taken as a
whole.


/s/ COOPERS & LYBRAND L.L.P.

Detroit, Michigan
January 31, 1997


                                       2


<PAGE>   104
[COOPERS & LYBRAND L.L.P. LETTERHEAD]

Report of Independent Accountants

To the Partners of
Tradewinds East Associates Limited 
Dividend Housing Association:

We have audited the accompanying balance sheet of Tradewinds East Associates
Limited Dividend Housing Association (a Michigan limited partnership), MSHDA
Development No. 147, as of December 31, 1995 and the related statements of
profit and loss, partners' equity, and cash flows for the year then ended. These
financial statements are the responsibility of the Partnership's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.

We conducted our audit in accordance with generally accepted auditing standards
and Government Auditing Standards, issued by the Comptroller General of the
United States. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audit provides 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 Tradewinds East Associates
Limited Dividend Housing Association, as of December 31, 1995 and the results of
its operations and its cash flows for the year then ended, in conformity with
generally accepted accounting principles.

In accordance with Government Auditing Standards, we have also issued a report
dated January 25, 1996 on our consideration of Tradewinds East Associates
Limited Dividend Housing Association's internal control structure and a report
dated January 25, 1996 on its compliance with laws and regulations.

Our audit was conducted for the purpose of forming an opinion on the basic
financial statements taken as a whole. The supplemental data included on pages
13 and 14 is presented for purposes of additional analysis and is not a required
part of the basic financial statements of Tradewinds East Associates Limited
Dividend Housing Association. Such information has been subjected to the
auditing procedures applied in the audit of the basic financial statements and,
in our opinion, is fairly stated, in all material respects, in relation to the
basic financial statements taken as a whole.


                                       1


<PAGE>   105
We have previously audited and expressed an unqualified opinion on the financial
statements of Tradewinds East Associates Limited Dividend Housing Association
for the years 1990 through 1994. In our opinion, the supplemental data included
on page 15, relating to the years 1990 through 1995, is fairly stated, in all
material respects, in relation to the basic financial statements from which it
has been derived. The data on page 15 for the years 1975 through 1989 was not
audited by us and, accordingly, we do not express an opinion on such data. That
data was audited by other auditors who have ceased operation and whose report,
dated January 24, 1990, stated that such information was fairly stated, in all
material respects, in relation to the basic financial statements taken as a
whole.


/s/ COOPERS & LYBRAND L.L.P.

Detroit, Michigan
January 25, 1996


                                        2


<PAGE>   106
                [ALTSCHULER, MELVOIN AND GLASSER LLP LETTERHEAD]

            INDEPENDENT AUDITORS' REPORT ON FINANCIAL STATEMENTS AND
                      ADDITIONAL FINANCIAL DATA REQUIRED BY
              THE U.S. DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT

To the Partners of
Warren Heights Apartments, Ltd.

We have audited the accompanying balance sheets of WARREN HEIGHTS APARTMENTS,
LTD., FHA Project No. 042-44156-LDP (Partnership), as of December 31, 1997 and
1996, and the related statements of operations, changes in partners' equity and
cash flows for the years then ended. These financial statements are the
responsibility of the Partnership's management. Our responsibility is to express
an opinion on these financial statements based on our audits.

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

In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Warren Heights Apartments,
Ltd., as of December 31, 1997 and 1996, and its results of operations and cash
flows for the years then ended in conformity with generally accepted accounting
principles.


                                                                               2


<PAGE>   107
Our audits were conducted for the purpose of forming an opinion on the basic
financial statements taken as a whole. The accompanying 1997 additional
financial data (shown on pages 13 through 19) are presented for the purpose of
additional analysis and are not a required part of the basic financial
statements of the Partnership. Such information has been subjected to the
auditing procedures applied in the audit of the 1997 basic financial statements
and, in our opinion, is fairly stated in all material respects in relation to
the basic financial statements taken as a whole.

In accordance with Government Auditing Standards, we have also issued a report
dated February 13, 1997 on our consideration of the Partnership's internal
control and a report dated February 13, 1997, on its compliance with laws and
regulations.


/s/ ALTSCHULER, MELVOIN AND GLASSER LLP

Chicago, Illinois
February 13, 1998


                                                                               3


<PAGE>   108
                [ALTSCHULER, MELVOIN AND GLASSER LLP LETTERHEAD]

            INDEPENDENT AUDITORS' REPORT ON FINANCIAL STATEMENTS AND
                      ADDITIONAL FINANCIAL DATA REQUIRED BY
              THE U.S. DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT

To the Partners of
Warren Heights Apartments, Ltd.


We have audited the accompanying balance sheet of WARREN HEIGHTS APARTMENTS,
LTD. (an Ohio limited partnership), FHA Project Number 042-44156-LDP (the
"Partnership"), as of December 31, 1995, and the related statements of
operations, changes in partners' equity and cash flows for the year then ended.
These financial statements are the responsibility of the Partnership's
management. Our responsibility is to express an opinion on these financial
statements based on our audit. The Partnership's financial statements as of and
for the year ended December 31, 1994 were audited by other auditors whose report
dated January 19, 1995, expressed an unqualified opinion on those statements.

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

In our opinion, the 1995 financial statements referred to above present fairly,
in all material respects, the financial position of Warren Heights Apartments,
Ltd. as of December 31, 1995, and the results of its operations, changes in
partners, equity and cash flows for the year then ended in conformity with
generally accepted accounting principles.

In accordance with Government Auditing Standards, we have also issued a report
dated February 2, 1996, on our consideration of the Partnership's internal
control structure and a report dated February 2, 1996, on its compliance with
laws and regulations.


                                       2.



<PAGE>   109
Our audit was performed for the purpose of forming an opinion on the financial
statements taken as a whole. The additional financial data required by the U.S.
Department of Housing and Urban Development shown on pages 13 through 19 are
presented for purposes of additional analysis and are not a required part of the
financial statements. Such information has been subjected to the procedures
applied in the audit of the financial statements and, in our opinion, is fairly
stated in all material respects in relation to the financial statements taken as
a whole.


/s/ ALTSCHULER, MELVOIN AND GLASSER LLP

Chicago, Illinois
February 2, 1996


                                                                              3.


<PAGE>   110
                [ALTSCHULER, MELVOIN AND GLASSER LLP LETTERHEAD]

            INDEPENDENT AUDITORS' REPORT ON FINANCIAL STATEMENTS AND
                      ADDITIONAL FINANCIAL DATA REQUIRED BY
              THE U.S. DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT

To the Partners of
White Cliff Apartments, Ltd.

We have audited the balance sheets of WHITE CLIFF APARTMENTS, LTD., FHA Project
No. 046-35409-LDP (Partnership), as of December 31, 1997 and 1996, and the
related statements of operations, changes in partners' equity and cash flows for
the years then ended. These financial statements are the responsibility of the
Partnership's management. Our responsibility is to express an opinion on these
financial statements based on our audits.

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

In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of White Cliff Apartments, Ltd.,
as of December 31, 1997 and 1996, and its results of operations, changes in
partners' equity and cash flows for the years then ended in conformity with
generally accepted accounting principles.

Our audits were conducted for the purpose of forming an opinion on the basic
financial statements taken as a whole. The accompanying 1997 additional
financial data (shown on pages 14 through 18) are presented for the purpose of
additional analysis and are not a required part of the basic financial
statements of the Partnership. Such information has been subjected to the
auditing procedures applied in the audit of the 1997 basic financial statements
and, in our opinion, is fairly stated in all material respects in relation to
the basic financial statements taken as a whole.


                                                                               2


<PAGE>   111
In accordance with Government Auditing Standards, we have also issued a report
dated February 10, 1998 on our consideration of the Partnership's internal
control and a report dated February 10, 1998, on its compliance with laws and
regulations.


/s/ ALTSCHULER, MELVOIN AND GLASSER LLP

Chicago, Illinois
February 10, 1998


                                                                               3


<PAGE>   112
                [ALTSCHULER, MELVOIN AND GLASSER LLP LETTERHEAD]

            INDEPENDENT AUDITORS' REPORT ON FINANCIAL STATEMENTS AND
                      ADDITIONAL FINANCIAL DATA REQUIRED BY
              THE U.S. DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT

To the Partners of
White Cliff Apartments, Ltd.


We have audited the accompanying balance sheet of WHITE CLIFF APARTMENTS, LTD.
(an Ohio limited partnership) , FHA Project Number 046-35409-LDP, (the
"Partnership") as of December 31, 1995, and the related statements of
operations, changes in partners' equity and cash flows for the year then ended.
These financial statements are the responsibility of the Partnership's
management. Our responsibility is to express an opinion on these financial
statements based on our audit. The financial statements of White Cliff
Apartments, Ltd. as of and for the year ended December 31, 1994 were audited by
other auditors whose report dated January 19, 1995, expressed an unqualified
opinion on those statements.

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

In our opinion, the 1995 financial statements referred to above present fairly,
in all material respects, the financial position of White Cliff Apartments, Ltd.
at December 31, 1995, and the results of its operations, changes in partners'
equity and cash flows for the year then ended in conformity with generally
accepted accounting principles.

In accordance with Government Auditing Standards, we have also issued a report
dated February 2, 1996, on our consideration of the Partnership's internal
control structure and a report dated February 2, 1996, on its compliance with
laws and regulations.


                                                                              2.


<PAGE>   113
Our audit was performed for the purpose of forming an opinion on the financial
statements taken as a whole. The additional financial data shown on pages 13
through 19 are presented for purposes of additional analysis and are not a
required part of the financial statements. Such information has been subjected
to the procedures applied in the audit of the financial statements and, in our
opinion, is fairly stated in all material respects in relation to the financial
statements taken as a whole.


/s/ ALTSCHULER, MELVOIN AND GLASSER LLP

Chicago, Illinois
February 2, 1996


                                                                              3.


<PAGE>   114
                [ALTSCHULER, MELVOIN AND GLASSER LLP LETTERHEAD]

            INDEPENDENT AUDITORS' REPORT ON FINANCIAL STATEMENTS AND
                      ADDITIONAL FINANCIAL DATA REQUIRED BY
              THE U.S. DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT


To the Partners of
Yorkview Estates, Ltd.

We have audited the accompanying balance sheets of YORKVIEW ESTATES, LTD., FHA
Project No. 042-44151-LDP, as of December 31, 1997 and 1996, and the related
statements of operations, changes in partners' equity and cash flows for the
years then ended. These financial statements are the responsibility of the
Partnership's management. Our responsibility is to express an opinion on these
financial statements based on our audits.

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

In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Yorkview Estates, Ltd., as of
December 31, 1997 and 1996, and its results of operations and cash flows for the
years then ended in conformity with generally accepted accounting principles.


                                                                               2


<PAGE>   115

Our audits were conducted for the purpose of forming an opinion on the basic
financial statements taken as a whole. The accompanying 1997 additional
financial data (shown on pages 12 through 18) are presented for the purpose of
additional analysis and are not a required part of the basic financial
statements of the Partnership. Such information has been subjected to the
auditing procedures applied in the audit of the 1997 basic financial statements
and, in our opinion, is fairly stated in all material respects in relation to
the basic financial statements taken as a whole.

In accordance with Government Auditing Standards, we have also issued a report
dated February 4, 1998 on our consideration of the Partnership's internal
control and a report dated February 4, 1998, on its compliance with laws and
regulations.


/s/ ALTSCHULER, MELVOIN AND GLASSER LLP

Chicago, Illinois
February 4, 1998


                                                                               3


<PAGE>   116
                [ALTSCHULER, MELVOIN AND GLASSER LLP LETTERHEAD]

            INDEPENDENT AUDITORS' REPORT ON FINANCIAL STATEMENTS AND
                      ADDITIONAL FINANCIAL DATA REQUIRED BY
              THE U.S. DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT

To the Partners of
Yorkview Estates, Ltd.


We have audited the accompanying balance sheet of YORKVIEW ESTATES, LTD. (an
Ohio limited partnership), FHA Project Number 042-44151-LDP, (the
"Partnership") as of December 31, 1995, and the related statements of
operations, changes in partners' equity and cash flows for the year then ended.
These financial statements are the responsibility of the Partnership's
management. Our responsibility is to express an opinion on these financial
statements based on our audit. The financial statements of Yorkview Estates,
Ltd. as of and for the year ended December 31, 1994, were audited by other
auditors whose report dated January 19, 1995, expressed an unqualified opinion
on those statements.

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

In our opinion, the 1995 financial statements referred to above present fairly,
in all material respects, the financial position of Yorkview Estates, Ltd. as of
December 31, 1995, and the results of its operations, changes in partners'
equity and cash flows for the year then ended in conformity with generally
accepted accounting principles.

In accordance with Government Auditing Standards, we have also issued a report
dated February 2, 1996, on our consideration of the Partnership's internal
control structure and a report dated February 2, 1996, on its compliance with
laws and regulations.


                                                                              2.


<PAGE>   117
Our audit was performed for the purpose of forming an opinion on the financial
statements taken as a whole. The additional financial data shown on pages 13
through 19 are presented for purposes of additional analysis and are not a
required part of the financial statements. Such information has been subjected
to the procedures applied in the audit of the financial statements and, in our
opinion, is fairly stated in all material respects in relation to the financial
statements taken as a whole.


/s/ ALTSCHULER, MELVOIN AND GLASSER LLP

Chicago, Illinois
February 2, 1996


                                                                              3.

<PAGE>   118
                       REAL ESTATE ASSOCIATES LIMITED VII
                       (A CALIFORNIA LIMITED PARTNERSHIP)

                                 BALANCE SHEETS

                           DECEMBER 31, 1997 AND 1996

                                     ASSETS


<TABLE>
<CAPTION>
                                                            1997                1996
                                                        ------------        ------------
<S>                                                     <C>                 <C>         
INVESTMENTS IN LIMITED PARTNERSHIPS (Note 2)            $ 16,870,487        $ 17,873,759

        CASH                                                 447,200             342,631

OTHER ASSETS                                                 105,129             105,129
                                                        ------------        ------------

TOTAL ASSETS                                            $ 17,422,816        $ 18,321,519
                                                        ============        ============


                LIABILITIES AND PARTNERS' DEFICIENCY

LIABILITIES:
Notes payable (Note 3)                                  $ 24,869,501        $ 24,869,501
Accrued interest payable (Note 3)                         26,152,645          24,393,044
Accrued fees and expenses
  due general partner (Note 4)                             3,762,494           3,213,854
Accounts payable and other liabilities                       116,312              22,582
                                                        ------------        ------------

                                                          54,900,952          52,498,981
                                                        ------------        ------------

COMMITMENTS AND CONTINGENCIES (Notes 4 and 5)

PARTNERS' DEFICIENCY:
General partners                                            (697,912)           (664,905)
Limited partners                                         (36,780,224)        (33,512,557)
                                                        ------------        ------------

                                                         (37,478,136)        (34,177,462)
                                                        ------------        ------------
TOTAL LIABILITIES AND PARTNERS'
  DEFICIENCY                                            $ 17,422,816        $ 18,321,519
                                                        ============        ============
</TABLE>


   The accompanying notes are an integral part of these financial statements.


<PAGE>   119
                       REAL ESTATE ASSOCIATES LIMITED VII
                       (A CALIFORNIA LIMITED PARTNERSHIP)

                            STATEMENTS OF OPERATIONS
              FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995


<TABLE>
<CAPTION>
                                                          1997               1996               1995
                                                      -----------        -----------        -----------
<S>                                                   <C>                <C>                <C>        
REVENUE:
     Interest income                                  $    15,330        $    15,911        $    20,741
                                                      -----------        -----------        -----------

OPERATING EXPENSES:
     Interest (Note 3)                                  2,344,792          2,320,842          2,323,426
     Management fees - general partner (Note 4)           743,640            743,640            743,640
     General and administrative (Note 4)                  289,898            103,194            106,227
     Legal and accounting                                 109,967             88,801             81,534
                                                      -----------        -----------        -----------

                                                        3,488,297          3,256,477          3,254,827
                                                      -----------        -----------        -----------

LOSS FROM OPERATIONS                                   (3,472,967)        (3,240,566)        (3,234,086)

DISTRIBUTIONS FROM LIMITED
     PARTNERSHIP RECOGNIZED
     AS INCOME (Note 2)                                   234,084             63,515             19,632

EQUITY IN LOSS OF LIMITED
     PARTNERSHIPS AND AMORTIZATION
     OF ADDITIONAL BASIS AND
     ACQUISITION COSTS (Note 2)                           (61,791)          (243,392)          (511,033)
                                                      -----------        -----------        -----------

NET LOSS                                              $(3,300,674)       $(3,420,443)       $(3,725,487)
                                                      ===========        ===========        ===========

NET LOSS PER LIMITED PARTNERSHIP
     INTEREST                                         $      (159)       $      (164)       $      (179)
                                                      ===========        ===========        ===========
</TABLE>


   The accompanying notes are an integral part of these financial statements.


<PAGE>   120
                       REAL ESTATE ASSOCIATES LIMITED VII
                       (A CALIFORNIA LIMITED PARTNERSHIP)

                       STATEMENTS OF PARTNERS' DEFICIENCY
              FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995


<TABLE>
<CAPTION>
                                        General            Limited
                                       Partners            Partners             Total
                                     ------------        ------------        ------------
<S>                                  <C>                 <C>                 <C>          
DEFICIENCY, January 1, 1995          $   (593,446)       $(26,438,086)       $(27,031,532)

    Net loss for 1995                     (37,255)         (3,688,232)         (3,725,487)
                                     ------------        ------------        ------------

DEFICIENCY, December 31,. 1995           (630,701)        (30,126,318)        (30,757,019)

    Net loss, 1996                        (34,204)         (3,386,239)         (3,420,443)
                                     ------------        ------------        ------------

DEFICIENCY, December 31, 1996            (664,905)        (33,512,557)        (34,177,462)

    Net loss, 1997                        (33,007)         (3,267,667)         (3,300,674)
                                     ------------        ------------        ------------

DEFICIENCY, December 31, 1997        $   (697,912)       $(36,780,224)       $(37,478,136)
                                     ============        ============        ============
</TABLE>


   The accompanying notes are an integral part of these financial statements.


<PAGE>   121
                       REAL ESTATE ASSOCIATES LIMITED VII
                       (A CALIFORNIA LIMITED PARTNERSHIP)

                            STATEMENTS OF CASH FLOWS
              FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995


<TABLE>
<CAPTION>
                                                                   1997               1996               1995
                                                               -----------        -----------        -----------
<S>                                                            <C>                <C>                <C>         
CASH FLOWS FROM OPERATING ACTIVITIES:
         Net  loss                                             $(3,300,674)       $(3,420,443)       $(3,725,487)
      Adjustments to reconcile net loss to net cash
      used in operating activities:
      Equity in loss of limited partnerships
        and amortization of additional basis
        and acquisition costs                                       61,791            243,392            511,033
      Decrease (increase) in other assets                             --                 --              (75,561)
      Increase in accrued interest payable                       1,759,601          1,965,517          1,913,055
      Increase in accrued fees and expenses
        due general partner                                        548,640            583,640            588,640
      Increase (decrease) in accounts payable
        and other liabilities                                       93,730              9,063             (3,582)
                                                               -----------        -----------        -----------

      Net cash used in operating activities                       (836,912)          (618,831)          (791,902)
                                                               -----------        -----------        -----------

CASH FLOWS FROM INVESTING ACTIVITIES:
      Maturity of short term investments                              --              125,000               --
      Distributions from limited partnerships recognized
        as a return of capital                                     966,260            499,766            649,950
      Capital contributions to limited partnerships                (24,779)           (15,956)            (4,350)
                                                               -----------        -----------        -----------

      Net cash provided by investing activities                    941,481            608,810            645,600
                                                               -----------        -----------        -----------

NET INCREASE (DECREASE) IN CASH                                    104,569            (10,021)          (146,302)

CASH, BEGINNING OF YEAR                                            342,631            352,652            498,954
                                                               -----------        -----------        -----------

CASH, END OF YEAR                                              $   447,200        $   342,631        $   352,652
                                                               ===========        ===========        ===========

SUPPLEMENTAL DISCLOSURE OF
   CASH FLOW INFORMATION
      CASH PAID DURING THE YEAR FOR INTEREST                   $   585,191        $   355,325        $   410,370
                                                               ===========        ===========        ===========
</TABLE>


   The accompanying notes are an integral part of these financial statements.


<PAGE>   122

                       REAL ESTATE ASSOCIATES LIMITED VII
                       (a California limited partnership)

                          NOTES TO FINANCIAL STATEMENTS
                                DECEMBER 31, 1997

1.     SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

        ORGANIZATION

        Real Estate Associates Limited VII (the "Partnership") was formed under
        the California Limited Partnership Act on May 24, 1983. The Partnership
        was formed to invest primarily in other limited partnerships or joint
        ventures which own and operate primarily federal, state or local
        government-assisted housing projects. The general partners are Coast
        Housing Investments Associates, a limited partnership and National
        Partnership Investments Corp. (NAPICO) a wholly owned subsidiary of
        Casden Investments Corporation, the corporate general partner, and
        National Partnership Investments Associates II (NAPIA II), a limited
        partnership. The business of Real III is conducted primarily by NAPICO.
        Casden Investment Corporation owns 100 percent of NAPICO's stock. The
        general partner of NAPIA II is NAPICO.

        These financial statements include the accounts of Real Estate
        Associates Limited VII and Real Estate Associates IV ("REA IV"), a
        California general partnership in which the Partnership holds a 99
        percent general partner interest. Losses in excess of the minority
        interest in equity that would otherwise be attributed to the minority
        interest are being allocated to the Partnership.

        The Partnership issued 5,200 units of limited partnership interests
        through a public offering. Each unit was comprised of two limited
        partnership interests and two warrants granting the investor the right
        to purchase two additional limited partnership interests. An additional
        10,400 interests associated with warrants were exercised. The general
        partners have a 1 percent interest in profits and losses of the
        Partnership. The limited partners have the remaining 99 percent interest
        in proportion to their respective investments.

        The Partnership shall be dissolved only upon the expiration of 50
        complete calendar years (December 31, 2033) from the date of the
        formation of the Partnership or the occurrence of various other events
        as specified in the Partnership agreement.

        Upon total or partial liquidation of the Partnership or the disposition
        or partial disposition of a project or project interest and distribution
        of the proceeds, the general partners will be entitled to a liquidation
        fee as stipulated in the Partnership agreement. The limited partners
        will have a priority return equal to their invested capital attributable
        to the project(s) or project interest(s) sold and shall receive from the
        sale of the project(s) or project interest(s) an amount sufficient to
        pay state and federal income taxes, if any, calculated at the maximum
        rate then in effect. The general partners' fee may accrue but shall not
        be paid until the limited partners have received distributions equal to
        100 percent of their capital contributions.

        USES OF ESTIMATES

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


                                       5


<PAGE>   123
                       REAL ESTATE ASSOCIATES LIMITED VII
                       (a California limited partnership)

                    NOTES TO FINANCIAL STATEMENTS (CONTINUED)
                                DECEMBER 31, 1997

1.     SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)



        METHOD OF ACCOUNTING FOR INVESTMENTS IN LIMITED PARTNERSHIPS

        The investments in limited partnerships are accounted for on the equity
        method. Acquisition, selection and other costs related to the
        acquisition of the projects have been capitalized as part of the
        investment account and are being amortized on a straight line basis over
        the estimated lives of the underlying assets, which is generally 30
        years.

        NET LOSS PER LIMITED PARTNERSHIP INTEREST

        Net loss per limited partnership interest was computed by dividing the
        limited partners' share of net loss by the number of limited partnership
        interests outstanding during the year. The number of limited partnership
        interests was 20,802 for all years presented.

        SHORT TERM INVESTMENTS

        Short term investments consist of bank certificates of deposit with
        original maturities ranging from more than three months to twelve
        months. The fair value of these securities, which have been classified
        as held for sale, approximates their carrying value.

        IMPAIRMENT OF LONG-LIVED ASSETS

        The Partnership reviews long-lived assets to determine if there has been
        any permanent impairment whenever events or changes in circumstances
        indicate that the carrying amount of the asset may not be recoverable.
        If the sum of the expected future cash flows is less than the carrying
        amount of the assets, the Partnership recognizes an impairment loss.

2.     INVESTMENTS IN LIMITED PARTNERSHIPS

        The Partnership holds limited partnership interests in 31 limited
        partnerships. In addition, the Partnership holds a general partner
        interest in REA IV. NAPICO is also the general partner in REA IV. REA
        IV, in turn, holds limited partner interests in 16 additional limited
        partnerships. In total, therefore, the Partnership holds interests,
        either directly or indirectly through REA IV, in 47 partnerships all of
        which own residential low income rental projects consisting of 4,690
        apartment units. The mortgage loans of these projects are payable to or
        insured by various governmental agencies.

        The Partnership, as a limited partner, is entitled to between 93 percent
        and 99 percent of the profits and losses in the limited partnerships it
        has invested in directly. The Partnership is also entitled to 99 percent
        of the profits and losses of REA IV. REA IV holds a 99 percent interest
        in each of the limited partnerships in which it has invested.

        Equity in losses of limited partnerships is recognized in the financial
        statements until the limited partnership investment account is reduced
        to a zero balance. Losses incurred after the limited partnership
        investment account is reduced to zero are not recognized. The cumulative
        amount of the unrecognized



                                       6
<PAGE>   124
                       REAL ESTATE ASSOCIATES LIMITED VII
                       (a California limited partnership)

                    NOTES TO FINANCIAL STATEMENTS (CONTINUED)
                                DECEMBER 31, 1997

2.     INVESTMENTS IN LIMITED PARTNERSHIPS (CONTINUED)

        equity in losses of certain unconsolidated limited partnerships was
        approximately $8,901,000 and $8,129,000 as of December 31, 1997 and
        1996, respectively.

        Distributions from the limited partnerships are accounted for as a
        return of capital until the investment balance is reduced to zero.
        Subsequent distributions received are recognized as income.

        The following is a summary of the investments in limited partnerships
        and reconciliation to the limited partnership accounts:


<TABLE>
<CAPTION>
                                                         1997                1996
                                                    ------------        ------------
<S>                                                 <C>                 <C>         
Investment balance, beginning of year               $ 17,873,759        $ 18,600,961
Cash distributions recognized as
  a return of capital                                   (966,260)           (499,766)
Equity in loss of limited partnerships                   129,945             (51,136)
Amortization of additional basis and
  capitalized acquisition costs and fees                (191,736)           (192,256)
Capital contributions to limited partnerships             24,779              15,956
                                                    ------------        ------------
Investment balance, end of year                     $ 16,870,487        $ 17,873,759
                                                    ============        ============
</TABLE>


        The difference between the investment per the accompanying balance
        sheets at December 31, 1997 and 1996, and the equity per the limited
        partnerships' combined financial statements is due primarily to
        cumulative unrecognized equity in losses of certain limited
        partnerships, additional basis and costs capitalized to the investment
        account and cumulative distributions recognized as income.

        Selected financial information from the combined financial statements at
        December 31, 1997 and 1996 and for each of the three years in the period
        ended December 31, 1997, of the limited partnerships in which the
        Partnership has invested directly or indirectly, is as follows:


                                 Balance Sheets


<TABLE>
<CAPTION>
                                                     1997            1996
                                                   --------        --------
                                                        (in thousands)
<S>                                                <C>             <C>     
Land and buildings, net                            $ 72,596        $ 79,208
                                                   ========        ========

Total assets                                       $ 93,230        $ 96,894
                                                   ========        ========

Mortgages loan payable                             $ 72,899        $ 75,690
                                                   ========        ========

Total liabilities                                  $ 92,672        $ 95,054
                                                   ========        ========

Equity of Real Estate Associates Limited VII       $  1,212        $  2,612
                                                   ========        ========

Deficiency of other partners                       $   (654)       $   (772)
                                                   ========        ========
</TABLE>


                                        7


<PAGE>   125
                       REAL ESTATE ASSOCIATES LIMITED VII
                       (a California limited partnership)

                    NOTES TO FINANCIAL STATEMENTS (CONTINUED)
                                DECEMBER 31, 1997

2.      INVESTMENT IN LIMITED PARTNERSHIPS (CONTINUED)

                            Statements of Operations


<TABLE>
<CAPTION>
                                              1997            1996           1995
                                            --------        --------        --------
                                                         (in thousands)
<S>                                         <C>             <C>             <C>     
Total revenue                               $ 28,267        $ 27,858        $ 27,145
                                            ========        ========        ========

Interest expense                            $  4,078        $  4,068        $  3,503
                                            ========        ========        ========

Depreciation                                $  5,512        $  5,472        $  6,596
                                            ========        ========        ========

Total expenses                              $ 29,362        $ 29,519        $ 28,768
                                            ========        ========        ========

Net loss                                    $ (1,095)       $ (1,661)       $ (1,623)
                                            ========        ========        ========

Net loss allocable to the Partnership       $   (441)       $ (1,642)       $ (1,606)
                                            ========        ========        ========
</TABLE>


      Land and buildings above have been adjusted for the amount by which the
      investments in the limited partnerships exceed the Partnership's share of
      the net book value of the underlying net assets of the investee which are
      recorded at historical costs. Depreciation on the adjustment is provided
      for over the estimated remaining useful lives of the properties.

      An affiliate of NAPICO is the general partner in 26 of the limited
      partnerships included above, and another affiliate receives property
      management fees of approximately 5 to 6 percent of the revenue from three
      of these partnerships. The affiliate received property management fees of
      $117,571, $116,995 and $116,175 in 1997, 1996 and 1995, respectively. The
      following sets forth the significant data for these partnerships in which
      an affiliate of NAPICO was the general partner, reflected in the
      accompanying financial statements using the equity method of accounting:


<TABLE>
<CAPTION>
                                                         1997            1996            1995
                                                       --------        --------        --------
                                                                   (in thousands)
<S>                                                    <C>             <C>             <C>     
Total assets                                           $ 39,068        $ 40,934
                                                       ========        ========

Total liabilities                                      $ 50,465        $ 50,671
                                                       ========        ========

Deficiency of Real Estate Associates Limited VII       $(11,088)       $ (9,442)
                                                       ========        ========

Deficiency of other partners                           $   (309)       $   (295)
                                                       ========        ========

Total revenue                                          $ 12,950        $ 12,785        $ 12,311
                                                       ========        ========        ========

Net loss                                               $ (1,240)       $ (1,141)       $ (1,262)
                                                       ========        ========        ========
</TABLE>


                                        8


<PAGE>   126
      Under recent adopted law and policy, HUD has determined not to renew HAP
      Contracts on a long term basis on the existing terms. In connection with
      renewals of the HAP Contracts under such new law and policy, the amount of
      rental assistance payments under renewed HAP Contracts will be based on
      market rentals instead of above market rentals, which was generally the
      case under existing HAP Contracts. As a result, existing HAP Contracts
      that are renewed in the future on projects insured by the FHA will not
      provide sufficient cash flow to permit owners of properties to meet the
      debt service requirements of these existing FHA-insured mortgages. In
      order to address the reduction in payments under HAP Contracts as a result
      of this new policy, the Multi-family Assisted Housing Reform and
      Affordability Act of 1997 (the "MAHRAA"), which was adopted in October
      1997, provides for the restructuring of mortgage loans insured by the FHA
      with respect to properties subject to HAP Contracts that have been renewed
      under the new policy. The restructured loans will be held by the current
      lender or another lender. Under MAHRAA, an FHA-insured mortgage loan can
      be restructured to reduce the annual debt service on such loan. There can
      be no assurance that the Partnership will be permitted to restructure its
      mortgage indebtedness pursuant to the new HUD rules implementing MAHRAA or
      that the Partnership would choose to restructure such mortgage
      indebtedness if it were eligible to participate in the MAHRAA program. It
      should be noted that there are uncertainties as to the economic impact on
      the Partnership of the combination of the reduced payments under the HAP
      Contracts and the restructuring of the existing FHA-insured mortgage loans
      under MAHRAA. Accordingly, the General Partners are unable to predict with
      certainty their impact on the Partnership's future cash flow.

      As a result of the foregoing, the Partnership is undergoing an extensive
      review of disposition, refinancing or re-engineering alternatives for the
      properties in which the limited partnerships have invested and are subject
      to HUD mortgage and rental subsidy programs. The Partnership has incurred
      expenses in connection with this review by various third party
      professionals, including accounting, legal, valuation, structural and
      engineering costs, which amounted to $167,778 for the year ended December
      31, 1997.

      A real estate investment trust ("REIT") organized by an affiliate of
      NAPICO has advised the Partnership that it intends to make a proposal to
      purchase from the Partnership certain of the limited partnership interests
      held for investment by the Partnership.




                                        9


<PAGE>   127

                       REAL ESTATE ASSOCIATES LIMITED VII
                       (a California limited partnership)

                    NOTES TO FINANCIAL STATEMENTS (CONTINUED)
                                DECEMBER 31, 1997

2.    INVESTMENT IN LIMITED PARTNERSHIPS (Continued)

      The REIT proposes to purchase such limited partner interests for cash,
      which it plans to raise in connection with a private placement of its
      equity securities. The purchase is subject to, among other things, (i)
      consummation of such private placement by the REIT; (ii) the purchase of
      the general partner interests in the local limited partnerships by the
      REIT; (iii) the approval of HUD and certain state housing finance
      agencies; (iv) the consent of the limited partners to the sale of the
      local limited partnership interests held for investment by REAL VII; and
      (v) the consummation of a minimum number of purchase transactions with
      other Casden affiliated partnerships. As of March 31, 1998, the REIT had
      completed buy-out negotiations with a majority of the general partners of
      the local limited partnerships.

      A proxy is contemplated to be sent to the limited partners setting forth
      the terms and conditions of the purchase of the limited partners'
      interests held for investment by the Partnership, together with certain
      amendments to the Partnership Agreement and other disclosures of various
      conflicts of interest in connection with the transaction.

3.    NOTES PAYABLE

      Certain of the Partnership's investments involved purchases of partnership
      interests from partners who subsequently withdrew from the operating
      partnership. The Partnership is obligated on non-recourse notes payable of
      $24,869,501, bearing interest at 9.5 percent, to the sellers of the
      partnership interests. The notes have principal maturity dates ranging
      from August 1999 to December 2002 or upon sale or refinancing of the
      underlying partnership properties. These obligations and related interest
      are collateralized by the Partnership's investments in the investee
      limited partnerships and are payable only out of cash distributions from
      the investee partnerships, as defined in the notes. Unpaid interest is due
      at maturity of the notes.

      The partnership is currently negotiating with the respective noteholders
      to obtain extensions, reductions in interest rate and principal
      reductions. There is no assurance that these properties will not be lost
      to foreclosure.

      Maturity dates on the notes and related accrued interest payable are as
      follows:


      <TABLE>
      <CAPTION>
                                                            Accrued
      Years Ending December 31,                 Notes       Interest
                                             -----------   -----------
      <S>                                    <C>           <C>        
      1997                                   $        --   $        --
      1998
      1999                                    18,059,000    17,358,918
      2000
      2001                                     4,595,000     4,837,648
      Thereafter                               2,215,501     2,196,478
                                             -----------   -----------
                                             $24,869,501   $24,393,044
                                             ===========   ===========
      </TABLE>


4.    FEES AND EXPENSES DUE GENERAL PARTNER

      Under the terms of the Restated Certificate and Agreement of Limited
      Partnership, the Partnership is obligated to NAPICO for an annual
      management fee equal to .5 percent of the original invested assets of the
      partnerships. Invested assets is defined as the costs of acquiring project
      interests, including the proportionate amount of the mortgage loans
      related to the Partnership's interest in the capital accounts of the
      respective partnerships.



                                       10


<PAGE>   128
4.    FEES AND EXPENSES DUE GENERAL PARTNER

      As of December 31, 1997, the fees and expenses due the general partner
      exceeded the Partnership's cash. The general partners, during the
      forthcoming year, will not demand payment of amounts due in excess of such
      cash or such that the Partnership would not have sufficient operating
      cash; however, the Partnership will remain liable for all such amounts.

      The Partnership reimburses NAPICO for certain expenses. The reimbursement
      to NAPICO was $46,975, $43,124 and $39,900 in 1997, 1996 and 1995,
      respectively, and is included in operating expenses.

5.    CONTINGENCIES

      The corporate general partner of the Partnership and the Partnership are
      involved in various lawsuits arising from transactions in the ordinary
      course of business. In the opinion of management and the corporate general
      partner, the claims will not result in any material liability to the
      Partnership.

6.    INCOME TAXES

      No provision has been made for income taxes in the accompanying financial
      statements since such taxes, if any, are the liability of the individual
      partners. The major differences in tax and financial reporting result from
      the use of different bases and depreciation methods for the properties
      held by the limited partnerships. Differences in tax and financial
      reporting also arise as losses are not recognized for financial reporting
      purposes when the investment balance has been reduced to zero.

7.     FAIR VALUE OF FINANCIAL INSTRUMENTS

      Statement of Financial Accounting Standards No. 107, "Disclosure about
      Fair Value of Financial Instruments," requires disclosure of fair value
      information about financial instruments, when it is practicable to
      estimate that value. The notes payable are collateralized by the
      Partnership's investments in investee limited partnerships and are payable
      only out of cash distributions from the investee partnerships. The
      operations generated by the investee limited partnerships, which account
      for the Partnership's primary source of revenues, are subject to various
      government rules, regulations and restrictions which make it impracticable
      to estimate the fair value of the notes payable and related accrued
      interest and amounts due general partner. The carrying amount of other
      assets and liabilities reported on the balance sheets that require such
      disclosure approximates fair value due to their short-term maturity.




                                       11
<PAGE>   129


8.    FOURTH-QUARTER ADJUSTMENT

      The Partnership's policy is to record its equity in the loss of limited
      partnerships on a quarterly basis, using estimated financial information
      furnished by the various local operating general partners. The equity in
      loss of limited partnerships reflected in the accompanying annual
      financial statements is based primarily upon audited financial statements
      of the investee limited partnerships. The decrease of approximately
      $106,000 between the estimated nine-month equity in loss and the actual
      1997 year end equity in loss has been recorded in the fourth quarter.




                                       12
<PAGE>   130
                                                                        SCHEDULE

                       REAL ESTATE ASSOCIATES LIMITED VII
                       INVESTMENTS IN LIMITED PARTNERSHIPS
                  YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995


<TABLE>
<CAPTION>
                                                         Year Ended December 31, 1997
                             ----------------------------------------------------------------------------------------
                                                                       Cash                 Equity
                              Balance                                Distri-                    in         Balance
                              January                 Capital        butions                Income         December
Limited Partnerships          1, 1997           Contributions        Received               (Loss)         31, 1997
--------------------         -----------        -------------       -----------        -----------        -----------
<S>                          <C>                <C>                 <C>                <C>                <C>        
Anthracite Apts.             $ 1,053,910        $                   $   (25,948)       $    26,494        $ 1,054,456
Aristocrat Manor                 496,521                                                   (68,471)           428,050
Arkansas City Apts.
Arrowsmith Apts.                 372,420                                (55,000)           (17,206)           300,214
Ashland Manor                                           1,483            (1,483)
Bangor House                   1,684,384                               (296,478)            97,618          1,485,524
Bellair Manor Apts.              259,346                                 (1,826)           (27,980)           229,540
Birch Manor I                                           1,149            (1,149)
Birch Manor II
Bluewater Apts.                1,866,348                                (13,502)            85,731          1,938,577
Center CIty Apts.              2,345,638                                (36,470)           200,499          2,509,667
Clarkwood Apts. I                                       1,696            (1,696)
Clarkwood Apts. II                                      3,173            (3,173)
Cleveland I                       52,481                                (35,008)            (2,138)            15,335
Cleveland II                      78,823                                (20,389)           (27,319)            31,115
Cleveland III
Danbury Park Manor
Desoto Apts.                     109,159                                (26,303)            (3,953)            78,903
Dexter Apts.                      63,571                                (28,783)           (24,376)            10,412
Edgewood Terrace II              664,034                                (16,279)          (184,686)           463,069
Goodlette Arms Apts.           2,429,091                                 (1,485)            31,081          2,458,687
Hampshire House Apts.
Henrico Arms
Ivywood Apts.                    306,172                                    (32)           (52,192)           253,948
Jasper County
King Towers                      239,612                                 (2,266)           (30,232)           207,114
Meherrin Landings
Nantucket Apts.                  237,051                                 (3,066)            (9,732)           224,253
Newton Apts.
Oak Hill I                       103,548                                                   (57,996)            45,552
Oakview Apts.
Oakwood Park I                                            786              (786)
Oakwood Park II                                           171              (171)
Pachuta Apts.
Parkway Towers                 1,823,359                                (16,537)           182,429          1,989,251
Pebbleshire Apts.                                       9,840            (9,840)
Pinebrook Apts.                  770,843                                                    15,192            786,035
Rand Grove Village               229,394                                (24,284)          (205,110)                 0
Richards Park Apts.                                     2,992            (2,992)
Ridgewood Towers                 564,681                               (312,501)           104,571            356,751
Shubuta Properties
South Glen Apts.
South Park Apts.                                        3,489            (3,489)
Sunland Terrace
Tradewinds East Apts.          1,586,724                                (19,388)             8,320          1,575,656
Warren Heights Apts. II          242,208                                   (519)           (46,579)           195,110
White Cliffs Apts.               170,432                                 (3,172)           (37,811)           129,449
Yorkview Estates                 124,009                                 (2,245)           (17,945)           103,819
                             -----------        -------------       -----------        -----------        -----------
                             $17,873,759        $      24,779       $  (966,260)       $   (61,791)       $16,870,487
                             ===========        =============       ===========        ===========        ===========
</TABLE>


<PAGE>   131
                                                                        SCHEDULE
                                                                     (CONTINUED)

                       REAL ESTATE ASSOCIATES LIMITED VII
                       INVESTMENTS IN LIMITED PARTNERSHIPS
                  YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995


<TABLE>
<CAPTION>
                                                           Year Ended December 31, 1996
                          -------------------------------------------------------------------------------------------
                                                                       Cash                 Equity
                              Balance                                Distri-                    in         Balance
                              January                 Capital        butions                Income         December
Limited Partnerships          1, 1996           Contributions        Received               (Loss)         31, 1996
--------------------      --------------     ----------------    --------------     --------------     --------------
<S>                       <C>                <C>                 <C>                <C>                <C>           
Anthracite Apts.          $    1,057,033     $                   $      (25,948)    $       22,825     $    1,053,910
Aristocrat Manor                 547,020                                                   (50,499)           496,521
Arkansas City Apts.
Arrowsmith Apts.                 382,819                                                   (10,399)           372,420
Ashland Manor
Bangor House                   1,613,076                                                    71,308          1,684,384
Bellair Manor Apts.              282,472                                 (2,654)           (20,472)           259,346
Birch Manor I
Birch Manor II
Bluewater Apts.                1,796,000                                (13,502)            83,850          1,866,348
Center CIty Apts.              2,190,092                                (36,470)           192,016          2,345,638
Clarkwood Apts. I                                       1,316            (1,316)
Clarkwood Apts. II                                      2,729            (2,729)
 Cleveland I                     108,138                                (37,821)           (17,836)            52,481
Cleveland II                     136,258                                (19,268)           (38,167)            78,823
Cleveland III                     24,941                                (13,150)           (11,791)                 0
Danbury Park Manor
 Desoto Apts.                    140,188                                (13,209)           (17,820)           109,159
 Dexter Apts.                    112,122                                (22,451)           (26,100)            63,571
Edgewood Terrace II              768,565                                                  (104,531)           664,034
Goodlette Arms Apts.           2,520,096                                 (1,485)           (89,520)         2,429,091
Hampshire House Apts.
Henrico Arms
Ivywood Apts.                    359,633                                 (5,790)           (47,671)           306,172
Jasper County
 King Towers                     296,703                                 (2,045)           (55,046)           239,612
Meherrin Landings
Nantucket Apts.                  255,625                                 (1,417)           (17,157)           237,051
 Newton Apts.
  Oak Hill I                     189,146                                 (3,085)           (82,513)           103,548
Oakview Apts.
Oakwood Park I                                          1,207            (1,207)
Oakwood Park II                                           694              (694)
Pachuta Apts.
Parkway Towers                 1,707,990                                (15,801)           131,170          1,823,359
Pebbleshire Apts.                                       9,840            (9,840)
Pinebrook Apts.                  728,826                                                    42,017            770,843
Rand Grove Village               518,851                                (24,284)          (265,173)           229,394
Richards Park Apts.                                       170              (170)
Ridgewood Towers                 616,752                               (221,751)           169,680            564,681
Shubuta Properties
South Glen Apts.                   9,305                                                    (9,305)                 0
South Park Apts.
Sunland Terrace
Tradewinds East Apts.          1,610,376                                (19,388)            (4,264)         1,586,724
Warren Heights Apts. II          284,076                                 (4,230)           (37,638)           242,208
White Cliffs Apts.               210,389                                                   (39,957)           170,432
Yorkview Estates                 134,469                                    (61)           (10,399)           124,009
                          --------------     ----------------    --------------     --------------     --------------
                          $   18,600,961     $         15,956    $     (499,766)    $     (243,392)    $   17,873,759
                          ==============     ================    ==============     ==============     ==============
</TABLE>


<PAGE>   132
                                                                        SCHEDULE
                                                                     (CONTINUED)

                       REAL ESTATE ASSOCIATES LIMITED VII
                       INVESTMENTS IN LIMITED PARTNERSHIPS
                  YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995


<TABLE>
<CAPTION>
                                                          Year Ended December 31, 1995
                          --------------------------------------------------------------------------------------------
                                                                      Cash              Equity
                              Balance                                Distri-              in              Balance
                              January              Capital           butions            Income            December
Limited Partnerships          1, 1995         Contributions          Received           (Loss)            31, 1995
--------------------      --------------     ----------------    ----------------     -------------     --------------
<S>                       <C>                <C>                 <C>                  <C>               <C>           
Anthracite Apts.          $    1,037,867     $                   $        (25,948)    $      45,114     $    1,057,033
Aristocrat Manor                 660,098                                                   (113,078)           547,020
Arkansas City Apts.
Arrowsmith Apts.                 469,332                                  (14,850)          (71,663)           382,819
Ashland Manor
Bangor House                   1,609,060                                 (101,136)          105,152          1,613,076
Bellair Manor Apts.              305,068                                   (4,882)          (17,714)           282,472
Birch Manor I                                             581                (581)
Birch Manor II                                          3,244              (3,244)
Bluewater Apts.                1,797,663                                  (27,003)           25,340          1,796,000
Center CIty Apts.              2,033,873                                  (36,470)          192,689          2,190,092
Clarkwood Apts. I                                       1,061              (1,061)
Clarkwood Apts. II
 Cleveland I                     133,418                                  (33,240)            7,960            108,138
Cleveland II                     166,434                                  (18,230)          (11,946)           136,258
Cleveland III                     30,597                                   (1,734)           (3,922)            24,941
Danbury Park Manor
 Desoto Apts.                    178,452                                  (18,253)          (20,011)           140,188
 Dexter Apts.                    149,359                                   (5,623)          (31,614)           112,122
Edgewood Terrace II              934,508                                  (30,738)         (135,205)           768,565
Goodlette Arms Apts.           2,543,290                                   (1,485)          (21,709)         2,520,096
Hampshire House Apts.
Henrico Arms                                                               (9,865)            9,865
Ivywood Apts.                    411,136                                   (4,015)          (47,488)           359,633
Jasper County
 King Towers                     337,383                                                    (40,680)           296,703
Meherrin Landings
Nantucket Apts.                  274,141                                                    (18,516)           255,625
 Newton Apts.
  Oak Hill I                     241,932                                                    (52,786)           189,146
Oakview Apts.
Oakwood Park I                                          1,640              (1,640)
Oakwood Park II                                           864                (864)
Pachuta Apts.
Parkway Towers                 1,558,737                                  (15,590)          164,843          1,707,990
Pebbleshire Apts.                                       9,840              (9,840)
Pinebrook Apts.                  679,155                                                     49,671            728,826
Rand Grove Village               822,741                                  (24,284)         (279,606)           518,851
Richards Park Apts.                                     1,022              (1,022)
Ridgewood Towers                 721,120                                 (224,604)          120,236            616,752
Shubuta Properties
South Glen Apts.                 323,984              (15,000)            (23,763)         (275,916)             9,305
South Park Apts.                                        1,098              (1,098)
Sunland Terrace
Tradewinds East Apts.          1,634,847                                                    (24,471)         1,610,376
Warren Heights Apts. II          308,241                                   (3,915)          (20,250)           284,076
White Cliffs Apts.               246,471                                   (1,031)          (35,051)           210,389
Yorkview Estates                 148,687                                   (3,941)          (10,277)           134,469
                          --------------     ----------------    ----------------     -------------     --------------
                          $   19,757,594     $          4,350    $       (649,950)    $    (511,033)    $   18,600,961
                          ==============     ================    ================     =============     ==============
</TABLE>


<PAGE>   133
                                                                        SCHEDULE
                                                                     (Continued)


                       REAL ESTATE ASSOCIATES LIMITED VII
        INVESTMENTS IN, EQUITY IN EARNINGS OF AND DIVIDENDS RECEIVED FROM
                          AFFILIATES AND OTHER PERSONS
                               FOR THE YEARS ENDED
                        DECEMBER 31, 1997, 1996 AND 1995


NOTES:1.    Equity in income (losses) of the limited partnerships
            represents the Partnership's allocable share of the net results
            of operations from the limited partnerships for the year. Equity
            in losses of the limited partnerships will be recognized until
            the investment balance is reduced to zero or below zero to an
            amount equal to future capital contributions to be made by the
            Partnership.

      2.    Cash distributions from the limited partnerships will be treated as
            a return of the investment and will reduce the investment balance
            until such time as the investment is reduced to an amount equal to
            additional contributions. Distributions subsequently received will
            be recognized as income.


<PAGE>   134
                                                                    SCHEDULE III
                       REAL ESTATE ASSOCIATES LIMITED VII
                    REAL ESTATE AND ACCUMULATED DEPRECIATION
                 OF PROPERTY HELD BY LOCAL LIMITED PARTNERSHIPS
                       IN WHICH REAL VII HAS INVESTMENTS
                               DECEMBER 31, 1997
<TABLE>
<CAPTION>
                                                                       Buildings,
                                                                      Furnishings 
                                                                      & Equipment
                                 Number   Outstanding                Amount Carried            
                                   of      Mortgage                   at close of                    Accumulated
Partnership/Location              Units      Loan          Land          period         Total        Depreciation
------------------------------   ------   -----------   -----------   ------------   ------------   -------------
<S>                              <C>      <C>           <C>           <C>            <C>             <C> 
Anthracite Apartments               121   $ 3,426,633   $   153,451   $  4,347,253   $  4,500,704    $ 1,783,764
  Pinston, PA
Aristocrat Manor                    131     1,745,136       265,158      3,007,932      3,273,090      1,256,052
  Hot Springs, AR
Arkansas City Apartments             16       499,073        22,416        504,920        527,336        153,186
  Arkansas City, AR
Bangor House                        121     3,814,254       125,277      6,660,792      6,786,069      4,257,274
  Bangor, ME
Bluewater Apartments                116     1,740,868       130,163      3,937,939      4,068,102      1,749,278
  Port Haron, MI
Center City Apartments              176     4,886,003       216,196      6,273,626      6,489,822      2,604,012
  Hazelton, PA
Cleveland Apartments I               50       780,924        60,000      1,406,756      1,466,756        792,549
  Hayti, MO
Cleveland Apartments II              50       775,661        50,000      1,450,620      1,500,620        711,693
  Hayti, MO
Cleveland Apartments III             21       344,075        25,000        604,465        629,465        346,249
  Hayti, MO
Danbury Park Manor                  151     1,866,562       183,752      4,486,519      4,670,271      1,957,806
  Superior, MI
Desoto Apartments                    42       663,197        50,000      1,223,646      1,273,646        666,381
  Desoto, MO
Dexter Apartments                    50       785,603        50,000      1,522,911      1,572,911        845,249
  Dexter, MO
Goodlette Arms Apartments           250     3,045,744       500,000      7,044,606      7,544,606      3,213,749
  Naples, FL
Henrico Arms                        232     2,763,974       206,980      3,804,019      4,010,999      3,460,781
  Richmond, VA
Jasper County Prop.                  24       663,307        33,000        773,068        806,068        684,373
  Heidelberg, MS
Newton Apartments                    36       958,324        55,017      1,055,920      1,110,937        979,594
  Newton, MS
Oakview Apartments                   32     1,110,861        75,000      1,159,591      1,234,591        333,634
  Monticello, AR
Pachuta Apartments                   16       445,632        20,680        490,732        511,412        458,844
  Pachuta, MS
Parkway Towers Apartments           104     1,288,368       287,919      4,077,524      4,365,443      3,595,527
  East Providence, RI
Rand Grove Village                  212     2,763,796       491,000      6,532,301      7,023,301      4,563,830
  Palatine, IL
Shubuta Properties                   16       446,501        23,179        547,431        570,610        463,373
  Shubuta, MS
South Glen Apartments               159     2,792,288       298,089      4,782,816      5,080,905      3,741,250
  Trenton, MI
Sunland Terrace                      80     2,339,475        55,500      3,012,952      3,068,452      1,604,714
  Phoenix, AZ
Tradewinds East Apartments          150     2,294,145       117,692      5,229,341      5,347,033      2,385,544
  Escaville, MI
Arrowsmith Apartments                70     1,266,314       252,480      2,312,151      2,564,631      1,145,100
  Corpus Christi, TX
Ashland Manor                       189     2,207,112        91,530      4,439,177      4,530,707      2,337,966
  Toledo, OH
Bellair Manor Apartments             68       902,777       152,995      1,546,944      1,699,939        696,127
  Niles, OH
Birch Manor Apartments I             60       577,573        60,889      1,322,956      1,383,845        595,336
  Medina, OH
Birch Manor Apartments II            60       738,531        50,284      1,386,407      1,436,691        623,889
  Medina, OH
Clarkwood Apartments I               72       636,890        68,841      1,592,455      1,661,296        749,786
  Elyria, OH
Clarkwood Apartments II             120     1,166,033        92,510      2,628,368      2,720,878      1,182,762
  Elyria, OH
Hampshire House Apartment           150     2,928,357       101,163      3,945,365      4,046,528      1,775,412
  Warren, OH
Ivywood Apartments                  124     1,669,580       200,184      3,020,686      3,220,870      1,410,465
  Columbus, OH
King Towers                          68       781,108        97,919      1,481,422      1,579,341        662,528
  Cincinnati, OH
Nantucket Apartments                 60       633,177        34,676      1,299,013      1,333,689        584,550
  Alliance, OH
Oak Hill Apartments                 120     1,882,176        75,834      3,083,971      3,159,805      1,387,787
  Franklin, PA
Oakwood Park I Apartments            50       243,552        63,123        889,197        952,320        420,765
  Lorain, OH
Oakwood Park II Apartments           78       439,731       102,202      1,378,989      1,481,191        620,541
  Lorain, OH
Richards Park Apartments             60       731,886        52,416      1,403,588      1,456,004        631,611
  Elyria, OH
South Park Apartments               138       964,102       135,579      2,749,092      2,884,671      1,237,086
  Elyria, OH
Warren Heights Apartments I          88     1,188,792        21,803      2,202,950      2,224,753        991,332
  Warren, OH
White Cliff Apartments               72     1,140,297        62,911      1,912,523      1,975,434        860,639
  Cincinnati, OH
Yorkview Estates                     50       661,237        22,049      1,202,879      1,224,928        541,296
  Massillon, OH
Edgewood Terrace II                 258     3,903,270       525,000      9,732,730     10,257,730      6,274,495
  Washington, DC
Pebbleshire Apartments              120     1,928,710       359,943      4,311,798      4,671,741      1,945,671
  Vernon Hills, IL
Pinebrook Apartments                136     1,493,505       265,172      3,569,357      3,834,529      1,624,618
  Lansung, MI
Ridgewood Towers                    140     2,574,293        88,658      6,421,038      6,509,696      3,994,000
  Moline, IL
Additional basis of
  real estate due to capital
  contribution to investee
  limited partnership                                       332,570      8,022,823      8,355,393      5,101,757
                                 ------   -----------   -----------   ------------   ------------    -----------
        TOTAL                     4,731   $72,899,407   $ 6,806,200   $145,793,559   $152,599,759    $80,004,225
                                 ======   ===========   ===========   ============   ============    ===========
</TABLE>
<PAGE>   135
                                                                    SCHEDULE III
                                                                     (CONTINUED)


                       REAL ESTATE ASSOCIATES LIMITED VII
              REAL ESTATE AND ACCUMULATED DEPRECIATION OF PROPERTY
                       HELD BY LOCAL LIMITED PARTNERSHIPS
                        IN WHICH REAL VII HAS INVESTMENTS
                                DECEMBER 31, 1997


NOTES:1.    Each local limited partnership has developed, owns and operates
            the housing project.  Substantially all project costs, including
            construction period interest expense, were capitalized by the 
            limited partnerships.

      2.    Depreciation is provided for by various methods over the estimated
            useful lives of the projects. The estimated composite useful lives
            of the buildings are from 25 to 40 years.

      3.    Investments in property and equipment:


<TABLE>
<CAPTION>
                                                       Buildings,
                                                      Furnishings,
                                                          And
                                      Land              Equipment              Total
                                 -------------        -------------        -------------
<S>                              <C>                  <C>                  <C>          
Balance, January 1, 1995         $   6,771,343        $ 144,930,684        $ 151,702,027

Net additions - 1995                    31,400              755,312              786,712
                                 -------------        -------------        -------------

Balance, December 31, 1995           6,802,743          145,685,996          152,488,739

Net additions - 1996                    87,881            1,259,235            1,347,116
                                 -------------        -------------        -------------

Balance, December 31, 1996           6,890,624          146,945,231          153,835,855

Net deletions - 1997                   (84,424)          (1,151,672)          (1,236,096)
                                 -------------        -------------        -------------

Balance, December 31, 1997       $   6,806,200        $ 145,793,559        $ 152,599,759
                                 =============        =============        =============
</TABLE>


<PAGE>   136
                                                                    SCHEDULE III
                                                                     (CONTINUED)


                       REAL ESTATE ASSOCIATES LIMITED VII
              REAL ESTATE AND ACCUMULATED DEPRECIATION OF PROPERTY
                       HELD BY LOCAL LIMITED PARTNERSHIPS
                        IN WHICH REAL VII HAS INVESTMENTS
                                DECEMBER 31, 1997


<TABLE>
<CAPTION>
                                                                      Buildings,
                                                                     Furnishings
                                                                         And
                                                                      Equipment
                                                                     -----------
<S>                                                                  <C>        
ACCUMULATED DEPRECIATION:

Balance, January 1, 1995                                             $62,498,377

Net additions, 1995                                                    6,563,752
                                                                     -----------

Balance, December 31, 1995                                            69,062,129

Net additions, 1996                                                    5,565,703
                                                                     -----------

Balance, December 31, 1996                                            74,627,832

Net additions, 1997                                                    5,376,393
                                                                     -----------

Balance, December 31, 1997                                           $80,004,225
                                                                     ===========
</TABLE>


<PAGE>   137
PART III.

ITEM 10.   DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

REAL ESTATE ASSOCIATES LIMITED VII (the "Partnership") has no directors or
executive officers of its own.

National Partnership Investment Corp. ("NAPICO" or "the Managing General
Partner") is a wholly-owned subsidiary of Casden Investment Company, an
affiliate of The Casden Company. The following biographical information is
presented for the directors and executive officers of NAPICO with principal
responsibility for the Partnership's affairs.

CHARLES H. BOXENBAUM, 68, Chairman of the Board of Directors and Chief Executive
Officer of NAPICO.

Mr. Boxenbaum has been associated with NAPICO since its inception. He has been
active in the real estate industry since 1960, and prior to joining NAPICO was a
real estate broker with the Beverly Hills firm of Carl Rhodes Company.

Mr. Boxenbaum has been a guest lecturer at national and state realty
conventions, certified properties exchanger's seminars, Los Angeles Town Hall,
National Association of Home Builders, International Council of Shopping
Centers, Society of Conventional Appraisers, California Real Estate Association,
National Institute of Real Estate Brokers, Appraisal Institute, various mortgage
banking seminars, and the North American Property Forum held in London, England.
In 1963, he was the winner of the Snyder Award, the highest annual award offered
by the National Association of Real Estate Boards for Best Exchange. He is one
of the founders and a past director of the First Los Angeles Bank, organized in
November 1974. Mr. Boxenbaum was a member of the Board of Directors of the
National Housing Council. Mr. Boxenbaum received his Bachelor of Arts degree
from the University of Chicago.

BRUCE E. NELSON, 46, President and a director of NAPICO.

Mr. Nelson joined NAPICO in 1980 and became President in February 1989. He is
responsible for the operations of all NAPICO sponsored limited partnerships.
Prior to that he was primarily responsible for the securities aspects of the
publicly offered real estate investment programs. Mr. Nelson is also involved in
the identification, analysis, and negotiation of real estate investments.

From February 1979 to October 1980, Mr. Nelson held the position of Associate
General Counsel at Western Consulting Group, Inc., private residential and
commercial real estate syndicators. Prior to that time Mr. Nelson was engaged in
the private practice of law in Los Angeles. Mr. Nelson received his Bachelor of
Arts degree from the University of Wisconsin and is a graduate of the University
of Colorado School of Law. He is a member of the State Bar of California and is
a licensed real estate broker in California and Texas.

ALAN I. CASDEN, 52, Chairman of The Casden Company, an affiliate of Casden
Properties (formerly CoastFed Properties), a director and member of the audit
committee of NAPICO, and chairman of the Executive Committee of NAPICO.

Mr. Casden is Chairman of the Board, Chief Executive Officer and sole
shareholder of The Casden Company and Casden Investment Company. Prior to that,
he was the president and chairman of Mayer Group, Inc., which he joined in 1975.
He is also chairman of Mayer Management, Inc., a real estate management firm.
Mr. Casden has been involved in approximately $3 billion of real estate
financings and sales and has been responsible for the development and
construction of more than 12,000 apartment units and 5,000 single-family homes
and condominiums.



<PAGE>   138
Mr. Casden is a member of the American Institute of Certified Public Accountants
and of the California Society of Certified Public Accountants. Mr. Casden is a
member of the advisory board of the National Multi-Family Housing Conference,
the Multi-Family Housing Council, and the President's Council of the California
Building Industry Association. He also serves on the advisory board to the
School of Accounting of the University of Southern California. He holds a
Bachelor of Science and a Masters in Business Administration degree from the
University of Southern California.

HENRY C. CASDEN, 54, President, Chief Operating Officer and Secretary of The
Casden Company and a director and secretary of NAPICO.

Mr. Casden has been President and Chief Operating Officer of The Casden Company,
as well as a director of NAPICO since February 1988. He became secretary of both
companies in late 1994. From 1982 to 1988, Mr. Casden was of counsel and a
partner in the Los Angeles law firm of Troy, Casden & Gould. From 1978 to 1981,
he was of counsel and a partner in the Los Angeles law firm of Loeb & Loeb. From
1972 to 1978, Mr. Casden was a member of the Beverly Hills law firm of Fink &
Casden, Professional Corporation.

Mr. Casden received his Bachelor of Arts degree from the University of
California at Los Angeles, and is a graduate of the University of San Diego Law
School. Mr. Casden is a member of the State Bar of California and has numerous
professional affiliations.

BOB SCHAFER, 56, Senior Vice President of Finance.

Mr. Schafer joined NAPICO in 1984 and is the Corporate Controller responsible
for the financial reporting function of the Company. Prior to this, he was a
Group and Division Controller at Bergen Brunswig for over eight years,
Controller at a Flintkote subsidiary for over four years, and Assistant
Controller at an electronics subsidiary of General Electric for two years.

Mr. Schafer is a member of the California Society of Certified Public
Accountants. He holds a Bachelor of Science degree in accounting from Woodbury
University, Los Angeles.

PATRICIA W. TOY, 68, Senior Vice President -- Communications and Assistant
Secretary.

Mrs. Toy joined NAPICO in 1977, following her receipt of an MBA from the
Graduate School of Management, UCLA. From 1952 to 1956, Mrs. Toy served as a
U.S. Naval Officer in communications and personnel assignments. She holds a
Bachelor of Arts Degree from the University of Nebraska.

MARK L. WALTHER, 37, Executive Vice President, General Counsel and Assistant
Secretary.

Mr. Walther joined NAPICO in 1987 and is responsible for the legal affairs of
the NAPICO sponsored limited partnerships. Prior to joining NAPICO, Mr. Walther
worked in the San Francisco law firm of Browne and Kahn which specialized in
construction litigation. Mr. Walther received his Bachelor of Arts Degree in
Political Science from the University of California, Santa Barbara and is a
graduate of the University of California, Davis, School of Law. He is a member
of the State Bar of Hawaii.

NAPICO and several of its officers, directors and affiliates, including Charles
H. Boxenbaum, Bruce E. Nelson and Alan I. Casden, consented to the entry, on
June 25, 1997, of an administrative cease and desist order by the U.S.
Securities and Exchange Commission (the "Commission"), without admitting or
denying any of the findings made by the Commission. The Commission found that
NAPICO and others had violated certain federal securities laws in connection
with transactions unrelated to the Partnership. The Commission's order did not
impose any cost, burden or penalty on any partnership managed by NAPICO and
does not impact NAPICO's ability to serve as the Partnership's Managing General
Partner.

<PAGE>   139

ITEM 11.     MANAGEMENT REMUNERATION AND TRANSACTIONS

Real Estate Associates Limited VII has no officers, directors or employees.
However, under the terms of the Restated Certificate and Agreement of Limited
Partnership, the Partnership is obligated to pay the Corporate General Partner
an annual management fee. The annual management fee is approximately equal to .5
percent of the invested assets, including the Partnership's allocable share of
the mortgages related to the real estate properties held by local limited
partnerships. The fee is earned beginning in the month the Partnership makes its
initial contribution to the local partnership. In addition, the Partnership
reimburses the Corporate General Partner for certain expenses.

An affiliate of the General Partner is responsible for the on-site property
management for certain properties owned by the limited partnerships in which the
Partnership has invested.


ITEM 12.    SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

(a)   Security Ownership of Certain Beneficial Owners

      The General Partners own all of the outstanding general partnership
      interests of REAL VII; no person is known to own beneficially in excess of
      5 percent of the outstanding limited partnership interests.

(b)   With the exception of the initial limited partner, Bruce Nelson, who is an
      officer of the Corporate General Partner, none of the officers or
      directors of the Corporate General Partner own directly or beneficially
      any limited partnership interests in REAL VII.


ITEM 13.     CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

The Partnership has no officers, directors or employees of its own. All of its
affairs are managed by the Corporate General Partner, National Partnership
Investments Corp. The Partnership is obligated to NAPICO for an annual
management fee equal to .4 percent of the original invested assets of the
limited partnerships. Invested assets is defined as the costs of acquiring
project interests, including the proportionate amount of the mortgage loans
related to the Partnership's interest in the capital accounts of the respective
partnerships. The management fee was $743,640 for each of the three years in the
period ended December 31, 1997.

The Partnership reimburses NAPICO for certain expenses. The reimbursement to
NAPICO was $46,975, $43,124 and $39,900 in 1997, 1996 and 1995, respectively,
and is included in operating expenses.

An affiliate of NAPICO is the general partner in 26 of the limited partnerships
in which the Partnership has an investment, and another affiliate receives
property management fees of approximately 5 to 6 percent of the revenue from
three of these partnerships. The affiliate received property management fees of
$117,571, $116,995 and $116,175 in 1997, 1996 and 1995, respectively.

A real estate investment trust ("REIT") organized by an affiliate of NAPICO 
has advised the Partnership that it intends to make a proposal to purchase 
from the Partnership certain of the limited partnership interests held for
investment by the Partnership.

The REIT proposes to purchase such limited partner interests for cash, which it
plans to raise in connection with a private placement of its equity securities.
The purchase is subject to, among other things, (i) consummation of such
private placement by the REIT; (ii) the purchase of the general partner
interests in the local limited partnerships by the REIT; (iii) the approval of
HUD and certain state housing finance agencies; (iv) the consent of the limited
partners to the sale of the local limited partnership interests held for
investment by REAL VII; and (v) the consummation of a minimum number of
purchase transactions with other Casden affiliated partnerships. As of 
March 31, 1998, the REIT had completed buy-out negotiations with a majority of
the general partners of the local limited partnerships.

A proxy is contemplated to be sent to the limited partners setting forth the
terms and conditions of the purchase of the limited partners' interests held
for investment by the Partnership, together with certain amendments to the
Partnership Agreement and other disclosures of various conflicts of interest in
connection with the transaction.
<PAGE>   140
ITEM 14.    EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K:

FINANCIAL STATEMENTS

Report of Independent Public Accountants.

Balance Sheets as of December 31, 1997 and 1996.

Statements of Operations for the years ended December 31, 1997, 1996 and 1995.

Statements of Partners' Deficiency for the years ended December 31, 1997, 1996
and 1995.

Statements of Cash Flows for the years ended December 31, 1997, 1996 and 1995.

Notes to Financial Statements.

FINANCIAL STATEMENT SCHEDULES

APPLICABLE TO REAL ESTATE ASSOCIATES LIMITED VII, REAL ESTATE ASSOCIATES IV AND
THE LIMITED PARTNERSHIPS IN WHICH REAL ESTATE ASSOCIATES LIMITED VII AND REAL
ESTATE ASSOCIATES IV HAVE INVESTMENTS.

Schedule - Investments in Limited Partnerships, December 31, 1997, 1996 and
1995.

Schedule III - Real Estate and Accumulated Depreciation, December 31, 1997.

The remaining schedules are omitted because the required information is included
in the financial statements and notes thereto or they are not applicable or not
required.

EXHIBITS

(3)  Articles of incorporation and bylaws: The registrant is not incorporated.
     The Partnership Agreement was filed with Form S-11 #2-84816 which is
     incorporated herein by reference.

(10) Material contracts: The registrant is not party to any material contracts,
     other than the Restated Certificate and Agreement of Limited Partnership
     dated May 24, 1983 and the forty-eight contracts representing the
     partnership investment in local limited partnership's as previously filed
     at the Securities Exchange Commission, File #2-84816 which is hereby
     incorporated by reference.

REPORTS ON FORM 8-K

No reports on Form 8-K were filed during the year ended December 31, 1997.


<PAGE>   141
                                   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 in the City of Los Angeles,
State of California.


REAL ESTATE ASSOCIATES LIMITED VII

By:        NATIONAL PARTNERSHIP INVESTMENTS CORP.
           General Partner


/s/ CHARLES H. BOXENBAUM
--------------------------------------
Charles H. Boxenbaum
Chairman of the Board of Directors
and Chief Executive Officer


/s/ BRUCE E. NELSON
--------------------------------------
Bruce E. Nelson
Director and President


/s/ ALAN I. CASDEN
--------------------------------------
Alan I. Casden
Director


/s/ HENRY C. CASDEN
--------------------------------------
Henry C. Casden
Director


/s/ BOB E. SCHAFER
--------------------------------------
Bob E. Schafer
Senior Vice President of Finance